Geoeconomics now sits alongside geopolitics when it comes to war, peace and prosperity. Economic statescraft now is a key component of global foreign policy and state capitalism is the main challenge to the free market. This one of the remarkable analyses in the forecast for 2013 of the influential company Eurasia Group, researching global risk, which in the beginning of every year presents the top ten risks for the world.
Europe no longer is among the first five biggest risks
Unlike last year, when the eurozone crisis was outlined as the third biggest risk on the planet, in 2013 the company has put Europe on the sixth place. The biggest risk the eurozone faces this year is the loss of momentum in creating the institutional frameworks for a new design of the zone of the single currency. The weak economic outlook and the crisis politics remain sources of uncertainty this year too. Eurasia Group fully shares the fears of Jose Manuel Barroso, the European Commission chief, who around the presentation of his ambitious blueprint for reforms of the Economic and Monetary Union (EMU), said that because of fading market pressure, the leaders will lose ambition in taking strategic decisions. The consultant company points precisely this - that in the absence of strong market pressure the member states will tempt to slow down the pace of integration, which was very clear at the last European Council on December 13-14.
The euro area is facing two more dangers: the elections in Italy and in Germany. The biggest risk in terms of Italy, the analysts from the group believe, will stem from possible inconclusive outcome of the parliamentary elections in the end of February. They may produce a fragmented parliament, with a majority of anti-austerity populist parties. The new government will find it difficult to maintain political stability and achieving a consensus on unpopular economic reforms will be a challenge that will increase the risk of market volatility and higher prices of funding, the forecast reads. In that context, Eurasia Group predicts that the government will request to conclude a precautionary programme with the European Stability Mechanism (ESM, the permanent bailout fund of the eurozone).
That would allow the European Central Bank to buy out Italian debt on the secondary market but only if the government in Rome would sign and would implement a certain number of economic reforms. And this is the biggest challenge, according to the analysts - if the government does not implement its commitments under the programme, the ECB will face three difficult choices: 1. either to insist on the adoption of additional fiscal measures that would further undermine growth; 2. or to continue to buy out bonds even if the targets are not met, thus undermining its own credibility and encouraging moral hazard in Italy and elsewhere; 3. or to stop purchasing bonds, deepening the crisis in Italy and therefore in the eurozone in a moment when both are most vulnerable.
The elections in Germany come as the cherry on the pie after the forecast for Italy -both in timing and in terms of expectations. They will be in the autumn and that is the problem. The Eurasia Group's expectations are that in spite of the almost certain victory of Angela Merkel and her staying for a third term in a row, Germany's being busy with the elections will force the government to delay as much as possible any decisions that could harm her popularity. That, against the backdrop of the expectations about Italy, outlines quite an unpleasant picture for 2013 when we were to see the first results from a second stormy year in a row of legislative activities (2012).
The truth about the emerging markets
I started with the euro area because the developments there affect directly all of us in Europe (and beyond) but in fact risk number one, according to Eurasia Group, are the countries which analysts called several years ago 'emerging markets' because of the opportunities they provided for investors and for the developed countries in terms of export destinations. According to the analysts, the era of abundance of emerging markets as generators of excessive growth is over. They break down the group into three subgroups. It is very interesting to see in which subgroup some big and influential countries go after that breaking down.
- A - becoming developed. Those are countries that have the tools to respond effectively to domestic and external challenges and to continue implementing policies that attract investments. In that group fit most of the Latin American countries, Turkey, Oman, the United Arab Emirates, South Korea, Malaysia and the Philippines;
- B - still emerging and therefore problematic. Those are the countries with potential but much more uncertainty than it is generally understood. It is about mainly political instability (and/or unwillingness to face the domestic political risks) in a combination with strong economic challenges. In that group fit India, Indonesia, Egypt, Iraq, Saudi Arabia, Thailand, Peru, South Africa. The big surprise is China because the country is expected to double its efforts to keep the current model of development to ensure its security which, however, could threaten the foreign companies and investors;
- C - the group of the backsliding countries. The analysts call them submerging - not only that they do not perform well economically, but they also generate unacceptable levels of political risk. In the absence of effective governance and facing serious economic challenges, those markets do not deserve the benefits they were awarded while under the label "emerging", Eurasia Group believes. The most vivid representative of this group is Russia where, according to the forecast, the possibilities are diminishing quite fast on almost every front. In that group fit many of the so called "frontier markets", such as Pakistan and Ukraine. By the way, at the summer Davos two years ago, Simeon Djankov, Bulgaria's deputy PM and minister of finance, defined Bulgaria as a frontier market. Although nothing is mentioned in Eurasia Group's forecast about Bulgaria, the group in which Mr Djankov put it deserves attention.
The Chinese information war is the second biggest global risk because of the growing usage of Internet in China. Currently, almost half of the population in the country have access to the Internet, while some 400 million people use the local social networks. That will aspire the government to shout louder than everyone and to steer the conversation.
A source of significant risk is the tension in the Middle East which will continue to grow, according to the forecast of Eurasia Group. The political conflicts in Washington are also among the biggest risks. But very interesting is the new group JIB - Japan, Israel and Britain. This group is particularly interesting not only for consisting of incompatible with each other, at a first glance, countries, but also for the challenges they are facing. According to the analysts, three are the global trends that matter the most: China's rise, the Middle East exploding and the crisis in Europe. The structural losers from those trends, however, are these three countries, which will suffer the greatest implications (director or indirect) because they are in a very similar situation.
On the one hand, their special relations with the United States are no longer as important as they used to be; they do not participate in the big geopolitical changes and they also lack the tools to play constructive role anyway; and finally, they suffer from severe domestic constraints (political, social, historical) which prevent them from responding adequately to the challenges. Of the three countries, Britain is of particular interest because of the increasingly frequent usage of the term "Brexit" (Britain + exit) from the EU. Something the analysts reject as a possibility in 2013 but point out that this year the country will become even more with its legs apart. On the one hand, if it stays in the EU, Britain will be even more marginalised while the Eurogroup will play bigger role and it wins only small battles over regulation issues.
But if they leave, they will face a Europe which will be increasingly heading in a different direction in terms of economic policy but also in terms of regulation models. In other words, the benefits Britain had from the "two worlds" are coming to an end and it is worth David Cameron to have that in mind when preparing his speech on Europe.