Against the tide: Political flashpoints
The failed coup in Turkey shows that we are in one of those periods in history when politics matter as much or more than economics for financial markets.
We need to refocus our strategic thinking from the economic to the political. The rise of nationalism and populism – expressions of the global ‘anger’ vote – will hold sway over the pabulum of tepid economic performance and what the central bankers have had for breakfast in data.
The attempted coup in Turkey and the ever-widening purge of those in opposition to president Recep Tayyip Erdogan have set the scene for the end of the country’s accession into the EU, created huge uncertainty about the implementation of the EU-Turkey immigration deal and increased the forces for populism and separation from the EU project.
And this comes on top of the momentous decision of the British people in a referendum to leave the EU. The Brexit negotiations will not start until early next year, causing more uncertainty and possible copycat demands for referenda in other countries.
There is talk of such in the Netherlands and Denmark. Hungary has a referendum to approve the government’s noncompliance with EU immigration directives and agreements. This is in direct violation of EU law and Hungary’s EU Treaty commitments.
And then there is Italy. The state of Italy’s banks hangs over a stagnant economy like an albatross. Meanwhile, the EU institutions and the Italian government haggle over how to restructure the banks without hurting small depositors, as EU rules insist, or using state funds, ruled out by the EU’s banking regulations.
Political fragmentation, the ‘anger’ vote and backwardation on globalization are now universal common denominators
Polls are showing that prime minister Matteo Renzi could lose his October referendum on constitutional reforms, which would signal the end of his government and its possible replacement by the populist Five-Star party.
Spain and Portugal, without stable governments, face EU Commission sanctions (fines and withdrawal of structural funds) because they have not met EU fiscal targets. This increases the north versus south eurozone divide.
In Austria there is to be a rerun of the presidential election in October after the centrist candidate very narrowly defeated the right-wing extremist candidate. A victory for the latter in the re-run adds another uncertainty.
Then there are elections in the Netherlands in March, where the eurosceptic party is polling well, and in France in May. The likely victory of the centre-right could mean more opposition to any deal with the UK and more eurosceptic momentum in France itself. A further sharp rise in the extremist National Front vote looks inevitable.
Outside Europe there are other political flashpoints. The US might yet serve us up Trump as president in November. While Hillary Clinton appears to be ahead in the polls, dislike of mainstream politicians is just as powerful in the US as in Europe. The ‘anger’ vote got Trump the Republican nomination and gave Bernie Sanders a close run against Clinton for the Democratic one. A big surprise in November cannot be ruled out, even if unlikely.
And the South China Sea territorial dispute can become a flashpoint. President Xi Jinping in China is a Marxist ideologue, a Chinese nationalist (with xenophobic overtones) and an expansionist.
The South China Sea is characterized by territorial and militarized claims and circumferenced by an inexperienced nationalist leader in Taiwan (Tsai Ing-wen), a maverick and populist president in the Philippines (Duterte) and a failing nationalist in Japan (Abe).
Abe has always been more interested in reasserting Japan’s nationalist standing in geopolitics than in economic reform and he is easily capable of bolstering himself domestically by generating an external incident about the Senkaku islands.
Korea is ruled by the incompetent president Park and has conflicting territorial claims with Japan and the unpredictable Kim Jong-un in the North.
And to add sauce to the gander, president Duterte could destroy years of economic progress in the Philippines with the denial of civil rights and his shoot-to kill ‘justice’ policies. In Indonesia, president Joko Widodo could revert to nationalism, endangering critical inward investment.
So political fragmentation, the ‘anger’ vote and backwardation on globalization are now universal common denominators. Politics matters more now than central bank actions because the latter is losing credibility faster than rainwater out of a leaky bucket.