What kind of political risks do investors need to consider?

1.Euro-contagion and the rebirth of nationalism: Greece's troubles point to the limitations of the European model of peaceful economic development and extensive social net constructed on the monolith of a pan-European identity and common institutions. Part of this model focused on economic convergence - the bringing of the poorer parts of the union up to the living standards of the richer economies. This helped establish a bloc of 27 countries, stretching from the Atlantic to Russia. The current problem is that this union never established a well-defined political center and a blind eye was turned to corruption and failure to make important structural changes in a number of countries, like Greece. All of this worked as long as there was moderate economic growth, easy access to capital markets, and a willingness of some countries' taxpayers to foot the bill for those that still needed to converge. With the Great Recession of 2008-09 easy access to credit evaporated, economic conditions deteriorated, and the willingness of the wealthier countries to subsidize the poorer has given away to the view that they should pull their economic weight. The German hesitancy to provide a bailout for Greece is a clear reflection that the European model is in trouble. We would expect more fractious European behavior in the future as the sovereign debt issue is not going to disappear any time soon, with deep concerns over Portugal and Spain. Europe is shifting - it is a little less "European" and more nationalistic along the lines of individual countries. The Ultimate downside - which we do not see currently - is that the euro-zone breaks up under the pressures of fiscal retrenchment, pleas for bailouts and rising political tensions.

David Fuller's view I agree with all of this but we are probably taking about medium to longer-term political risk in Euroland, because the immediate problem has been papered over with even more debt, this time via quantitative easing. Consequently, Southern Europe can return to its laidback lifestyle with short working hours, long holidays, early retirement and caring social safety net. OK, there are likely to be some reductions in public sector pay rather than the usual entitlement rises, and the retirement date with generous pension may be pushed closer to 60. Life is tough in the first world but improving seasonal weather and the bountiful foods that it brings will soften the blow. Germans may grumble for a while longer but not without cause as they will pick up a significant chunk of the bailout tab.

The problem with our enviable entitlements in the west is that they are increasingly financed by debt rather than entrepreneurial ingenuity and hard work. There is a limit to this Rake's Progress because socialists either run out of other people's money or drive it away, and the printing of ever more fiat currency is not without its eventual consequences as history has repeatedly shown us.

No wonder the price of gold is hitting new highs in USD and appreciating against all paper currencies.

While Scott MacDonald makes a number of good points in his article, I personally do not feel that political risks are rising globally, especially when we consider some of the dire forecasts in 2H 2008 and 1H 2009. Worst case scenarios often dominate headlines during difficult times. Investors should recognise that this is usually an emotional overreaction and therefore a contrary indicator.

We have seen remarkably little of the trade wars, commodity wars and general anarchy widely forecast, although fortunately not by this service. I attribute much of the more benign outcome to globalisation, which encourages communication and cooperation. Also, the earlier embracing of capitalism by most emerging markets of consequence has enabled them to progress, increasing the likelihood of political stability in the process.