Global Issues to Watch - February 2013 by ISA - International Strategic Analysis

February 05, 2013 11:40 AM | Deleted user
Political Crisis in Tunisia (2013-02-20)
As the country in which the Arab Spring began, Tunisia’s stature and importance in the Middle East and North Africa have risen in recent years. As a result, the recent political unrest in that country is raising fears that the transitions to democracy underway in many countries in the region will struggle to succeed and could further destabilize the region. If a relatively stable and homogenous country such as Tunisia cannot build a stable democracy, many fear that there is little hope for democracy or stability in most other countries in the region.

Tunisia’s latest political crisis was triggered by the assassination of opposition leader Chokri Belaid earlier in the month. Opposition supporters accused the leading party in Tunisia’s coalition government, the Islamist Ennahda party, of being behind the assassination, triggering massive anti-government protests. This led to Prime Minister Hamadi Jebali attempting to dissolve the government and form a new technocratic government, but this attempt was blocked by the Ennahda party. As such, Prime Minister Jebali announced that he would resign instead, creating much uncertainty in Tunisia.

The division that has come to the fore in Tunisia in the wake of the Arab Spring is the same that has emerged in Egypt and other countries in the Middle East and North Africa, the division between Islamists and liberals. In Tunisia, the Islamist Ennahda party emerged as the leading political power in recent years and was considered to be relatively moderate. However, it faces pressure from more conservative Islamist movements that have gained significant support since the Arab Spring, just as the Muslim Brotherhood in Egypt is facing extreme pressure from the radical Salafists. As a result, this has pushed mainstream Islamist movements to pursue a more anti-liberal agenda, leading to severe political and cultural clashes that threaten to destabilize those countries transitioning to democracy in the Middle East and North Africa.

Europe's Recession Worsens (2013-02-19)
As expected, Europe’s recession worsened in the fourth quarter of 2012, highlighting the risk that Europe will remain in a recession much longer than many economists are forecasting. For the European Union as a whole, GDP contracted by 0.6% on an annualized basis over the final three months of 2012. For the Eurozone, the news was even worse, as its GDP contracted by 0.9% during the same period. As a result, 2012 was yet another difficult year for the European economy and the near-term outlook is bleak, while some European economies face a major long-term crisis.

The economic results for the fourth quarter of 2012 in the European Union confirmed that the crisis in southern Europe was continuing to spread to nearly all countries in Europe. The region’s three largest economies all slowed sharply, with the German economy growing by just 0.4% on an annualized basis in the fourth quarter (and shrinking by 0.6% compared with the previous quarter). France’s struggles continued as well, with its economy shrinking by 0.3% on an annualized basis. Meanwhile, Britain’s economic performance was also very poor, having recorded no growth in either of the past two quarters. Many other northern European economies also remained in a recession in the latter part of 2012 as their export competitiveness waned.

While the news from northern Europe was discouraging, the situation in southern Europe remained far worse. In Greece, where the crisis started, GDP contracted by 6.0% in the fourth quarter of 2012, continuing that country’s miserable run in recent years. In Italy, GDP growth was a disappointing -2.7% in the fourth quarter, the third consecutive quarter in which GDP contracted by more than two percent in Italy. In Spain, the recession also worsened, with the Spanish economy shrinking by 1.8% in the last quarter. This deterioration in southern Europe, coming from what was already a terrible position, signals that the crisis there will persist for some time, with growth almost certain not to return to pre-crisis levels at any point in the coming years.

Europe is Losing the Currency War (2013-02-13)
Thanks to the commitment of the European Central Bank (ECB) to defend the euro and protect Eurozone member states threatened with default, the euro has seen its value appreciate significantly against most other major currencies in recent months. While this is good news for those who were worried about the fate of Europe’s shared currency, it is bad news for European exporters. Moreover, with Europe increasingly dependent upon exporting outside of its region for its economic growth, this strengthening of the euro could not have come at a worse time.

