GLOBAL PREDICTIONS FOR 2016

Published by Stratfor

2016 is shaping up to be an unsettling year for much of the world. The United States and Russia are still locked in an intractable standoff. Nationalism is resurfacing in Europe. The price of oil and other commodities are low. Chinese consumption is falling. And countries around the world are more resolved than ever before to intensify their military campaigns against the Islamic State. But it is important to remember that all these trends are connected, and the way they play out this year could determine how tumultuous the world will be in 2016.

With old geopolitical realities resurfacing across Eurasia and commodity prices stuck in a slump, 2016 is shaping up to be an unsettling year for much of the world.

A logical place to begin is the country that bridges Europe and Asia: Turkey. This is the year when Turkey, nervous but more politically coherent than it was last year, will likely make a military move into northern Syria while trying to enlarge its footprint in northern Iraq. Turkey will not only confront the Islamic State but will also keep Kurdish expansion in check as it raises the stakes in its confrontations with its old rivals, Russia and Iran.

The last thing Russia wants is a confrontation with Turkey, the gatekeeper to the Black and Mediterranean seas, but confrontation is something it cannot avoid. Russia risks mission creep this year as it increases its involvement on the Syrian battlefield. But the Islamic State will be only part of Moscow's focus in Syria; Russia will try to draw the United States toward a compromise that would slow a Western push into Russia's former Soviet space. The United States will be willing to negotiate on tactical issues, but it will deny Moscow the leverage it seeks by linking counterterrorism cooperation to a broader strategic discussion. The U.S. administration will work instead to shore up European allies on the front lines with Russia.

Regardless of the participants' secondary motives, an intensified military campaign against the Islamic State will surely damage the militant group's core. However, the fledgling caliphate will not be eradicated this year. A lack of reliable ground forces will hamper the anti-Islamic State campaign. And the more the Islamic State's conventional capabilities weaken, the more actively the group and its affiliates will try to conduct terrorist attacks outside the Middle East to maintain its relevance. This in turn will drive competition within the jihadist landscape as al Qaeda factions in the Arabian Peninsula, the Maghreb, West Africa and South Asia try to keep pace.

The jihadist threat will fuel Islamophobia in the West and catalyze the fragmentation of Europe. Border controls and calls for preserving national identity will dilute the EU principle of allowing free movement of people. Closed borders will create a bottleneck of migrants in the Western Balkans, a region already rife with ethnic and religious tension. But the main story in Europe for 2016 will center on France and Germany, the two pillars of the European Union. Both will be preparing for 2017 elections, and both are leaning in a more nationalist and Euroskeptic direction. Over time, Germany will become more outspoken and much less willing to compromise on matters of EU integration.

The continuation of quantitative easing and another year of low oil prices will have a palliative effect on the deeper frictions in Europe as global commodity markets continue to suffer. The addition of Iranian oil to the market in the first half of the year will offset a drop in U.S. production. Any change to Saudi Arabia's oil output would come later in the year, after Riyadh has assessed the price impact from Iran's return as well as the effect on U.S. shale producers. Any attempt by Riyadh to coordinate a drop in production with Kuwait and the United Arab Emirates would come only after this assessment. Regardless of Iran's impact, Saudi Arabia will still be prepared to take on more debt and draw down reserves to cope with low oil prices.

China will not bring about relief in commodity prices, either. Consumption growth will slacken as Beijing struggles to implement reforms amid growing dissent among the Party elite. Even as Beijing faces the threat of party factionalization, it will still have enough economic heft to offer incentives to Southeast Asian states to counterbalance a stronger U.S. security presence in the region.

Low commodity prices and rising U.S. interest rates, which affect currencies, will also spell another difficult year for much of Latin America. The threat of impeachment will hang over Brazilian President Dilma Rousseff and further sour the investment climate in Brazil in the short term. Argentina may have a new, reform-minded president, but his struggle with high inflation and foreign currency shortages means any moves to settle debt and to raise protectionist measures will be limited. In Venezuela, the end of Chavismo is near. An embattled United Socialist Party of Venezuela will eventually splinter under growing political and economic pressure, and the country risks defaulting on its foreign debt in 2016.

