THE BLOG

Collision Between Geopolitics and Markets

14/10/2014 10:15 BST | Updated 12/12/2014 10:59 GMT

At the crossroads

"We come together at a crossroads between war and peace; between disorder and integration; between fear and hope," said US President Obama during his address to the United Nations. Stock markets still do not feel the same urgency. There is a huge gap between geopolitical reality and the financial markets.

Geopolitically, the world is on edge while global economic growth is mediocre; the OECD has revised growth expectations down for all major countries, apart from India. Therefore, a substantial reaction would not surprise. If (geo)political fires break out or flare up (and if they get enough oxygen), the markets could suffer burns.

No end to history

After the Cold War was over, it seemed as if international peace could be on the horizon. The idea being that the US would keep the world on course with a little bit of help from its allies. Most observers believed the world was becoming a more prosperous and peaceable place. Francis Fukuyama pronounced "The end of history" and proclaimed an unabashed victory of economic and political liberalism.

A quick survey of the current global landscape reveals that the optimism of the 1990s and (to some extent) the early millennium years seems outdated. After the worst economic crisis since the Great Depression, the world needs to regain its political and economic balance. Add to this the relative weakening of the West, the ascendance of countries such as China, the renewed assertiveness of - for example - Japan and Russia, terrorist threats, and tensions at different levels of international relations.

A five level world

These levels can be classified as follows:

• Global: This level constitutes institutions like the UN and the IMF.

• Regional: The world is increasingly divided into regional blocs, for example the EU and NAFTA. On the one hand, this aids coordination and stability. At the same time, it tends to undermine global initiatives. For instance, attempts to agree on a global trade treaty.

• National: Having taken major steps in the past centuries, in recent decades the success of the traditional nation state seemed less certain. It was assumed that globalisation would cause boundaries to blur. Radical thinkers assumed that the nation state would become surplus to requirement. Globalisation has indeed changed the way countries interact in international politics, but it has also disenfranchised large numbers of people, which has led to a revival of the nation state. Especially in the aftermath of the economic crisis. Witness the nationalism in Japan and India. Another case in point is how, during the financial crisis, heads of states and governments bypassed the European Commission and Parliament as they worked around various treaties with intergovernmental agreements.

• Subnational: People are again inclined to look inwards, in response to the fallout of globalisation and the economic crisis. This tendency also applies within individual states. National governments increasingly fail to meet the demands and fulfill the wishes of the electorate so voters focus on their own regions.

• Individual: This may be the lowest level but it has a huge effect on the rest. Open borders make it easier for individuals to contact like-minded people in other countries. Of course, internet and mobile phones are the perfect tools. The Arab Revolutions - most of which have run hopelessly aground - partly gained momentum due to Facebook and other modern media and means of communication.

Failure and explosions all over

A number of players on the international chessboard find it easy to hop between the different levels, like terrorist movements and multinationals. They know how to use the possibilities and shortcuts of a fluid international system. By contrast, nation states struggle to get to grips with changing environments. It could be said that businesses, terrorist movements, and individuals are gaining power at the expense of national governments. Meanwhile, the latter have to go all out to gain a semblance of control (for example, through their intelligence services). Obama described the situation as, "the failure of our international system to keep pace with an interconnected world."

Or to quote the US Defence Secretary, "the world is exploding all over." This may be an exaggeration but in any case:

• The region between West Africa and Pakistan is very instable and acts as a breeding ground for a new generation of terrorists.

• Russia is taking an aggressive and expansive stance (partly in response to actions by the West).

• It remains to be seen if is the Asia-Pacific region is large enough to accommodate four great powers (the US, China, India, Japan); especially if nationalism continues to gain ground.

• In the West, the political and economic system could run aground. Globalisation has hit home in every way, but people have forgotten to globalise politics. The tensions between globalisation, democracy, and sovereignty will continue to create structural problems.

• The US is uncertain about how to interpret its role of global leader in a rapidly changing world. No other leaders have stepped forward to fill its shoes. In the meantime, we are nowhere close to a well-functioning new international system with fair roles for the likes of China.

If markets have already moved into bubble territory (as many fear), geopolitical triggers that could cause these balloons to burst could be just around the corner.