In 2013, the great global unraveling

Following on from ECFR's “Ten trends for 2013”, the main theme of 2013 is likely to be the unraveling of the global economy and supporting political integration. 

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The disparate prospects of each continent have little in common. To the extent that they can be linked by a single theme in 2013, however, it is the idea of the unraveling of the global economy and the political integration that supported it. After two decades of globalisation, this year will see each of the big political theatres re-erecting barriers and focusing more on domestic repairs than on global expansion. The unraveling has its roots in longer-term trends, but it is set to step up in the next year.

There has been a remarkable stabilisation within the eurozone since European Central Bank president Mario Draghi’s intervention in the summer of 2012. But even as the eurozone integrates, the politics and economics of the wider European Union are likely to diverge. In practice, the measures toward an integrated banking union, increased parliamentary accountability and more incentives for reform could go hand in hand with the de facto economic and political disintegration of the EU. Economically, as Sebastian Dullien argues in an ECFR paper, “Why the euro crisis threatens the EU single market,” there is a significant risk of a gradual unraveling of the EU’s single-market system. A full eurozone breakup would shatter the euro, while a great leap toward political union could see shrinkage of the single market, as countries such as the United Kingdom withdraw from the heart of Europe.

Even muddling through the crisis seems likely to diminish the depth of the single market. In recent months, banks in the eurozone have withdrawn from trans-border business. Even poorly-managed German companies are paying significantly less interest on capital than well-managed Spanish companies. These new barriers between eurozone members will lead to a renewed focus on domestic markets. For Europe, this means less competition, less growth and higher prices for consumers.

Europe’s economic unraveling will be matched by a new political geography. The continent is already seeing a reshuffling of its elite, as the traditional political forces in many countries – from Greece to Italy to Finland to Austria – find themselves besieged by an emerging anti-political class of populists from left and right. There is also a renegotiation of the relationship between the “core” and the “periphery” – with many EU member states, including larger nations such as the UK, Poland and Spain, deeply concerned that integration is forcing them to the periphery of the European project.

Most worrying is the fragmentation of the core itself, with possibly irreconcilable differences emerging between Paris and Berlin over the future shape of the EU polity.

The Middle East could also become divided like never before in 2013. In the past two years we have seen political action unite the Arab world with an “awakening” that has spread from capital to capital through social media, satellite television and the infectious promise of change. But the story of the year ahead will focus more on the splits.

Syria’s civil war is becoming the epicentre of a regional sectarian conflict, bringing the threat of wider destabilisation. It has already sharpened sectarian tensions and reinvigorated dormant Sunni jihadi forces, putting Iran and its allies on the defensive and providing space for Kurdish ambitions. The febrile atmosphere in Kurdish areas is opening cracks between Ankara and its de facto allies Saudi Arabia and Qatar, and reverberations are spreading into northern Iraq.

A story with enormous global resonance is the growing tension between a strong Chinese society and a weak Chinese state, as it drives the new Asia apart. Many in the Chinese elite think their country needs to enter a new era of political and economic change. After Mao’s political revolution (China 1.0) and Deng Xiaoping’s economic revolution (China 2.0), they are calling for a major re-orientation toward a China 3.0.

Now that China’s populace is becoming increasingly affluent, how does the state deal with issues like growing inequality, the need to rebalance its economy and its increasing exposure to the global economy? How does the Communist Party retain stability in a time of unrest within Chinese society that includes half a billion “netizens” on the Web? And how does China take on the burden of being a Great Power as it develops interests in every continent on the planet?

In September, China’s 18^th Party Congress anointed leaders whose views are more aligned with the past than the future. As the political system becomes more rigid and its foreign policy more aggressive, there is a risk of growing tension between China’s strengthening society and its weakening political system. These tensions are already having an impact on the wider Asian system.

Asia’s economic map has been redrawn over the past 15 years as increasing intraregional trade, investment and supply chains have driven deep interdependence (all done largely without the United States). But tension and weakness in the Chinese state seem to be driving the nation to take ever more worrying steps toward neighbours such as Japan, the Philippines, and Korea. Since 2010, a more aggressive China has increasingly threatened to pit the “economic Asia” that was uniting without the United States against a “security Asia” that is demanding an American pivot to balance against China’s rise.

All of the above are linked to the question of American leadership, or its absence. At the moment, America’s political class wonders whether there will be a deal made as Congress hurtles toward a fiscal cliff. But for the first time in decades, a dramatic question at the heart of the most powerful nation in the world is met outside with curiosity and concern rather than existential angst.

The fiscal cliff drama does not show America at its best – its law-makers seem divided and disconnected from economic reality. But there is an even more shocking development about the events on Capitol Hill: the fact that the stakes for the rest of the world seem so low. It is a sobering reminder that – although no power has emerged to replace the United States– American leadership will not be able to stop the great unraveling. In fact, to the extent that America will continue to lead the world, it will be pioneering a focus on internal rebuilding rather than foreign adventures.

The article first appeared on Reuters.com