Wednesday , March 21, 2018

Top 10 Global Risks of 2017

Top 10 Global Risks 2017Eurasia_logo

The World Enters Geopolitical Recession

 The Eurasia Group first wrote about the coming of the “G-Zero” world—a world with no global leader—six years ago. Prescient. While it seemed unconventional at that time, it is becoming increasingly evident. The group’s President Ian Bremmer and Chairman Cliff Kupchan recently presented their Top Risks 2017 report, identifying the most challenging political and geopolitical trends and stress points for global investors and market participants in 2017.

“The underlying shifts in the geopolitical environment have been clear,” according to the report, “a U.S. with less interest in assuming leadership responsibilities; U.S. allies, particularly in Europe, that are weaker and looking to hedge bets on U.S. intentions; and two frenemies, Russia and China, seeking to assert themselves as (limited) alternatives to the U.S.—Russia primarily on the security front in its extended backyard, and China primarily on the economic front regionally, and, increasingly, globally.

“These trends have accelerated with the populist revolt against ‘globalism’—first in the Middle East, then in Europe, and now in the U.S. Through 2016, you could see the G-Zero picking up speed on multiple fronts: the further deterioration of the transatlantic alliance with Brexit and the ‘no’ vote on the Italy referendum; the end of America’s Asia pivot with the collapse of the Trans-Pacific Partnership and the Philippine president announcing a break with the U.S.; the Russian victory in Syria after backing President Bashar al Assad through nearly six years of war.

“But with the shock election of Donald Trump as president of the U.S, the G-Zero world is now fully upon us. The triumph of ‘America first’ as the primary driver of foreign policy in the world’s only superpower marks a break with decades of U.S. exceptionalism and belief in the indispensability of U.S. leadership, however flawed and uneven. With it ends a 70-year geopolitical era of Pax Americana, one in which globalization and Americanization were tightly linked, and American hegemony in security, trade, and promotion of values provided guardrails for the global economy.”

Ominously, the report indicates, “This year marks the most volatile political risk environment in the postwar period, at least as important to global markets as the economic recession of 2008. It needn’t develop into a geopolitical depression that triggers major interstate military conflict and/or the breakdown of major central government institutions. But such an outcome is now thinkable, a tail risk from the weakening of international security and economic architecture and deepening mistrust among the world’s most powerful governments.”

According to Bremmer and Kupchan, at the top of the list in 2017 is the risk presented by Independent America: “The triumph of ‘America first’ as the primary driver of foreign policy in the world’s only superpower marks a break with decades of U.S. exceptionalism and belief in the indispensability of U.S. leadership. Independent America renounces exceptionalism, the notion that the U.S. actively promotes democracy, civil rights, and rule of law.”

Below follows a summary of the top 10 global risks for 2017.

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1- Independent America

The world’s sole superpower was once the international trump card, imposing order to force compromise and head off conflict. Now it’s a wildcard. Instead of creating policies designed to bolster global stability, President-elect Donald Trump will use U.S. power overwhelmingly to advance U.S. interests, with little concern for the broader impact. Trump is no isolationist. He’s a unilateralist. Expect a more hawkish—and a much less predictable—U.S. foreign policy. Allies, especially in Europe and Asia, will hedge. Rivals like Russia and China will test. U.S.-led institutions will lose more of their international clout.

2- China Overreacts

China’s leadership transition will create risks that matter far beyond that country’s borders. The need to maintain control of the transition ahead of next fall’s party congress will increase the risk of economic policy mistakes that rattle foreign investors and international markets. In addition, President Xi Jinping knows this is a dangerous time to look weak and irresolute. Provocations from Trump, and the multitude of areas where U.S.-Chinese tensions might play out—North Korea, Taiwan, Hong Kong, the East and South China Seas, and in U.S.-Chinese political and economic relations—make 2017 a dangerous year for China and all who depend on it for growth and stability.

