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Continental Drift - Political Risks Ahead

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FISCAL CLIFF VOTE
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Many of the risks in the year ahead could be the result of what might be characterised as drift.

This applies in two senses: First, a lack of leadership and political will that leaves nations and regions without a clear strategy to solve serious long-term challenges. And second, in the sense of drifting apart through a divergence of interests over time.

In the United States all eyes are on the fiscal cliff kabuki. It looks like a deal is in the offing that could see Republicans u-turn and accept tax rises. For all of the fuss, the fiscal cliff negotiation is merely Washington digging out of a hole it created for itself.

But the long-term challenges of reforming entitlements and tax codes will not be settled by the cliff and are much more complex. Will President Obama and Speaker Boehner turn their attentions to this in the New Year? Or will the deal leave the prospects of a long-term deal in tatters?

Lack of action here will leave the US drifting towards a genuine fiscal crisis.

The United Kingdom is drifting apart from the EU. As the eurozone prepares to chart a more integrationist course, a referendum could ask the British people for their views on future relations with the EU.

But is there a credible strategy for life outside of the EU? Or will the UK stay inside as a semi-detached member? Without a well formed plan, British business will suffer from the uncertainty.

Without imminent calamity in the European Union to focus minds on reform, and with forthcoming elections in Italy and Germany, could we see leaders put essential structural changes to the economic and monetary union on the backburner?

Is it possible that, ironically, the relative calm in markets leaves the bloc drifting towards another crisis?

Is the EU drifting towards protectionism as a risk - though we could easily have argued the same about the US in its attempts to apply financial regulation extra-territorially.

Finally, could the slow escalation of a regional standoff over shipping lanes and resources in the Asia Pacific region cause countries around the South and East China Sea to drift into open conflict? In a region that has driven the global economy, such a confrontation is a very worrying prospect.

These are just some of the things that could shape 2013

To read the Cicero Global Political Risk Report go to www.cicero-group.com

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