It's a mixed bag these days. Europe appears to have arrested
its fall into the abyss and the U.S. economy is finally looking up. But with a
looming consensus that war with Iran is in the offing and Putin's recent return
to power in Russia, geopolitical chaos lurks around the corner. Foreign Policy
once again turned to Nouriel Roubini -- who's always good for a little doom and
gloom -- and Ian Bremmer to make sense of the ticking time bombs. And they
didn't hold back.
When asked about the consequences of war in Iran, Roubini sees
prolonged high oil prices "$170, $180, $200 a barrel" and warned of the
knock-on consequences: "the last three major global recessions ... were all
caused by a geopolitical shock in the Middle East that led to spike in oil
prices." But Bremmer's not buying all the war hype: "the Obama administration
does not want to engage in military strikes against Iran -- and they sure as
hell are going to resist it, no matter what -- before the elections."
When it comes to metaphors, the pair of prognosticators
didn't disappoint: Roubini still sees a dark outcome in Europe -- "a
slow-motion train wreck" -- while Bremmer sees the Chinese economy as a "very,
very fast car" hurtling down a highway ... "the problem is that there's a bend in
the road coming up and there's no steering."
But the real surprise comes at the end of the conversation,
where Roubini and Bremmer both worry about instability in Moscow and Beijing
bringing the two nations together -- but it might be less a case of keeping
your friends close than keeping your enemies closer.
Foreign Policy: February's
job numbers are out, the third straight month of 200,000-plus gains, but unemployment
stays steady. Are we seeing the green sprouts of an economic recovery here?
Nouriel Roubini: My
feeling is that the economic data are mixed. Certainly creating 200,000 jobs
per month as opposed to only 100,000 is a positive signal. But while the data
for the last 2 to 3 months were consistently surprising on the upside, some recent
data suggests an element of caution. For example, real consumption spending has
been flat for three months in a row. Durable goods orders -- a proxy for
capital spending by the corporate sector -- are sharply down in January after
the tax advantages expired at the end of last year. Construction spending is
still down. Home prices are still falling. Today, the number on the trade
balance in January came in worse than expected. So if you look at the macro supply
data it looks better. But the demand data, whether it's consumption or residential
or net exports, suggests there's still softness.
My view of it is still that economic growth is going to be
soft, anemic, and below-trend. I think the tail risk of an outright recession conditional
on external shock, like eurozone turmoil or oil or China is a small risk right
now compared to six months ago. But I think the data is not consistent with the
views that we are going to start growing at 3 percent plus in the next 12
Growth for this year is going to be maybe 2 percent. And by
next year, what's going to happen is that -- regardless of whether Obama is
reelected or a Republican (say, Romney) there will be, first of all, a
meaningful fiscal drag, because mandated spending cuts start to be triggered if
they refuse to do the draconian spending cuts on defence or discretionary funds.
All the tax cuts -- dividends, capital gains, estate, income taxes -- expire and
not all of them are going to be fully renewed. The payroll tax cut is also supposed
to be one year, now it's two years, but we cannot have it forever. And discretionary
transfer payments are going to be reduced and government spending is on the way
down. So you have a fiscal drag. Disposable income growth has been boosted for
the last year and a half ... so some of the growth of last year and this year has
been stolen from the future. And because of the fiscal drag and the effect of
that on household disposable income, I see further economic softness even next
Ian Bremmer: From
my perspective -- not to disagree with anything Nouriel was saying -- but we
are, broadly speaking, in 2012, we've entered the post 9/11 era. We're not
going after Bin Laden or al Qaeda. We're out of Iraq, we're getting out of
Afghanistan, and we're entering the post-crisis period.
Really, since 2008, if it's not been one thing, it's been
something else. We no longer believe that there's meaningful likelihood that a
shock is going to send the world back into recession. That's in part true
because of the strengthening of American numbers. Nouriel's right, these are
not exciting growth numbers -- this isn't the robust bounce-back that we think
is going to power a global economy with the kind of figures you saw before the
crisis, but it's a very different environment from the last four years. That's
very important in terms of getting consumer confidence back, but it's also very
important in terms of the orientation of CEOs to start spending some of the
major cash that they've left off the table. I think the answer that they'll start
doing it -- and not just in the United States. I don't want to say they're
getting ebullient, but they're less fearful about medium and long-term
And it's clearly true in Europe as well, where just six
months ago, you had folks saying "oh my god, even if I don't know how to assess
it, there's a possibility that the euro's just going to fall apart." They're
not worried about that now. From that perspective, we're in a much better macro
environment than we have been.
