Every January, New York-based risk advisory firm Eurasia Group issues an annual list of the top global geopolitical threats in the new year. This year's roster contains some predictable problems, such as the schism in the euro zone, worries over North Korea, the troubles of Pakistan and Mexico, and the danger of government gridlock in the U.S. But as always, Eurasia Group also throws out some surprises: Its analysts downplay the risk from Iran this year and are sanguine about the Islamization of Turkey.

The major theme of the Top Risks 2011 report is that humanity is facing the emergence of a new world order. "Few of us have experienced a transition of this scope," Eurasia Group says. "This is scary not because it's incomprehensible but because the scale of change is so great that it becomes difficult to manage."

The No. 1 risk this year: evaporation of the cooperative spirit shown by the G-20 countries during the economic crisis and its replacement with more self-interested national behavior—what Eurasia Group calls "The G-Zero." Click on for a look at this and other risks in 2011, as well as four "red herrings," or situations that are less hazardous than they appear.

All material excerpted from Top Risks 2011, © Eurasia Group, 2011
Kostas Tsironis/Bloomberg
Every January, New York-based risk advisory firm Eurasia Group issues an annual list of the top global geopolitical threats in the new year. This year's roster contains some predictable problems, such as the schism in the euro zone, worries over North Korea, the troubles of Pakistan and Mexico, and the danger of government gridlock in the U.S. But as always, Eurasia Group also throws out some surprises: Its analysts downplay the risk from Iran this year and are sanguine about the Islamization of Turkey.

The major theme of the Top Risks 2011 report is that humanity is facing the emergence of a new world order. "Few of us have experienced a transition of this scope," Eurasia Group says. "This is scary not because it's incomprehensible but because the scale of change is so great that it becomes difficult to manage."

The No. 1 risk this year: evaporation of the cooperative spirit shown by the G-20 countries during the economic crisis and its replacement with more self-interested national behavior—what Eurasia Group calls "The G-Zero." Click on for a look at this and other risks in 2011, as well as four "red herrings," or situations that are less hazardous than they appear.

All material excerpted from Top Risks 2011, © Eurasia Group, 2011
Kostas Tsironis/Bloomberg

Top Global Risks of 2011

Putting Politics In Perspective
Putting Politics In Perspective
Every January, New York-based risk advisory firm Eurasia Group issues an annual list of the top global geopolitical threats in the new year. This year's roster contains some predictable problems, such as the schism in the euro zone, worries over North Korea, the troubles of Pakistan and Mexico, and the danger of government gridlock in the U.S. But as always, Eurasia Group also throws out some surprises: Its analysts downplay the risk from Iran this year and are sanguine about the Islamization of Turkey.

The major theme of the Top Risks 2011 report is that humanity is facing the emergence of a new world order. "Few of us have experienced a transition of this scope," Eurasia Group says. "This is scary not because it's incomprehensible but because the scale of change is so great that it becomes difficult to manage."

The No. 1 risk this year: evaporation of the cooperative spirit shown by the G-20 countries during the economic crisis and its replacement with more self-interested national behavior—what Eurasia Group calls "The G-Zero." Click on for a look at this and other risks in 2011, as well as four "red herrings," or situations that are less hazardous than they appear.

All material excerpted from Top Risks 2011, © Eurasia Group, 2011
Kostas Tsironis/Bloomberg
Risk: The G-Zero
Risk: The G-Zero
In the G-Zero, the world's major powers set aside aspirations for global leadership—alone, coordinated, or otherwise—and look primarily inward for their policy priorities. Key institutions that provide global governance become arenas not for collaboration but for confrontation. Global economic growth and efficiency is reduced as a result.

For a brief period following the financial crisis, governance of the global economy looked to be handed over to the G-20. It was a messier group than the G-7, with a broader agenda and less room for agreement. Still, at least in principle, members shared an overriding interest in the stability of the international system.

G-20 cooperation proved a short-lived collective reaction to panic. In the G-Zero, domestic constituencies will become increasingly effective in pushing populist agendas on trade, currency, and fiscal policy.
Tomohiro Ohsumi/Bloomberg Images
Risk: A Messy Euro Zone
Risk: A Messy Euro Zone
This year will be one of growing uncertainty for Europe. The euro zone will remain intact, but the risk will grow that the crisis will balloon into something unmanageable. The main problem is that the politics of austerity in the periphery is probably not sustainable, undermining the prospects for the "bailouts with tough conditionality" strategy to contain the crisis.

