by Tina Fordham

This promises to be a very political year. Elections are taking place in many of the most economically powerful and geopolitically significant countries following last year's wave of mass protests.

Shifting public opinion - perhaps at its most volatile for decades - will play a crucial role in the year ahead and beyond as the relationship between government, business and society re-balances. With declining public trust in government and a strong appetite to unseat those in power, the potential for change through the ballot box - or via unrest in the streets - is high.

Forecasting electoral outcomes may prove more challenging than usual because of the shifting socio-economic and political context in which new actors and ideas are vying for the support.

Historical comparisons are not much help. After all, many advanced economies are experiencing the longest period of low growth in decades, bringing with it stagnating living standards and rising unemployment. With so much at stake, understanding the political context will be more important than picking winners.

The majority of those who triumph will have limited room for manoeuvre and be obliged to march down a path of fiscal tightening, or risk downgrades and the wrath of the bond market. In these circumstances politics in the advanced economies is better explained along debtor v creditor lines, rather than traditional concepts of left and right.

For most leaders, staying as close as possible to the pre-crisis status quo will be the best they can achieve, while resisting the structural reforms that markets and rating agencies demand or the changes the public craves. Disappointment seems inevitable, given this disconnect between market and public expectations. With the leaders of many of the world's most powerful countries struggling to maintain support amid the economic downturn, there could be an increased focus on short-term populist, nationalist and protectionist policies instead of comprehensive long-term reforms.

A prolonged period of declining living standards could provide fertile ground for more radical alternatives over time. Among the key political outcomes evident in recent months is the politicisation of fiscal and budgetary issues by the Right, historically more concerned with immigration and culture.

Capitalism and democracy have prevailed, but budgets, benefits and taxation are the new political battlegrounds.

History suggests that major reforms are rarely attempted in the aftermath of a crisis. The 2007-2009 global financial maelstrom seems unlikely to prove an exception. In the past governments may have been tempted to indulge in fiscal loosening in the run-up to an election. Today budgetary constraints make the notion of 'sharing the proceeds of growth' through fiscal largesse a remote prospect for most leaders. In this environment, the potential for self-inflicted policy failure remains the most significant risk, though muddling through is the most likely outcome.

Before 2008, politics was not a major influence on stock markets; now it forms one of the key drivers. Resolution of the current political uncertainty, particularly in the eurozone, could help improve company and investor sentiment, prompting job creation and inventory replenishment as well as providing more immediate relief by narrowing bond spreads and reducing borrowing costs. Yet between the upcoming French elections, new Greek elections, the pending Irish referendum, heightened tensions in the Middle East and the prospect of four years of legislative gridlock in Washington, there are numerous sources of political risk in the months ahead that will increase uncertainty precisely when investors and citizens are looking for decisive action from their leaders.

Business is as globalised as ever, but politics remains firmly national.

Tina Fordham is Senior Global Political Analyst at Citibank



"Volatile Times, Uncertain Futures"