Re-engaging an ancient empire

Iran was the oldest Empire in world founded by Cyrus the Great around 600 BC. This imperial inheritance laid the foundations for successive empires that followed i.e. the Parthian, Sasanian and Safavid dynasties. The current Iranian state continues in core form to be geographically common to the erstwhile empires with a landmass greater than UK, France and Germany combined extending from Caspian to the Indian Ocean and running concurrent to the most important energy sea-lane (Hormuz strait) in the south. It has the largest natural gas reserve and the 4^th largest oil reserve in the world.

The political influence of the state extends beyond borders into Syria (Al-Assad regime), Lebanon (Hezbollah), Iraq (Shiite government and militias) and Yemen (Houthis). A continuous series of imperial power develops among the people and bureaucracy a mindset and maturity to manage complex situations almost at a sublime level. And, unlike the autocracies that govern the artificial Arab states, Iran has a far more institutionalized form of governance with deep cultural and bureaucratic heritage which allows it the dynamism. Shia Iran is partially democratic and far more sophisticated, enlightened, and Westernized than benighted, culturally sterile Wahhabi Saudi Arabia - Kaplan. For example, Iran exports its ideology and coalesces these groups into extensions of the regime; Saudi Arabia also expounds its Wahhabi ideology but is unable to exercise even a partial influence amongst its supporters.

This is the nation that will come out of the cold once the nuclear deal is negotiated and that India has ignored. For most parts of the cold war there has been limited convergence in India and Iranian interest. However, the principal points of convergence over the last few decades has been the joint cooperation to the Northern Alliance in Afghanistan, energy imports and helping Iran build Chabahar port to allow access to Afghanistan and Central Asia. But once the US-led sanctions tightened, India withdrew.

Unlike India’s relationships in South-east Asia which are driven more by economic logic and carries limited political burden (despite them wanting India to balance China), Iran is important from a geopolitical perspective. India’s non-aligned history with limited maturity in playing great power politics has kept it away from the complex quagmire of the Middle East. As an aspirational power, we need to have the ability to play the game between the Arabs, Turks, Persians and the Israelis on the one side and the more important from India’s perspective the dynamic in the Iran-Pakistan-Afghanistan theatre. This is our neighborhood and one where we have had cultural and economic relationships for thousands of years.

Global power players understand the situation well. The Russian foreign minister walked out of the meetings as he saw the last round draw to a close to ensure delays and potential derailment and immediately after the last round of talks concluded offered the S300 missile systems. Iran not into the international fold also plays well with the Russian and the Chinese as it is a source of significant US distraction. The Chinese have already placed massive bets in Pakistan, have limited historical relation with Iran. For the US which is already coordinated with Iran on Islamic state, it is critical to engage Iran. With the fall of the totalitarian regime of Saddam Hussain, the middle-eastern balance of power collapsed. A nuclear Iran would trigger ambitions in Saudi Arabia and Turkey. A ‘cooperative’ Iran allows tremendous latitude for Americans i.e. stabilizing Iraq and Syria, while restoring the regional balance of power.

The Indian-Iranian equation can build significant commonalities in energy, infrastructure and defense. I had written in December 2014, “But with our old relationship with Iran and our significant interest in Middle Eastern energy, no policy is a 'non-answer'.” It is already past time when India should have started doing the ground work.

European Gauge

In 1948, US implemented The Marshall Plan to aid Europe, in which it gave $13 billion in economic support over 4 years to help rebuild European economies (remove trade barriers and modernize industry) after the end of World War II. However, the first aid went to Greece and Turkey in January 1947 under the Truman Doctrine, which were battling against communist expansion, even before the program was formally initiated. From then till the end of the cold war US continued to provide defense support to Greece. Post the collapse of the Soviet Union, the single currency came into place in a few years. The threat of Russia had dissipated and germanization of EU monetary policy allowed massive increases in spending capacity of EU countries, especially high inflation southern countries. This resulted in low interest rates for countries like Greece and Spain which had very different economies. And, what further depressed rates was the massive Chinese production increases at dollar pegged rates.

The European Coal and Steel Community to the current EU were essentially a political response to the repeated wars between France and Germany and was designed to economically embed Germany in Europe through market access. This market access with no exchange rate adjustment mechanism has resulted in the industrial engine of Germany, the 4^th largest economy in the world, building a ~8% current account surplus. Current account surplus is nothing but a manifestation of incremental saving over investments and lack of internal demand and raw material access has been a critical element of German geopolitical insecurity.  

With the European economy slowing substantially and inflation declining (and now aided by energy prices) post the global financial crises; ECB adopted various measures to keep the system on life support and more recently initiated quantitative easing (essentially financial asset purchases). The resultant impact is a substantial decline in the Euro, currently at 1.09 to USD from 1.4 levels a year back and expected to decline to 0.9-0.85 in the next 2 years. The real yields in Eurozone have already declined below Fed QE levels (10 yr bunds at 0.17%, France at 0.47% vs US at 1.19% and Japan at 0.35%). While this will play out in terms of helping export sensitive countries like Germany or Italy in the international markets and in terms of second order wealth effects due to increasing equity prices across the EU together which hopefully will lift investment, it however does not directly allow for adjustments within EU. The Euro-area countries also continue on their path of reducing fiscal deficits (e.g. Spain 5.6%, France 4.4%) or debt deflation and wage growth has stalled. In essence two aspects impact the Eurozone as always – (1) the overwhelming weight of the cost-effective German export engine; and (2) lack of adequate demand within Germany.   

The economic pressure has resulted in the rise of right wing political parties across the European Union like Podemos in Spain or the victory of Syriza in Greece. Along with the economic pressure, the geopolitical pressure of the European Union has multiplied with the reemergence of Russia (Ukraine conflict and increasing intensity of military exercises) and collapse of order in the middle-east, all on the eastern border of Europe.

The nation acutely reflecting the multiplicity of these pressures is the ancient land of Greece, birth place of western civilization, sitting on the south-eastern border of Europe.

Greece will likely be the first pin to fall under the economic constraints created by the Eurozone. As after WW II, Russia is awaiting this moment where it could have a toe-hold in the Mediterranean. This may also result in a very similar response where EU or the US steps in to prevent the same under a national security paradigm. But this response will alter the complexion of EU. Grexit will raise the gauge pressure to critical levels and EU which in many ways was cajoled together by the US as a geopolitical response post World War II, will be taking a step towards the known unknown…national interest first but path uncertainty may finally make it otherwise.

“Europe and the euro zone have no reason, rationally, to push Greece out of the euro. But this is a system in which many parties, many countries, many governments, many electorates participate and we could have events which, rationally, are not controllable.” – Greek Politician

“The Europeans are still human, and they will encounter terrible choices like those that others face and that they have faced in the past. They will have to choose between war and peace, and as in the past, they will at times choose war. Nothing has ended. For humans nothing significant is ever over.” George Friedman, Flashpoints, 2015