As we begin 2012, political risks dominate global headlines in a way we’ve not experienced in decades. Everywhere you look in today’s global economy, concerns over insular, gridlocked, or fractured politics affecting markets stare back at you. Continuation of the politically driven crisis in the eurozone appears virtually guaranteed. There is profound instability across the Middle East. Grassroots opposition to entrenched governments is spreading to countries such as Russia and Kazakhstan that were thought more insulated. Nuclear powers North Korea and Pakistan (and soon Iran?) face unprecedented internal political pressure.

Paradoxically, political risk has become so fashionable that its effects are now frequently overstated. Those 2012 political handovers in countries totaling some 50% of the world’s GDP? They’re not such a big deal this year, whether the democratic elections in the United States and France or managed authoritarian transitions in China and Russia. Moreover, serious challenges to national decision-makers doesn’t mean that governments are all poised to buckle under pressure. The eurozone isn’t heading toward fragmentation (one of the most consistently over-exagerated risks out there). The American economy is more resilient than many believe. And a Chinese hard landing? Not if Beijing can help it—and it can—in 2012.

So the big challenge, for risk analysts and for corporate decision-makers and investors, is in carefully weighing the risks in a world of ever-increasing information, data, and commentary (much of it noise). Our top risks of 2012 are meant to provide you with tools, signposts, and our best judgments on where all these stories are heading—and on how some stories that you’re not reading about elsewhere might prove more important than people think.

The most important macro theme for 2012: The world’s key political decision-makers will be focused heavily on questions of domestic economic stability at the expense of international security concerns at a moment when politics is having unprecedented impact on the global economy. This conflation of global politics and markets defines the formal end of the 9/11 era, a moment when decision-makers sought to isolate globalization from international security concerns. The end of the 9/11 era is our top risk for 2012.

1) The End of the 9/11 Era

The end of 2011 marked the formal close of the 9/11 era—the killing of Osama bin Laden, the withdrawal of US troops from Iraq, and an end date for the war in Afghanistan. In 2012, we begin to put the global war on terror behind us. These are positive developments for the economy. But for most, what’s replacing it is of greater concern and far more impactful. It was a truism of globalization—economics drives the markets, and national security drives geopolitics. Banks hire economists and worry primarily about the private sector; the government hires political scientists and concerns itself mainly with the public sector. No longer. The culmination of a number of discrete events and longer-term trends turns the page on this formula as we enter a world where politics and economics overlap almost entirely.

The war on terror is being subsumed by fears for the global economic balance. This is not a conventional or unconventional weapons threat. It’s not a balance of terror or an individual terrorist. The new nightmares are of spiraling deficits, the eurozone crisis, and economic relations with China. These have become the primary risks to national security, though there are clearly other ongoing security concerns for the US.

That’s clearest for the country that still matters most, the United States. During his first three years in office, President Barack Obama eschewed an overarching foreign policy strategy. In part, that was driven by the country’s overwhelming focus on domestic economic headaches. But as long as bin Laden was still at large and the endgames in Iraq and Afghanistan remained uncertain, these inherited concerns dominated the administration’s foreign policy agenda.

The death of bin Laden, the withdrawal from Iraq, and acceptance that Afghanistan is not amenable to counterinsurgency strategies have created the Hillary Clinton moment in US foreign policy. Secretary of State Clinton has developed a doctrine founded on economic statecraft and a shift in US foreign policy priority toward Asia, despite continuing instability in the Middle East. Asia is the engine of global economic growth; it is also where the long-term credibility of US commitments faces the biggest potential challenge from a competitor (China). It is therefore of the highest geopolitical importance. That (accurately) reflects an environment of both risk and opportunity in Asia.

Just as economics is driving geopolitics, politics is now moving markets as never before. The role of politics in global markets is hardly new, but before 2008 the overlap was defined and limited. Only in emerging markets was politics the primary economic driver. Only in these countries were natural resources especially susceptible to resource nationalism and interstate conflict. Elsewhere, markets were driven mainly by economic fundamentals. Geopolitics was primarily a matter for those concerned with national security, not with the Nasdaq.

That’s no longer true, for three reasons: 1) Emerging markets are now the primary drivers of global economic growth; 2) Developed states are in structural crisis, and political decisions are an increasingly important determinant of their economic trajectories for the first time since the end of World War II; and 3) An overarching rebalancing is needed between developed and developing states. How quickly and how successfully that rebalancing occurs is primarily a question of political will and political capacity.

In short, for the first time in the era of globalization, 2012 reflects the full global convergence of politics and economics. This will fundamentally drive investor sentiment toward risk aversion, as investors focus on the obvious lack of strong and effective political leadership in virtually all of the major players. Intriguingly, it will lead to an overestimation of political risks in several important cases, especially the eurozone, the US, and China. Our red herrings this year are much more important than usual, because baseline expectations for those risks have become exaggerated.

Concern about macro risks will erode confidence in an improving American economy, exacerbate concerns of eurozone crisis, and enhance worries that emerging market growth might prove wobbly. Caution will remain an overarching investment principle—lending continued support for the dollar, a reluctance to rebalance portfolios dramatically toward the growth economies, and a greater desire to stay in “safe havens” such as cash and gold.