Following the ECB’s decision to protect Eurozone member states threatened with default by soaring bond yields, the euro was stabilized and later gained in value against most other major currencies. This was due to both a growing confidence among investors that the euro would survive its recent crisis and the decision by other major economies to push down the value of their currencies in order to boost their export competitiveness. As a result, exporters from rival economies such as the United States, Japan and many emerging markets have seen their export competitiveness improve significant against the Eurozone in recent months.

This surge in the value of the euro has come at a critical time for the Eurozone’s economy. This is due to the fact that domestic markets in the Eurozone remain extremely weak as unemployment rates have risen and governments have enacted severe austerity measures to reduce their high levels of debt. With little prospect for growth on the domestic market, Eurozone countries are being forced to export even more goods and services in order to stabilize their struggling economies. With a strong euro, this has become increasingly difficult and this is raising the possibility that the current recession in the Eurozone could last even longer than had been previously forecasted.

North Korea Strikes Again (2013-02-12)
North Korea carried out its third nuclear test (the first two were in 2006 and 2009), a development that reinforces the notion that North Korea is an unpredictable state in the middle of one of the most important economic and political regions in the world. This test is likely to set back efforts to woo North Korea’s young new leader and reduce tensions on the Korean Peninsula. Moreover, this test comes at a time when tensions in the greater East Asian region are rising to dangerous levels that could involve the world’s leading powers.

North Korea’s third nuclear test was its largest yet, and, while the device remained very small by international standards, it nevertheless showed that North Korea is making progress with its nuclear weapons program. More worryingly is the fact that North Korea appears to be getting closer to being able to produce a viable nuclear weapon that would be small enough to fit on one of its long range rockets, giving it the ability to target many of its perceived enemies. Coming as it did after a period of reduced tensions on the Korean Peninsula, this test serves to remind South Korea and its allies in the United States that North Korea remains a very dangerous state in a highly strategic location.

North Korea’s latest nuclear test could not have come at a worse time with regards to the leading powers in East Asia given the heightened state of tensions in the region due to a range of territorial disputes between the region’s leading powers. Most importantly, the heightened tensions between China and Japan over their territorial claims in the East China Sea are just a spark away from producing a clash between these two large powers, a spark that could be provided by actions taken by North Korea. Moreover, North Korea’s volatile behavior has put the Chinese government in a bind, as it fears that such actions will lead to a greater US presence in Northeast Asia, while also worrying about the ramifications of a collapse of the government in North Korea.

Egypt's Armed Forces Wait in the Wings (2013-02-05)
With Egypt once again on the verge of descending into chaos, it is becoming apparent that the Muslim Brotherhood-dominated government led by President Mohammed Morsi is running out of time to restore order. If the unrest that has broken out across Egypt continues to worsen, Egypt’s armed forces will find themselves in a position where they are the only force in Egypt capable of restoring order. Should they move to do so, the violence in Egypt could rise to levels not seen there in recent history.

The challenges facing Egyptian President Mohammed Morsi and his government are many, and Egypt’s new leaders are clearly struggling to cope with these challenges. On one hand, President Morsi’s power grab in late 2012 has cost him the support of many moderates in Egypt, leaving him increasingly dependent upon the support of the Muslim Brotherhood. Furthermore, his power within the Muslim Brotherhood is tenuous (he wasn’t their first choice for president) and should he continue to stumble, this could provoke a power struggle within that organization. Meanwhile, Egypt’s economy continues to falter, raising the level of popular anger in Egypt, a factor that could provide the spark for a major explosion of unrest.

While the government struggles with these issues, and while the political opposition remains deeply divided, one political force in Egypt has managed to slowly recover from the loss of power it suffered in the wake of the Arab Spring, Egypt’s armed forces. In recent weeks, leaders of the armed forces have publically warned the government that it must do more to restore order to Egypt. This is a clear signal that the armed forces have regained confidence in their ability to impose their will on the government, a fact that must concern President Morsi. Should President Morsi fail, the stage will be set for a showdown between Egypt’s armed forces and its most power political force, the Muslim Brotherhood. This could lead to major clashes in Egypt and this would not only destabilize that country, but many other areas of the Middle East and North Africa as well.

