Introducing the top risks of 2010

By Ian Bremmer and David Gordon

Over the next two weeks, The Call will feature the political risks that we at Eurasia Group consider the most important for 2010. We begin today with an overview and a few introductory comments.

We’ve just been through a year of enormous economic turbulence, and yet in most ways 2009 was mercifully quiet. The financial crisis hit the previous September and most things that could have gone wrong didn’t, allowing the world to focus on the digging out. 2009 saw no big geopolitical crises, no tussles with North Korea or Iran. The war on drugs in Mexico didn’t spill across the American border in a big way. Iraq didn’t blow up. There were no massive terrorist attacks (though Christmas saw a close call in the United States). No killer hurricanes, no huge earthquakes, and the H1N1 virus didn’t prove that threatening a pandemic after all. Governments around the world focused overwhelmingly on the domestic, putting tough policy decisions on hold. (And when they didn’t, as with President Obama’s Afghanistan and healthcare plans, the results were seriously watered down, and actual policy risk was limited.)

This year, that’s going to be much harder to accomplish. If the 2009 top risks were first and foremost about developed states having their wits sufficiently about them to get through the financial crisis (with the U.S. Congress leading the pack), as the world now emerges from recession, the risks begin to shift to the challenges created by the emergence of a new global order — developed vs. developing states, the old unipolar system vs. the emerging non-polar one, and the old dominant globalized system of regulated free market capitalism vs. the growing strength of state capitalism.

The biggest risk for 2010 comes from the point at which these three trends converge: U.S.-China relations. Simply put, 10 (percent unemployment in the United States) plus 10 (percent growth in China) does not equal 20. There’s been an enormous effort by the leadership of both governments to keep a functional U.S.-Chinese relationship in place, much like the international approach to the G20, so that everyone could see the seriousness of the enterprise. But with the world’s principal actors under less immediate strain, there’s less pressure to keep up appearances. This year, the gloves start coming off.

Next up is Iran, where a deteriorating domestic and international environment combined with toughening sanctions pressure will create greater incentives for Tehran to provoke conflict. Along with the continuing (though limited) risk of Israeli military strikes on Iran’s nuclear sites, this is the year to watch for serious trouble emanating from the Islamic Republic.

We’ll also still see significant concerns within developed states this year — weaker states in Europe under massive fiscal pressure; financial regulatory reform in the United States; and the impact of a political revolution in Japan. A few surprises from emerging markets — Brazil’s at risk this year, as coming elections are more troubled than people expect. India-Pakistan risk resurfaces after years of quiet engagement (while Afghanistan, making headlines throughout the year, is effectively pushed as a top risk to 2011 by the U.S. troop surge). Unemployment coupled with a spate of elections merit a spot for Eastern Europe in the top ten.  And a host of domestic and international stresses puts Turkey on the list too, though barely.

Terrorism doesn’t make the list. It’s a growing global concern, but as a specific risk, it’s a fat tail. It can really upset markets when an attack hits, but short of that it’s principally a growing drag on global growth. Yemen is emerging as a focus for al Qaeda, and no doubt we’ll see significant fighting there … with direct American engagement. But short of Yemen actually failing as a state (unlikely in the nearest term), it won’t have significant impact globally — or even on neighboring Saudi Arabia. After many years, climate change finally sees its place on the top 10 list, mostly because of the growing policy and market impacts of the continued absence of effective international coordination on responses, a trend we’ll see more often in our increasingly non-polar world.

There are all sorts of country risks that don’t quite make the list — Colombia, Dubai, Malaysia, Mexico, Nigeria, and Thailand to name a few. Each is worthy of concern for those with direct exposures in these economies, but none will grow to the level of global risk in 2010.

And then some interesting red herrings. These include U.S. and British financial centers, the death of which has been greatly exaggerated; Iraq, where investment and new oil will be a much bigger story than security risks; the Persian Gulf, which we generally like quite a bit (Dubai’s problems notwithstanding); and the dollar, where really slow and steady-ish still wins the race.

First up, risk #1: turbulence in U.S.-Chinese relations…

Ian Bremmer is president of Eurasia Group. David Gordon is the firm’s director of research.

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