Europe

By Ian Bremmer

Two years ago, there was a debate in Washington about whether a strong Europe or a weak Europe was preferable. There's no disagreement today. A more multilateral U.S. foreign policy needs a stronger Europe. As the G20 weakens the West's global strategic position, the United States will increasingly need coherent policies from its principal allies to maintain its international influence and leadership. Europe, however, appears to be fragmenting.

Witness Germany moving away from EU fiscal targets, which will make it harder for the European Commission to compel other countries to develop credible and consistent fiscal policy. Meanwhile, European tax policy changes need to be implemented to cover the costs of interventions, stimulus packages, and revenue shortfalls-but they have barely begun. Upcoming elections in the United Kingdom could produce major ripple effects next year. And the risk of a complete breakdown in negotiations over Turkey's bid to join the EU could further divide the continent.

Overall, political issues will be tougher to deal with in 2010 than they were at the height of the economic crisis. As things unraveled in late 2008 to early 2009, governments had no choice but to use existing policy tools. Now they may have to take up the difficult task of developing new ones.

The European agenda next year will be full of challenges, many of which require policy coordination. There will be impediments to effectively managing a crisis in a truly pan-European bank; uncertainty over corporate refinancing, particularly in eastern Europe; and emerging political problems combined with social discontent as the difficult tasks of footing the bill for crisis responses become more pressing. At this point, a real move toward greater European consolidation looks like it's still a long way off.

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By Eurasia Group analysts Irmak Bademli and Wolfango Piccoli

Turkey's ailing bid for EU membership will face greater difficulties following the win of the Christian Democratic Union (CDU) and the Free Democratic Party (FDP) in Germany's recent elections. The FDP's replacement of the pro-Turkey Social Democratic Party (SPD) will allow Chancellor Angela Merkel, who has long favored a "privileged partnership" rather than full membership for Turkey, to become more vocal in her opposition to Ankara's EU entry. Meanwhile, Cyprus remains a major obstacle in Turkey's path to EU membership.

The SPD's exit from power was a major loss for Ankara, which now faces skeptical governments in both Paris and Berlin. The party had been instrumental in tempering Chancellor Merkel's anti-Ankara views during her first term in office from 2005 to 2009. While the FDP's victory does not rule out Turkish membership, leading figures in the party recently said that they do not think Turkey is ready for EU membership due to "major deficits" in Ankara's efforts to meet the EU's criteria.

In the near term, however, the changeover in Germany will not bring a total breakdown in Turkey-EU talks. The ongoing negotiations over Cyprus are entering a delicate stage and Merkel, like other EU leaders, wants to see them succeed.

At the end of 2006, Turkey's refusal to extend its customs union agreement with the EU to Cyprus led the EU to freeze talks over 8 of the 35 policy chapters that each candidate country has to negotiate to become eligible for membership. This fall, the EU will review Turkey's progress in its accession negotiations, in particular focusing on the Cyprus issue. If Turkey has not complied with its customs union obligations by the time the EU carries out its review, some anti-Turkey member states could put pressure on the EU to take sterner action. The European Commission, for its part, is expected to bury its review of the freeze within its larger annual report on Turkey's progress, which will be issued on 14 October.

The EU's options to deal with noncompliance are not clearly spelled out, but they could range from a mild rebuke to further sanctions. A full-suspension of talks, however, is not on the table this year -- despite calls from the Greek Cypriots to punish Turkey if it continues to ignore its obligations. Little progress has been made in the Cyprus negotiations, which began in September 2008, and the failure to reach a settlement by early 2010 could bring a total breakdown in Turkey-EU talks.

While it is hard to trace a sense of urgency on the Greek Cypriot side, the April 2010 presidential elections in the self-declared Turkish Republic of Northern Cyprus (TRNC) are generally regarded as a deadline for the reunification talks. Without a settlement, the present incumbent Mehmet Ali Talat may lose his seat in April 2010 and be replaced by a president less supportive of a settlement. This development will further complicate the already difficult negotiations.

By Eurasia Group analyst Sean West

Earlier this month, the G8+5, the world's leading industrial states plus some other important developing states, committed to finishing the Doha Round of trade talks by the end of 2010. U.S. and Chinese officials paid lip service to finishing Doha this week during the inaugural bilateral "Strategic and Economic Dialogue." World Trade Organization chief Pascal Lamy will likely cite both announcements as cause for celebration. Healthy skepticism is in order.

Overblown fears of oncoming protectionism were all the rage just weeks ago. But as Ian Bremmer wrote in this space back in March, the financial crisis need not trigger as many new trade barriers as some feared. Still, the global liberalization envisioned by a completed Doha Round by the end of next year is likely a bridge too far.

