Eurasia Group | Top Risks for 2011: G-Zero tops the list 

Top Risks for 2011: G-Zero tops the list 

04 January 2011

Eurasia Group President Ian Bremmer and Head of Research David Gordon today announced the firm's annual Top Risks in a note to clients. Top Risks identifies the upcoming year's key geopolitical areas to watch for global investors and market participants. According to the report, the greatest risk in 2011 is the new global order. No country or bloc of countries currently has the political and economic will or leverage to drive today's international agenda. Marking the end of a decades-long agreement on how the global economy should function, we are entering the era of G-Zero.

Dr. Bremmer and Dr. Gordon write, "2011 looks to be the year that our understanding of how the world works becomes out of date. The dominant economic trend of the last half century, globalization, now faces a direct challenge from geopolitics."

This major transition will intensify all the other Top Risks for 2011-including the potential for uncontained crisis in Europe; tensions in cybersecurity and geopolitics; an unwillingness of China to respond to growing international pressure; provocations from North Korea; and currency controls.

The following is a summary of Eurasia Group's Top Risks for 2011. Please CLICK HERE for the complete report

1 - The G-Zero: We are entering the era of G-Zero, a world order in which no country or bloc of countries has the political and economic leverage to drive an international agenda. The US lacks the resources to continue as primary provider of public goods, and rising powers are too preoccupied with problems at home to welcome the burdens that come with international leadership. As a result, economic efficiency will be reduced and serious conflicts will arise.

2 - Europe: While the eurozone will undoubtedly remain intact in 2011, the region's political crises will become increasingly unmanageable. There's a real concern that core European countries (such as Germany) will become less committed to the peripherals, in turn hurting policy coordination and undermining market confidence in the EU.

3 - Cyber security and geopolitics: In 2011, geopolitics and cyber-security will collide. Whether attacks are waged for power (state versus state), profit (particularly among state capitalists), or pleasure (from info-anarchists, as in the recent WikiLeaks case), this is a key development to watch. Governments, corporations, and banks are all vulnerable to sudden, radical transparency, and a debilitating attack could be a long-term game changer.

4 - China: China's growth story will generate more and more resentment abroad, especially as Beijing "talks the talk" of participating in global coordination, but doesn't "walk the walk." By the next G20 in Cannes, 10 months from now, frustrations may erupt and bring many countries to confront China on issues ranging from industrial policy to intellectual property to currency valuation.

5 - North Korea: Pyongyang is likely to take more provocative steps against the south, particularly amid a faster-than-expected leadership transition. If North Korea strikes peninsular South Korea or US forces, tension would spike. Given US-China mistrust, there's a real potential for this scenario to get out of control.

6 - Capital controls: As increased inflows and currency appreciation persist, a number of countries, including those that resisted the urge last year, will impose capital controls. This trend is driven by the divergence in economic recovery between emerging markets and industrialized countries-combined with the increasingly dim prospects for a coordinated G20 strategy to tackle current account imbalances. The lack of global governance on this front will create significant market uncertainties.

7 - US gridlock: At a time when decisive action is needed, congressional gridlock will instead put up roadblocks to policymaking. Both parties will posture about issues that matter to markets, such as housing reform, but there will be little to no movement. In turn, the White House may take more heavy-handed administrative actions that are hard to predict or influence.

8 - Pakistan: Pakistan is experiencing a near perfect storm of political risks this year, with political, economic, and social crises all rising. While a 1999-type coup is unlikely, worsening governance and security could encourage the army to intervene politically. President Asif Ali Zardari will fight any such army effort to remove his cronies and government, risking a debilitating power struggle, and even if a technocratic government is put into place, it will struggle to reverse the effects years of weak governance.

9 - Mexico: Although the country is not headed for state failure, its battle against drug cartels will continue occupying most of the government's time and resources. Although the Felipe Calderon administration is gaining ground in its fight against organized crime, there will be a rising risk of more dramatic episodes of violence, including higher-profile assassination attempts on government officials, security forces, and figures.

10 - Emerging markets: Virtually all emerging markets are riding high currently, but as fiscal and political risks play out in 2011, they will contribute to poor investment outcomes in certain countries, ranging from adverse regulatory changes to asset bubbles to weak stock market performance. The most notable underperformers will be Argentina, Hungary, Peru, South Africa, Sri Lanka, and Thailand.

In addition to Top Risks, Dr. Bremmer and Dr. Gordon identify four Red Herrings-Iran, Turkey, Sudan, and Nigeria-which are places that Eurasia Group believes will not be sources of geopolitical instability in 2011.

Alexsandra Lloyd, Director, Communications: +1 646.291.4036 or [email protected]

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Eurasia Group is the world's leading global political risk research and consulting firm. By providing information and insight on how political developments move markets, we help clients anticipate and respond to instability and opportunities everywhere they do business. Founded in 1998, the firm's name reveals its early focus on the Soviet Union and Eastern Europe, but today our research platform is global. Our analysts monitor political, economic, social, and security developments in Africa, Asia, Eurasia, Europe, Latin America, the Middle East, and North America. Headquartered in New York, we have offices in Washington, DC, and London, as well as on-the-ground experts and resources in more than a hundred countries. Our analysts are highly trained political scientists with extensive experience in the public and private sectors.