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Wednesday, 30 August 2017

Political risk

According to Wikipedia, “political risk is a type of risk faced by investors, corporations, and governments that political decisions, events, or conditions will significantly affect the profitability of a business actor or the expected value of a given economic action. Political risk can be understood and managed with reasoned foresight and investment.”

Recently, the CEO of Denmark’s largest pension fund made an interesting statement to Bloomberg: “Politics and economics have decoupled a lot in recent years. Politicians populate an insulated world of their own, while companies live in another sphere. If you’re afraid of politics in one place you can just move production elsewhere. As long as politics doesn’t get out of hand and turn into military action, it will stay in its own sphere and not influence companies much."

This year the Netherlands might break the post-WW2 record of the longest cabinet formation (1977: 208 days). As a consequence, the current Dutch cabinet is the longest post-WW2 cabinet ever with 1,758+ days. Given the lack of political progress, the 2017 Dutch Cabinet formation is hardly front page news. There is no evidence that the absence of a new Dutch cabinet affects the Dutch economy in a negative way. Some cynics may argue the opposite is true.

The political situation in the USA has created a domestic and international mess ever since Donald Trump got elected as the 45th President. However, the negative impact on domestic and international economic affairs has been negligible thus far. Does this imply that political risk in Western economies no longer exists?

Brexit could suggest that political risk is very much alive as the negative impact on the UK economy becomes more clear day by day. However, the Chancellor's post-Brexit emergency budget was never required (eg, BBCFT). The political risk was overstated. Moreover, UK politicians on both sides are slowly reversing course, including UK Labour (eg, FTGuardian).

Hence, Brexit isn’t an example of political risk but of British arrogance. The UK is finally realising that it made a terrible miscalculation in their expectations about the EU stance towards a Brexit. The UK actually assumed that it had the upper hand in the EU-Brexit negotiations. Human stupidity isn’t a risk according to Einstein but a certainty. Hence, Brexit may never happen.

There are many more examples in which political risk doesn’t affect the economy. The common denominator is a democracy guarded by a separation of powers in its 3 branches: the executive, judicial and the legislative branch. This separation is absent in autocracies and political risk is omnipresent in those territories.

The decoupling of economics and politics is thwarted by a rise in autocracies. Life always looks for symmetry and balance (my blog). A rise in autocracies is an indicator for future military conflict. The proposed bill by US Congress to restrict the power of the US President in declaring war (without consent of Congress), is a welcome sign of the times (eg, CNNIndependent).

"Only two things are infinite, the universe and human stupidity, and I'm not sure about the former." Quote by Albert Einstein

Sign of the Times (2017) by Harry Styles - artist, FBlyrics, video, Wiki-1, Wiki-2

We never learn, we've been here before
Why are we always stuck and running from
The bullets, the bullets?


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