New sources of financial and geo-strategic risk have caused the tremendous global shakiness, notes Claude Smadja
What is going on? Stock and financial markets have been in turmoil since the beginning of the year, with wild gyrations that have no solid economic rationale except nervousness and fear about some possible threats hanging over the global economy.
These include worries that China’s slowdown might be more pronounced than expected, concerns born of some impending signs that the US recovery might be getting closer to an end, and slowing growth and rising financial strains in a number of emerging markets.
The jitters would normally look like an over-reaction, considering that the latest International Monetary Fund World Economic Outlook Update -- while mentioning that risks ‘remain tilted to the downside’ -- painted in January a cautious but not alarmist picture.
It suggested global growth would rise from 3.1 per cent in 2015 to 3.4 per cent this year and 3.6 per cent in 2017, and growth in emerging markets would rise from four per cent last year to 4.3 per cent this year and 4.7 per cent in 2017.
The problem is that traditional analyses or forecasts seem today to reflect only part of the picture, missing or under-estimating factors which go beyond textbook economic mechanisms.
It is, for instance, significant that the present sharply lower oil prices which -- until now -- had always been greeted as a boon by non-producing countries, are yet unable to shake the apathy of consumers in developed economies.
Instead, they increasingly cause concern about the impact they could have in reinforcing dreadful deflation trends in Europe and Japan.
And, speaking of Europe, one has to wonder what is so wrong with the European Union.
Despite zero interest rates, very low oil prices, a depreciated euro and now a timid loosening of absurd austerity policies, it remains incapable of generating the kind of recovery and growth levels needed to make a significant dent on devastating unemployment rates in France, Italy, Spain, Portugal or Finland -- not to mention Greece, now back in severe recession.
This feeling of nervousness, of fear about impending negative developments, is not limited to the economic domain.
One needs to consider the general perception that volatility and risks have also significantly increased in the geopolitical sphere.
We seem to have entered a new era marked by a disturbing paradox: On the one hand, at the global level the world is safer than it has been since World War II because the risk of frontal confrontation leading to global nuclear conflict is now very marginal.
On the other hand, we have a much more fragmented world, marked by a steady increase of regional and local conflicts and risks while the spread of the terrorist threat has created pervasive insecurity at the global level.
Two factors explain this new context: During the Cold War, the East-West confrontation harnessed local and regional conflicts within specific limits, as none of the two superpowers could afford to let things get out of control or threaten the global status quo.
The end of the Cold War, along with the shift in US policy towards avoiding direct involvement in military conflicts, have created a new context in which local and regional conflicts are allowed to fester and flourish.
We need to take into account the growing role and destabilising impact of non-state actors operating on the international scene without any of the constraints imposed by international law -- thus creating asymmetric threats to international stability.
However, what explains the present general nervousness is not so much the realisation that we are now in a shakier, less predictable, economic and geopolitical environment but the pervasive concern that -- globally speaking -- we are not fully equipped to deal with this new context.
In that respect, it is worrisome to note the sharp decline in popular confidence in political leaders’ ability to find and implement appropriate solutions to the challenges their respective countries are facing -- and the decline, or even the evaporation, of trust towards government, business, the media and all institutions in general.
On the economic front, the nagging questions in many business and political leaders’ mind are whether we are now locked in a “new normal” of low growth; whether there is still any ammunition left to deal with the next recession, when interest rates are already at zero or even negative levels; whether the efficacy of Quantitative Easing -- the injection of money into the economy -- has not now run its course in Europe and in Japan; whether there could be a corporate default somewhere that will trigger a chain reaction; or if some dark unknown element in China’s economic or financial figures or in the accounts of some European banks will suddenly pop up and create panic on the markets. Remember the head of Deutsche Bank having last week to state that the bank remained “absolutely rock solid” to stop the nascent panic of investors about its stability?
In the geopolitical domain, what we have witnessed is not the dawn of a 'post-conflict' era that some observers had imagined, but the emergence of a new type of geopolitical risk and new types of conflicts -- where aligning interests among allies become more difficult, and where the disruptive capabilities of non-state actors are proving to be gigantic.
Think not only about what Islamic State has proved capable of doing, but also about how a small group of cyber pirates could today create general havoc.
In this volatile context, there are new sources of risk. They include: a Sunni-Shia rivalry more intense than ever, and embodied by the Saudi Arabia-Iran rivalry; the reverberations of the Syrian war on West Asia; the reassertion by Vladimir Putin of Russia’s claim to great power status; the geopolitical inexistence of Europe now struggling with a migrant disaster which could be the straw that breaks the camel’s back; the emergence of a China which has broken with the Deng Xiaoping doctrine of 'hiding its strength, lying low and biding its time' and now intends to deal with the US on an equal footing.
These risks are all less predictable and less manageable, given the failure so far to strengthen existing multilateral institutions or build strong conflict-resolution mechanisms,
Add to that the growing dysfunctionality of the American political system, the declining ability of the US to shape global events, and its reluctance to get involved again in military conflicts -- and one can measure how sorely leadership is lacking at the global level when we might need it most.
Claude Smadja is the president of Smadja & Smadja, a strategic advisory firm