We're Headed for a Geopolitical Recession

We're Headed for a Geopolitical Recession

When Ian Bremmer expresses his views on world affairs, the smart money listens.

And no wonder.

He’s credited with bringing the craft of political risk to financial markets (he created Wall Street’s first global political risk index—the GPRI) and for establishing political risk as an academic discipline.

He’s also the author of nine books, including national bestseller The End of the Free Market: Who Wins the War Between States and Corporations?

In addition, he appears regularly on CNBC, Fox, Bloomberg, CNN, the BBC, and other networks, he’s the foreign affairs columnist and editor-at-large for Time, and is a regular columnist for Reuters and the Financial Times A-List.

Currently, he’s president and founder of Eurasia Group, a leading global political risk research and consulting firm he started in 1998 with just $25,000.

Now, Eurasia Group has offices in New York, Washington, San Francisco, London, Sao Paulo, Singapore, and Tokyo, as well as experts scattered throughout 90 countries.

Below is a synopsis of what he and EG Chairman Cliff Kupchan see as the biggest risks for investors and business decision-makers to worry about this year.

It’s disquieting, to say the least…

Top Risks for 2017

Eurasia Group

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 US power overwhelmingly to advance US 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—US foreign policy. Allies, especially in Europe and Asia, will hedge. Rivals like Russia and China will test. US-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 US-Chinese tensions might play out—North Korea, Taiwan, Hong Kong, the East and South China Seas, and in US-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 US, but the DPRK appears to be approaching the finish line at a time of dangerously deteriorating relations between China and the US. 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 US 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.

The above was an excerpt from the Eurasia Group’s annual forecast of the political risks most likely to play out in 2017. You can read the full report and see an accompanying video here (highly recommended).