The real danger here: that the euro zone countries big enough to matter in global finance, Spain and Italy, will find it increasingly difficult to borrow at rates that are financially sustainable. Should this occur, the chances of a truly systemic crisis will grow dramatically.
Chris Hondros/Getty Images
Risk: Cybersecurity and Geopolitics
Risk: Cybersecurity and Geopolitics
For the past decade, increasingly technologically capable hackers and organized crime organizations have elevated cybersecurity as a business risk, but not as a political risk. The centralization of data networks, both in energy distribution (the move to the smart grid) and information technology more broadly (the shift to cloud computing) are now metastasizing the cyber risk, and governments are becoming more directly and actively involved in playing both offense and defense in cyberspace. The primary involvement of states in cybersecurity, as both protagonists and principal targets, fundamentally changes the nature of the risk.
Jim Watson/Getty Images
Risk: China Doesn't Budge (Much)
Risk: China Doesn't Budge (Much)
With a sluggish global recovery, especially in the industrialized countries where unemployment remains high, the China growth story will generate more and more resentment abroad. One of the most important implications of the G-Zero is that the pattern of reasonably coordinated global responses to the financial crisis that we saw in 2009—but which broke down by the end of 2010—will not be put back together in 2011. Most significant, China will talk of participating in global coordination, but it will not follow through.
Kevin Lee/Bloomberg
Risk: North Korea
Risk: North Korea
In 2011, the North Koreans are likely to take provocative steps against the South despite reasonably strong pressure from China. In the context of growing U.S.-China mistrust, the potential for the Korean peninsula to spin out of control is real. North Korea's decision to keep pushing the South Koreans' buttons is almost certainly the result of a faster-than-expected leadership transition in Pyongyang.

Further North Korean escalation is likely to provoke a response, particularly if Pyongyang targets peninsular South Korea or American forces. There has been no military-to-military discussion, let alone coordination, for scenario planning between American and Chinese top brass—not a good recipe for crisis management.
Dieter Depypere/Bloomberg
Risk: Capital Controls
Risk: Capital Controls
The risk is rising that a number of countries, including those that resisted the urge last year, will impose capital controls in 2011. This trend is driven by a combination of the divergence in economic recovery between emerging markets and industrialized countries, and the increasingly dim prospects for a coordinated G-20 strategy to tackle current account imbalances.

A wall of money, driven by expectations of higher long-term growth rates, is headed into emerging markets and developing economies. This trend is generating upward currency pressure on those economies open to capital inflows, hurting domestic firms by making exports more expensive and intensifying import competition.
Andrew Harrer/Bloomberg
Risk: U.S. Gridlock
Risk: U.S. Gridlock
Strong governance is generally considered good for emerging markets, where new policies are needed to make the trains run on time, while gridlock is a fine outcome for developed states, allowing markets and businesses to prosper undisturbed. But gridlock can be problematic even in industrialized nations when decisive action is needed, especially in a sluggish economy. That's the principal political risk facing the U.S. this year.

American gridlock will pose three specific risks for markets in 2011. First is the risk that there will be no movement on policies that the markets and business leaders want to see. Most important here is housing finance reform. Second, both parties may loudly promote priorities for which there is no path forward, such as substantially revising the Dodd-Frank financial regulation bill. Third is the risk that a roadblocked White House turns to heavier-handed administrative actions that are hard to predict or influence.
Andrew Harrer/Bloomberg
Risk: Pakistan
Risk: Pakistan
The risk in the subcontinent this year isn't Afghanistan-Pakistan (or Af-Pak, as it's called in Washington). It's Pak-Pak. Pakistan is experiencing a near perfect storm of political, economic, and social crises all rising in the absence of an effective central government. The bigger worry is that instability will spread to Pakistan's most important provinces, Punjab and Sindh, which have been isolated from the turbulence in Pakistan's tribal areas.

Further social and ethnic dislocation and conflict in "mainland" Pakistan would lead the military to weigh the prospect that urban unrest and terrorism are undermining national unity. In even the best-case scenario, Pakistan's governance woes make support for U.S. Afghanistan policy implausible.
Asif Hassan/Bloomberg
Risk: Mexico
Risk: Mexico
2011 promises to be very challenging for Mexico. The country isn't headed for state failure, and it's unlikely fighting will spread much beyond the northern and western regions of the country where escalating violence has already created a serious crisis of governability. But Mexican authorities have yet to turn the tide in incapacitating the drug cartels and creating the conditions for a restoration of order.

