Former U.S. Treasury Secretary Lawrence Summers said investorsare far too sanguine about the risks of Donald Trump's policies,which analysts at Eurasia Group say could contribute to a level ofglobal instability not seen since World War II.

The Harvard professor, a Democrat who was Treasury chief underBill Clinton, Tuesday cited the possibility of protectionistmeasures by the U.S., as well as changes to foreign policy anddomestic social programs, as issues that are creating“extraordinary uncertainty.” Analysts at consulting firm EurasiaGroup echoed those sentiments in a new report, saying the world isentering a period of “geopolitical recession” in 2017.

With Trump's ascent to the presidency on an America Firstplatform, the global economy can't count on the U.S. to provide“guardrails” anymore, according to Eurasia, which advisesinvestors on political risk. Trump's signals of a thaw with Russia,skepticism toward the North Atlantic Treaty Organization and his“alignment” with European anti-establishment parties such asFrance's National Front could weaken the main postwar allianceprotecting the global order, according to its report releasedTuesday.

The warnings are a reminder of the range of threats to stabilityin 2017, from elections in Germany, France and the Netherlands andBritain's planned exit from the European Union to the transition ofpower in the U.S., setbacks in emerging nations such as Brazil andEurope's refugee crisis.

Investors in the U.S. so far have shrugged off those concernsand instead are betting that Trump's pledges to boost spending, cuttaxes and unwind regulations will fuel economic growth. With justover two weeks to go before his inauguration on Jan. 20, theS&P 500 is close to a record high, having risen almost 10% in2016 on optimism over fiscal stimulus and stronger economic growth.While the Dow Jones Industrial Average has struggled to close atthe 20,000 level, it rose 13% last year.

Dangerous Game

Summers, who also served in the Obama administration, saidinvestors are playing a dangerous game by gambling on anadministration whose policies are still unclear. He dismissed theincoming administration's idea that encouraging U.S. companies torepatriate profits would boost investments, and said some membersof Trump's economic team have proposed ideas that go “well beyondvoodoo economics.”

“This is probably the largest transition ideologically and interms of substantive policy that we've seen in the U.S. in the lastthree quarters of a century,” Summers told Tom Keene in a BloombergTelevision interview. “Those kinds of transitions have to be —given the central role of the U.S. in the global system — mattersof enormous uncertainty. I don't think that's fully recognized bymarkets.”

In addition to Trump, other global factors including China'sgrowing assertiveness and a weakened German Chancellor AngelaMerkel will make 2017 the “most volatile” year for political risksince World War II, according to Eurasia Group.

International war or “the breakdown of major central governmentinstitutions” isn't inevitable, though “such an outcome is nowthinkable,” according to the consulting firm, which was founded bypolitical scientist Ian Bremmer.

Biggest Risk

Merkel, who is seeking re-election in the fall, faces likelydisputes over Brexit, Greece's simmering debt crisis and an“increasingly authoritarian” Turkish President Recep TayyipErdogan, threatening a refugee accord between the EU and Turkey,Eurasia said.

Other threats cited by the consulting firm include:

• Lack of economic reforms, with only China on a “positivetrajectory” among 14 major nations and Italy, Russia, Saudi Arabia,South Africa, Turkey and the U.K. declining.
• Politicians blaming central banks, including the FederalReserve, for economic woes.
• North Korea's nuclear program, which may yield some 20 nuclearweapons, combined with technological advances allowing strikes atthe U.S. west coast in the future.

New York University economics professor Nouriel Roubini said onTuesday the biggest political risk facing Europe is National Frontleader Marine Le Pen's chance of winning the French presidentialelection.

“If Le Pen comes to power in France, if an anti-euro party comesto power in Italy, this could be the beginning of the end of Europeand the euro zone,” he told Bloomberg Television.

Bloomberg News

Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.