Four Crises Reshaping the Global Economy
Over the summer, a massive security breach at JP Morgan Chase alarmed not just consumers but also the national security community when the bread crumbs seemed to lead back to hackers in Russia. Then last week, Russia emerged again as the main suspect in an attack on White House computer systems. Looking at a parallel campaign against NATO countries, a cybersecurity specialist told the New York Times, “This is Russia using their network operations to achieve their key political goals.”
It is no coincidence that Russia is testing US reactions while the Middle East cracks apart over the response to ISIS , China grows ever more hostile to foreign firms and the US and EU drift further apart. To date, investors have shrugged off these geopolitical brush fires as individual stories without direct significance for the global economy. But these are not isolated problems.
It’s becoming unavoidably obvious that the current global order is unraveling. Add investor fears that we’ve ignored warning signs of slower growth, particularly in Europe, and that the easy money days of quantitative easing may finally be coming to an end, and it didn’t take much to spook equity markets in October.
A distracted, war-weary Washington is no longer able to provide global leadership, and no one is stepping up to take its place. The U.S.’s international disengagement and improvised foreign policy is leaving allies, distracted by their own problems, looking to hedge their bets. Meanwhile, emerging countries have become powerful enough to block US-led plans — but are not yet coordinated, motivated or influential enough to offer alternatives. Fast-changing China, revisionist Russia and a host of emerging markets with competing priorities and different political and economic systems leave us with too many major powers with too many divergent interests. The result is a global power vacuum — and markets are afraid of what might come next.
We now live in a world where no single power or alliance of powers is willing and able to provide global leadership. Call it geopolitical creative destruction: The old model is breaking down, but the only thing yet emerging in its place is more geopolitical crises, burning hotter, for longer, more often.
We’ve reached a crossroads where the outcomes of four combustible geopolitical crises could begin to reshape the global economy. Two of these crises are already reaching a critical point. The conflict between Russia and the West will rage in and around Ukraine, at Russia’s borders with other neighbors, in energy markets, in financial markets, in the defense budgets of countries on both sides, in cyberspace — and anywhere else Moscow can try to undermine what remains of American global leadership.
In the Middle East, the battle with ISIS has just begun. On top of the terrorism risk, the conflict could devolve into a regional sectarian war between major Middle Eastern powers, and the Iran nuclear negotiations may well be headed over a cliff.
Two others crises, not yet dominating headlines, are very much in play. Chinese leader Xi Jinping has his hands full with transformational economic reforms that will reshape the Chinese market and his country's global standing. But as this economic agenda comes under pressure, Beijing will look to deflect frustration and attention onto foreign firms, neighborhood adversaries or Washington. The Asia-Pacific is the most dynamic and vital region for the future of economic growth — and the most combustible for geopolitics.
Second, new fissures in the U.S.-Europe alliance are taking shape. Divisions between European countries as well as global challenges that disproportionately threaten Europe are widening a structural divide between Europe and America. Shortcomings of the NATO alliance betray evaporating common ground, and a relationship increasingly driven by economics rather than security concerns. We may be witnessing a fundamental reshaping of the transatlantic alliance, one that can inflict lasting damage on the global financial system.
In coming months, these four geopolitical challenges will feed off one another. On top of dividing European member states, a more revisionist Russia will actively undermine the West on Middle East policy. Russia also wants to eradicate ISIS, but for different reasons. Moscow doesn’t share the West’s opinion of its close ally, Syrian President Assad; undermining ISIS strengthens him. Russia’s cratering relations with the U.S. offer Iran hope that Russia could be a viable economic partner, willing to bust sanctions if the nuclear negotiations fall through. That makes a no-deal world easier for Iranian leadership to live with, in turn letting them toe a harder line in negotiations. If Russia undermines American sanctions on Iran, it would make the U.S.-Russia dynamic even more combustible.
The world’s leadership vacuum and these four crises will get much worse before they can get better, but any widespread, coordinated response to severe geopolitical challenges will come only if a crisis threatens key players at the same time — and to the same extent. We saw that with the financial crisis, when freefalling markets seemed to pose an existential danger for any country with a globally connected economy. Held to the fire, leaders came together to respond decisively. As soon as the pressure abated, that coordination broke apart.
In the absence of core interests or a perceived collective threat, fires are left burn. Washington remains relatively insulated. The Western Hemisphere is removed from the most acute consequences that will reverberate across Europe and Asia. Washington feels it can afford to improvise its foreign policy. No one else will do more. By the time enough leaders have their backs against the wall, the challenges will loom larger — and their capacity to build a coordinated response will have diminished even further.
Geopolitics are back, and markets are beginning to notice. If investors are jittery over European growth and the end of Fed tapering, imagine how they’ll react to the next geopolitical bolt from the blue.
To learn about the four crises in depth, read my new cover story in Institutional Investor, from which this essay is adapted.
Photo credit: Tjebbe van Tijen / Flickr.
Ian Bremmer is president of Eurasia Group and global research professor at New York University. You can follow him on Twitter, Facebook and LinkedIn.