Pledges aside, there's not much reason to be optimistic that a deal can be concluded in the near future. Personality conflicts may have receded, as both Susan Schwab and Kamal Nath -- who banged heads last year -- no longer represent the United States and India respectively. But domestic conditions in the wake of the financial crisis won't help much with trade liberalization. While there's ample reason to be skeptical that neither China nor the EU are any more ready conclude an agreement than in the past, all other countries can play wait-and-see unless and until the United States shows serious leadership.

Obama has yet to lay out a clear strategy for the Doha Round. U.S. Trade Representative Ron Kirk has said several times that the United States considers Doha completion as critical, but there's no evidence yet that he'll have the political support he needs to set policy and to bargain. Comments from Obama himself on Doha have been ambiguous at best, warning of an "imbalance" in potential trade-offs on the table in current negotiations. It's also not yet clear how much political capital Obama will put at risk at a moment when he needs the support of organized labor for a host of other domestic priorities. And in a nod to agricultural interests, he allowed his budget proposal to cut farm subsidies -- a critical sticking point in the Doha negotiations -- to die on arrival.

Real movement on trade policy remains on hold until the president explains publicly how trade policy fits into his administration's broader agenda -- a speech he might give in advance of the September G20 meeting in Pittsburgh. But he'll have to use that speech to persuade an anxious American public -- and many trade skeptical US lawmakers -- that trade deals can spur growth without killing jobs. Obama has an advantage. His history suggests that he believes in the benefits of trade, and in a Nixon-goes-to-China way, he can spend political capital earned on the campaign trail to bring trade-wary Democrats along with his initiatives. But he has so far provided no indication that he's ready to accept the political risks that come with the push needed to get Doha done within 18 months.

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By Ian Bremmer
 
The first five "fat tails" are detailed in the entry below. Here are the second five. Again, each of these scenarios remains unlikely. But in each case, the impact of the global economic meltdown on a particular state's real economy has dramatically increased the likelihood of a fat tail occurring -- from 2 percent or 3 percent six months ago to 10 percent to 20 percent over the next several months, a serious enough concern to warrant focused attention.

6. Turkey's secularists lash out

Reinvigorated by their solid performance in recent local elections and still seething over last year's failed bid to close the ruling justice and development party (AKP), Turkey's opposition secularists in the military, media, and business elite are emboldened to try again, launching a public campaign to build opposition to the ruling party across the country. A sharper-than-expected economic contraction provides them with a new political opportunity to take on the AKP in the courts.

Weakened by the AKP's own poor election showing, Prime Minister Recep Tayyip Erdogan struggles to manage the nationalist and radical Islamist elements within his party. Convinced that his political survival depends more on party unity than on building consensus across the political class, Erdogan overplays his hand by trying once again to amend the constitution. The high court orders closure of the AKP and bans Erdogan from office. Turkey then finds itself in an institutional crisis that brings policymaking -- and the country's bid to join the European Union -- to a grinding halt in the middle of a recession. Foreign investors abandon ship, moving capital into less risky markets.

7. Argentina opens up

Fat tails can offer opportunities as well as risks.  That's the case in Argentina.  There the global recession could unravel the country's economy. The government's inability to manage the fallout would push its poll numbers sharply lower, persuading advisors to President Cristina Fernandez de Kirchner to advance the date of legislative elections from October to June to allow her allies a chance to face voters before the opposition gets organized and the economy deteriorates further. The president's husband, former president Néstor Kirchner, would head the government's legislative list.

Against the backdrop of spiraling social discontent, President Kirchner's Peronist party loses its lower house majority, and Néstor Kirchner would finish behind dissident members of his own party in Buenos Aires. The president resigns, and Vice President Julio Cobos becomes president. Kirchner's departure opens new policy possibilities. The Cobos government reduces state interference in domestic markets, removes restrictions on the farming sector, and improves the transparency (and therefore the credibility) of the national statistics institute. He signs an agreement with the IMF and promises to resolve the country's outstanding debt problems, quelling fears of default. This leads to a serious improvement in market sentiment.

8. The emirates disintegrate

The weakness of existing federal institutions has pulled back the curtain on a serious problem -- Emirati leaders haven't been able to respond in a coordinated way to the financial crisis. Abu Dhabi has jumped in to recapitalize the other emirates, but its strong moves to extend political control could push angry royals in Dubai, Ras al Khaymah and Sharjah, to look for future opportunities to reassert their independence.

