2013 will see emerging global players adjust to the vacuum America’s decline has created. Some may be tempted to exploit these new realities.
Whatever you may think about America’s ability to reinvent itself, or Europe’s determination to save the euro, one fact is clear: neither of these erstwhile power centers have any chance of reclaiming the economic heft they wielded a decade ago.
From this decline flow many of the economic and geopolitical shifts that beset the world as 2013 unfolds.
Lists of global risks invariably fail to satisfy everyone. In addition to the five global challenges I’ve sketched out below, I could have easily added the Israel-Iran nuclear standoff; North Korea’s perennial threat to go critical; the simmering violence in the Democratic Republic of Congo; or the long-running Israeli-Palestinian or India-Pakistan conflicts.
But those persistent plagues have mostly local origins; even if they have global implications, they are contained to some extent. On another level altogether are the shock waves emanating from the continuing revolutions in the Arab World, the heightened nationalist and territorial tensions between Japan and China, the radicalization of Islam in North Africa, and the debt crises in Europe and the US. Ranked from 1 to 5, here’s a look at what’s at stake in each, and the likely impact these issues could have on the world in 2013.
1) The Arab Spring enters a new winter
Two years after a Tunisian man’s self-immolation set the Arab world alight, uprisings and outright civil wars have changed geopolitical realities. With US forces having withdrawn from Iraq and due out of Afghanistan in 2014, outside players have diminishing influence — though resurgent Turkey has filled the gap to some extent.
In 2013, the US will wield less influence in the region, as it concentrates on its 2014 pullout from Afghanistan and its pivot toward East Asia. Turkey’s alliances with the Gulf kingdoms will strengthen, in order to counter Iran’s influence, especially in Syria. That bolstered alliance will ensure that the Assad regime ultimately falls. This will represent a severe setback to Iran’s (and Russia’s) regional clout. One risk, however, is that the final weeks of the civil war could draw Turkey (buffer zone) and Lebanon (via anarchy in the Alawite-friendly border region) into the fighting. If Assad’s collapse were to threaten Hezbollah’s position in Lebanon, the threat of civil strife there would be high.
The new order in the Middle East means that Israel is more isolated and vulnerable — especially after the overthrow of Mubarak, the exasperation of US and EU allies over settlement expansion, and ongoing frosty relations with Turkey, once a close military partner of Israel. The two fell out furiously after Israeli commandos killed Turkish citizens in 2010 on a Gaza-bound humanitarian aid flotilla bent on breaking the Israeli embargo of the enclave.
Middle Eastern instability could also cause a major oil price spike in 2013 — especially given the continuing risk of an Israeli strike on Iran’s nuclear facilities, as well as the deteriorating ability of Saudi and other Gulf states to back global markets with spare oil capacity. The risk will particularly climb after the Jan. 22 Knesset vote, which is expected to return an even stronger majority for the hawkish Likud-led government of Benjamin Netanyahu.
Israel, for all its rhetoric, will likely refrain from a strike against Iran’s nuclear facilities as long as sanctions are playing havoc with the Iranian regime (as they are). Hopeful note: Israel could also move to mend ties to Turkey and, if Egypt settles, to draw Cairo into a three-way initiative to finally settle the Palestinian issue.
Finally, Libya’s revolution remains incomplete. The militias that did the bulk of the fighting remain at odds over the writing of a new constitution. More seriously, looted weaponry and mercenaries from Gaddafi’s regime has flooded the Sahel, fueling unrest from Mali to Nigeria. Algeria, along with the US, France and the regional group ECOWAS, are talking seriously about military intervention in Mali, where an Islamic group with links to Al Qaeda is now in tacit control of the country’s northern desert. (See “Sahel in a Handbasket,” below).
2 ) China’s “near abroad” — not so pacific
Many had hoped that the China’s new leadership, installed last autumn, would lead Beijing to halt provocative naval actions in the South and East China seas, where Chinese vessels have come close to open conflict with Japanese, Vietnamese, Korean and Filipino warships as they vie for control of several island chains. On the contrary, China’s new Communist Party General Secretary, Xi Jinping, in mid-December told his armed forces to “intensify combat readiness,” hardly the words of a man seeking to calm tensions.
The tension has been building for several years. In 2010, China publicly declared a vast area of the seas along its coastline as its “indisputable sovereign territory,” in spite of dozens of conflicting claims to the Spratly, Paracel and other islets. The region is thought to sit atop significant gas and/or oil reserves.
In 2012, Chinese vessels harried ships around disputed islets, leading to similarly nationalistic actions by these nations. It also prompted a new US vow to build up forces and regional alliances along the Pacific Rim. China objected to the visit of an Indian navy helicopter carrier to Vietnam recently, and to Indian-Vietnamese talks about joint offshore oil exploration — an apparent effort by smaller claimants to enlist their own powerful regional allies.
But the real flashpoint of the moment appears to be between China and Japan, which have a history of antagonism dating back centuries, including the long, brutal Japanese occupation of 1931 – 1945.
In 2010, after Japan arrested a Chinese fishing boat captain for allegedly ramming a Japanese coast guard cutter, China cut off exports of dysprosium, neodymium and other rare earths Japan needs in electronics manufacturing, causing huge losses as Japanese companies scrambled to find alternative sources (in some cases, there were none). Bilateral trade and FDI between the two countries has fallen sharply.
