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Is Recovery Sustainable?

While political risks remain a concern worldwide, the global economy—for many countries—continues to show signs of recovery.

“So far we’ve been talking about political risk—during the second half of last year and the first half of this year,” said Julien Marcilly, chief economist for Coface SA. “Now we’re talking more about recovery.”

That doesn’t mean, however, that “all of the problems are solved,” he noted. The new question becomes whether this recovery is sustainable or is it going to be short-lived.

While there is reason for cautious optimism, concerns remain amid continued political instability for certain countries—particularly Brazil and Russia. At Coface’s Country Risk Conference held June 28, Marcilly noted modest recovery in the eurozone and a better outlook for business insolvencies in Western Europe—aside from the U.K.; questioned President Trump’s ability to implement a fiscal stimulus plan in the U.S.; and highlighted banking risk as a concern across emerging markets.

Frédéric Bourgeois, Coface U.K. managing director, pointed out the importance of being knowledgeable about what is happening in the world.“In uncertain times, being informed enables us to be comfortable with the business decisions we make and mitigate risk,” Bourgeois explained. Many factors “could have a destabilizing effect on trade and increase the risk of payment defaults.” In addition to economic trends, “geopolitical and social concerns … are contributing to the sense of volatility in domestic and overseas markets,” he added.

At FCIB’s upcoming International Credit & Risk Management Summit, Marcilly will present on Sept. 11 a global picture of advanced and emerging markets, where they are today with a look toward 2018 to help credit professionals keep on top of what is happening worldwide.

Fickle Voters in Europe

Chris Kuehl, Ph.D.

It is inevitable that voter popularity will wax and wane. Voters often seek instant solutions to problems that may have developed over decades. But the whole process of democracy is messy with lots of compromises; the average person fails to understand that and resents those who do not give them what they want.

Many of the leaders in Europe are facing a decline in their overall popularity. In some cases, this does not matter so much because these leaders will not be facing voters any time soon. That is the situation that Emmanuel Macron faces. He just won his race and will be president of France for years.

Germany’s chancellor, Angela Merkel, however, is facing an election in a couple of months and needs to pay more attention to her poll numbers. As she returns from a break, she has a 10-point drop in her popularity. The decline doesn’t really help her opponent, Martin Schulz, because he also saw a decline of four points. Voters that turned on Merkel have been drifting to the smaller parties as something of a protest.

Merkel seems to be fighting a perception that she has been too relaxed about this campaign and is not taking the whole thing seriously. She also has been attacked for the response to the violence that surrounded the G-20 meeting. Many people thought she was not tough enough with the protestors. The continued attacks from terrorists have alarmed people as well, but this has not translated into support for the right-wing parties as it has in the past.

The overall sense is that some voters are just restless and wonder why there has not been a credible challenge to Merkel at this point. Schulz made a run at her at the start of the year, but it faded because the Social Democrats are just not that different from the Christian Democrats on many key policies.

Analysts are not sure where all of this is heading, but there has been agreement that voters are uneasy. This is the attitude that has led to flirtation with extremists such as the Alternative for Germany (AfD) and the National Front in France. These groups surge for a while and then that popularity starts to fade. The left-leaning parties have likewise seen their fortunes improve. Then they also lose momentum.

There is a sense that nobody is really addressing the issues that are of most concern, but the fact is that few of these issues are easily addressed. What can the leaders really do about the state of the global economy or warfare in the Middle East or the inexorable advance of social problems? There is not even consensus on which of these should be tackled first.

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Strategic Global Intelligence Briefs

December 11-December 15

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Latin American Trade Agenda Takes 3-Pronged Approach

Growing protectionism in the United States has led Latin American leaders to seek “new, deeper economic relationships,” according to a new report from The Economist Intelligence Unit (EIU), Building Bridges: Latin America’s New Trade Agenda.

The region’s focus on globalization has resulted in a more positive outlook “about the deepening of free trade and regional integration in Latin America,” the report notes.

