By Christian Takushi, Macro Economist & Geopolitical Strategist, and his Team – 1 Jan 2018 – Switzerland.
We are used to see world leaders and nations take advantage of the relative “quiet” of the Christmas-New Year period to advance their interests. But this year the level of activity is impressive and the list of nations, where we are monitoring action ranges from Germany, USA, Russia, Iran, Israel .. all the way to … Guatemala, Venezuela, Argentina, Brazil and Peru. Latin America is experiencing a revival, but also a struggle for dominance. We see Brazil’s beleaguered Mercosur steeping up efforts to slow down the rise of the rival Pacific Alliance.
While most of the Western press continues its focus on the US administration, Russia, Iran and North Korea, we deem the action in Germany, Latin America and Lebanon-Syria as the most underestimated. True to our approach, we focus our resources on identifying and analysing developments that consensus is underestimating and that could be relevant for the world economy. Before we start here some quick excerpts from our global geopolitical surveillance:
Lebanon & Syria: Intelligence points to the buildup of Iranian & pro-Iranian military forces and the amassing of heavy assets
Ukraine: USA signals increased military support as forward military units in North-Eastern Europe are reinforced. We see calculated moves to contain and provoke Moscow
North Korea: China caught supplying N Korea with fuel. The West – outsmarted by China – will instead increase pressure on Russia over next 4 months
Guatemala to shift embassy from Tel Aviv to Jerusalem. Nine other nations come under massive pressure by UN and EU for considering a similar move.
Argentina walks further away from purchasing Israeli KFIR fighter jets and Russian MIG 29’s. France is winning 7 year old procurement battle to supply Argentinian Air Force; contains UK security projection on Falklands. BREXIT is being felt as far away as Argentina and Chile.
1) Germany in Crisis – Consensus holds on to Merkel
Germany faces probably the most intricate Political Crisis since WW2. The rise of the Federal President over a weakened Chancellory has shaken politics as usual in Berlin and is solidifying the liberal shift in German politics.
Latest move – sealing off the liberal shift of Germany
In the run up to Christmas influential business leaders have distanced themselves from Mrs. Angela Merkel and gone to the offensive against her after 12 years of a cozy relationship. Merkel’s “behind closed doors” management and low tolerance for dissident minds worked well for over ten years to control power, but its side effects are finally showing. All those who partnered with Merkel were later decimated or humiliated, not least by Merkel herself in an effort to cater to the liberal center or the right wing. As a result, no German mainstream party and no major German industrial leader is eager to enter a coalition or partnership with Merkel. Merkel’s survival is not in her own hands anymore, but Steinmeier’s, the Federal President.
The Federal President has risen to this occasion and given Germany and the EU the continuity they badly needed. It is Steinmeier that is forcing all stake holders to talk to Merkel. Steinmeier has demanded that CSU, FDP, the Greens and SPD enter coalition talks with Merkel’s CSU. Many say he can’t force them, but we think he can. Unlike Merkel, Steinmeier is an open communicator and charismatic personality. Wisely, he has set a clear goal: by no means should the Far Right AfD get a chance to win more parliament seats and influence. The threat has been well understood: If coalition or minority rule talks fail, the Federal President will call new elections. Since mainstream parties tend to equate the AfD with a return of Fascism, we ascertain that they will ultimately find a common ground – even if it is around a new Chancellor or tolerating a minority government. The so called GroKo is nevertheless the coalition favoured by many German leaders as we step into 2018. Groko stands for a Grosskoalition or Large Coalition encompassing CDU/CSU and SPD.
Understanding Germany will pay off
Our independent intelligence analysis leads us to believe that Steinmeier prefers a weakened Merkel as Chancellor rather than one of the rising stars of political Berlin. With a weak Chancellor Merkel, Steinmeier hopes to solidify the liberal shift of Germany further to the left. Steinmeier is a moderate Socialist and to the left of Merkel. Wisely he used his tenure as Foreign Minister to build strategic relationships and alliances.
Whether China, Russia, Turkey, the Pacific Alliance or Iran .. every rising power is looking to Germany and building a strategic alliance with German industries and political parties. Just as Schröder built a Russo-German business alliance, and Merkel built a Sino-German strategic alliance, Steinmeier has built an alliance with Iran – helping to bring it out of its isolation and aligning it with the EU. Germany is a resurgent power that has always looked to the East to secure its geopolitical advance or survival.