A Nasty Surprise from the US Economy (2013-01-31)
The announcement that the United States had contracted in the fourth quarter of 2012 came as a surprise to many economists and sent shockwaves through the global economy that is dependent upon US economic growth to help it recover from its latest downturn. Moreover, this surprisingly poor performance showed that, for all of its natural advantages, the US economy can be held back by the ineptitude of the country’s current political leaders. As a result, the decisions of US lawmakers in the coming months will go a long way towards determining the health of the global economy in 2013.

GDP growth in the United States contracted by 0.1% on an annualized basis in the fourth quarter of 2012, a major slowdown from the 3.1% growth that was recorded in the previous quarter. Much of this slowdown can be attributed to the uncertainty that the debate over the “fiscal cliff” created in the US’ business sector, as many businesses held back on major investments as this debate unfolded. Moreover, growth was reduced as a result of the major reductions in government spending that have been enacted in recent months, including the 22% cut in national defense spending in late 2012.

With a looming debt ceiling debate and other budget-related issues set to emerge in the coming months, US politicians will continue to exercise massive influence over the performance of the US economy. If these politicians can reach concrete agreements on these issues, consumer and business confidence levels will be boosted and this will propel economic growth in 2013. Moreover, the outlook for US exports is improving thanks to strengthening export markets and a weakening US dollar. However, should political gridlock take hold in Washington, the US economy could be in for a rough ride this year and this will have major implications for a global economy seeking to bounce back from a difficult year.

Dark Days for the Spanish Economy (2013-01-30)
While the European Union has been growing more confident that the worst of its economic crisis is behind it, Spain provided a worrying reminder that while the region’s debt crisis may have eased, its growth crisis continues. As Spain’s recession deepens and its unemployment rate continues to rise to unprecedented levels, there are fears that Spain and many other countries in the European Union will struggle to pull out of their current recessions. Moreover, without a surge in export growth, this growth crisis could continue for a long time.

The latest bad news from Spain was the announcement that the country’s economy had contracted by 1.8% on an annualized basis in the fourth quarter of 2012, while the shrinking of the Spanish economy accelerated even faster on a quarterly basis. For Spain, the problems are many, including a lack of export competitiveness inside and outside of the Eurozone, high private and public debt levels, a collapsed real estate sector and harsh austerity measures that have been enacted by the Spanish government. This has resulted in the worsening recession that is underway in Spain and the 26.6% unemployment rate that has been the result of this recession.

For an economy like Spain that is facing a dramatic decline in domestic demand, the only way to pull out of this recession is through a major increase in exports. As Europe’s leading markets are forecast to remain weak for some time, this means that Spain will have to significantly boost its exports outside of Europe. However, before the crisis most of Spain’s exports were to other European countries and there is little demand for Spanish exports further afield. As a result, Spain will have to significantly boost its export competitiveness in order to attract foreign investment aimed at using Spain as a base for exporting goods and services around the world. However, a strong euro and growing unrest inside Spain could deter such investment at the time when it is needed the most.

Britain and the EU (2013-01-29)
British Prime Minister David Cameron presented his vision the United Kingdom’s role in the European Union, promising to hold a referendum on British membership in the EU should his Conservative Party win re-election in the UK’s next national elections. The need for Prime Minister Cameron to present such a stark choice for the UK’s future role in Europe has been driven primarily by domestic concerns, notably the growing opposition to the EU on the political right in Britain. Should Britain choose to leave the EU later this decade, there will be major ramifications for both Britain and the rest of Europe.

In recent years, polls taken in the United Kingdom have clearly shown that a majority of British voters hold negative views of the European Union, particularly the huge amount of bureaucracy emerging from Brussels. This has manifested itself in the surge in support for Britain’s withdrawal from the EU within Prime Minister Cameron’s Conservative Party as well as the rise of the right-wing UK Independence Party. By declaring that a referendum will only take place if the Conservatives win the next national elections, Prime Minister Cameron has ensured that Europe will be a key issue in this election, a shrewd move considering the opposition Labour Party’s struggles with this issue.

