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2017: Most Volatile Year for Political Risk Since WWII, Says Eurasia Group

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U.S. unilateralism under Donald Trump, China’s growing assertiveness and a weakened German chancellor, Angela Merkel, will make 2017 the “most volatile” year for political risk since World War II, according to Eurasia Group.

“In 2017 we enter a period of geopolitical recession,” the New York-based company said in its annual outlook. International war or “the breakdown of major central government institutions” isn’t inevitable, though “such an outcome is now thinkable.”

With Trump’s ascent to the presidency on an America First platform, the global economy can’t count on the U.S. to provide “guardrails” anymore, according to Eurasia, which advises investors on political risk. Trump’s signals of a thaw with Russia, skepticism toward the North Atlantic Treaty Organization and his “alignment” with European anti-establishment parties such as France’s National Front could weaken the main postwar alliance protecting the global order, according to the report released Tuesday.

The warning is a reminder of the range of threats to stability in 2017, from elections in Germany, France and the Netherlands and Britain’s planned exit from the European Union to setbacks in emerging nations such as Brazil and refugee crises.

Even so, the U.S. may be poised to gain strength, said Eurasia Group’s president, Ian Bremmer.

“You could see an environment that geopolitically is by far the worst that we’ve experienced in decades in 2017 and yet the investment into the U.S. markets and the strength of the American dollar is going to grow,” he said in a Bloomberg Television interview.

Chinese Challenge

In China, a scheduled leadership transition makes it likely that President Xi Jinping will be “more likely than ever to respond forcefully to foreign policy challenges,” potentially leading to spikes in U.S.-China tensions, according to Eurasia. To maintain domestic stability, Xi might “overreact” to any sign of economic trouble, leading to a risk of new asset bubbles or capital controls, Eurasia said.

Merkel, who is seeking re-election in the fall, faces likely disputes over Brexit, Greece’s simmering debt crisis and an “increasingly authoritarian” Turkish President Recep Tayyip Erdogan, threatening a refugee accord between the EU and Turkey.

“Despite just how wrong the polls have been in recent major electoral contests across the developed world, Merkel will win a fourth consecutive term,” the report said. “But the need to appease domestic critics this year will leave her a diminished figure, impacting the quality of her leadership both at home and in the EU.”

Other risks cited by Eurasia include:

Lack of economic reforms, with only China on a “positive trajectory” among 14 major nations and Italy, Russia, Saudi Arabia, South Africa, Turkey and the U.K. declining. Politicians blaming central banks, including the Federal Reserve, for economic woes. Such attacks mark “a risk to global markets in 2017 by threatening to upend central banks’ roles as technocratic institutions that provide financial and economic stability.” A “witch hunt” against parts of the opposition in Turkey, even tighter control over government and the media by Erdogan, and pressure on the Turkish central bank to keep rates low and rely increasingly on fiscal stimulus to offset slowing growth. North Korea’s nuclear program, which may yield some 20 nuclear weapons, combined with technological advances allowing strikes at the U.S. west coast in the future.

National Front leader Marine Le Pen winning the French presidential election is the biggest political risk in Europe, where EU ties and the euro area are “in a process of gradual, slow-motion disintegration,” New York University economics professor Nouriel Roubini said on Bloomberg Television.

“If Le Pen comes to power in France, if an anti-euro party comes to power in Italy, this could be the beginning of the end of Europe and the euro zone,” he said.

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