FP: Ian, how much
of this has been because Europe did actually get its political act together, that
it came through with the requisite bailouts for Greece, and stemmed the immediate,
pressing concern of a massive default?
IB: I think it's
about three things. First, it's about the U.S. numbers being higher that what
any of the broad consensus views were six or 12 months ago. Some of that is
real. People underestimated how bad the recession was going to be in the United
States. They also underestimated how much resiliency the U.S. economy would
develop in 2012. Second, you have Europe, which is a very big piece of that,
and it's not just about putting together a couple meaningful bailout programs for
the Greeks. It's also about sticking with austerity, with vastly improved
governance in Spain, Portugal, and Italy -- especially Italy, where the new
leadership of Mario Monti and the ability to get the broad political spectrum
actually together on budget and competitiveness in a country that does actually manufacture things and has a long-term trajectory in a way that Greece does not. I think that's very
meaningful, as is the structural movement toward eventual fiscal compact.
think the third point, which is a meaningful one, is that in that last six
months, we haven't had another Fukushima -- we haven't had North Korea blow up;
we haven't had a war with Iran. There are a lot things making headlines,
especially in the Middle East, but frankly, from a geopolitical period, the
last few months of American recovery have not been accompanied by any real,
horrifying external shocks. And we should recognize that, because in this
geopolitical environment, we can't count on that.
NR: I agree that
some of the tail risk of an outside default or eurozone exit by Greece is
lower. But the periphery's recession is not going to improve and markets
eventually are going to start to worry again. Unemployment is rising, the
recession is deepening, the election in France could be disruptive, a referendum
in Ireland, elections in Greece -- there are lots of elements potentially
spooking the markets and widening spreads again. I think that the risk of a
southern collapse of the eurozone is lower, but it's still a slow-motion train
FP: Let's talk
about spooking the market a bit, then. The one that everyone is concerned about
-- and that's obviously being priced into the oil market already -- is the
concern over an Israeli attack on Iran. How imminent do you think that is?
NR: I'm not the
geopolitical expert and I will let Ian and others figure out the probability of
an attack on Iran this year before the U.S. election or after the election -- or
of an Israeli attack alone. Whether it's 20 percent, or 30 or 50 -- I think
that view will change over time. But it's likely that the second quarter of
2012 is going to be the period when final round of giving a chance to diplomacy
is going to be attempted. If that fails, maybe at that point both the U.S. and
Israel are going to say, "Unless you back down, we may eventually attack you." So
you have to time how much these things are going to affect markets.
But even without an attack outright, there's a war of words between
the U.S., Israel, and Iran, and this war of words has been escalating. There is
also a covert war, because Israel and the U.S. allegedly have been killing some
of the scientists, engaging in sabotage through cyberwarfare, and now Iran is reacting.
They've tried to kill a bunch of Israeli diplomats around the world and, if sanctions
become more binding, they could start making noises about other threats. Brent [Crude]
that used to be $90 per barrel is already in the $120-125 range. But if that
war of words and covert war escalates, there's a possibility that -- even short
of a military confrontation -- oil prices could become high enough that it becomes
material for the economy.
I would not underestimate the effect of gasoline today, in a
number of U.S. states, being already at $4.00 a gallon -- and it could be so in
many other states. Psychologically, once you're above the $4 mark, it has an
impact on consumer confidence. And in the summer, prices tend to go up another
20 or 30 cents. The higher those oil prices are, the higher the chance that has
a negative effect on consumer confidence, on disposable income, and on the economy.
And it's not just in the U.S. -- the price of oil is very high in Europe and in
many other parts of the world. So I would let other people assess the risk of a
conflict, but confidently I see oil prices from here going higher, rather than
lower. The one thing I worry about more than the eurozone is oil.
