Global Issues to Watch - May 2012 by ISA - International Strategic Analysis

May 07, 2012 4:15 PM | Deleted user
French and Greek Elections Rattle Europe (2012-05-07)
The victory by the Socialist candidate Francois Hollande in France’s presidential election and the success of political parties opposed to additional austerity measures in Greece’s parliamentary elections, while expected, has nevertheless raised concerns about the European Union’s political cohesiveness. With many of Europe’s leading economies in the grip of a recession, and with the outlook for economic growth in the region remaining poor, these political changes will raise concerns that the economic crisis in southern Europe could continue to worsen. This is due to the fact that the winners of these two elections are opposed to the policies endorsed by the two most powerful players in the European economic crisis, international creditors and the German government.

Socialist candidate Francois Hollande won France’s presidential election, defeating incumbent President Nicolas Sarkozy by a narrower-than-expected margin of 51.7% to 48.3%. His calls for more government spending and higher taxes are likely to put him at odds with German Chancellor Angela Merkel and international financial markets and could derail efforts in the Eurozone to find common ground in the effort to end the region’s economic crisis. Meanwhile, Greece’s two main political parties (New Democracy and PASOK) managed to win just 149 of the 300 seats in the Greek parliament, giving a slight majority to parties opposed to additional austerity measures and the other bailout conditions set forth by international creditors. If a new coalition government can’t be formed in Greece, new elections will have to take place, adding to the political uncertainty in that country and across the Eurozone.

For Europe, these two elections signal two crucial shifts. First, France’s new president will be the only left-leaning political leader in a larger European Union member state, as Germany, Britain, Italy, Spain and Poland all have center-right governments that favor lower degrees of government control of the economy, lower taxes and greater adherence to fiscal prudence. Second, the elections in France and especially Greece reflect the growing anger at the austerity measures being enacted across much of the Eurozone. This could shift the focus of the efforts to bring an end to the European economic crisis from cutting spending to finding ways of promoting economic growth. However, without a major improvement in the economic competitiveness of southern Europe’s economies, these governments are likely to find it hard to produce the economic growth rates needed to improve Europe’s economic future.

Election Weekend in Europe (2012-05-02)
This weekend, voters in three European countries (France, Greece and Serbia) will go to the polls at a critical junction in each country’s history. For each country, economic concerns will be the dominant issue on voters’ minds when they go to the polls, as Greece is in the midst of a severe depression and France and Serbia are confronting major economic challenges. Moreover, each election will be a referendum on those countries’ relations with Europe as a whole, as the economic crisis in Europe has raised major questions about the future direction of the European Union.

France’s presidential election will head to a second round of voting this weekend pitting Socialist candidate Francois Hollande against President Nicolas Sarkozy, after Mr. Hollande defeated the president in the first round of voting last month. According to all polls, Mr. Hollande is expected to win between 53% and 55% of the vote in the second round, putting him in a strong position to become just the second leftist president of France in the past 50 years. Should he win, Mr. Hollande will likely face a severe economic test as France’s struggling economy could be buffeted by the markets’ fear of Mr. Hollande’s calls for more government spending and higher tax rates at a time when austerity measures are being enacted across the region. Moreover, it remains to be seen if Mr. Hollande will be able to work together with his German counterpart, Chancellor Angela Merkel, at a time when Germany is increasingly dictating European economic policy.

On the same day, Greek voters will go to the polls to vote in early parliamentary elections amid that country’s ongoing economic collapse. With Greece’s main rightist and leftist parties losing support as a result of their handling of Greece’s economic crisis, newer parties, together with far-right and far-left parties, are expected to make major gains. In fact, recent polls show that the two leading parties (New Democracy on the right and PASOK on the left) are likely to win less than a combined 40% of the vote. Instead, the far-left SYRIZA and Communist parties are both expected to win more than 10% of the vote at the expense of PASOK, while right-wing parties such as the new Independent Greeks party and the far-right Golden Dawn party are also forecast to perform well. As a result, the political situation in Greece could become much more muddled at a time when strong leadership is needed.

In Serbia, presidential, parliamentary and local elections will all take place on the same day as the elections in France and Greece. According to polls, the presidential election in Serbia will be a very close run affair between the pro-European President Boris Tadic and the nationalist candidate, Tomislav Nikolic. As such, a second round of voting will likely be needed, making the likely third place finisher (the Socialist candidate Ivica Dacic) the kingmaker. Meanwhile, this presidential election will be influenced by the parliamentary elections in which polls show that the nationalist Serbian Progressive Party is likely to win the most seats in the parliament. Should a nationalist government take power in Serbia, its relations with the European Union and its neighbors will deteriorate significantly, adding to the instability in southeastern Europe.