Thus far, much of the attention on this issue has focused on the detrimental impact that the UK’s withdrawal from the European Union would have on the British economy and the fact that Britain would still be subject to many EU laws and regulations. However, a British withdrawal would also have a major impact on the EU. For example, more liberal northern European economies would lose a leading ally, strengthening the hand of those countries that favor a greater state role in the economy. Likewise, Britain remains the EU’s leading military power and its withdrawal from the EU would leave France as the only EU country capable of projecting any kind of military force outside of Europe, further reducing the EU’s already waning geopolitical clout.

Deadlock in Israel (2013-01-23)
Thanks to an unexpected surge by a new center-left political party, Israel’s parliamentary elections resulted in an even split between that country’s right-wing and center-left blocs. This split will make it difficult for current Israeli Prime Minister Benjamin Netanyahu to form a new coalition government, as he will have to now negotiate with his current religious hardline allies as well as parties on the center-left. As a result, the deep divisions within Israel over the status of the country’s fast-growing ultra-Orthodox Jewish population and the peace process with the Palestinians will be exposed.

Polls taken before Israel’s parliamentary elections suggested that Prime Minister Netanyahu’s Likud-Yisrael Beitenu alliance would win the largest share of the vote, which it did. However, this right-wing alliance saw its number of seats in the 120-seat parliament fall from 42 to 31. Meanwhile, the newly-formed center-left Yesh Atid party performed surprisingly well, finishing in second place with 19 seats. While the spilt between the right-wing and the center-left blocs was 60-60, 18 of the seats on the center-left are for Israeli Arabs and it is highly unlikely that they will be asked to join a new government, allowing the right-wing to lead the efforts to form a new government.

This deadlock in Israel will have a major impact on three major issues in Israel. First, the Yesh Atid party has made in clear that it will not join any new government unless the law that allows ultra-Orthodox Jewish seminary students to defer their military service is changed, a move that is staunchly opposed by Prime Minister Netanyahu’s hardline allies. Second, the center-left has insisted that the peace process with the Palestinians must be revived, something that the prime minister appears not interested in pursuing. Finally, the center-left’s better-than-expected performance was due in large part to the growing problem of wealth inequality and the rising cost of living in Israel, and this will force any future government to pay more attention to economic issues.

Positive Signs from the Chinese Economy (2013-01-21)
With Chinese economic growth levels rebounding from a 13-year low in the latter part of 2012, there is growing optimism that China can once again become a leading engine of global economic growth. In particular, there are hopes that China begins to realize its potential as one of the world’s leading markets for exporters from around the world as purchasing power levels in China continue to rise. While the outlook for the Chinese economy is generally positive, it is highly unlikely that China’s economy will return to the soaring levels of growth that it reached before the recent downturn.

The Chinese economy grew by 7.9% on an annualized basis in the fourth quarter of 2012, up from the 7.4% growth rate that was recorded in the previous quarter. This growth was largely driven by the Chinese government, which boosted spending on infrastructure projects late last year and which launched a series of incentives designed to increase consumer and business spending inside China. Moreover, Chinese exporters are benefitting from the recovery underway in North America and the higher rates of growth in some key Asian export markets, which have helped to offset the current weakness in export markets in Europe.

As wealth levels in China continue to rise and as the country’s work force begins to decline, China will not be able to match the incredible high rates of economic growth that it did in the years before the recent downturn. Instead, economic growth rates are forecast to hover between 7% and 9% in the years ahead, which is still a very respectable level for an economy at China’s state of development. Moreover, this growth will be increasingly driven by rising levels of domestic spending in China, as export growth is forecast to slow as production and labor costs rise in China and as other countries’ export competitiveness improves vis-à-vis China. For global exporters, this means that China will remain a leading growth market in the years ahead, although growth rates will not match earlier levels.

Reprinted from ISA Report published February 5, 2013 (updated February 20, 2013), International Strategic Analysis,  
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