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

July 24, 2012 4:18 PM | Deleted user
Political Crisis in Romania (2012-08-01)
While President Traian Basescu survived last weekend’s referendum on whether or not he should be ousted from office, the political crisis in Romania shows no signs of abating and could jeopardize that country’s efforts to restore its struggling economy. Moreover, his political opponents have indicated that they will not abandon their efforts to remove the unpopular president from office, despite their setback in the recent referendum. As such, Romania faces a political crisis that could lead to a much worse economic crisis in the coming months.

In last weekend’s referendum on whether or not to allow for President Basescu to be impeached, 88% of the people who voted supported the impeachment of the president. However, Romania’s Constitutional Court required a 50% voter turnout for the referendum to be valid and only 46% of Romanian voters took part in the referendum as supporters of the president boycotted the vote and many Romanians were away on summer holiday. Due to the failure to meet the 50% voter turnout requirement, President Basescu indicated that he would remain in office for the rest of his term. Meanwhile, the leader of the political opposition, Prime Minister Victor Ponta, called on the president to resign.

For Romania, this political showdown that has paralyzed the country’s political system could not have come at a worse time, for the country is in the midst of a serious economic crisis that could take a turn for the worse due to the lack of political leadership in the country. Romania was one of the first countries in Europe to face a serious debt crisis in recent years and this forced the government to enact dramatic austerity measures that have severely reduced a wide array of public services. Moreover, Romania remains dependent upon European export markets for much of its economic growth and these countries are in the midst of a serious economic slowdown, reducing Romania’s growth potential and possibly leading to a much more serious recession in Romania.

The Lackluster United States Economy (2012-07-30)
The United States economy slowed slightly in the second quarter of 2012, exactly as had been forecast. While the US economy is outperforming most other developed economies at this time and is forecast to continuing outpacing most other developed economies over the course of this year, the pace of the recovery has failed to match up to previous economic recoveries in the US. As such, the United States heads into the final four months of its presidential campaign with an economy that is far from fully recovering from the collapse of the US housing market and the financial crisis that led to a severe recession in 2008 and 2009. 

GDP growth in the United States slowed to 1.5% on an annualized basis in the second quarter of this year, down from the 2.0% GDP growth recorded in the first quarter of 2012. This slowdown was the result of weakening consumer demand on the US market as well as the pace of import growth outpacing export growth during that period. Looking ahead, the US economy is forecast to pick up steam in the second half of the year, although the earlier forecast for 3.0% GDP growth in that period is now looking optimistic. As a result, the persistently high rate of unemployment in the US (currently at 8.2%) is likely to remain in place well into 2013.

This sluggish performance by the world’s largest economy is worrying news for the Obama Administration as the campaign for November 2012’s presidential election in the US heats up. President Obama’s economic team had been confident that the economy recovery in the United States would have been more robust in recent months and would have pushed the country’s unemployment rate much lower than it currently stands. As such, the performance of the US economy in the third quarter could play a decisive result in this election, as that quarter’s GDP results will be released just over a week before the presidential election. If the economy remains sluggish and unemployment remains high, Republican candidate Mitt Romney could close the gap with President Obama in a number of key swing states that will decide this election.

Dark Days in Spain (2012-07-25)
Spain’s economy is facing its greatest challenge in modern times as its prospects both over the near-term and the long-term are dire. Over the near-term, Spain’s deteriorating financial situation will almost certainly force the Spanish government to seek an international bailout that will result in even more austerity measures being imposed on Spain. Over the longer-term, Spain’s economic competitiveness is unlikely to improve enough to offset the dramatic reductions in public spending that will continue to be implemented in Spain, consigning Spain to a long period of economic stagnation.

Spain’s immediate concern is the worsening financial crisis facing the country. Across Spain, regional and local governments are in dire need of financial assistance after years of over-spending. Fears that Spain’s regional and local governments will need huge amounts of financial support have driven Spanish bond yields to unsustainable levels and this has made it almost certain that Spain will need an international bailout no later than the end of this year. Moreover, delays in implementing a plan to provide funds for struggling banks within the Eurozone have further increased the pressure on Spain’s beleaguered financial sector, even as Spanish banks have already been granted a $120 billion (100 billion euro) loan package by the EU.

While Spain’s near-term problems dominate the headlines, it is the dire long-term outlook for the Spanish economy that is most worrying for the people of Spain. Economic growth in Spain, once the highest among Europe’s larger economies, has ground to a halt and is unlikely to rebound at any time in the coming years. This economic growth allowed Spain to narrow the wealth gap with richer developed economies, but now, Spain is likely to fall further behind most other developed economies. Furthermore, Spain’s unemployment rate is near 25% and will remain high for the foreseeable future, dampening domestic demand. Without a major increase in export competitiveness, Spain’s economy will have little opportunity for growth and it will take a long time, and major changes in economic policy, for Spain to improve its export competitiveness.

Syria's Teetering Government (2012-07-24)
As fighting in Syria’s intensifying civil war spread to that country’s two largest cities, it has become clear that Syrian President Bashar al-Assad and his government are losing their grip on power. Moreover, defections and attacks from within have raised the possibility of an internal coup that sweeps President Assad from power. Finally, rebel forces are making larger territorial gains, a development that will allow the rebels to establish bases of power within the country that they can use to rearm and regroup, a development that is likely to turn the tide against the Assad regime.

Until recently, the fighting that has escalated into a full-scale civil war in Syria had not reached that country’s two leading cities, Damascus and Aleppo. However, that has now changed as rebel forces have launched major attacks against government targets in both cities and have taken control of some quarters close to the heart of both of Syria’s largest cities. Moreover, the recent assassination of high-ranking government and military leaders in Damascus has highlighted the growing rebel infiltration of the highest levels of power in Syria, a development that may convince President Assad that his time in power is coming to an end.

Despite the recent gains by the rebels in Syria, the Assad regime still has a number of powerful tools at its disposal. Until recently, Syria’s armed forces have refrained from using the country’s substantial air power against the rebels out of fear that this could provoke intervention by foreign military forces. Furthermore, Syria has large stockpiles of chemical weapons, a fact that concerns both the rebels and foreign powers with a stake in Syria. Nevertheless, recent developments have shown that the momentum is firmly behind the rebels and, if they can maintain their unity, they stand a strong chance of ousting President Assad before too long. However, the fighting is likely to grow much more intense, and the death toll is likely to rise much further, before the Assad regime can be once and for all driven from power.

Reprinted from ISA Report published July 24, 2012 (updated August 6, 2012), International Strategic Analysis,  
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