Will Political Risk Derail World Economic Growth?

In a tentative recovery, everyone’s looking for the next nasty that could spring up and derail growth next — the answer is political risk...All over the world.

World in Hand
Matt Jeacock | Stockbyte | Getty Images
World in Hand

We all know about the geo-political tensions around the Middle East that sent Brent over $126 earlier this month. But in a year heavy with elections and politically unpopular austerity, national governments have much work to do and many risks to their power.

In Europe, several governments have fallen since the crisis started and their replacements aren’t having an easy ride of it either.

Portugal is a prime example. The current Prime Minister Pedro Passos Coelho won power nine months ago in the middle of the crisis, after the previous leader called in the bailout and subsequently stood down.

Last week in Portugal a clash between the government and the largest union over job reforms prompted the country’s second general strike during Coelho’s reign. That as markets speculate Portugal will need a second bailout and Greek-style debt restructuring.

In Italy, where the government fell, to be replaced by technocratic leader Mario Monti, unions are also railing against labor market reform.

While in Spain, another new mid-crisis leader, Mariano Rajoy, has endured a test of his commitment to austerity in this weekend’s regional elections in Andalusia.

The countries that need austerity the most seem to be the ones with the biggest political struggle to achieve it. Here in the UK, we’re facing a different political balancing act.

Battling to save the UK’s AAA credit rating, last week’s budget was complicated by the fact that Chancellor George Osborne had to balance not only growth and austerity, but Liberal Democrat and Conservative sensibilities.

Although the general public brought the whole budget down to the issue of the “granny tax,” I’m endlessly impressed that the coalition is still managing to reach compromises and keep the government together while battling with pressures from the outside.

But it’s not only governments that have to worry about politics making their work difficult.

On Thursday last week shares of Randgold Resources plunged 14 percent in one day after a military coup in Mali spooked investors.

The gold miner might be expected to benefit from high gold prices , but Randgold has most of its operations and growth plans in the African country.

There’s still plenty more to come...

The Russian election concluded as expected, but now we need to watch returning president Vladimir Putin’s response to increasing pressure on him to condemn the Syrian crackdown. Plus there are upcoming elections in the US and France and a shift in leadership in China.

There are countless economic issues at play in the recovery story, but this issue of political risk is only going to become more important through the year.