EIU finds that the region’s integration agenda targets three main areas:

  • Among members of the Pacific Alliance free-trade area (which includes Chile, Peru, Colombia and Mexico)
  • Between the Pacific Alliance and Mercosur (the Southern Cone customs union, comprising Argentina, Brazil, Paraguay and Uruguay); and
  • Between Mexico and the rest of Latin America.

Two key priorities in trade relations include “securing an EU-Mercosur free-trade deal and resurrecting the Trans-Pacific Partnership (TPP) without the participation of the U.S.” The EIU is “increasingly optimistic about the chances of these deals being made,” it says.

Political risk, however, remains the biggest obstacle to the trade and integration agenda. Major economies in the region will hold presidential elections next year, including Brazil, Mexico and Colombia. Unexpected outcomes could “shift the pro-trade-free stance that currently dominates Latin America,” the report cautions.

“The complicated political calendar highlights the urgency of making progress with trade and integration efforts,” the EIU said. “It also highlights the need for Latin American leaders to address the problem of ‘winners’ and ‘losers’ in free-trade deals, to get buy-in from a public that has associated globalization with increasing global inequality in recent years. … Assuming these issues are addressed, progress on stalled free-trade talks could finally be on the horizon.”

Election Calendar

Aug. 23 - Angola, General
Sep. 11 – Norway, Norwegian Parliament
Sep. 23 – New Zealand, New Zealand House of Representatives
Sep. 24 – Germany, German Federal Diet
Oct. 10 – Liberia, President
Oct. 10 – Liberia, Liberian House of Representatives
Nov. 19 – Chile, Chilean Chamber of Deputies
Nov. 19 – Kyrgyzstan, President
Nov. 19 – Chile, Chilean Senate
Nov. 19 – Chile, President
Nov. 26 – Honduras, Honduran National Congress
Nov. 26 – Honduras, President

Global Roundup

New Venezuela assembly declares itself superior government branch. Venezuela’s new constitutional assembly took over the halls of the endangered, opposition-controlled congress on Aug. 8 and decreed itself superior to all other branches of government while prominently displaying images of the late President Hugo Chavez. (Washington Post)

Nuclear tensions rise after symbolic U.S. sanctions. A new raft of U.S. sanctions against Iran, North Korea and Russia are largely symbolic in terms of their impact on trade, but have led to a huge increase in geopolitical tensions. (Global Trade Review)

Kenya election observers urge losing candidates to concede gracefully. International observers urged candidates in Kenya's tense presidential elections to respect the final outcome and resolve any poll disputes in court. Preliminary results by the electoral commission show incumbent President Uhuru Kenyatta leading main challenger Raila Odinga 54% to 45% with more than 98% of polling stations reporting. (CNN)

EU imposes import duties on some Chinese steel to counter subsidies. The European Union has imposed provisional import duties of as much as 28.5% on certain Chinese corrosion-resistant steels after an eight-month investigation found that the products benefited from unfair subsidies. (EurActiv)

Making sense of Trump’s possible China actions. The Trump administration is reportedly deliberating imposing a set of economic measures to punish China. The timing is telling. It suggests that the Trump administration is looking for an effective expression of its mounting frustration with China, including: the expanding bilateral trade imbalance; its resistance to reversing unfair trade practices; and its reluctance to do more to rein in North Korea’s nuclear and missile programs. (Global Trade Magazine)

Italy’s banking dilemma: Improving, but still needing help. Italy’s banking industry has gone through a recent rough period. But with an infusion of new funds and a call for much needed reforms, there may be a chance that there will be improvement. (Global Risk Insights)

Fitch: Bankruptcies to keep rising as China tackles overcapacity. Chinese bankruptcies are likely to continue rising sharply as authorities become more accepting of them and tighter financial regulations take effect. Market forces, however, are still playing only a minor role in determining failures in the state-owned sector, says Fitch Ratings. (HSN)

Growing extremism as source of strategic instability in Asia. North Korea's growing nuclear brinkmanship, renewed tensions between India and China and persistent frictions in the South China Sea have all contributed to a renewed focus on inter-state instabilities in Asia. There is, however, another growing source of strategic instability at the sub-state level. (The Interpreter)

Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations