Today, The Call presents our top risks for 2013. Click HERE for Eurasia Group's complete report.
1. Emerging markets -- The era of emerging market abundance is
finished. As the United States and Europe slowly regain their economic footing, the
political risk focus will return to the emerging market world, where
differences among the largest players will become more obvious. Slower growth
and rising expectations from larger and more demanding middle classes will
create public pressure on governments, meaning that emerging markets -- including
the increasingly suspect BRICs -- should no longer be treated as an asset class
for outsized growth. Consideration instead should shift toward which
developing country governments have enough political capital to remain on track
to a more advanced stage of development.
2. China vs. information -- China's new leadership faces many challenges in 2013, most importantly the state's growing inability to control the flow of ideas and information across borders and within the country. Until now Beijing has been largely effective in isolating online discourse to focus on discrete issues without culminating in real challenges to the government's decision-making or policy. But every corruption scandal and example of official malfeasance makes the next event more difficult to navigate, and the risk is that a broad-based social movement for change will gain momentum in China in 2013, distracting the government from its domestic and foreign policy priorities and potentially weakening investor confidence in the stability of the mainland market.
3. Arab Summer -- We are far beyond the Arab Spring, and an Arab Winter, where dictators rebound and consolidate power, has not materialized. Instead we are approaching an Arab Summer, whereby the region will witness radicalized movements -- both sectarian and Islamist -- playing a much more important role. As outside powers look to avoid direct involvement in the region's risks, local powers -- Iran, Turkey, Saudi Arabia and others -- will compete for influence and play out their rivalries. At the center of this lies Syria, whose civil war now has implications that extend far beyond the humanitarian. Syria has become a proxy conflict for Shiite and Sunni powers, as well as a magnet for jihadists, increasing the geopolitical risk overall and sparking further insecurity throughout the region, most notably in Iraq, Jordan, and Turkey.
4. United States -- Every silver lining has a dark cloud. While the fiscal cliff was averted, the process by which the deal was reached casts a large shadow over hopes that the election might create a more conducive environment for cooperation, and dysfunctional American politics will weigh on both the U.S. economic recovery and President Obama's legislative agenda. This is not about a politically induced new recession, let alone a major financial crisis. But political uncertainty over corporate taxes and a series of noisy brinkmanship episodes will generate a modest but real drag on growth.
5. JIBs (Japan, Israel, Britain) -- These are the three current global trends that matter most: China is rising, the Middle East is exploding, and Europe is muddling through. Set against a G-zero backdrop, the structural losers of these trends are the JIBs (Japan, Israel and Britain): countries influenced most directly and problematically by changes now underway in the geopolitical order. All three countries are now in a similar position for three reasons: their special relationships with the United States are no longer quite as important; they sit just outside the major geopolitical changes underway, without the means to play a constructive role; and key domestic constraints in all three countries (political, social, historic, and otherwise) make it particularly difficult for them to respond effectively to the challenges posed by a shifting global order.
6. Europe -- There will be no grand implosion, but the muddle-through approach to crisis management carries risks of its own. The eurozone is headed for neither breakup nor resolution, and in 2013 the risks shift from a threat of financial crisis to a loss of momentum in creating the institutional and policy frameworks for a redesigned union. The weak economic outlook and the politics of crisis-fighting will also remain sources of uncertainty. Simultaneously, euro-skepticism is on the rise and resistance to reforms is increasing in the face of protracted austerity and few prospects for an economic turnaround.
7. Asian geopolitics -- In 2013, geopolitical risk will continue growing in East Asia in a new and potentially more dangerous way. Facing increased nationalism in China and Japan, the United States will look to play a larger role, giving oxygen to the hedging strategies of many regional states seeking closer American ties. Territorial disputes over the East China and South China Seas will also create new friction, and at risk overall is East Asia's decades-long distinction as a zone where positive-sum commerce and economics trumps zero-sum geopolitical tension.
8. Iran -- The significant risk in Iran this year is not the one everyone's thinking about. A strike on the country's nuclear program is unlikely, but biting sanctions, other forms of international pressure, and leadership tensions make Iran less predictable and heighten the stakes of an ongoing shadow conflict with Israel and the United States -- one with the potential to rattle markets and put upward pressure on oil prices.