FP: Ian, what's the calculus for Obama regarding high oil
prices and another war in the Middle East?
IB: Well first of
all, if you look at the assessments, whether it's on Intrade or anywhere else, people at
this point believe that Obama is going to get reelected, and that's with understanding
about oil, about gas, about Iran. I'm not saying that these guys are massively
sophisticated, but the markets speak in a holistic way about this. I certainly
agree that the risk for Europe has gone down radically, in terms of its ability
to cause real problems for Obama before November. The risk of Iran and oil has
gone up; it has not replaced it, but it has gone up. It is not as big a problem
as Europe was in my view. But it is a big problem.
FP: Really? It's
something that Americans did not seem to care about at all.
IB: The White
House was very concerned about Europe blowing up. But I think oil absolutely is
more politically relevant; it's something the Republicans can actually get
their teeth into.
Let's look at what's actually likely to happen with Iran
going forward. The first broad point going forward is that, in the same way
that you should not trust eurozone coverage coming out of London because of the
overwhelmingly negative bias, the same thing is true with coverage of Iran in
the United States -- you only get one side of the picture. Overwhelmingly, it
is going to be the Israeli side, and it tend to overegg the likelihood that
catastrophe is imminent. "We can't live with an Iranian bomb," they say even
though we live with one in Pakistan and North Korea, so at some point or
another we're heading for blows.
I don't' care what percentage you want to put on it, and I
do geopolitics here, right? My point is: If you read the press, it seems to
indicate that it is inevitable that there will be blows between the U.S. and
Iran. That is clearly not true.
It is true that in the second quarter, we will see an effort
to ramp up sanctions that have been already been put in place but need to be
implemented, and a real effort at negotiations. But you've also seen recent
successful parliamentary elections in Iran that were not preceeded by
demonstrations. We've seen [Ayatollah] Khamenei come out and say almost
unprecedentedly positive things about the Obama administration and the United
States. So clearly, they're going to give a few months of negotiations a chance
-- and that means that right now, in the short term, the geopolitics of Iran is
being hyped more than it should be.
Over the longer term, the Obama administration does not want
to engage in military strikes against Iran -- and they sure as hell are going
to resist it, no matter what -- before the elections. The Israelis don't want
to engage in strikes either. There was a recent
poll in Haaretz that came out just
yesterday: 58 percent of Israelis oppose unilateral strikes against Iran. Netanyahu
has to deal with that, however popular he is. And remember: Netanyahu hasn't made
a decision that he is going to attack. What Netanyahu understands is that the
best thing for him to do is pretend
that he's going to attack. Then, at the very least, he has to be talked down
from the ledge by the Americans and he's in a better position to demand
concessions if he doesn't attack -- because it's such a horrible thing for
Israel and so on.
I think that the danger is that you do see an escalatory
tit-for-tat that can eventually bring the U.S. into play, that puts a higher
geopolitical premium on oil, and brings about a higher likelihood of military
conflict. But I actually think the likelihood of the Israelis unilaterally going
into Iran and blowing up their nuclear program -- which is a broad, long,
dangerous campaign -- that's relatively unlikely, and it's quite unlikely
before U.S. elections.
FP: Nouriel, what's
the worst-case economic scenario if Israel does attack Iran?
NR: The worse-case scenario is a protracted conflict. If
there's an effect on the supply of oil and gas from the Gulf, and production
and exports from Iran go for a while to zero, oil could go to $170,$180, $200 a
Then, the question is how long it remains there. Of course,
there are now discussions in Washington on how to respond. The amount of oil in
the Strategic Petroleum Reserve is finite, but if you're not going to use it in
this situation, when else are you going to use it?
The reality is that if you think about the last three major
global recessions, there were all caused by a geopolitical shock in the Middle
East that led to spike in oil prices. The Yom Kippur War in 1973 led to the
global recession from 1974 to 1979; the Iranian revolution in 1979 led to spike
in oil prices and the 1980-1982 recession; and even in 1990, the Iraqi invasion
of Kuwait brought a temporary spike in oil prices that led, among other factors,
to a U.S. and global recession.
So if the conflict is severe and protracted and the increase
in oil prices in significant, I would say we're talking about not just a U.S.
recession but a global recession. And this time around, we're also coming out
of a global financial crisis where now we have a huge amount of private and
public debt in many advanced economies, like we did not have in 1973 or 1979 or 1990. So the global economy could not
take a kind of protracted oil shock coming at a time where there's already a painful
process of deleveraging, with fragility in the balance sheets of governments and
the private sector as well.
FP: Ian, you just
got back from China, which.is still buying Iranian oil and has been
intransigent in the Security Council (along with Russia) on condemning the
crackdown in Syria. And now, as the country seems to be prepping for the ascension
of Xi Jinping to head of state, it lowers its GDP growth outlook to around 7.5
percent. Is this more of a political or an economic hedge?
IB: 62 percent of
China's GDP is now state-owned enterprises. That number has actually gone up
from what it was before. China's consumption is going up, but it's not going up
as fast as state investment is. The World Bank report
that came out at the end of February was an excellent report: it was
comprehensive, it showed exactly what the Chinese need to do. And the Chinese
government also cosponsored it, that's great. But there's nothing new there.
They need to fundamentally rebalance, they need transparency in their economy,
they need to move away from labor-intensive state investment, and they need to
move away from state-owned enterprises that are inefficient. I do not see any
political will to do that on the part of the senior leadership in China, and I
don't see that changing with Xi Jinping and his colleagues following their
ascension to power later on this year. And I think that's the real problem.
Nouriel and I wrote this
piece in the Wall Street Journal
a few months ago where we came to the conclusion that, long-term, the biggest
can being kicked down the road is China. I feel more strongly about that having
just come back from there. Look, China's a very, very fast car; it's got a very
big engine and it's been going down a very long, straight highway for a few
years now. The problem is that there's a bend in the road coming up and there's
no steering on this Chinese car, and I don't think we're going to see any. That
should really concern us.
Also, the U.S.-China relationship continues to deteriorate.
I mean, you're right, they vetoed the Syrian Security Council resolution -- they
did not abstain, they vetoed. And
they did it a week before Xi Jinping came to the United States. They do not
The U.S. is not the demographic. They're not trying to
impress us. They're not trying to offend us unnecessarily -- but they don't
really care what we have to say. You've seen that in the recent Senate
legislation as well, which is really trying to push the Chinese on currency.
The Chinese response was absolute indifference.
But they've got massive internal challenges that they are
not addressing in a structural systemic way -- and that in the long-term will
bite them in the ass and creates vastly more volatility around economic and
FP: Is there a
downside volatility to China not being a responsible power, if they continue to
refuse to step up to the table and act as an emerging superpower?
Clinton made it very clear, you don't criticize your banker. Their ability to
do what they want from a human rights perspective -- despite the fact that
their record is vastly worse than that of any developed country -- is not one
that we're going to particularly ding them for. But there are other issues that
will come up.
Clinton recently gave a speech where she said that America welcomes
China's peaceful rise, if they act responsibly. Well, assuming that they don't
act responsibility -- and there's no one in the administration right now that
thinks that they do (and that also includes a prospective Romney administration)
-- then what do you do? Then the American pivot to Asia becomes a hedge, and
then American strategy in Asia starts looking to the Chinese a lot more like
containment. So, in other words, your relationship between the two largest
economies in the world deteriorates dramatically, and that has enormous
implications in terms of volatility of the global economic environment. This is
by far the biggest medium-term risk out there. It's not the Middle East, it's
not Europe, it's this -- because these are the world's two largest economies.
FP: Nouriel, speaking
of ascensions to power, what do you think about Vladimir Putin's election? Do
you see any willingness in him to reform the Russian economy or is he just sort
of coasting along on high oil prices? And how long is that leash?