US Economic Growth Slows (2012-05-01)
As expected, economic growth in the United States slowed in early 2012 following a surge in the final months of 2011. This slowdown was expected as much of the growth in the latter part of last year was the result of inventory building and was not sustainable for a prolonged period of time. As such, the fact that the US economy was able to continue grow, albeit at a slower pace, is a welcome sign that the overall outlook for the US economy continues to improve, with higher growth rates forecast for the second half of this year.

GDP growth in the United States slowed to 2.2% on an annualized basis in the first quarter of 2012, down from the 3.0% growth that was recorded in the previous quarter. In a historical context, this rate of growth was relatively low when compared to the recoveries from previous recessions, a trend that has been in place over the past two years. Moreover, with key export markets weakening and with the US housing market remaining in the doldrums, there are a number of worrying factors that suggest that this recovery will continue to struggle to gain momentum.

However, there are some signs from the results from the first quarter that suggest that the economy in the United States is finding a firmer footing that should lead to higher rates of growth over the course of this year. The most encouraging sign is the fact that much of the growth recorded in the first quarter was the result of higher levels of consumer spending, not inventory building. As consumer spending accounts for more than two-thirds of the economy activity in the US, it is imperative that this segment of the economy begins to grow once again. Fortunately, the worst appears to be over for the US housing market and household income levels are once again on the rise, pointing 

The Political Fallout from Europe's Economic Crisis (2012-04-24)
Over the past few years, Europe’s political landscape has begun to be transformed as a result of that region’s economic crisis that continues to devastate the economies on the periphery of the Eurozone and weaken even the strongest economies at the core of Europe. Moreover, the economic changes underway in Europe are shifting voter preferences across the region as many of the region’s traditionally dominant parties have been discredited by their inability to prevent this crisis from spreading. Ominously, voters in many countries are turning to more extreme parties as Brussels usurps power from national capitals and as Europe’s vast social welfare systems unravel.

Since the beginning of the current economic crisis in Europe, 11 of the 17 member states of the Eurozone have seen their governments fall, mostly as a result of the crisis. Moreover, French President Nicolas Sarkozy became the first-ever French president not to win the largest share of the vote in the first round of a presidential election in that country and is now likely to become the 12th Eurozone leader to lose his job during the current crisis. Even the Eurozone’s dominant political leader, German Chancellor Angela Merkel, has not been immune from the crisis as her government’s approval ratings have fallen, despite the fact that Germany has avoided the worst effects of the crisis thanks to its ability to export outside of the Eurozone.

One notable result of this crisis has been the erosion of support for political parties that have long dominated the political scene in many Eurozone countries. For example, far-right and far-left candidates won one-third of the vote in the first round of voting in France’s presidential election. Moreover, far-right and far-left parties now control a large share of the seats in the parliaments of as many as eight Eurozone member states and are able to exert significant influence over government policy in these countries. Should the economic crisis in Europe persist for a prolonged period of time (and there is every reason to believe that it will), these fringe parties could gain an even larger share of the vote and could enter the government in a number of countries. 

Egypt's Uncertain Election (2012-04-18)
This week’s decision by Egypt’s electoral authorities to bar some of the most high-profile candidates from taking part in Egypt’s presidential election scheduled for next month has created a great deal of uncertainty surrounding the election. Moreover, with the leading candidates of the Muslim Brotherhood, the ultra-conservative Salafist movement and the country’s armed forces being barred from the election, Egypt’s three most powerful political forces will be unable to secure the presidency for themselves. As a result, all three front-runners for this election have been eliminated, a move that could lead to a new round of unrest in Egypt.

Egypt’s Higher Presidential Election Commission (HPEC) surprised many observers when it decided to bar ten of the 23 candidates that were seeking to run in May 2012’s presidential election. Among the ten candidates that were barred from running for the presidency was the Muslim Brotherhood’s leader Khairat al-Shater, the prominent Salafist Hazem Abu Ismail and Egypt’s former intelligence chief and vice president, Omar Suleiman. Polls had shown that these were three of the most popular candidates for the presidency, with Mr. Shater being the front-runner thanks to the Muslim Brotherhood’s success in Egypt’s recent parliamentary elections.

Of the 13 remaining candidates for the presidency, none is a clear front-runner. The remaining candidate with the highest profile in Egypt is Amr Moussa, who had been the head of the Arab League and is widely admired in Egypt. Other important candidates are the moderate Islamist Abdel Moneim Aboul Fotouh, who once was a member of the Muslim Brotherhood, and former Prime Minister Ahmed Shafiq. Meanwhile, supporters of the barred candidates have already taken to the streets to protest against the decision of the electoral authorities and this could lead to greater unrest if the remaining candidates are unable to win their support. In particular, the powerful Salafist movement has been angered by the barring of its candidate from the election and could use this decision to launch a new series of protests against what it sees as the lingering power of the country’s armed forces and the old regime.

