Analysis: 2012 Could Prove Even Wilder Ride than 2011

By Peter Apps, Political Risk Correspondent

LONDON (Reuters) – The ancient Mayans attached special significance to 2012, possibly the end of time. That has spawned a rush of apocalyptic literature for the holiday season.

But you don’t have to believe the world is about to end to realize that next year contains perhaps the widest range of political risks to the global economy in recent history.

With elections and leadership changes in the most powerful countries, Europe in crisis, ferment in the Middle East and worsening economic hardship driving unrest and discontent everywhere, 2012 could be just as volatile as 2011 if not worse.

The current year may yet carry a sting in its tail, with worries over the euro and jitters over a possible Israeli strike on Iran likely to keep financial markets and policymakers on tenterhooks all the way to the New Year.

More than three years after the collapse of Lehman Brothers prompted the worst financial crash since the Great Depression, economic turmoil looks to be driving political upheaval in what could become a particularly disruptive feedback loop.

Economic stresses — from rising food prices to worsening economic hardship in the developed world — were at the heart of many of 2011’s political stories. As they intensify, political volatility, gridlock, confrontation and conflict — whether domestic or international — look set to worsen.

“It’s going to get worse before it gets better,” said Jonathan Wood, global issues analyst at London-based risk consultancy Control Risks. “If you look at what’s been driving events this year, none of the factors has gone away and many of the economic drivers are still growing.”

Presidential elections in the United States, France and Russia and the dual transition of power at the top of China’s Communist Party will add to the uncertainty. They may make it harder for political leaders to find compromises or push through tough policy choices.

GROWING GRIDLOCK?

That, many analysts warn, brings with it a mounting risk of political gridlock coming just as the world needs leadership most. The failure of the U.S. Congressional “super committee” to agree on how to reduce the budget deficit may be a sign of things to come domestically in many countries.

President Barack Obama faces a tough re-election bid, whomever the Republicans choose to challenge him, because of a sluggish economy, 8.6 percent unemployment and a squeeze on the middle classes due to fallen home and stock prices.

A fragile global consensus forged at a 2009 summit of leaders of the Group of 20 major economies may be gone for good, replaced by what Ian Bremmer, president of political risk consultancy Eurasia Group, calls a rudderless “G-zero” world.

Top of the list of 2012 risks for many analysts is the unresolved sovereign debt crisis in the euro zone.

If the 17-nation European single currency is to survive in its current form, its members will have to confront harsh economic adjustments and seismic political reform. Last week’s Brussels summit, the 16th since the start of the two-year-old crisis, was billed by some as the last chance to save the euro.

While euro zone leaders and some non-euro states agreed to forge a closer fiscal union with stricter budget discipline, the outcome fell short of guaranteeing the euro’s ultimate survival.

At worst, 2012 could still see a disorderly breakup bringing with it a chain of defaults, bank runs and civil unrest, not to mention a savage global economic shock worse than that of 2008.

Ultimately, however, many believe the euro will endure — although not without colossal strains as it tries to reconcile very different economies such as Germany and Greece.

“The greatest single risk is obviously the euro zone but it might also be the risk that is sorted out the quickest,” says Alastair Newton, a former British government official who is chief political analyst at Japanese bank Nomura.

“But even if that happens then you’re still going to have very low growth and a rise in social unrest in the southern euro zone in particular and across Europe in general. Even in the best case scenario, 2012 looks pretty rough.”

For others, the Middle East remains the most important area to watch for potential disruption to the global economy.

Almost a year after the beginning of the “Arab Spring” democracy movement, the region remains in political flux with untested Islamist parties winning power across north Africa and Syria’s uprising slowly turning towards outright civil war.

CONFLICT, UNREST

After the fall of several veteran Western-backed Arab rulers, the withdrawal of U.S. forces from Iraq is seen as the latest sign of the diminishing influence of Western powers in a region they dominated for some 200 years.

In the resulting vacuum, regional powers such as Turkey, Saudi Arabia and an isolated and perhaps more erratic Iran appear in increasingly open confrontation.

Western intelligence estimates that Iran is moving closer to a viable nuclear weapon have a shorter timeline, and some analysts say 2012 could be the year when Tehran’s enemies decide to go beyond covert sabotage with a military strike that could spark retaliation against oil supplies in the Gulf.

“The bigger wild card out there is an Israeli attack on Iran’s nuclear facilities and elements of regime control,” says Thomas Barnett, chief strategist of political risk consultancy Wikistrat, saying neither the Israeli nor the Iranian leadership looks inclined to back down. “The setting here is scary… something has got to give in this strategic equation.”

Even if the world avoids a devastating shock such as a Middle East war or a European breakdown, many analysts fear the business of politics and policy-making could become increasingly difficult around the world.

With economic growth slowing and unemployment creeping up, most analysts believe the risks of social unrest will continue to rise across much of the developed and developing world.

“We have all the problems you’d expect from economic hardship. At some stage we will have rising food prices which are always destabilizing and we have a question over whether China will overheat,” says Elizabeth Stephens, head of credit and political risk at London insurance brokers Jardine Lloyd Thompson.

“Even a fall of one or two percentage points of GDP (in China) could be enough to really question social stability if they can’t keep job creation going… We (also) have probable ongoing unrest in Europe and the ongoing transition in the Middle East and North Africa could be quite unstable.”

In the dying days of the year, other long held assumptions of stability have be thrown into question — not least by the rising tide of protest against Russia’s Vladimir Putin. The one certainty for 2012, many believe, is more of the unexpected.

“2011 was a nightmarish year to be a policy maker or an investment portfolio manager but it was a great one to be a political analyst,” says Newton. “I’d certainly expect the same for next year.”

(Reporting By Peter Apps)

13-52