As ever, politics will be a very important factor in the economic developments in – and ultimately the prospects for – these countries. Indeed, many of the major crises that broke out in 2014 were connected to (geo)politics. And it is no coincidence that most experts regard poor governance as the biggest threat to global security.
Moreover, leaders find it increasingly difficult to get a grip on national and international politics and economics in what the FT’s Gideon Rachman, describes as the ‘democratic age’. The world seems more complex and obtrusive than ever before. Borders – and not just physical ones – are porous. People, capital flows, criminality, information, weapons, ideas, pollution, and epidemics move around the world at speed. As Rachman writes, “These days a would-be grandmaster, staring at the global chessboard, is liable to find that the pawns have started moving around on their own.”
Gazing into the crystal ball
Although this makes it harder to predict future events, it is still important to understand what the key geostrategic and (geo)economic issues impacting the financial markets will be over the next 12 months. And amidst all the uncertainty, one thing is clear – global instability and unrest will continue into 2015.
First of all, in the Middle East and North Africa (MENA) region, arrangements that were set up in the first half of the 20th century continue to come under internal and external pressure. And, there is no reason to think that the reshuffle of borders and power relations will come to an end any time soon.
Elsewhere, since the eruption of the financial crisis in 2007/2008, liberal democracy has been creaking on its foundations in many areas. History professor Mark Mazower wrote that, “by discrediting the more mythical idealisations of the market, it has encouraged the restoration of state power as a goal in itself. This programme is easily harnessed by authoritarian leaders in the name of national sovereignty and democracy.” In some cases, we are seeing transitions from ‘authoritarianism light’ to a totalitarian regime. Conditions have hardened in countries like China, Hungary, and Turkey, but most of all in Russia. Tensions between these areas and the West could become exacerbated (unless strong leaders actively strive to reassure the markets by creating more stability – which may pose a moral conundrum).
Over in Africa, some 20 countries are “failed states” or are heading in this direction. As a result, they are exposed to the dissemination of diseases, extremism and violence. The past shows that instability can easily spread from one African country to another, and with resource-rich areas such as Nigeria, Angola, South Africa, and South Sudan so relevant to the financial markets, this is a concern. Meanwhile, in Asia, the restructuring of national security and economic order continues. This affects the relations between the US and China. Add to this the maritime tensions between China and other Asian countries, such as Japan, and the picture becomes quite cloudy. Nevertheless, Asia continues to benefit from the shift of political and economic power from West to East and from North to South. In a relative sense, the Americans are losing power and this is all the more true of Europe too.
Market hurdles in 2015
Over the past year, the markets have not been overly bothered by geopolitical crises or politico-economic setbacks. However, market sentiment is fickle and it is likely to change as the Fed tightens its belt. In combination with waning confidence in the omnipotence of central banks, the slowdown in Chinese growth, political instability, and growing risk-aversion, this could result in a ‘risk-off’ climate going forward.
In Europe, 2014 was a relatively quiet year, but 2015 could be very different, considering the lack of adequate reform in France and Italy, which is being compounded by the fact that the core Eurozone countries are not doing very well either. Various electoral fireworks are scheduled for 2015 as well. The main question treasurers should be considering is: will Europe opt for a fiscal union (and write down Greek debts) or is a ‘Grexit’ on the cards? If the other euro countries want to hang on to Greece, write-downs are unavoidable.