Former U.S. Treasury Secretary Lawrence Summers said investors are far too sanguine about the risks of Donald Trump's policies, which analysts at Eurasia Group say could contribute to a level of global instability not seen since World War II.
The Harvard professor, a Democrat who was Treasury chief under Bill Clinton, Tuesday cited the possibility of protectionist measures by the U.S., as well as changes to foreign policy and domestic social programs, as issues that are creating “extraordinary uncertainty.” Analysts at consulting firm Eurasia Group echoed those sentiments in a new report, saying the world is entering a period of “geopolitical recession” in 2017.
With Trump's ascent to the presidency on an America First platform, the global economy can't count on the U.S. to provide “guardrails” anymore, according to Eurasia, which advises investors on political risk. Trump's signals of a thaw with Russia, skepticism toward the North Atlantic Treaty Organization and his “alignment” with European anti-establishment parties such as France's National Front could weaken the main postwar alliance protecting the global order, according to its report released Tuesday.
The warnings are a reminder of the range of threats to stability in 2017, from elections in Germany, France and the Netherlands and Britain's planned exit from the European Union to the transition of power in the U.S., setbacks in emerging nations such as Brazil and Europe's refugee crisis.
Investors in the U.S. so far have shrugged off those concerns and instead are betting that Trump's pledges to boost spending, cut taxes and unwind regulations will fuel economic growth. With just over two weeks to go before his inauguration on Jan. 20, the S&P 500 is close to a record high, having risen almost 10% in 2016 on optimism over fiscal stimulus and stronger economic growth. While the Dow Jones Industrial Average has struggled to close at the 20,000 level, it rose 13% last year.
Dangerous Game
Summers, who also served in the Obama administration, said investors are playing a dangerous game by gambling on an administration whose policies are still unclear. He dismissed the incoming administration's idea that encouraging U.S. companies to repatriate profits would boost investments, and said some members of Trump's economic team have proposed ideas that go “well beyond voodoo economics.”
“This is probably the largest transition ideologically and in terms of substantive policy that we've seen in the U.S. in the last three quarters of a century,” Summers told Tom Keene in a Bloomberg Television interview. “Those kinds of transitions have to be — given the central role of the U.S. in the global system — matters of enormous uncertainty. I don't think that's fully recognized by markets.”
In addition to Trump, other global factors including China's growing assertiveness and a weakened German Chancellor Angela Merkel will make 2017 the “most volatile” year for political risk since World War II, according to Eurasia Group.
International war or “the breakdown of major central government institutions” isn't inevitable, though “such an outcome is now thinkable,” according to the consulting firm, which was founded by political scientist Ian Bremmer.
Biggest Risk
Merkel, who is seeking re-election in the fall, faces likely disputes over Brexit, Greece's simmering debt crisis and an “increasingly authoritarian” Turkish President Recep Tayyip Erdogan, threatening a refugee accord between the EU and Turkey, Eurasia said.
Other threats cited by the consulting firm include:
- Lack of economic reforms, with only China on a “positive trajectory” among 14 major nations and Italy, Russia, Saudi Arabia, South Africa, Turkey and the U.K. declining.
- Politicians blaming central banks, including the Federal Reserve, for economic woes.
- North Korea's nuclear program, which may yield some 20 nuclear weapons, combined with technological advances allowing strikes at the U.S. west coast in the future.
New York University economics professor Nouriel Roubini said on Tuesday the biggest political risk facing Europe is National Front leader Marine Le Pen's chance of winning the French presidential election.
“If Le Pen comes to power in France, if an anti-euro party comes to power in Italy, this could be the beginning of the end of Europe and the euro zone,” he told Bloomberg Television.
Bloomberg News
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