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

June 03, 2012 4:16 PM | Deleted user
Germany and France on Opposite Sides (2012-06-27)
With the election of the Socialist Francois Hollande as France’s new president, relations between the Eurozone’s two largest economies, Germany and France, are becoming increasingly strained and this could have massive consequences for Europe’s economic future. For the new French government, it is imperative that measures be taken to stimulate growth in Europe, particularly in the recession-bound economies of southern Europe. However, the conservative German government continues to demand that more austerity measures be enacted in those Eurozone economies in need of international financial assistance.

Over the near-term, relations between Germany and France are likely to remain strained over the two countries’ differing visions of a future European Union. Moreover, economic growth is forecast to continue to slow in both countries over the near-term and this will force both governments to take steps in the interest of their own country’s economic outlook. For France, with its deteriorating level of export competitiveness, this means more government-led steps to stimulate economic growth in Europe through higher levels of public spending. In contrast, Germany, with its high level of export competitiveness, is in many ways satisfied with the status quo as the Eurozone’s troubles have weakened the euro and led to higher levels of German exports outside of the Eurozone.

Looking further ahead, there is a significant possibility that relations between Germany and France will move further away from the close relations that existed over the past six decades. One reason for this split is the fact that, as a result of its shrinking domestic market, Germany will become ever more dependent upon exports for economic growth. In contrast, France is likely to struggle to raise its export competitiveness in the coming years and thus will face the prospect of a longer-term economic stagnation along the lines of Italy or Spain. With their two economies moving further apart, Germany and France will struggle to find common ground on many issues and this could lead to a much-less cohesive European Union in the future. Of course, much will depend upon national elections in Germany next year, as should the opposition SPD enter the government, it will favor some of the policies being supported by France’s new government.

Egypt's New President (2012-06-25)
The Muslim Brotherhood’s Mohammed Mursi was declared the winner of this month’s presidential election In Egypt, becoming that country’s first president to have been elected in a free and fair election. President-elect Mursi’s victory means that the Muslim Brotherhood now controls both Egypt’s presidency and its parliament, reflecting the power of Islamist movements in Arab countries impacted by the Arab Spring. However, the Egyptian military’s power grab in recent weeks means that much remains unsettled in Egyptian politics and the new president could struggle to assert his authority in the coming months.

Mohammed Mursi won this month’s presidential election in Egypt by the narrow margin of 51.7% to 48.3% over former Prime Minister Ahmed Shafiq in the election’s second round of voting. To the dismay of liberals and reformers, the two finalists were relative hard-liners, one representing the country’s social conservatives and the other representing the old guard. With President-elect Mursi soon to be in power, the Muslim Brotherhood will have control of most levels of political power in Egypt and this will have massive implications for Egyptian foreign and social policy and could lead to tensions with Israel and Egypt’s Coptic Christian minority.

In the coming weeks and months, President-elect Mursi and the Muslim Brotherhood will find itself in a struggle with Egypt’s armed forces over control of various aspects of Egypt’s political system. Already, the country’s armed forces have attempted to weaken the presidency, question the legitimacy of the parliament and move to have a greater influence over the creation of a new constitution for Egypt. This is certain to lead to clashes with the Muslim Brotherhood, which after nearly 90 years of oppression is anxious to strengthen its new-found hold on power in Egypt. As a result, the political situation in Egypt is likely to remain very tense and this could destabilize not only Egypt, but also much of the Middle East and North Africa.

Chaos in the Eastern Mediterranean (2012-06-20)
While Central Asia and Central Africa are often cited as the world’s two most unstable regions, another region, the Eastern Mediterranean, has emerged as an increasingly worrying source of economic and political instability. Politically, the Arab Spring has had a massive impact on the southern and eastern coasts of the Eastern Mediterranean, producing wars in Libya and Syria and upheaval in Egypt, Gaza and Lebanon. Meanwhile, most of the region’s economy has nosedived in recent years, highlighted by the depression in Greece that has impacted other countries such as Cyprus.

The Arab Spring and the European debt crisis have served to destabilize what has been throughout history one of the world’s leading flashpoints, the Eastern Mediterranean region that stretches from Greece in the north, around the eastern Mediterranean to Libya in the south. These momentous events have led to massive political changes across the region, with governments in Egypt, Libya and Greece being ousted and with Syria on the brink of a full-scale civil war. Moreover, what had been one of the fastest-growing regions in terms of economic growth has fallen into uncertainty, with most of the region’s economies experiencing deep recessions.

These changes are having a massive impact on the balance of power in the Eastern Mediterranean. First, outside powers such as the United States, Europe and Russia have been forced to scramble to keep up with the rapid political changes that are continuing in the region, with each of these powers potentially losing key allies in the region. Second, Turkey has emerged as a much more powerful player in the region, returning to a role that it held prior the collapse of the Ottoman Empire. Finally, Israel sees itself threatened by the massive changes in the political leadership of its Arab neighbors and it fears that the region’s new leaders will prove to be much more hostile to Israel than their ousted predecessors.

