Welcome to the "geopolitical recession"
With the election of Donald Trump, the G-zero world is now fully upon us.
The triumph of an “America first” foreign policy marks a fundamental break with decades of U.S. exceptionalism and a consensus view in Washington that U.S. international leadership, however flawed and uneven, is indispensable for international stability.
That in turn is set to bring to an end the 70-year era of Pax Americana, a period in which U.S. hegemony in security, trade, and the promotion of values provided baseline predictability for the global economy. In 2017, we enter a period of deep geopolitical recession.
With these ideas as backdrop, here are the top 10 political risks for the coming year, according to the Eurasia Group — the political risk consultancy I founded and oversee. There are also a few “red herrings,” stories where we see less risk than meets the eye:
1. Unpredictable 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, because instead of creating policies designed to bolster global stability, President 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 China and even Russia will test. U.S.-led institutions will lose more of their international clout.
2. China Overreacting
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 the Party Congress in the fall 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 sheer number of places where U.S.-China tensions might play out — North Korea, Taiwan, Hong Kong, the East and South China Seas — make 2017 a dangerous year for China, and all who depend on it for growth and stability.
3. A Power Vacuum in Europe
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 re-election 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. A Pause in Economic Progress
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 France and Germany, reform will wait until after coming elections, and China faces an all-consuming leadership transition in the 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 Disrupting the Middle East
Each year, governments in the Middle East lose more of their legitimacy. Technological change is further weakening an already fragmenting region. The risks are both top-down and bottom-up. The revolution in energy production undermines the stability to 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 find like minds and to 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. Politics Interfering with Central Banks
Western central banks are increasingly vulnerable to the same sort of crude political pressures that distort economies in developing countries. 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 eventually use Janet Yellen’s departure — her term is due to end in February 2018 — to replace her with a personal ally, undermining the Fed’s credibility for years. This isn’t just a U.S. risk. Britain’s Theresa May has blamed the Bank of England for low rate policies that have increased income inequality. In Germany, Wolfgang Schäuble has argued that low interest rates have reduced the incentive for peripheral European states to accept the need for reform.
7. The White House vs Silicon Valley
President Trump and the tech sector don’t have much in common. Trump wants security and control. The techs want freedom and privacy for their customers. Trump wants jobs. The techs want to push automation into overdrive. The two sides differ substantially on investment in science. In 2017, there will be plenty for Trump and the giants of Silicon Valley to fight over.
8. Turkey’s Ongoing Crackdown
President Erdogan continues to use an ongoing state of emergency to seize control of day-to-day affairs and tighten his hold on the judiciary, bureaucracy, media, and even business sector through waves of arrests and purges. In 2017, he’ll likely use a referendum to formalize his powers, and his tightening grip will exacerbate the country’s economic problems and his worsening relations with Europe and his neighbors. It’s a volatile player in an increasingly volatile region.
9. North Korea Rattling Its Saber
It’s hard to know exactly when North Korea will have a missile capability that poses a clear and immediate danger to the United States, but the DPRK appears to be approaching the finish line. Kim Jong Un said in his New Year’s message that preparations for launching an intercontinental ballistic missile (ICBM) had “reached the final stage” — though as ever with North Korea, that claim has not been independently confirmed. At a time of dangerously deteriorating relations between China and the United States, the two countries that will have to work together to manage the fallout, a belligerent North Korea is an especially dangerous arena of great power conflict.
10. A Struggling South Africa
The deeply unpopular President Jacob Zuma, beset by corruption allegations, is afraid to pass power to someone he doesn’t trust. The resulting infighting over succession stalls any momentum toward crucial economic reform in the country and limits South Africa’s ability to offer leadership needed to stabilize conflicts inside neighboring countries.
U.S. domestic policy poses fewer risks than foreign policy, because the Republican-controlled 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. Brazil will have an easier 2017 as legislators try to appease public anger for change by making progress on President Temer’s agenda.