2) Battle for supremacy in Latin America – On the economic front Mercosur loses to Pacific Alliance. But Brazil’s Mercosur could still slow down the dynamic 4
Latin America is witness to one of the most impressive economic transformations and geopolitical power struggles we have seen in recent years. The market-oriented Pacific Alliance of Mexico, Colombia, Peru and Chile is prospering and increasing exports just as the much larger Mercosur is economically “sick” and facing a crisis of identity. Mercosur was never just an economic union, but also a rather protectionist Socialist block that embraced Hugo Chavez’ Bolivarian revolution. But the implosion of Venezuela’s Socialist state into a dictatorship, Argentina’s cover up of Iranian terror and large corruption scandals in Brazil have thrown Mercosur into an identity crisis. Mercosur increasingly sees the rise of an open and successful economic block as an existential threat. But the Pacific Alliance’s ability to welcome liberal and conservative member state governments may not be enough to overcome the next stage of this struggle for supremacy.
The magnitude of protectionism and inefficiency fed by well-meaning but ill-conceived wealth redistribution systems allowed corruption to grow to unprecedented proportions in Venezuela, Brazil and Argentina. The giant Mercosur block is in such an economic stagnation and political disarray, that some of the member states want to get out – When Uruguay and Argentina decided to seek closer relationships with the Pacific Alliance, Mercosur leaders were alarmed and took the rivalry to a new level. Uruguay – the most open and advanced economy of Mercosur – was always uneasy about the ideological agenda of the block, but for years Montevideo saw no chance of escaping its geographic encirclement. Interestingly, since Uruguay’s move to embrace the Pacific Alliance, the corruption scandals of Brazil are doing most harm to Pacific Alliance states, not Brazil. Argentina, historically closely aligned with Peru, may hold the key for the future geopolitical landscape of South America though.
History matters – Pacific Alliance has systematically underestimated Mercosur’s geopolitical savviness
Several Mercosur institutions and leaders have in the past characterised members of the Pacific Alliance as traitors or puppets of the USA and the West. There were even threats and efforts by Mercosur leaders to interfere in the political process of Pacific Alliance members, but the dynamic 4 (as I call Mexico, Colombia, Peru and Chile) have struggled to take this seriously and to respond coherently – Maybe to their own demise.
Pacific Alliance leaders simply relied on their economic performance, pointed to Latin unity and failed to build credible geopolitical intelligence services to better identify challenges and threats to their successful yet vulnerable alliance. Now that lack of geopolitical intelligence and exchange thereof is proving fatal. Our intelligence gathering is confirming our independent geopolitical analysis: the giant corruption scandals in Brazil will barely affect the Brazilian political process, but they are likely to throw key Pacific Alliance nations into chaos. Peru – as a logistical hub and host of the joint stock market of Mexico, Colombia, Peru and Chile – is a key target. But not the only one. Not only did large Brazilian firms infiltrate vital political institutions and sectors of Pacific Alliance economies, we see Mercosur also taking advantage of the virulent political culture in countries such as Mexico, Peru and Colombia. Why not? It is a smart strategy. These three Pacific nations still rely on more laws and law enforcement to clean up their political systems – but in the long run there are no winners and the system is not cleaner. In this respect Chile is a more advanced state – Santiago is aware that it is not virulent law enforcement that yields integrity, stability and progress. Currently Brazilian officials and business leaders are seen as determining what is released about whom and when. That staged approach spares Brazil, but has given Brasilia unprecedented influence over the destiny of many government and opposition leaders in the Pacific Alliance. Peru’s president, Pedro Pablo Kuczynski, barely survived a no-confidence vote before Christmas and his predecessors have already seen their names marred by corruption investigations.
While Mercosur looks defeated on the economic front, it is not clear how well the Pacific Alliance will survive the Odebrecht scandal. Our analysis shows that Brasilia has an interest in a weaker Pacific Alliance to gain influence over it and to gain market access at more favorable terms. The delayed massive infrastructure projects between the Pacific Alliance and Mercosur now also favor the latter. Timing is everything. The deeply ingrained protectionism and redistribution tendencies of Mercosur will infiltrate the Pacific Alliance and slow down its rise – just as Odebrecht did. On this track, Latin America is likely to make great progress in integration – presidents of Pacific and Atlantic nations in Latin America will have great projects to celebrate, but the Pacific Alliance may not be able to live up to its great potential. In an increasingly geopolitics-driven globalised marketplace great economic performance is not enough to secure survival.
It is an irony, the Pacific Alliance has a tremendous demographic tailwind of 15-20 years thanks to young and growing labor pools especially in Colombia and Peru. But what could be the 8th largest economy in the world and one of the fastest growing in the coming decade, has only a few years to “grow up” geopolitically. For their part Brazil and Argentina are making a superb use of their geopolitical capabilities – albeit in different ways. Smart nations use all their resources and assets (even size, business practices and scandals) to advance their interests. Round two goes to Mercosur.
By Christian Takushi, Macro Economist & Geopolitical Strategist, and his Team – 1 Jan 2018 – Switzerland.
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