2012 could be more difficult than 2011

I have just come off the phone to an acquaintance of mine who lives in Beijing. He is Chinese, and older than me, old enough to have worked for Deng Xiaoping, China’s reforming Leader, during the 1980s.

My acquaintance’s career has taken him around the world as a diplomat and an academic and a banker. He is a clever man, and a thoughtful one. I asked him whether or not he expected the Eurozone to disintegrate, and we got talking about the global picture. Our conversation imagined a depressing trajectory, towards fresh political and economic crisis next year, and even the possibility of a conflict breaking out, probably in the Middle East. Here are the key components of a deterioration in global affairs in the next 12 months:

The economic outlook may get worse before it gets better. The Eurozone crisis may begin to resolve but it will leave euro countries, and possibly the UK, in recession. The US is flat, Japan is flat, growth in India and China is slowing. The worst case scenario is a downward spiral, as confidence and credit fall out of the global system.

Meanwhile, next year will see the world’s political leaders unusually distracted. If and when they put the fire out, Merkel, Sarkozy and Monti will have to embark on a complex and politically painful programme of re-building. During 2012 France will go to the polls and Sarkozy may go, though my hunch is that he will beat Hollande, who does not look like a man for a crisis. The Brits look likely to remain in a reactive mode and will stand on the sidelines. America’s political paralysis will lock into a new level of inertia as the race for the White House gets under way. With America feeling battered and under threat, the political mood could sour. Both candidates may choose to become more nationalistic, and protectionist, than they want to be. The rest of the world will watch with baited-breath. There will also be a leadership transition in Beijing. This will look orderly in comparison with America’s billion dollar election campaign, and the result (xi Jinping) is a known quantity, but it will usher in new management in the world’s biggest manufacturing economy at a very difficult time. Meanwhile Japan is weak, Ban Ki-Moon is weak, the UN is weak …

Which brings us to Iran, a key oil exporter and opponent of US hegemony which currently feels dangerously isolated. The Middle East has since January this year been destabilised by revolutions led by disenfranchised young people (Iran has millions). Iran’s principal ally, Bashar al-Assad of Syria, will hopefully fall next year. Hugo Chavez, Iran’s other cheerleader, is dying. Meanwhile, Tehran’s nuclear programme is getting closer to completion. What’s riskier: to take action against Iran in order to try and stop her acquiring a nuclear weapon, or living with a nuclear Iran? Probably the latter, but its not cut and dry and the more time that goes by, the higher the stakes. Israel, which Iranian President Mahmoud Ahmadinejad wants to “vanish from the pages of time”, is currently feeling unusually isolated from the US and other traditional allies. Benjamin Netanyahu, a former soldier, may decide that Israel cannot afford to stand idly by for much longer. Bold military action has worked for Israel before, and in 2010 Tel Aviv used a cyber attack to stall Iran’s centrifuges. A military attack on Iran would shut the Straits of Homuz; it would takes days to clog up world trade and deny Asia the energy it needs to keep its factories running. China and India would be quickly drawn in. So would the US and Russia, probably on opposing sides. What happens next doesn’t really bear thinking about but its vital that policy makers are thinking precisely about these scenarios as they engage with Iran. Things are feeling pretty taut right now but they could get worse.

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