Under this scenario, once the financial crisis passes, the smaller emirates try to kickstart their economic programs, provoking a federal veto. Sheikh Mohammed bin Rashid al Maktoum of Dubai tries to reestablish his economic autonomy by launching new infrastructure projects without the approval of Abu Dhabi's al Nahayan family. Abu Dhabi then blocks Dubai's negotiations with international partners, damaging Dubai's credibility and humiliating its royal family. Sharjah tries to restart talks on gas imports from Iran and Ras al Khaymah considers the same option. The Abu Dhabi-dominated federal government opposes the process. The smaller states then create a new federation or simply become independent states, and the UAE federation ceases to exist. The weak institutionalization of federalism and the UAE's increasingly personalized politics make this scenario not quite as unlikely as it seems.

9. Japan's policy paralysis

Japan's Liberal Democratic Party (LDP) will likely lose control of the lower house of parliament, the chamber which selects the prime minister, in an election that must be called by September 10. The opposition Democratic Party of Japan (DPJ) will likely win a majority of seats outright and form a new cabinet or a large plurality and forge a coalition with independents and LDP defectors.

But the more worrisome scenario involves the DPJ failing to win a majority of lower house seats, creating a chain reaction of party schisms that paralyze the coalition building process. The LDP loss aggravates already bitter internal rivalries, splintering the party that has ruled Japan almost continuously for more than 50 years. Internal battles over policy also plague the DPJ. If more conservative DPJ members form alliances with former LDP members, the DPJ could fall apart as well, further complicating the coalition-building process at a moment of economic uncertainty.

Japan is then ruled (as it was during the mid 1990s) by a fragile and fractious multiparty coalition that can't advance reforms needed for response to the economic crisis, deregulation, and foreign-policy priorities like reinvigorated relations with Washington, undermining Japan's value as an economic and security partner. This scenario provokes anxiety over the future strength of the Japanese economy and its security alliance with the United States. It then takes several years for the country's leading political parties to redevelop along ideologically coherent lines.

10. Poland runs off the rails

In Poland, the Civic Platform (PO)-led ruling coalition has successfully promoted a moderate, pro-market, pro-western agenda and has become one of Eastern Europe's most stable and capable governments. But under this fat tail scenario, the global economic outlook pushes Poland into a severe recession. Following an anti-market, anti-foreigner, and thinly veiled anti-banking/anti-Semitic electoral campaign, the populist/nationalist Law and Justice party (PIS) takes power in 2011, and the country turns inward. The new government blames capitalism (as well as the west in general and PO in particular) for all of Poland's ills. Its policy agenda is economically statist and culturally intolerant and nationalist.

The PIS-led government asserts control over a broad range of state and quasi-state companies in sectors like energy, mining, and banking/insurance. Officials appoint boards of directors for these companies based less on competence than on political loyalty. Poland withdraws its commitment to join the eurozone. The government scores domestic political points via attacks on both the EU and Russia -- with negative strategic and economic consequences. PIS launches corruption "witch hunts" against former communists, PO party loyalists, and foreigners, destabilizing Poland's economy and generating capital flight.

Click Here for The 10 crises you aren't expecting but should be (Part 1)

By Eurasia Group analyst Alexander Kliment

In recent years, explanations of Moscow's increasingly assertive foreign policy have tended, in one way or another, to take the following form: Russia has more clout because Russia has more cash.

As soaring oil prices boosted the leverage of Russia's state-controlled energy companies and filled the Kremlin's coffers, Moscow consolidated power at home and was emboldened to stake its claims abroad in a hard-nosed, and sometimes bare-knuckled, way. There is a good deal of truth to this line of reasoning -- paying off its sovereign debts to the world and amassing lots of dollars to throw around certainly gave Russia the independence, the confidence, and the means to cut a dramatically more imposing figure on the world stage.

Yet as the country sinks deeper into an economic crisis initially brought on by the world's financial woes, but exacerbated by glaring structural flaws in Russia's economy, this line of reasoning suggests an important question: If Russia's current foreign policy was formed largely on the basis of rapid economic growth, will the collapse of that growth deform, chasten, or reverse Russia's recent foreign policy?

Probably nyet.

Russia's leaders certainly have a bit less cause for "petro-arrogant" swagger these days. But the Kremlin's core foreign-policy objectives -- finding diplomatic pressure points that make Russia a more indispensable global player, and consolidating political and economic influence over its neighbors -- don't, in fact, require all that much cash.

On the first point, casting a veto at the United Nations or trying to play a crafty mediating role with Iran doesn't require a fat wallet. Those things merely require a veto at the UN Security Council and a relationship with Iran, neither of which is in peril because of the economic crisis. Dealing with Syria, Iran, Venezuela or Cuba in ways that tweak Washington's nose and give Russia some bargaining leverage with the United States on other strategic issues -- such as missile defense or NATO expansion -- also does not hinge on the dynamics of the financial crisis. These policies will continue.

