With 2017 comes the beginning of a “G-Zero world,” or a world with no global leader, according to a new study.
Eurasia Group, which tries to help investors understand the impact of politics on the risks and opportunities in foreign markets, blames a number of factors: the U.S.’s decreasing interest in assuming leadership, weaker U.S. allies, Russia and China asserting themselves as security and economic alternatives to the U.S., Brexit, the collapse of the Trans-Pacific Partnership, and Russia’s recent victory in Syria.
But it was Donald Trump’s election that brought this G-Zero world to a head, resulting in what the firm calls a “geopolitical recession.” This year, according to the Eurasia Group, “marks the most volatile political risk environment in the postwar period, at least as important to global markets as the economic recession of 2008.”
To comprehend what 2017 may bring on a global scale, the group has released its annual forecast of the political risks it says are the most likely to play out over the year:
1. Donald Trump and his “Independent America”
Trump has surrounded his campaign, and now his forthcoming presidency, on one core American value: Independence, according to Eurasia Group. From “Make America Great Again” to his America first philosophy, Trump plans to make the U.S. “independent” from its responsibility to play “an indispensable role in world affairs” by “shaking off the burdens placed on the U.S, by multilateral institutions and a range of allies.”
“This is not isolationism,” the group writes. “As leader of the world’s most powerful country, Trump rejects the comparative weakness of the presidency, and he wants to more directly project American power in service of U.S. national interests. He’s a resolute unilateralist.”
2. China could overreact
Fear and frustration among China’s party and business elites are at their highest level since Mao Zedong’s time, according to Eurasia Group. Provocations in North Korea, the East China Sea, Japan, Taiwan, Hong Kong, and the South China Sea all have the potential to cause an overreaction from Chinese leaders.
“[President] Xi will be extremely sensitive to external challenges to his country’s interests at a time when all eyes are on his leadership,” the group predicts. “The Chinese president will be more likely than ever to respond forcefully to foreign policy challenges.”
3. Germany’s Angela Merkel will be less powerful
A refugee policy that lacks support (both in Germany and in Europe), a series of corporate crises involving some of Germany’s most important companies, (Volkswagen, Deutsche Bank, and Lufthansa), and the rise of populism have all undermined Merkel’s leadership as of late.
“Europe has never needed a strong Merkel more,” according to the group. “In 2017, she’ll be unavailable for the role.”
4. No reform
Eurasia Group predicts that political officials, both in developed and emerging economies, will avoid structural reform—thus undermining prospects for growth and new opportunities for investors.
“The reform needle won’t move in 2017. Save for a few bright spots, money won’t know where to flow.”
5. Technology in the Middle East
Technology has proven to be a force of political instability in the Middle East instead of enhancing economic growth. Energy, connectivity, cyber, automation, and forced technological transparency will all challenge many of the region’s governments, existing and authoritarian regimes, and Middle Eastern systems.
“Technology, a force for economic growth and efficiency, also exacerbates political instability.”
6. Central banks are becoming political
Politicians have blamed central bankers for political and economic difficulties, but these attacks represent a risk to global markets in 2017 by “threatening to upend central banks’ roles as technocratic institutions that provide financial and economic stability,” the group predicts.
“In Germany, Finance Minister Wolfgang Schaeuble has argued that low interest rates have reduced the incentive for peripheral European states to reform their unsustainable economic models. Trump accused the Federal Reserve of supporting Hillary Clinton during the U.S. presidential election campaign. In each of these cases, overt politicization of central banking is breaking longstanding taboos in domestic political cultures.”
7. The White House vs. Silicon Valley
Most of the technology leaders in California, aside from Peter Thiel, disagree with the President-elect’s policies: Trump supports national security, while Silicon Valley promotes freedom and privacy. Trump wants to create more jobs in the U.S., while Silicon Valley is pushing for workplace automation. However, Silicon Valley will welcome Trump’s support for corporate tax reform and more streamlined government regulation.
“Trump will surely go after some high-profile organizations that he, for whatever reason, has a personal gripe with, and many of those companies will take a tumble,” according to the Eurasia Group. “But that’s a problem only for individual firms, not a structural issue. The conflict with Silicon Valley is different. Technology leaders from California, the major state that voted in largest numbers against Trump in the election, have a bone to pick with the new president.”
July’s failed coup has led to even great political uncertainty, especially in a country with an ongoing state of emergency, notes the Eurasia Group. President Erdogan has been “tightening his hold” on the judiciary, bureaucracy, media, and business sector—continually trying to legitimize his “de facto expansion of powers,” according to the firm.
“Ever-fewer checks on executive power will leave the private sector vulnerable to political whims.”
9. North Korea
North Korea’s growing nuclear power is worrisome, as the country’s government has “substantially advanced their nuclear and missile programs and are set to expand them further,” the group writes. In 2017, the U.S. will increase sanctions and make a push to rid North Korea of its nuclear weapons, but the risk of nuclear capability will grow.
“[North Korea] is making consistent progress on an intercontinental ballistic missile capability that would allow it to hit the West Coast of the U.S. with a nuclear weapon.”
10. South Africa
President Jacob Zuma will prevent “reformers from taking needed steps to restore the country’s economic stability,” the Eurasia Group predicts. The political crisis between Zuma and his opponents will also worsen in 2017—a factor that will put the South African economy at an even greater risk and subsequently damage its regional stability.
“South Africa’s political infighting will undermine the country’s traditional role as a force for regional security.”