Greece's No-Win Election (2012-06-18)
It was an election that was not divided by the traditional split between left-wing and right-wing political parties, but rather by the differences between parties that either supported or opposed the international community’s bailout program for the collapsing Greek economy. In the end, Greece’s traditionally two most powerful parties (those that support the bailout that they negotiated with international lenders) managed to win enough seats in the parliament to form a coalition government. However, this will do little to ease Greece’s pain as years of economy decline lie ahead and this election may have prolonged an eventual solution to the crisis.

The center-right New Democracy party won a narrow victory over the left-wing (and anti-bailout) Syriza party by a margin of 29.7% to 26.9% and this meant that New Democracy won the 50-seat bonus granted to the winner of Greek elections. As such, New Democracy now holds 129 seats in the 300-seat Greek parliament. In the meantime, the once-powerful center-left PASOK party suffered a crushing defeat, winning just 12.3% of the vote. Nevertheless, PASOK’s 33 seats mean that it can form a pro-bailout coalition with New Democracy if it chooses, as is expected. Meanwhile, extremist parties such as the far-right Golden Dawn and ANEL parties, as well as the far-left Communists, all won enough votes to qualify for representation in the parliament.

The parliamentary majority held by pro-bailout New Democracy and PASOK parties means that any chance of Greece dropping the euro (or being kicked out of the Eurozone) over the near-term has been diminished. However, this means that Greece will be saddled with a currency that has a value far too high for a country like Greece. Without a weaker currency, Greece will struggle to improve its export competitiveness and this will delay Greece’s recovery from its current depression. As such, Greece’s (and the Eurozone’s) economic crisis will not worsen dramatically over the near-term, but it also will not come to an end, to the long-term detriment of Greece and much of southern Europe.

Two Crucial Elections in Latin America (2012-06-13)
While there are relatively few national elections taking place in Latin America in the second half of 2012, there are two elections that will have a major impact on the political direction of the region for years to come. First, Mexico will hold a presidential election in July 2012 that could see that country’s old dominant political party return to power after 12 year in opposition. Then, Venezuela will hold presidential elections in October 2012 that will pit the leader of Latin America’s far-left movement, President Hugo Chavez, against a candidate backed by a newly unified political opposition.

Mexico’s upcoming presidential election promises to be an interesting race as the old guard seeks to regain the presidency in Latin America’s second-largest country. For months, the candidate of the once-dominant PRI party, Enrique Pena Nieto, has held a commanding lead over his rivals in the polls, promising to return the PRI to power. However, recent polls have suggested that his support has ebbed somewhat, presenting a chance to the candidate of Mexico’s political left, Andres Manuel Lopez Obrador, the man who nearly won 2006’s presidential election. Should this election prove closer than polls indicate, there is a strong possibility of political unrest in Mexico at a time when drug-related violence has destabilized many areas of that country.

Venezuela’s presidential election promises to be one of 2012’s most interesting elections. Since 1999, President Hugo Chavez has dominated Venezuelan politics and has led a revival of the far-left in Latin America. However, he is suffering from cancer and there are serious doubts as to whether or not the president will be able to compete in October 2012’s election. Meanwhile, Venezuela’s long-divided rightist opposition has formed an alliance to back a single candidate in this election, Henrique Capriles, and polls suggest that he poses the most serious threat to President Chavez in years. Here too the potential for political unrest is high, particularly if President Chavez’s health deteriorates further or if the political opposition wins the election.

Why Spain Still Needs Help (2012-06-12)
As expected, Spain was forced to seek international assistance to rescue its foundering financial sector, in this case a 100 billion euro ($125 billion) credit line for Spanish banks that have been battered by the collapse of Spain’s real estate market. While the Spanish government has been understandably reluctant to call this rescue a bailout, that is exactly what has been provided for Spain, although it will likely include less restrictions on Spain than the previous bailouts did on other Eurozone countries. Nevertheless, this bailout is unlikely to prevent Spain from experiencing a long period of economic decline.

Spain’s need of a bailout is the result of the fact that much of the country’s economic growth prior to the recent crisis was the result of Spain’s real estate bubble, which spectacularly burst in recent years. This collapse led to Spain’s unemployment rate rising to near 25%, devastating the country’s domestic market. Meanwhile, Spain’s export competitiveness has declined markedly in recent years, while Spanish exporters remained dangerously over-exposed to weakening European markets, with little presence outside of Europe. As a result, Spain has had nothing to fall back on as the country’s real estate sector collapsed.

Unfortunately, there is a real possibility that Spain will require further financial assistance in the near future. While this bailout for Spain’s banking sector will give the country some breathing room, Spain’s economy is forecast to continue to contract in the coming years. Moreover, the Spanish government has struggled to enact the austerity measures that have been demanded of it by Germany, particularly with regards to Spain’s regional governments. With more government spending cuts forthcoming and with Spain’s unemployment rate remaining dangerously high, Spain’s domestic market will remain very weak. As Spain’s export competitiveness continues to decline, export growth will remain too weak to prevent Spain from eventually needing more international assistance, or whatever the Spanish government decides to call it.

Reprinted from ISA Report published June 3, 2012 (updated June 27, 2012), International Strategic Analysis,  
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