The risk of a break-up of the euro zone is “vastly overplayed” and a collapse of the single currency area is out of the question, Ian Bremmer, President of the Eurasia Group told CNBC on Tuesday.
But, Bremmer added, the uncertainty and volatility that characterized 2011 will continue in 2012 as politicians continue to “muddle through”.
“Actual fragmentation in 2012 just isn’t going to happen,” he told CNBC.
Eurasia’s new report outlining the top ten risks for 2012 said the real problem in the euro zone was “continued incrementalism” — a policy-making process in which leaders take small steps towards resolving a crisis rather than a few bold, big decisions.
“There’s a market view that the euro zone crisis must be resolved quickly to avoid the collapse of the European project, but Europe’s key politicians don’t see it that way,” Eurasia said. Politicians will struggle to find a sustainable solution and the underlying issues will not be addressed, the group forecast.
Investors will shun risk in 2012, offering a boost to the dollar as well as safe havens such as gold and cash, as they see in a new era in which politics will drive markets more than ever, the report said.
“In 2012, we begin to put the global war on terror behind us,” Eurasia said in the report released on Tuesday.
But as the “9/11 era” draws to a close, what’s replacing it is of greater concern, it said.
Eurasia’s top ten risks for 2012 identified “the end of the 9/11 era” as the number one risk this year, and expressed concern that we are entering “a world where politics and economics overlap almost entirely”.
“This will fundamentally drive investor sentiment toward risk aversion, as investors focus on the obvious lack of strong and effective political leadership in virtually all of the major players,” the report said.
“The new nightmares are of spiraling deficits, the euro zone crisis, and economic relations with China.” Bremmer said that despite the fact that a lot of the numbers in 2012 would likely look better than people expect, companies will remain risk-averse and continue to hoard cash.
“The backdrop creates much less willingness to go out and place your bets,” Bremmer said.
Leadership change in China was another overestimated political risk, according to Eurasia.
“It’s big headlines, not much impact,” the report said.
Instead, Eurasia expressed concern over cyber security issues between the U.S. and China.
U.S.-Chinese relations have already seen tensions over cyber security issues and “indigenous innovation”, a policy which promotes domestic innovation but which has come under fire by foreign companies who say it prevents them from operating in China.