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INTERVIEW - Eurasia's Bremmer sees new phase in financial crisis

LONDON (Reuters) - The world has entered a dangerous new phase of the financial crisis with an era of state-on-state confrontation that could last five-10 years and dent growth, leading U.S. political risk analyst Ian Bremmer says.

A worker welds steel bars at a factory in Huai'an, east China's Jiangsu province, October 25, 2007. REUTERS/Patty Chen/Files

Bremmer, head of political risk consultancy Eurasia Group, said failure at an International Monetary Fund (IMF) meeting last week to reach anything approaching an agreement on currencies signalled the end of the any globalisation consensus.

China in particular seemed on a collision course with the U.S. and other developed economies, he said, while Western policymakers were constrained by a surge in anti-incumbent sentiment that could also fuel protectionism.

“What we have here is the world’s largest economies as antagonists with each other,” he said. “That is not somewhere we’ve been in my lifetime. I don’t think we’re headed for war -- there’s just too much mutual interdependence in the global economy -- but we may see the kind of low-level conflicts that could be a brake on global growth.”

U.S. President Barack Obama’s instincts would be to pull back any protectionist programmes and rhetoric after midterm elections next month, Bremmer said -- but partly because of the crisis, political pressures on him would be so heavy he would be largely unable to do so.

Developed powers, particularly the United States, want China to allow its currency to rise, something Beijing fears would make exports less competitive and which it has warned might spark unemployment and broader social unrest. Other emerging economies are considering capital controls to slow their currency rises.

RISE OF STATE CAPITALISM

But Bremmer -- who wrote a book this year saying the rise of “state capitalist” economies such as China and Russia represented a game changer for Western firms and countries -- said much more was at stake.

“This is about much more than just currencies,” he said. “This is about fundamental disagreements about the world.”

This would show itself in many ways, he said -- a rise in cyber espionage, rivalry over commodities as well as heightened arms spending in emerging economies.” It might draw developed economies into a “G3” of Europe, the United States and Japan, he said.

He divided the post-Lehman Brothers crisis into three phases. The first -- encompassing the period of the initial markets crash in September 2008 through the London G20 meeting in April 2009 and subsequent partial recovery -- was marked by almost unprecedented international cooperation.

The second he dated from December 2009, when U.S. National Economic Council director Larry Summers declared the recession over.

Leaders refocused their attention elsewhere. Western democracies were distracted by a sharp rise in anti-incumbent sentiment that followed the economic crisis. Meanwhile, emerging economies grew sharply in power and confidence.

The third phase started last week ahead of the IMF, he said, pointing to warnings about currency warfare and protectionism from the IMF and World Bank and public disagreements over currencies as Chinese Premier Wen Jiabao toured Europe.

“It’s always difficult to pick a date for these things,” he said. “But sometimes things stand out and you should stick your neck out and say so. But I think this phase will last longer than the others -- maybe five to 10 years.”

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