Concerning the former Soviet sphere, there is consensus among Russia's elite that further NATO expansion into the region is a red-line issue on which the Kremlin simply will not budge, no matter what Russia's finances look like. And in some ways, the financial crisis is actually expanding opportunities for Russia among the debt-ridden states in Russia's "near abroad." While Russia has been financially weakened by the crisis, it is still a powerhouse compared to neighboring countries. With international donors otherwise preoccupied, Russia has loosened the purse-strings to bail out governments and purchase distressed assets in what President Medvedev has called Russia's "traditional sphere of interest."

The Kremlin has already announced $2 billion loans to Kyrgyzstan and Belarus, a $3 billion contribution to Kazakhstan's sovereign wealth fund, and plans to establish a $10 billion regional bailout fund for post-Soviet states. And as Ukraine's internal political volatility continues to hamstring international lending there, Russia is poised to extend a similar amount to Kiev. While this is serious money at a time when Russia is facing financial constraints at home, the relative cost to Russia of gaining political and economic concessions from its neighbors -- whether by gaining preferential access for Russian companies and troops, or weakening regional ties with NATO and the United States -- is still a bargain for the Kremlin.

The global expansion of Russian state-owned and state-friendly companies, an important part of Russia's foreign policy, will suffer because of lack of financing. But on the more important goal of maximizing control over regional energy transport routes to Europe, the crisis will have little net effect. The global credit drought will probably delay plans for new Russian-controlled pipelines to Northern and Southern Europe, but by the same token, competing non-Russian pipeline projects are financially frozen as well. The status quo, in which Russia dominates the lucrative European market and can use gas supplies for political leverage in transit countries, suits Moscow well enough for the time being.

There are, of course, two caveats to all this.

First, the continuation of Russia's current foreign policy -- much like its domestic policy -- depends on maintaining the prevailing balance between hardliners and relative liberals within Russia's elite. There is a danger that a prolonged economic crisis in Russia could lead to an ouster of more liberal figures in Moscow, and the more marked ascent of the so-called "siloviki" hardliners. If that happens, Russia's foreign policy -- which, despite rhetorical cantankerousness, has been largely pragmatic, if frustrating, to U.S. and Western interests -- might lurch in a markedly more aggressive and unpredictable direction.

Second, if the economic crisis pushes Russia to the point of complete reserves depletion or catastrophic economic collapse (still very unlikely but possible if the crisis extends deep into 2010 and beyond), Russia's freedom of maneuver on foreign policy would be more significantly constrained. It would be difficult to seek international political clout while also seeking international financial support.

But barring that scenario, Moscow will continue to prioritize its core political and economic goals over relationships with foreign investors and governments. Time and again -- whether with Yukos, Shell, and Mechel, or Ukraine, Georgia, and Kyrgyzstan -- Russia's leaders have shown this inclination. The financial crisis won't change it.

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By Ian Bremmer

A lot of people continue to ask me if I could explain how and why British and French nuclear submarines collided in the Atlantic last week. What are the chances of such a thing happening? And what interesting questions does it raise -- like why do Britain and France even have nukes anymore?

First, this is not as unlikely an accident as you might think. These subs tend to pass through regions of the Atlantic where the Gulf Stream is strongest and they're, therefore, hardest to detect.

Second, both countries are extremely secretive about the positions of their submarines. On board, only the captain and senior officers generally know with much precision where they are. France will finally rejoin NATO's military structures this April, but that's unlikely to make them any more forthcoming about the nuclear submarine force.

Finally, stealth sonar technology works. Neither of the submarines would have detected the other--even at close quarters. These are the main reasons why this collision was merely really, really, really unlikely rather than virtually impossible.

Now for the much more interesting question: Why do Britain and France continue to maintain a nuclear deterrent? The two countries now have just four nuclear strike submarines each. The UK abandoned its airborne capability in 1998 and is now dependent on these subs. France still has an airborne capability, but this is steadily reducing, and its submarines now carry 80 percent of its nuclear weapons.

Yet, France has maintained its total nuclear weapons stockpile at around 400. Britain has probably halved its stockpile from 350 to about 170 since the end of the Cold War -- a level that is now smaller than Israel's estimated force and roughly equal to those of India and Pakistan. But the British government announced in March 2007 that it would spend 20 billion pounds to replace its nuclear sub force when it becomes obsolete a decade from now.

So this collision did not amount to a serious accident, but it may prod some to question why France and Britain would spend billions to maintain a nuclear weapons deterrent, a symbol of prestige more than a security guarantee, in the midst of a global recession.

I'll leave that question for French and British officials to answer.

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