Economic Concerns Cloud Geopolitics in 2008
A teetering US economy, Pakistan on the edge of chaos, conflicts and instability still raging in the Middle East and Afghanistan, and rising fears in the west of a resurgent Russia and an ever-more powerful China: the final days of 2007 have offered many pessimistic portents for the coming year. But what factors will define the geopolitical environment in 2008?
In the United States, the legacy of extended economic and foreign policy mismanagement will shape much of what is to come. The sub-prime mortgage crisis will have a lingering effect, impacting not just the housing market but also threatening the consumer spending that is the driver of economic growth. PFC Energy does not foresee a recession, but the US economy is extremely vulnerable; only one more crisis may be sufficient to push it over the precipice.
The year will also be dominated by the long, drawn-out presidential election campaign, which will expose yet again just how polarized US politics has become. The relatively short primaries will see candidates drift towards extremes, as they vie to secure the increasingly radical party bases; only once they have secured their party’s nomination will the two main contenders focus on the middle ground of undecided voters, a process that will be long and contentious.
But the challenges facing the next US president, Republican or Democrat, are immense: managing an almost intractable budgetary situation while assuring a soft landing for the dollar and attempting to restore long term economic growth; and restoring the prestige and influence of the sole remaining superpower while resuscitating an overextended military. And whether these can be achieved will depend to a large extent on whether the new White House incumbent and Congress shed the destructive partisanship of the past few years.
The answer has implications well beyond US shores. Washington’s decisions will go a long way to determining whether the US can revive its role as a constructive global leader, or whether the present fraying of the post-World War II international order continues. No country or region can yet fill US shoes.
China will continue to show strong economic growth, even in the event of a US recession, bolstered by ever increasing domestic demand. But it is not yet in a position economically or militarily to take up the global baton from Washington even though much of the world is starting to treat China with a new respect for its rising status in world affairs. The EU is mired in the problems of incorporating “new Europe” into its structure and lacks a common foreign or defense policy. Until member states agree on just how much federal power they want to accede to Brussels, the EU’s strength will primarily be economic not political. And for all the fears surrounding Russia’s rise, it remains primarily a regional power although Putin has exploited some important openings such as its leverage over Iran. With a new government in Moscow, drastic policy changes are unlikely and it will continue to consolidate recent gains made in strengthen the state.
The danger is that, whether by design or by accident, Washington will retreat further from its leadership role, creating a potentially dangerous structural vacuum. Already there are signs of a growing domestic backlash to globalization and the international institutions that sustain it, a backlash that if left unchecked could spur a damaging new round of mercantilism internationally. This trend will only be exacerbated by competition over vital resources such as oil and gas.
The weakening of international cooperation will also make it more difficult to deal constructively with key global challenges ahead. Addressing climate change in any meaningful fashion, for example, cannot be done without the United States being fully on board. Similarly, US unilateralism — or worse still isolationism — will exacerbate regional instability in places such as the Middle East that Bush Administration policy has helped to engender: state collapse in Iraq and Afghanistan, regional concerns over a strident Iran, socio-economic dislocations and extremism that threaten the flourishing economies of the Gulf and North Africa, and the legacy of the Israeli-Palestinian conflict are all problems that require cooperative international solutions.
Key Messages:
This year will be a year of transition with far reaching impacts. It will also determine whether the current international order will evolve in the face of new challenges, or whether the trend towards regional security, economic and political frameworks that has recently emerged becomes more dominant.
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Fareed Mohamedi is a Partner and Head of the Markets and Country Strategies practice. For further information on this article contact Enews_fmohamedi@pfcenergy.com.