9. India -- India in 2013 will be one of the prime examples of the intrusion of political factors into what had until recently been seen as a long-term economic success story. The country's dysfunctional politics and looming elections feed the risk of an economic shock, and in 2013 the ability of the government to implement robust economic policies will decline even further, perpetuating India's "stalling or falling" outlook.
10. South Africa -- In aggregate growth terms, Africa as a whole looks to be on a trajectory to continue its recent position of positive performance. But in South Africa -- one of the continent's largest and most sophisticated economies -- the outlook is far less rosy. Populism, spearheaded by the ruling ANC party, is on the rise, and it is hard to see any real movement on labor, education, and budgetary reforms. Coming retrenchments in mining will almost certainly spur another bout of labor unrest, which has the potential to spread into other sectors as well. Taken together, all these factors increase the risk of further credit downgrades.
In addition to these, Eurasia Group's red herrings for 2013 include:
The geopolitics of energy -- 2013 isn't the year to get overly concerned about geopolitical risk spiking energy prices. For one thing, most of the Middle East risk in the coming year isn't about energy -- it's about everything else -- and the energy revolution happening in the Western Hemisphere will be a boon for consumers across the globe.
Global protectionism -- The G-20 can afford to agree on protectionism because there's less of a threat here than meets the eye. The trend in fact is toward hints of competitive trade liberalization, especially within the European Union, which is generating a strong internal consensus on the need for a new major transatlantic economic cooperation package.
Radicalism in the developed world -- Many fear the growing gap between rich and poor will instigate class warfare and cause significant instability across the developed world. We think not. For much the same reason that emerging markets are the top risk this year, it's the underlying stability of advanced industrialized democracies that will come through in 2013.
European separatism -- There is no doubt that there are very real separatist pressures building in Catalonia and in Scotland, and national unity remains fragile in Belgium. However -- as much as we all would love to watch Barca field its own team in the World Cup -- there is almost no chance that any of these issues will grow into an actual crisis leading to separation in 2013.
? - North Korea -- Sometimes, you just can't know what's happening, and with North Korea in 2013 that's really the case. In the face of a sudden leadership transition in the world's most totalitarian state -- now run by an untested 28-year-old -- it's almost impossible to assess whether North Korea is becoming more stable. All signs point to the country remaining a perilous bet, but what causes trouble and when? It's hard not to lose sleep over it, but at the same time working harder to assess what exactly is going bump in the night doesn't feel very purposeful. Sorry.
Over the next three weeks, we'll be posting more ideas and information on each of these risks.
SAJJAD HUSSAIN/AFP/Getty Images
By Wolfango Piccoli
British voters are set to reject electoral reform in the May 5 referendum and deal a blow to the incumbent Conservatives and Liberal Democrat Party (LDP) in local and regional elections held concurrently. The fight over the electoral reform will damage the relationship between the coalition partners, but the government will survive and early elections are unlikely.
The referendum lies at the heart of the power-sharing deal struck between the Conservatives and the LDP. The LDP demanded the vote as a key condition for joining the coalition after the Tories, who want to retain the existing first-past-the-post system, failed to win a clear victory in last year's general election. The Labour party is split on the issue, but its leader Ed Miliband supports a system in which voters rank candidates in order of preference.
Local government elections will also be held in Scotland, Wales, and much of England, providing the first comprehensive indication of how the main parties have fared since last year's general election. Labour is expected to make the most gains, with some pollsters suggesting the party could gain more than 1,000 council seats. Prime Minister David Cameron's Conservative Party is expected to suffer big losses, possibly as many as 900 seats. The LDP meanwhile could lose control of around half of the 22 councils it is defending, possibly including prized possessions such as Bristol, Hull, Newcastle, and even Sheffield, where party leader Nick Clegg's seat is located.
In such a scenario, Nick Clegg will have to contend with disgruntled party members (mainly from the left of the party), who may step up their criticism of the coalition and he may even have to fight a leadership challenge. But there is no viable replacement and he will continue as party leader. To recover, Clegg is likely to champion (with the prime minister's consent) an accelerated reform for the House of Lords, push ahead with his social mobility agenda for higher education, and fight for changes to the National Health Service.
