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2014 - Central Bankers Making Way for Politics?

15/01/2014 10:50 GMT | Updated 16/03/2014 09:59 GMT

The year or politics?

2013 was the year of all-powerful central banks, fragile economic recovery, and financial market euphoria. 2014 will be all about politics: political economics, geopolitical developments, and electoral politics.

In various countries all over the world social disruption threatens and Western welfare states need to be overhauled because of aging populations and Asian competition.

Sustainable US recovery?

Following last year's shutdown drama in the US, electoral fireworks can be expected this year. Come November, Americans will head for the polls. All members of the House of Representatives stand for election while one third of the Senate seats are up for a vote.

Now that the Fed has taken the first steps towards dismantling its ultra loose monetary policy, all eyes will be on the politicians. In recent years, with Mr. Bernanke flooding the system, Democrats and Republicans managed to get away with childish squabbling that did the economy little good. As the Fed retreats, politicians should step forward and create healthy foundations for a sustainable revival. Will they? Obama has lost power and prestige, among others because of the Obamacare blunders. On Capital Hill, parties are unlikely to bridge the bipartisan divide as the midterms loom. The private sector cannot count on the support of politicians. Businesses will have to fight their own corner and set an upward trajectory.

Populism on the rise in Europe

The US recovery has held steady while Europe is finding it hard to emerge from the mire. The ECB will probably need to intervene more to keep the Eurozone going. Another factor that will force the ECB into action is that in Europe, too, voters will head for the polls. In May, a new European Parliament wil be elected. Subsequently, politicians will be at loggerheads over the composition of the next European Commission.

It is feared that waves of negative sentiment sweeping Europe will boost the chances of populist anti-euro parties. If pessimism provides a breeding ground for populism, the outcome of the elections could be disastrous for those who hold the EU dear. According to a Gallup survey eight out of the fifteen most pessimistic countries on earth are EU members (five of which are in the eurozone).

Assuming that populist, anti-EU parties make big gains, it is the response of the large centrist parties that really matters. If established parties panic and pander to populist rhetoric, the European project will be in jeopardy and the crisis will erupt with a vengeance. Alternatively, Social Democrats, Christian Democrats, and Liberals could decide to ward off the populist danger through concerted action. In that case, 2014 could turn out unexpectedly well for Europe.

Electoral upheavals in emerging economies?

Voters in a range of other major emerging economies will also go to the polls: in South Africa, India, Indonesia, Turkey, and Brazil. Most of these countries are in a state of political flux and tensions can increase as elections approach.

South Africa has just lost Mandela, its symbol of unity, whereas the incumbent president is deeply unpopular. In India, the ruling Congress Party is under fire; partly on the back of a growth slowdown and high inflation. In Turkey PM Erdogan seems to be aiming for a "Putin-Medvedev" construction. Later in 2014, he hopes to become president (with greatly expanded powers). This would mean he will remain the de facto leader of the country. In view of last year's turbulence, we cannot rule out protests. As Brazil prepares for the soccer World Cup in 2014 and the Olympics in 2016, voters are becoming more disgruntled in the face of inequality and unemployment as well as pervasive poverty. Finally, Indonesia. Nationalism and populism are on the rise, and chances for reforms seem very limited.

Geopolitics in the MENA region

Apart from electoral upheavals, geopolitical violence could stir up market volatility. Three major geopolitical themes are at play in the Middle East and North Africa alongside other (associated) factors: nuclear negotiations with Iran, war in Syria, and the Israeli-Palestinian conflict. As regards the latter, chances of successful negotiations are slim because there is little support for an agreement in either camp.

The Syrian conflict is about much more than a struggle between Assad and assorted rebels. Indirectly, Shia Iran and Sunni Saudi Arabia are fighting each other in Syria. Simultaneously, Lebanon and Iraq are drawn into the fray. In other words, three countries at the heart of the Mid East are on fire. To make matters worse surrounding states - such as Egypt and Libya - are far from peaceful. As a result, the anticipated increase in oil supply from the region could be disappointing.

Another great year for financial markets?

The economist Ruchir Sharma wrote in Foreign Affairs: "political cycles are as important to a nation's prospects as economic ones." Unquestionably, this will come to the fore in 2014. As to the financial markets, 2013 has been a splendid year in many respects. Whether this year follows suit will largely depend on political factors.