18-02-2013
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Insight
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Léon Cornelissen
What will keep world leaders busy in 2013? Robeco’s Chief Economist Léon Cornelissen weighs up 2013’s five biggest geopolitical threats.
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It isn’t cyber attacks, terrorism or flu. It isn’t the flashpoints in Iran, the East China Sea or on the 38th parallel. And it isn’t a renewed conflagration in the eurozone debt crisis. So what is the geopolitical issue most likely to boil up in 2013 and spill over into financial markets? Let’s look at Léon Cornelissen’s top five in reverse order to find out.
5 Cyber attack
Cyber-attacks have only recently appeared on the radar screen as a serious geopolitical issue. Companies such as Wells Fargo and Lockhead have come clean about the attacks they have suffered, but anecdotal evidence suggests it is now a widespread, if not publicly admitted, phenomenon. By and large, companies have repelled the attacks so far. But how well prepared are they really?
US president Barack Obama is concerned enough about this issue that in mid-February he signed an executive order of gain better protection of the US’s infrastructure.
How much should we be concerned about this? Robeco’s Chief Economist thinks it probably won’t be too big an issue. “The system is adjusting,” he observes. He points to the relative failure of the two best-known alleged incidents—the US intelligence attack on Iraq (“I can’t say it was very impressive”) and China’s on the New York Times (“it didn’t go very far”). “That’s a source of comfort,” he says.
Cornelissen’s worry factor: 2/10
4 China
In equal third place is China, thanks to issues both at home and abroad. At home, there is continuing uncertainty over the economy and the imminent arrival of a new generation of leaders. Abroad, the conflict with Japan over sovereignty of the Senkaku/Diaoyu islands shows no signs of cooling.
“In the short term, China’s economy is no reason for worry,” says Cornelissen. “Economically, the country is recovering. But it won’t be a recovery like earlier ones.” That’s because they are trying to rebalance the economy.
Further in the future it might be a different, more worrying story. “We can’t be too confident that things will go well in the long term,” he says. “China has many structural problems.” For now, though, the economy shouldn’t be too much of a problem.
What about the conflict in the East China Sea? By any measure, the sabre rattling over this handful of uninhabitable islets is the most serious conflict in Sino-Japanese relations since WW2 in terms of the potential for military conflict.
“We do not expect things to get out of hand,” says Cornelissen. “Our feeling is that China cannot risk conflict with Japan and the US at this stage.” For one thing, the Chinese are too weak militarily. For another, escalation would risk loss of face for the new leadership.
And while China may have more clout on the world stage, that does not necessarily translate into belligerent foreign policy. “China is not on a militaristic, expansionist trajectory,” says Cornelissen, adding that China hasn’t been at war since it entered northern Vietnam in 1979.
Still, he accepts that the situation could deteriorate badly in the short term. “It could give rise to a limited military conflict, which would be very bad news for financial markets,” he cautions. Overall, though, the East China Sea conflict is just a “normal” one.
Cornelissen’s worry factor: 3/10
3 The eurozone
Although policymakers seem to have done enough to prevent a serious upsurge in the eurozone debt crisis ahead of the German federal elections on 21 September, there is still plenty that can go wrong in the shared-currency region.
Italian elections are imminent. A corruption scandal has enveloped the Spanish government. Renewed tensions over austerity in the run-up to the German elections are possible.
That’s not all. Cyprus needs bailing out. The recession in the 17-nation monetary union is deepening, with the latest data revealing that GDP shrank by a worse-than-expected 0.6% in the last quarter of 2012. And the continuing emphasis on austerity could make things even worse.
“We are not out of the woods in a structural sense,” warns Cornelissen. “There is no definite long-term solution to the debt crisis and the really tough decisions still have to be taken. The back-pedaling on banking union doesn’t augur well.”
He adds that Italy looks like the biggest potential headache—“it has the potential for crisis,” he notes—but thinks a Bersani/Monti coalition is the likeliest outcome of the late-February election. He isn’t that anxious about developments in Spain. “If Rajoy has to go, someone else from the ruling party will replace him. Elections are a long way off,” he says.
All in all, Cornelissen believes the likelihood of a major negative impact is relatively small. A major reason for that is the readiness of the ECB’s as-yet-unused OMT (outright monetary transactions) instrument, which is able in certain circumstances to buy sovereign bonds issued by eurozone member states.
“The eurozone could see some short-term tensions but they will keep things together,” he says. “A really devastating escalation is not on the cards.”
Cornelissen’s worry factor: 3/10
2 The Middle East
“The real problem spot in the short term is the Middle East,” says Cornelissen. In particular, Iran’s ineluctable progress towards the nuclear threshold and Israel’s implacable determination that it does not get there. “Strategically, a nuclear Iran wouldn’t make much difference,” he says. “But it is a potential short-term flashpoint.”
Obama’s isolationist approach to the international scene is a mixed blessing. After the disastrous forays into Afghanistan and Iraq, no large-scale military adventures should be expected on his watch. Good job, too, says Cornelissen: “It would be a grave strategic mistake to be drawn into a war with Iran,” he argues.
But that approach is bringing with it some unhappy consequences. “There is a power vacuum in the Middle East,” he says.
He notes that there is some good news, however, in that Israel’s hawkish prime minister, Binyamin Netanyahu, has been weakened by the country’s recent elections. And while there are myriad ways that the situation could escalate—what if Israel decides to eliminate the Iranian leadership, for instance, an act that could provoke retaliation against US assets in the region—there is one simple fact that cannot be ignored. “The west is not prepared to send ground troops into Iran,” says Cornelissen.
A lot depends on the way the US plays the situation. And Cornelissen thinks Obama will deliver. “Obama is one for Realpolitik. He’s a cool hand,” he says. That is why Cornelissen believes the likelihood of an explosion is lower than 50%.
Cornelissen’s worry factor: 4/10
1 Global weirding
Yet that isn’t Cornelissen’s number-one worry for this year. He’s more concerned about the immediate impact of global weirding—the term that is more and more being used to describe the world’s increasingly unpredictable weather.
The term “weirding” recognizes that it isn’t just a question of “warming”. Floods, such as those in Australia recently, are becoming harsher. Winters are getting colder—look at the record-low temperatures in China recently. And droughts are getting drier: the widespread damage to crops in the US last summer is evidence of that.
But isn’t that just a long-term consideration? Not only, says Cornelissen. Extreme weather that destroys crops widely can feed through into higher food prices rapidly, causing social unrest. “Don’t forget that the Arab Spring was ignited by exploding food and agricultural prices,” he says.
“If you get another hot summer in the Northern hemisphere, agricultural prices could soar,” he notes. That is why global weirding—or its immediate consequences—is the biggest geopolitical risk of 2013.
Cornelissen’s worry factor: 5/10
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