The Liberal Democrats will not, however, leave the coalition. The party would cede all credibility if it were to walk away. Also, the LDP is down in the polls, which provides no incentive to provoke an early election. Neither will the Tories be tempted to end the relationship. They are unlikely to win a parliamentary majority in a snap election. But it will not be business as usual after 5 May. Clegg's party will strike a more independent tone, reminding the Conservative Party that it owes the LDP for its ability to govern.
Wolfango Piccoli is a director in Eurasia Group's Europe practice.
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There are several fascinating elections due this year. Next month, we can look forward to Britain's most unpredictable outcome in 100 years. In Poland, former Prime Minister Jaroslaw Kaczynski has become a presidential candidate in hopes of succeeding his twin brother Lech, killed in a plane crash earlier this month. Japan's ruling DPJ faces a referendum on its first turbulent months in power with upper house elections this summer. In November, recession-weary Americans will go to the polls to elect a new congress.
With all that going on, you probably haven't thought much about next month's local elections in North Rhine-Westphalia, Germany's largest state. Eager to institutionalize a post-bailout era of greater fiscal discipline, the German government is preparing to push for a major revision of eurozone rules in the form of a new European Union treaty. The aim is to build momentum behind a drive for fiscal consolidation and greater powers to enforce rules across the currency union.
But it's hard to imagine that Chancellor Angela Merkel's government will get what it wants. Irreconcilable differences remain among key European states, and Germany doesn't have the political power it held a generation ago in the run-up to introduction of the euro. Today's union is much larger, and the perceived benefits of convergence are worth less. The contentious debate over a new treaty will unfold just as the battle is heating up to replace Jean-Claude Trichet as president of Europe's Central Bank.
The immediate concern is that Standard & Poor's lowered Greece's debt rating to junk on Tuesday and Portugal by two steps. The big longer-term worry for Europe is that politicians locked into tough deflationary programs (in Greece and beyond) will take the once-taboo step of pushing for debt restructuring. We're not talking about the break-up of the eurozone, no matter how much apocalyptic rhetoric we hear in days to come or how many pundits write articles this fall with titles like "Who killed Europe?" But the less dramatic risks for European fiscal policy are plenty serious.
That's where Germany's local elections come in. The balloting in North Rhine-Westphalia, home to more than 20 percent of Germany's citizens, will provide a real test of Angela Merkel's center-right government. A bad result would jeopardize Germany's shot at tax reform. More to the point, it would weaken the entire eurozone by undermining support for fiscal discipline at the heart of Europe.
A return of the German left, even a modest one, will generate much more expansionary policy than we saw during the grand coalition period between 2005 and 2009. That will create stronger institutional support for German labor demands, driving a rebalancing within the eurozone as German labor costs begin to rise. That will undermine European competitiveness at a delicate moment in the union's recovery from recession. Over the longer term, it's hard to imagine Europe's fiscal woes improving in that environment. That's why I believe strongly in the eurozone, but not in a strong eurozone.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, May 2010)
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By Daniel Kerner and Willis Sparks
Remember when Britain and Argentina went to war over a handful of hard-scrabble islands with little to recommend them but two thousand windblown people and a few million penguins? In 1833, Britain seized and begun occupying what it called the Falklands, a set of islands just 350 miles off Argentina's coast and about 8,000 miles from London. Argentines, who refer to them as Islas Malvinas, have demanded their return ever since.
In April 1982, General Leopoldo Galtieri's military government announced that Argentina had finally claimed ownership of the islands. Prime Minister Margaret Thatcher insisted that they still belonged to Britain. To rally the Argentine people to a military junta blamed for large-scale human right abuses and a floundering domestic economy-and convinced that Thatcher would let the islands go rather than fight for them, Galtieri ordered an amphibious invasion. The British navy arrived and quickly forced an Argentine surrender.
The war lasted 74 days and killed 255 British and 649 Argentine troops -- along with three local residents. The Argentine government was soon forced from power, and Thatcher rode a surge of patriotic pride to a landslide re-election the following year.
Though Argentina withdrew, it has never surrendered its legal claim on the islands; ownership is enshrined in the country's constitution. The Falklands have experienced an economic boom in recent years, thanks to the revenue generated by increased exports of squid. But for most people outside Argentina and Britain, the war represents little more than a curious footnote of naval history.
Until last weekend.