The defining events of 2016 will raise apprehension around the world, leading into what will likely be an even more tumultuous 2017 as an array of developing conflicts comes into sharper focus. The essential thing to bear in mind is that all these trends are connected. The U.S.-Russia standoff, surging nationalism in Europe, Turkey's re-emergence and other geopolitical currents will tie in to and feed off of one another.

Europe

With nationalist policies gaining traction throughout the continent, Europe will only fragment further in 2016.

Germany and France Move to the Right

This will be a transition year for Germany and France. Both countries have elections in 2017, and politically both are moving in a more nationalist and Euroskeptical direction. The foundation of the European Union, the Franco-German relationship, will show signs of  craking as the interests of Paris and Berlin inevitably begin to diverge. Germany will oppose France's proposals to deepen continental integration (especially among eurozone countries) and increase spending across the bloc. Berlin and Paris will find it increasingly difficult to find common ground on measures to protect the European Union.

German Chancellor Angela Merkel will come under pressure as divisions widen between conservative and progressive members of her coalition. Regional elections in March will serve as a popularity test for Merkel's Christian Democratic Union. Should her party perform poorly in the elections, calls for her resignation will grow louder.

Thanks to pressure from the conservatives, border controls will remain frequent, and Berlin will look for ways to prevent people from arriving in Germany. The conservatives will also compel Berlin to take a tougher stance on Greece, especially because Athens, in an effort to avoid social unrest, will drag its feet in enacting economic reforms.

Greece Remains Troubled

In Greece, the government of Prime Minister Alexis Tsipras faces two main problems: political fragility and social unrest. The Greek economy has another year of negligible growth and extremely high unemployment ahead of it. This will lead to repeated protests and frequent conflicts within the government, which in turn will force the administration to slow the process of reform.

A collapse of the Greek government cannot be ruled out because Tsipras leads only a very small parliamentary majority. However, the Greek establishment wants to avoid early elections, so even if the government fell, it would be replaced by a technocratic or coalition government that would still be able to approve legislation.

In 2016, Greece's main threat will be social unrest, not debt repayments. A repeat of the 2015 crisis seems unlikely because Greece does not face a particularly pressing calendar of debt maturities. This means that the risk of a Greek default or exit from the eurozone is lower than in 2015. But Germany's tenacity and Greece's resistance will make every bailout review tense, and negotiations over potential debt relief will probably be delayed until late 2016. We do not expect Greece to exit the eurozone in 2016, but Greece's problems are far from resolved. Increasing resistance to reforms, initially among the public but then in the political sphere as well, set the country up for another inevitable confrontation with its creditors down the line.

Political Fragility in Southern Europe

In Portugal, a fragile coalition of left-wing parties will struggle to remain in power, and early elections are likely. Following Dec. 20 elections, Spain will spend the first weeks of the year trying to form a sustainable government. An agreement will finally be reached, but Spain's limited experience with coalition governments will make decision-making slow and cumbersome.

Neither Portugal nor Spain will return to the financial instability that defined the early years of the European crisis. Most of the main political parties in both countries are pro-market and defend the membership of their countries in the eurozone, so political frictions will not lead to a dramatic change of direction in Lisbon or Madrid. In addition, a combination of low oil prices and the European Central Bank's intervention in debt markets should prevent an escalation of the economic crisis in the Iberian Peninsula.

However, both countries will probably reverse some of the reforms that were applied by their predecessors. In the long run, this will re-create the conditions that led to the crisis in the first place. The behaviour of countries in Mediterranean Europe will also make the European Commission increasingly ineffective.

In Italy, the government of Prime Minister Matteo Renzi will seek a balance between introducing economic reforms and increasing public spending. One of the main challenges for Rome will be the introduction of reforms in the pension system to make it more sustainable. Italy will also hold a referendum in the second half of the year on the constitutional reforms that were approved in 2015.

