Geopolitical Update: US exit of Iran Deal exposes Europe’s new alliances

By Christian Takushi MA UZH, 8 May 2018 – Switzerland (public release delayed by 10 days: 18 May 2018).

The United States has pulled out of the Iran Deal. This is a preliminary assessment.

Source: C.I.A.

Despite the resolute attempts by the USA to contain Iran, these efforts (we ascertain) will fail. In a way they are too little too late. The effects of the highly elaborated support by the European Union and the Obama Administration cannot be made undone. It would need a willingness to face a large scale war with massive casualties, which not even a Trump Administration can afford politically. The rise of Iran and Turkey in the Middle East is inexorable – Both will exercise more and more influence over Europe: economically, socially and religiously. Possibly militarily. Two great civilisations are back and their advance is only a matter of time. Aware of the tremendous vulnerabilities and appeasement tendencies of Europe, they smartly combine aggressive expansion with smart diplomacy.

Conservative commentators and analysts have long underestimated President Obama – they thought he achieved nothing to very little except for Obama Care. All the while President Obama was reshaping the Middle East with a formidable plan and foresight. As we ascertained, his real strategic goal was not American domestic politics – much can be reversed in America. Not so in the Middle East.

We have been expecting that the Trump Administration would try to reach a short term fix in North Korea in order to move aggressively on Iran. This, also in an effort to rally the conservative base in the rural counties and especially the suburbs. The fact that the White House announced the end to the US-Iran Deal as Secretary of State Pompeo was about to touch down in Pyong Yang to seal a Trump-Kim Summit, shows the Trump Administration is serious about preserving the Republican majority in Congress. The timing couldn’t have been more aimed at the domestic audience: Today, May 8th, the US Mid Term Elections 2018 got formally underway. Four states run primary elections: Ohio, North Carolina, West Virginia and Indiana. Trump’s staff believes that the biggest threat to America and her allies is not North Korea, but Iran. Many of Trump’s advisers still believe NATO allies would defend the USA and US interests in case of war. But the doubters are growing in numbers.

A few things consensus is overlooking or underestimating at this stage:

• The USA has not pulled out of a Treaty, the US-Iran Deal was an Agreement (that lacked Congressional approval)
• London, Berlin and Paris oppose the USA and want to stay in the Iran Deal – A bit of wishful thinking. The EU and the USA are on collision course. Tensions have been building for years, but are coming to the surface now
• The European Union and Russia are among the economies most exposed to risks emanating from the US move. The EU has not only been embracing and supporting Iran, it has also eyed it as a strategic partner and backup source of energy. Still, Russia may be able to benefit strategically from Europe’s defiance of the USA. Behind the smoke of sanctions, Germany has been building close relations with Russia. Ironically, European NATO members are embracing US arch rivals. 
• Israel is likely to be target of a missile attack by Iran. Israel is preparing for an attack on multiple fronts. Iran may be able to achieve more by letting Hezbollah and Shiite forces in Syria attack Israel. Still, the threat of an attack is often better than the attack itself. The regime in Teheran has very close allies in Germany and other Western capitals. Even in the USA
• A large number of European companies had eyed big business deals in Iran – they will be affected. Timing is not good for the European economy. The EU economy had already been giving some signs of weakness and slack. European leaders had been hailing China as their new champion & global partner and prematurely celebrated the end of America’s supremacy: For them this is a rude awakening to the reality that the USA is in many ways an unrivalled superpower. Europe likes to see herself as an equal counterpart to the USA, it is not.An untold number of political and military experts helped shape a consensus view in recent years that the USA was de facto finished as global superpower – They said a multi-polar world order is here. We kept our stance against that consensus: In recent weeks the world doesn’t seem like a multi-polar planet. Washington is in the driver seat
• The EU is a geopolitical dwarf (specially after losing Great Britain). Geopolitical power rests on both military and economic strengths. Lacking strategic foresight, European leaders have implied that, because Europe has a sizeable economy, it can force the USA to go back to the liberal globalisation course
• The EU cannot defend the Trading Routes (on which her economic wealth and way of life so much depend upon) nor can she even defend herself. By November 2015 (terror attacks in Paris) all of the continent’s strategic military divisions had been dismantled or existed merely on paper. In a state of war, it took France more than three days to effectively mobilise a mere 5’000 soldiers. The European continent resembles indeed an over-managed company, that is under-led
• For sure Europe’s sympathy for the Iranian regime is understandable. This became eloquent during the Arab Spring. All over the Middle East the EU and the Obama Administration mobilised their intelligence and military resources to destabilise and overthrow oppressive regimes, except in Iran. European capitals would not let anything ruin their growing “shared interests” with Teheran
• As the biggest geopolitical risks shift to some extent away from East Asia to the Middle East, pressure on Russia is heightened once more. A war between Israel, Lebanon, Syria and Iran would quickly pull in Russia. Moscow and Europe have lost the geopolitical initiative to the USA
• Beneficiaries – long term and in case of war? Economies with a sizeable domestic market that are less geopolitically exposed to the potential fallout of a war in the Middle East are likely to benefit: South Africa, Indonesia and India stand out. To a lesser extent Latin America would also benefit

The timing of the overlapping events could allow the USD to get stronger, in particular against the EURO. It may also put a cap on the potential rise of US Bond Yields. We also ascertain that the USD and the YEN might be quietly in the process of partially replacing the Swiss Franc as Safe Haven currency. That is if the current de-escalation in North East Asia is lasting. The bigger the risk of a War or Clash of systemic proportions, the larger the dominance of the USD as ultimate Safe Haven Currency. Although the CHF should maintain its role, Switzerland is geopolitically increasingly a de facto “hostage” of its Bilateral Agreements with the EU. Thus, as Swiss independence and neutrality fade away over time, markets may increasingly treat the Alpine nation as a quasi EU member state.

(Geopolitical Macro Analysis is not only highly complex, geopolitical and economic assessments can change rapidly upon new information or data. The assessment above is based on current information and our independent analysis)

We see the overlap of geopolitical tensions in the Middle East with a potential for military action as bad news for Europe. Part of her inexorable Security Deterioration of the old continent. Furthermore, we continue to expect a major war in the Middle East and also a Peace Treaty between Israel and Arab states. These are scenarios with robust and growing likelihoods.

We will be closely monitoring these developments and reporting to you as soon as our analysis deviates from consensus.

By Christian Takushi MA UZH, Macro Economist & Geopolitical Strategist. 8 May 2018 – Switzerland (Public release was delayed by 10 days: 18 May 2018)

Note: None of our analyses should be interpreted or construed as an investment recommendation.

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