NR: Russia used to grow at 8 percent a year
between 1998 and 2008. Then the global financial crisis happened and there was
a contraction, but since then their economic record has been between 3.5 to 4
percent -- even with oil prices going from $30 a barrel in 2009 to well above
$100 now. And the problem with Russia is that unless you do structural reforms
by reducing the role of the government in the economy and state-owned
enterprises, and developing the private sector more -- unless you do a variety
of market-oriented structural reforms -- the potential growth rate of Russia
may not be much higher than 4 percent. And in an economy where there's a huge
amount of rent extraction occurring because of an excessive reliance on oil,
energy, and raw material, and as long as those prices are high, the incentive to
do reforms is going to be limited. Yes, now there's a movement especially in
Moscow and in the middle classes that is resisting him. But Putin won. We'll
see how much that is a reflection of the majority vote as opposed to ballot
rigging. He may be slightly weakened compared to what he was a year ago, and he
might be nudging a little more to the center and offering slightly more reforms
than he would have otherwise done, but in my view reforms in Russia are going
to occur at a mediocre, suboptimal pace relative to what's desirable. They'll
be cosmetic rather than radical.
FP: Ian, was the "reset" a failure?
IB: Well, it's over. Bush's effort, post 9-11, was a bit of
a reset as well. It failed. Who lost Russia? Clinton. That also failed. We've
now gone through three complete cycles of up and down with Russia. Historically,
a lot of the down has come from the United States. This time it's come from
Russia, because Putin is not somebody that the U.S. administration is going to
work well with, and Putin himself is not well oriented towards the United
States. In China, you see very incremental changes in foreign policy and
disposition towards the rest of the world because it's run by consensus. In
Russia, it is not. Foreign policy is run by one person with very few checks and
balances on his power.
And Putin's under pressure domestically, which makes him
even more unwilling to play nice with the Americans. Most of the people that
he's brought in around him are folks with a strong nationalist orientation.
Everything that we see from Moscow suggests that the U.S.-Russia relationship
will deteriorate pretty dramatically, and the real question there is: If
U.S.-Russia relations deteriorate dramatically and U.S.-China relations deteriorate
dramatically, and since Putin has had very nice things to say about China
recently, are we going to see a real orientation of those two countries
There are a lot of challenges to doing that -- demographic
challenges, issues of anti-Chinese discrimination on the part of the Russians --
but from an energy perspective, it's very interesting. From an arms
perspective, it's very interesting and very problematic for the United States. I
think that's one thing we should watch carefully.
FP: Do you think
there's going to be heightened tensions, or does Russia not really matter all
that much anymore?
IB: It doesn't
matter anywhere near China. I mean, if we had had this entire conversation and
you didn't bring up Russia once, I would have been okay with that. But it does
matter -- and more for the Europeans than it does for the United States. Nouriel
and I both believe that Russia should not be a BRIC. The BRICS are the countries
that are going to be dominant -- but look at Russian GDP slowing down, major
capital flight, a civil service that doesn't run effectively, massive
corruption, terrible demographics. We would kick Russia right out of the BRICs.
NR: On Russia,
Ian, you're right that Russia and China may get closer to each other, but I
think the biggest strategic threat to Russia is China. You've got a land mass
in Siberia that is as big as the United States, where there are barely 15
million people, and there are millions of Chinese now moving across the border
of Mongolia -- buying land, starting to produce. As you know, possession is
nine-tenths the law. So strategically, at some point, Russia's going to realize
that the only one who can defend them from losing Siberia is the United States
and Europe. So I don't understand the logic of their views. They'll be better off
being friends with the U.S. and Europe than with China.
IB: I get your
point. I think strategically, there's a lot to be said for that, but China's got
a lot of money and needs energy. Russia's got a lot of energy and Putin wants
to show some quick wins. You see that Russia and China are both on the same
side on Syria and Iran -- and my guess is that Hu Jintao decided to go with the
Security Council veto rather than the abstention only after Putin called him
personally before that vote. And they're both increasingly having problems with
the United States for very different reasons: because of the Arab Spring, because
of general views toward democracy, human rights, etc. From a purely realpolitik
perspective, if there was nothing happening domestically within these countries
-- if we're moving chess pieces on the board -- I can see a lot of reasons why
the Russians would want to go long-term with the United States. But I think
there's a lot more going on than that in Russia right now.
Ki Price/AFP/Getty Images