Renzi will continue to deal with resistance within his own party, but the prime minister will probably manage to make his reforms. A key event to watch for in 2016 is the evolution of the center-right as conservative and Euroskeptical forces try to form a common front to compete in the next elections (which are technically scheduled for 2018 but will probably happen before then). Italy's underlying economic situation will continue to deteriorate; Rome will increase spending while failing to deal with its debt problems, creating problems for itself (and Europe) in the near future. But although increasingly troublesome indicators are likely to arise — such as rating agency downgrades or intensifying problems in the Italian banking sector — no systemic crisis is expected in 2016, mainly because of the European Central Bank's ongoing bond-buying program.

The British Question

One of the main issues in 2016 will be the British referendum on EU membership. The vote is expected in late 2016 or early 2017. Some of London's proposals for EU reform, such as reducing red tape and increasing competitiveness, are uncontroversial and are likely to produce an agreement among member states. The United Kingdom will probably also be promised protection for non-eurozone countries against measures that affect the currency union, and London will even receive the ability to opt out of the concept of an "ever closer union." The United Kingdom's push to reduce in-work benefits for immigrants will prove more troublesome and will require London to compromise.

London's proposals for EU reform will produce different alliances over different issues. Some countries, including the Netherlands and Poland, will support the demands to give national parliaments veto power over EU legislation. Other countries, mostly in Northern Europe, will support the demands to restrict access to welfare for immigrants, but countries in Central and Eastern Europe will resist them. Countries in Central and Eastern Europe (specifically Poland, Hungary and Romania) will defend policies to protect non-eurozone countries from eurozone decisions.

As a result, British Prime Minister David Cameron is likely to make compromises and present them as a political victory at home. Though opinion polls show very different results when it comes to British citizens' view of EU membership, London will try to keep the United Kingdom in the bloc. If there is a referendum on the issue in 2016, the "in" side will win.

The Migration Crisis Risks Reigniting the Balkans

The immigration crisis will continue its cyclical behavior: During the early months of the year, cold temperatures and bad weather will probably lead to a reduction in the inflow of people into Europe. The flow will increase as summer approaches, but asylum seekers will find a different Europe in 2016. Border controls will become more frequent, and countries along the so-called Balkan routes will be less tolerant of immigrants crossing their territories. For the first time since its creation, the Schengen Agreement will not end the year as it began it; either free movement will be somewhat constrained, or fewer countries will be members.

As a result, asylum seekers will find it harder to reach Northern Europe. Some of them will be forced to look for new routes while others will be stuck in the Western Balkans. This will increase the probability of violence in the region as some people become involuntary immigrants in countries already experiencing high unemployment, ethnic tension and fractious politics.

The Eastern Front

2016 will be intense for Poland and Romania, the largest countries on the eastern EU border. In Poland, the conservative government will push the European Union to maintain a hard-line stance on Russia and will criticize Germany's handling of EU issues, including immigration and relations with Moscow. Berlin will argue that the Minsk peace agreement is not being completely respected and will pressure Southern European countries that have more flexible relations with Russia to continue the sanctions. At the same time, Berlin will try to protect its energy ties with Moscow (for example, by defending the Nord Stream 2 project), which will antagonize Germany's eastern neighbors.

Poland will demand a greater NATO presence in Central and Eastern Europe while trying to develop stronger ties with the Visegrad Group (which also includes Hungary, the Czech Republic and Slovakia) and Romania. As Poland becomes more distant from Brussels and Berlin, it will draw closer to the Visegrad countries and occasionally the United Kingdom. Warsaw will also make controversial moves at home, such as lowering the retirement age and creating special taxes on sectors such as banks and supermarkets. These policies will invite criticism from both the European Union and foreign investors.

In Romania, the technocratic government will have an auspicious start but will lose steam over time. Bucharest will remain committed to its alliance with the United States and its membership in NATO and the European Union. Romania will also continue to support Moldova's path to EU accession and maintain a cold relationship with Russia. However, political support for the government will erode gradually, especially as the parties that support the technocratic administration begin making their own calculations ahead of the general elections in December.

Countries along the European Union's eastern border will spend 2016 trying to improve regional cooperation and to boost NATO's engagement in the area. During a NATO summit in Warsaw in July, Poland and others will request a permanent NATO presence in Eastern Europe. Some members of the alliance, most notably Germany, will resist this idea, as will some Central and Eastern European countries that prefer to stick to troop rotations as they try to manage relations with Moscow.