As 2013 comesto a close, efforts to revive growth in the world’s most influential economies– with the exception of the eurozone – are having a beneficial effectworldwide. All of the looming problems for the global economy are political incharacter.

After 25 years of stagnation, Japan isattempting to reinvigorate its economy by engaging in quantitative easing on anunprecedented scale. It is a risky experiment: faster growth could drive upinterest rates, making debt-servicing costs unsustainable. But Prime MinisterShinzo Abe would rather take that risk than condemn Japan to a slow death. And,judging from the public’s enthusiastic support, so would ordinary Japanese.

By contrast, the European Union is headingtoward the type of long-lasting stagnation from which Japan is desperate toescape. The stakes are high: Nation-states can survive a lost decade or more;but the EU, an incomplete association of nation-states, could easily bedestroyed by it.

The euro’s design – which was modeled on theDeutsche Mark – has a fatal flaw. Creating a common central bank without a common treasury meansthat government debts are denominated in a currency that no single membercountry controls, making them subject to the risk of default. As a consequenceof the crash of 2008, several member countries became over indebted, and riskpremia made the eurozone’s division into creditor and debtor countries permanent.

This defect could have been corrected byreplacing individual countries’ bonds with Eurobonds. Unfortunately, GermanChancellor Angela Merkel, reflecting the radical change that Germans’ attitudestoward European integration have undergone, ruled that out. Prior toreunification, Germany was the main motor of integration; now, weighed down byreunification’s costs, German taxpayers are determined to avoid becomingEuropean debtors’ deep pocket.

After the crash of 2008, Merkel insisted thateach country should look after its own financial institutions and governmentdebts should be paid in full. Without realizing it, Germany is repeating thetragic error of the French after World War I. Prime Minister Aristide Briand’sinsistence on reparationsled to the rise of Hitler; Angela Merkel’s policies are giving rise toextremist movements in the rest of Europe.

The current arrangements governing the euro arehere to stay, because Germany will always do the bare minimum to preserve the common currency – andbecause the markets and the European authorities would punish any other countrythat challenged these arrangements. Nonetheless, the acute phase of thefinancial crisis is now over. The European financial authorities have tacitlyrecognized that austerity is counterproductive and have stopped imposingadditional fiscal constraints. This has given the debtor countries somebreathing room, and, even in the absence of any growth prospects, financialmarkets have stabilized.

Future crises will be political in origin.Indeed, this is already apparent, because the EU has become so inward-lookingthat it cannot adequately respond to external threats, be they in Syria orUkraine. But the outlook is far from hopeless; the revival of a threat fromRussia may reverse the prevailing trend toward European disintegration.

As a result, the crisis has transformed the EUfrom the “fantastic object” that inspired enthusiasm into something radicallydifferent. What was meant to be a voluntary association of equal states thatsacrificed part of their sovereignty for the common good – the embodiment ofthe principles of an open society – has now been transformed by the euro crisisinto a relationship between creditor and debtor countries that is neithervoluntary nor equal. Indeed, the euro could destroy the EU altogether.

In contrast to Europe, the United States isemerging as the developed world’s strongest economy. Shale energy has given the US an importantcompetitive advantage in manufacturing in general and in petrochemicals inparticular. The banking and household sectors have made some progress indeleveraging. Quantitative easing has boosted asset values. And the housingmarket has improved, with construction lowering unemployment. The fiscal dragexerted by sequestrationis also about to expire.

More surprising, the polarization of Americanpolitics shows signs of reversing. The two-party system worked reasonably wellfor two centuries, because both parties had to compete for the middle ground ingeneral elections. Then the Republican Party was captured by a coalition ofreligious and market fundamentalists, later reinforced by neo-conservatives,that moved it to a far-right extreme. The Democrats tried to catch up in orderto capture the middle ground, and both parties colluded in gerrymanderingCongressional districts. As a consequence, activist-dominated party primaries took precedence overgeneral elections.

That completed the polarization of Americanpolitics. Eventually, the Republican Party’s Tea Party wing overplayed its hand.After the recent debacleof the government shutdown, what remains of the Republican establishment hasbegun fighting back, and this should lead to a revival of the two-party system.

The major uncertainty facing the world today isnot the euro but the future direction of China. The growth model responsiblefor its rapid rise has run out of steam.

That model depended on financial repression of the household sector,in order to drive the growth of exports and investments. As a result, thehousehold sector has now shrunk to 35% of GDP, and its forced savings are nolonger sufficient to finance the current growth model. This has led to an exponential rise in theuse of various forms of debt financing.

There are some eerie resemblances with the financial conditions that prevailed in theUS in the years preceding the crash of 2008. But there is a significantdifference, too. In the US, financial markets tend to dominate politics; inChina, the state owns the banks and the bulk of the economy, and the CommunistParty controls the state-owned enterprises.

Aware of the dangers, the People’s Bank of Chinatook steps starting in 2012 to curb the growth of debt; but when the slowdownstarted to cause real distress in the economy, the Party asserted its supremacy. In July 2013,the leadership ordered the steel industry to restart the furnaces and the PBOC toease credit. The economy turnedaround on a dime.In November, the Third Plenum of the 18th Central Committee announcedfar-reaching reforms. These developments are largely responsible for the recentimprovement in the global outlook.

The Chinese leadership was right to giveprecedence to economic growth over structural reforms, because structuralreforms, when combined with fiscal austerity, push economies into a deflationarytailspin. But thereis an unresolved self-contradictionin China’s current policies: restartingthe furnaces also reignites exponential debt growth, which cannot besustained for much longer than a couple of years.

How and when this contradiction will be resolvedwill have profound consequences for China and the world. A successfultransition in China will most likely entail political as well as economicreforms, while failure would undermine still-widespread trust in the country’spolitical leadership, resulting in repression at home and militaryconfrontation abroad.

The other great unresolved problem is theabsence of proper global governance. The lack of agreement among the UnitedNations Security Council’s five permanent members is exacerbating humanitariancatastrophes in countries like Syria – not to mention allowing global warmingto proceed largely unhindered.But, in contrast to the Chinese conundrum, which will come to a head in the next few years, theabsence of global governance may continue indefinitely.