China's Economy Continues to Slow (2012-04-15)
The Chinese economy continued to slow as the world’s second-largest economy recorded its lowest rate of growth in nearly three years in the first quarter of 2012. Moreover, most signs are suggesting that the Chinese economy will continue to slow into mid-2012 as a number domestic and international factors will remain in place that have contributed to the lower rates of growth over the past year. With other major economies also weakening in recent months, China’s slowdown is likely to have major ramifications for global trade and investment levels this year.

Chinese GDP growth slowed to 8.1% on an annualized basis in the first quarter of 2012, a slowdown from the 8.9% GDP growth rate recorded in the fourth quarter of 2011. China’s weakening real estate sector played a leading role in this slowdown in early 2012 as real estate prices continued to fall in many Chinese cities and as investment levels in that key sector weakened. Moreover, export growth has slumped in recent months as key export markets, most notably in Europe, have weakened considerably, resulting in the lowest rates of export growth in China in the past three years.

Looking ahead, Chinese economic growth is forecast to continue to slow in the second quarter of 2012 and could remain on a downward trend into the second half of this year. Export growth, the key to China’s economic miracle of the past three decades, is likely to continue to decelerate in the months ahead as demand in Europe and other markets remains subdued. Moreover, China’s domestic market is unlikely to record the rates of growth that it did in recent years as the real estate market is unsettled and as the Chinese government is unlikely to enact a major economic stimulus package in the coming months. As a result, GDP growth in China appears set to dip below the 8% threshold for the first time in recent years, although we continue to forecast that no hard landing is in store for the Chinese economy in 2012.

Key Economic Risks in Q2 2012 (2012-04-11)
After the briefest of lulls, economic risk levels are rising once again in the second quarter of 2012 in both developed economies and in emerging markets. The fallout from the financial problems of the past four years will continue to have a major impact on many of the world’s leading developed economies and this will pose a number of risks to the global economy. Likewise, economic risk levels in emerging markets have risen to their highest level in the past two years, and given the greater role played by emerging markets in the global economy, the potential impact of this elevated risk is very significant.

Nearly all of the world’s leading developed economies have yet to recover from the impact of 2008’s financial crisis that nearly brought down the world’s financial system. In the second quarter of 2012, the greatest risk in developed economies will continue to be the situation in southern Europe, where unsustainable debt levels and a lack of growth prospects are once again raising the risk of sovereign defaults in this region. For Japan and Asia’s other developed economies, weakening export markets will pose a major risk in the months ahead and could push many of these economies into a new recession. Finally, the United States economy may be outperforming most other developed economies this year, but its growth rates have yet to return to the levels expected of the US and the country’s domestic market remains weak.

Many of the world’s leading emerging markets are also dealing with higher levels of economic risk that threaten to slow growth in the world’s fastest-growing economies. Already, Asia’s two giant emerging markets, China and India, have seen their growth rates fall to their lowest level in recent years and there are mounting fears that growth could yet fall much further in these countries. Meanwhile, emerging markets such as Turkey, Argentina and Vietnam that have performed very well in recent years all are facing the threat of overheating and could experience a hard landing this year. As a result, the potential for a much more severe global economic slowdown has risen in recent months and could be triggered by a number of events.

More North Korean Provocation (2012-04-10)
As North Korea prepared to launch a new long-range rocket (and perhaps even test a new nuclear weapon), East Asia was once again confronted with the fact that a highly unstable rogue state was located in the midst of one of the world’s great power centers. For countries such as South Korea and Japan, North Korea is a direct threat to their security, pushing those countries to maintain close defense ties with the United States. For neighboring China, North Korea is both a threat to its rising power and prosperity as well as being a long-time ally in the region.

After the death of Kim Jong-il late last year, it appeared that North Korea, under its young leader Kim Jong-un, was prepared to improve relations with the international community by halting its nuclear activities. However, its decision to launch a long-range rocket to put a satellite in orbit to “commemorate” the 100th birthday of North Korea’s founder Kim il-Sung brought a end to this short-lived thaw in relations with the US and other players in the region. Moreover, there are signs that North Korea is preparing to conduct its third test of a nuclear weapon, a development that would dramatically raise tensions in the region.

With tensions rising between China on one side and a host of other Asian countries (backed by the United States) on the other, a volatile flashpoint such as the Korean peninsula poses major risks for the region. While China backs North Korea politically, it fears that a North Korean collapse could lead to a flood of refugees into northeastern China as well as a major US military presence on China’s borders. Meanwhile, both South Korea and Japan are fearful that a nuclear-armed North Korea possessing long-range missiles could one day launch an attack against targets in either country. As a result, the world’s two leading powers, plus a host of mid-sized Asian powers, are deeply involved in attempting to bring stability to the volatile Korean Peninsula, a difficult task given the nature of the regime in North Korea.

Reprinted from ISA Report published May 7, 2012, International Strategic Analysis, 
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