3- A Weaker Merkel

Strong leadership from Angela Merkel has proven indispensable for Europe’s ability to manage crisis in recent years. Europe will face more challenges in 2017—from France’s elections, Greece’s finances, Brexit negotiations, and delicate relations with both Russia and Turkey. Unfortunately, though Merkel is likely to win reelection as Germany’s chancellor in 2017, she’ll emerge as a weakened figure. This will leave Europe with no strong leadership at all—at a time when strong leaders are badly needed.

4- No Reform

Don’t expect a surge in needed economic reforms in 2017. Some leaders, like India’s Modi and Mexico’s Pena Nieto, have accomplished as much as they can for now. In Russia, France, and Germany, reform will wait until after coming elections, and China faces an all-consuming leadership transition next fall. Turkey’s Erdogan, Britain’s May, and South Africa’s Zuma are fully occupied at the moment with domestic political challenges. In Brazil, Nigeria, and Saudi Arabia, ambitious plans will advance but fall short of what’s needed.

5- Technology and the Middle East

Each year, governments in the Middle East lose more of their legitimacy. Technological change is critically weakening an already fragmenting region. The risks are both top-down and bottom-up. The revolution in energy production undermines the stability of states still deeply dependent on oil and gas exports for state revenue. Automation of the workplace will make it even harder to create jobs for growing numbers of young people. New communications technologies continue to enhance the ability of angry citizens to commiserate and organize. Cyber conflict is further shifting the region’s precarious balance of power. Finally, “forced transparency” (think Wikileaks, etc.) is especially dangerous for brittle authoritarian regimes.

6- Central Banks Get Political

Western central banks are increasingly vulnerable to the same sort of crude political pressures that distort economies in developing countries. Britain’s May has blamed the Bank of England for low rate policies that have increased income inequality. In Germany, Wolfgang Schaeuble has argued that low interest rates have reduced the incentives for peripheral European states to reform. Trump accused the Federal Reserve of helping Hillary Clinton. In 2017, there’s a risk that Trump will use the Fed as a political scapegoat, putting new pressure on future Fed decisions. He might also use Janet Yellen’s departure to replace her with a personal ally, undermining the Fed’s credibility for years.

7- The White House vs. Silicon Valley

Trump and the tech sector don’t have much in common. Trump wants security and control. The tech firms want freedom and privacy for their customers. Trump wants jobs. The tech firms want to push automation into overdrive. The two sides differ substantially on investment in science. In 2017, there will be plenty for the White House and Silicon Valley to fight over.

8- Turkey

President Erdogan continues to use an ongoing state of emergency to tighten his control of day-to-day affairs, as well as on the judiciary, bureaucracy, media, and even the business sector through waves of arrests and purges. In 2017, he’ll use a referendum to formalize his powers, and his strengthening grip will exacerbate the country’s economic problems and its tense relations with neighbors and with Europe. Turkey is a volatile player in an increasingly volatile region.

 9- North Korea

It’s hard to know exactly when North Korea will have a missile capability that poses a clear and immediate danger to the U.S., but the DPRK appears to be approaching the finish line at a time of dangerously deteriorating relations between China and the U.S. Serious tensions will likely arise between the two over additional sanctions. And if President Park is forced from office in South Korea and replaced with a center-left government that favors diplomacy, a tough Trump policy could roil geopolitics throughout the region.

10- South Africa

The deeply unpopular President Zuma is afraid to pass on power to someone he doesn’t trust. Resulting infighting over succession poses an obstacle to any effort on needed reforms and limits South Africa’s ability to offer leadership to help stabilize conflicts inside neighboring countries.

* Red herrings

Bremmer and Kupchan expect that U.S. domestic policy poses fewer risks than foreign policy, because Congress has greater power to impose predictability on an unpredictable new president. Don’t expect a flare-up in India vs. Pakistan at a time when both governments need stability. And Brazil will have an easier 2017 as legislators try to appease public anger for change by making progress on President Temer’s agenda.

Eurasia Group is a leading global political risk research and consulting firm, providing information and insight on how political developments move markets and helping clients anticipate and respond to instability and opportunities everywhere they invest or do business. Top Risks 2017: The Geopolitical Recession was prepared by Eurasia Group, 3 January 2017.


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