On Sunday, a British-based oil company, Desire Petroleum, began drilling for oil in the northern basin of the islands. The news has provoked sharply rising tensions between a lame duck government in Britain, where the 1982 war remains a point of pride, and a struggling government in Argentina, where hard feelings over the conflict remain alive and well. Both governments face critical elections -- Britain later this year and Argentina in 2011.
Faced with few real options, the Argentine government tried to pre-empt the British exploration with a decree on February 16 that all ships moving to and from the islands that use Argentine ports or pass through Argentine waters must have a permit. Cristina Fernandez de Kirchner's government is now tightening the diplomatic screws on Britain, mainly by working to win broad support for its position from across Latin America. Other British oil companies are expected to explore the area soon.
Exploration will continue for the next few months. Local officials in the Falklands government claim there could be as many as 60 billion barrels in reserves beneath the basin, but some experts are skeptical. It's not yet clear that oil deposits near the islands contain enough accessible oil to make further investment worthwhile. Tensions will likely subside in coming weeks, and no one envisions a sequel to a war that killed nearly 1000 people. The Argentine government has said publicly that armed conflict is not an option, and the Argentina public is highly unlikely to support one.
But what if local officials are right about size of the oil reserves? What if there is much more oil there than some experts think? If two governments fighting for their political lives at home will go to war over islands famous only for their penguins, what might they do to secure billions of barrels of oil?
Daniel Kerner is a Latin America analyst at Eurasia Group, and Willis Sparks is an analyst in the firm's Global Macro practice.
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I had a random ten minute conversation over a nap-eschewing espresso with a soft-spoken Rich Gelfond, CEO of Imax. Just before he had met with a senior Chinese exec -- 40% of their market is in China ... and they're very tied in. They spent five years getting to know key government officials before they started doing actual business, and he's got about twenty years of time now in Beijing. That's Doing Business in China 101. I've no particular interest in promoting Imax, but it does strike me as less than coincidental that while the Chinese government recently stopped showing Avatar in their cinemas, China's Imax screens are all still sold out and running.
Speaking of full color tablet reading, on the way out I bumped into one of the senior correspondents from Abu Dhabi's major newspaper, The National. I always read it when I'm there -- they pretty much wallpaper the local hotels. The journalism is reasonable (as long as you're not talking local politics), but the layout is just stunning. His response--"yes, for as long as it lasts." I suggested they rename the paper to The Khalifa. Seemed like a good hedge.
I have dinner with the conservatives tonight -- Sen. Lindsay Graham (R-SC) and David Cameron (soon to be PM-UK). Very interested in their views on Europe -- have they yet come to the view that a strong, united Europe is good for all of us? Logic dictates yes. Politics suggests no. Dare I be privately hopeful?
Ian Bremmer will be blogging from Davos this week sending reports and commentary from inside the World Economic Forum.
by Ian Bremmer
vulnerabilities of emerging markets to social upheaval and state failure as a
result of the financial crisis is probably the most significant risk the world
will face this year. That's why last week's G20 decision to
significantly expand funding for the International Monetary Fund was so
important -- and part of why the meeting itself was successful. This success is
especially obvious once we accept the limits of what this forum can really
accomplish. An urgent call for help was answered, but there was never any real
chance that leaders would use this meeting to remake the international
financial and economic order in a way that genuinely reflects the shift of
recent years in the global balance of political and economic power.
But the seeds have been planted for longer-term problems. Chinese President Hu Jintao said very little during the event but was given an enormous level of respect by the other G20 participants and the media. This reflects the reality that many are now ready to accept China as a superpower. For the near term, this change will prove useful, because China has the money to help fund existing international financial institutions shepherd vulnerable countries through their domestic economic problems. But longer-term, it may become a problem, because China isn't fully ready to play this role and because China's leaders have fundamental disagreements with the leaders of other powerful states on how the global economic system should be governed.
Looking ahead, the broader promise of a G20 remaking the international order for long-term sustainability remains unrealistic. Reimagining the architecture of any multinational effort -- not just of financial institutions but of the nuclear non-proliferation regime, the composition of the United Nations Security Council, efforts to stop the international flow of illegal drugs, agreement on a single definition of "terrorism," a successor to the Kyoto protocols that will have a meaningful impact on climate change, and other difficult issues. That's just not possible in today's geopolitical environment.
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The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.