More broadly, the political consensus in Mexico in support of the Calderon administration's tough approach to drug violence is weakening. The government remains equipped to tackle its security woes, but a serious spike in violence this year, especially in high-level assassinations, is likely to erode investor confidence and have negative consequences for the Mexican economy.
Pedro Pardo/AFP/Getty Images
Risk: Emerging Markets -- Not Everyone Wins
Risk: Emerging Markets -- Not Everyone Wins
The dramatic increase in the flow of capital into emerging markets has lifted all boats. But there are very different risk profiles among emerging markets, and not all are going to perform well this year. The most notable underperformers:

Argentina
Markets appear overly optimistic that policy will improve.

Hungary
Markets still don't seem to be pricing in the scope of the potential impending crisis as the Fidesz government attacks asset holders across a range of classes.

Peru
Investors underestimate the potential for populist candidate Ollanta Humala to make a serious run at the presidency.

South Africa

Continued government accommodation of trade union demands will limit President Jacob Zuma's efforts to enhance the investment climate


Sri Lanka
Many have become overconfident that the end of the country's decades-long civil war will usher in a period of political stability.

Thailand
Investor confidence remains high, but 2011 promises to be full of political tensions, especially given the king's failing health.
Prashanth Vishwanathan/Bloomberg
Risk: Miscellaneous Militarism
Risk: Miscellaneous Militarism
Hezbollah in Lebanon has been arming, and 2011 brings a greater chance of war breaking out with Israel. But it's much more likely to be skirmishing, and we don't see significant market implications in any but the most unlikely cases. Terrorism is growing in Yemen and the Horn of Africa, and we'll undoubtedly see more militant attacks in that region as well as a more aggressive American military response. But Saudi Arabia isn't directly threatened, and regional militants' ability to export terror more broadly remains significantly constrained.
Anwar Amro/AFP/Getty Images
Red Herring: Iran
Red Herring: Iran
Seriously? Seriously. It's not exactly a good news story, given that the Iranians are still going nuclear, and there's very little chance that we're going to see a diplomatic breakthrough. But the sanctions regime is sufficiently serious that Israel will give it time to work. Diplomacy will also take some time to play out. So, there's little need to worry about military strikes.

Domestically, leadership tensions are brewing and the reduction of subsidies on key goods will provoke some unrest, but Iran's opposition is in disarray, enabling the well-fed Revolutionary Guard to remain on the sidelines. Iran is a big looming issue, no doubt. It's not a serious risk for 2011.
ATTA KENARE/AFP/Getty Images
Red Herring: Turkey
Red Herring: Turkey
There's a lot of worry about Turkey becoming more Islamist and the prospects for a sharp break with the EU and the U.S. But an increasingly Islamist Turkey remains on a democratic trajectory, Prime Minister Recep Erdogan's AK party is serious about improved governance, and a successful Turkey at the end of the day counters Iran (especially in Iraq). In stability terms, Erdogan is likely to win big in upcoming elections, giving him more domestic political flexibility. Expect more geostrategic hedging, but no break with the West.
AFP/Getty Images
Red Herring: Sudan
Red Herring: Sudan

Despite a great deal of (legitimate) hand-wringing, Sudan's not headed back to civil war. We'll surely see considerable tension and some violence around the southern Sudan independence referendum this month, but both sides have big incentives to compromise. Along with Iraq, Sudan is poised to be an example of how energy resources can sometimes promote stability rather than conflict.

Trevor Snapp/Bloomberg
Red Herring: Nigeria
Red Herring: Nigeria
A tense election year will pit northerners against southerners, including inside the ruling PDP. But we expect incumbent Goodluck Jonathan to win the party primary this month, setting him up for an electoral win in April and a continuation of the messy, but not fundamentally unstable, politics. A comprehensive peace deal with Niger Delta rebels is not in the offing and sectarian clashes will persist in central states, but Nigeria will continue to prove more resilient than most expect.

Click here for a complete copy of the Eurasia Group's Top Risks 2011.

Click here to see a slide show of the Top Global Risks of 2010.
Shawn Baldwin/Bloomberg