Meanwhile, the US, which has a mutual defense treaty with both Japan and Taiwan, has reasserted its right to transit the South and East China seas, so far unmolested. But with so many crucial decisions into the hands of relatively junior naval officers, the scope for miscalculation is large, as is the economic and financial fallout.
The US has sought to benefit diplomatically from the consternation that China’s actions are causing in the region. Rather than marshal diplomatic pressure, Washington has pressed regional powers for new basing rights, redeploying troops and naval units to Australia and the Philippines, where they had been absent since the Cold War ended. It has also pressed both India and Japan to take more aggressive posture in the region. India has resisted this — China just last year became its leading trade partner. But Japan’s new government is led by a nationalist, Shinzo Abe, the grandson of a man who was Japan’s imperial governor of occupied Manchuria during the 1930s. Last month, he said he would pursue a more formal alliance with India and “expand the country’s strategic horizons” as his top priority.
In the short-term, with so much riding on the decisions of low-level naval and coast guard officers, the risk of one of these maritime duels spiraling out of control is significant. And because the US and Japan have a formal treaty of mutual defense, America’s Seventh Fleet would be obliged to come to the aid of Japanese forces if conflict expanded. Given the shrillness of nationalist sentiment and historical grievances in both China and Japan, that scenario cannot be dismissed lightly.
3. Euro crisis: Manning up is hard to do
The philosophical and policy differences that have prevented aggressive euro zone action to deal with the sovereign debt crisis have delayed, but not prevented, a disaster. Greece, which is failing outright to meet the terms of its several bailouts, could well exit the euro sometime in 2013.
If so, this will put enormous pressure on other highly indebted countries, particularly those that have been acting as though there is no urgent need to reform the public sector, pensions, labor markets or other aspects of the social welfare state.
At the front of the line is Spain. The rescue of its banking sector has not brought political relief for Spain’s conservative government, which has repeatedly requested looser terms and tried to avoid a larger, more stringent bailout of the state’s coffers.
But in Spain, Italy and even France, governments that lose the ability to refinance debt at palatable rates may find themselves pushed to the wall earlier than we expect, if the fallout from a Greek exit is not properly managed. Germany, meanwhile, has so far managed to keep a lid on anger among its voters about transfers to bail out euro zone partners; with elections scheduled there in the third quarter, this firewall, too, may be fraying.
So be wary of a Greek exit in 2013, an upsurge in bond spreads and then a calming of markets after German and European Central Bank half-measures: all leading to a showdown over Spain in 2014.
4. America’s deficit disorder
The re-election of Barack Obama and a gentle watering down of the GoP House raised prospects for a compromise deal on US current account deficits. In the end, the deal proved just another round of can-kicking, though this time the can only traveled two months down the road. Another showdown — this one over the so-called “debt ceiling” — will play out before spring.
The downgrade of America’s AAA credit rating by S&P in 2011 suggested that Washington cannot continue its charmed relationship with bond markets indefinitely. But enough Republicans harbor an ideological allergy to tax hikes and believe that bond markets have no conceivable alternative to Treasuries that they would be willing to force America into default.
If so, America’s day of reckoning on fiscal matters will move forward rapidly as interest rates soar and foreign creditors demand action.
Would this be enough of a shock to untangle American policymaking? In the longer term none of the chess moves on deficits matters much. Structural reform of social entitlements, military spending and tax policy are needed to change the trajectory that now has American national debt topping 100 percent of GDP by 2020.
Some of the constituencies involved will dig in fiercely: the elderly regarding Medicare and Social Security pensions, homeowners and banks regarded the deductibility of mortgage interest, the rich and the non-profit sector regarding tax breaks for charitable deductions. But these issues will determine much about the recovery of the US post-2008 as a dynamic, job creating economy — and as the holder of the global reserve currency. If Obama chooses to kick these cans into the yard of the next administration, global markets may punish the United States before the cans stop rolling.
5. Sahel in a handbasket?
The popular rising that chased Libyan dictator Muammar Gaddafi from power freed Libyans to sort out their own affairs but had unintended consequences reverberating throughout neighboring countries. In early 2012, Tuareg rebels took control of northern Mali after a coup dislodged its government. Ultimately, the Tuareg movement was chased away by hardened fighters armed with weapons taken from Libya’s vast stockpiles, who claim allegiance (if not actual links) with Al Qaeda.
Subsequent intelligence reports suggest a mixture of groups — including Al Qaeda in the Islamic Maghreb (AQIM) and Nigeria‘s Boko Haram — have congregated in northern Mali and forayed into Niger, Burkina Faso, Benin and northern Ghana. Particularly worrisome is the Boko Haram activity, since that group has already stepped up attacks inside Nigeria, making some parts of the country no-go zones for Nigerian Christians. The country suffered its worst ever year of violence in 2012.
Nigeria’s President Jonathan Goodluck in December requested US government aid in battling the group the government once downplayed. While direct US intervention is neither wanted nor likely, America’s AFRICOM has been increasingly active, along with French and Algerian intelligence agencies. Both are playing a leading role helping ECOWAS prepare for an intervention to reclaim northern Mali. A second coup in Mali in early December muddies waters for ECOWAS there as intervention plans await final approval from United Nations Security Council.
In Nigeria and several other countries in the region, the insurgencies fueled by ethnic and religious groups and armed by traffickers tapping Libyan and many other sources of weaponry, could pose a threat to governments across the Sahel. Niger, Chad, and of course Mali, all have felt the sting of these uprisings, but the regional response has been too weak to counter the trend.