lunes, mayo 16, 2016

VACACIONES MAYO 2016

|

VACACIONES MAYO 2016

Jueves 28 de Abril del 2016

Queridos amigos,



Les escribo estas líneas con motivo de mi próximo viaje, el que me tendrá ausente de la oficina y de nuestras lecturas cotidianas, desde el lunes 2 hasta el lunes 23 de Mayo próximo, que me reintegro a mis labores.


Durante estos días no tendré acceso regular al Internet ni a mis correos.
  
  
En los últimos meses la situación económica y financiera internacional se ha seguido deteriorando aun mas, con el consiguiente aumento creciente de la volatilidad de los mercados financieros, según lo ya previsto en mi carta de Octubre pasado, replicada en algunos párrafos líneas más abajo para mayor abundancia, impactando duramente a los países emergentes, las monedas, el petróleo y los precios de los "commodities", el fortalecimiento notable del dólar norteamericano, típico de las épocas de crisis, y una retracción cada vez más marcada del crecimiento del producto mundial, ahora ya reconocido por todos los bancos centrales, lo que nos coloca claramente bajo la sombra del temor de una potencial deflación y de la recesión global, cada vez más inevitable.  
 
En los últimos dos meses el anuncio de una política de aumento de intereses menos agresiva que la anunciada previamente, por parte de la FED, ha debilitado ligera
y temporalmente al dólar, e impactado transitoriamente de manera positiva a los precios de las materias primas y los mercados de acciones.
 
La pregunta es cuanto tiempo puede durar esta situación en una economía global manipulada descaradamente por los bancos centrales y en franco camino de deterioro, con el continuo crecimiento de la desigualdad de los ingresos y una clase media cada vez mas disconforme, como lo reflejan las coyunturas políticas preocupantes de los últimos tiempos, tanto en los Estados Unidos de Norteamérica, como en Europa y el resto del mundo. La enorme volatilidad de los mercados financieros, que pensamos será cada vez mayor, es un síntoma de esta situación insostenible a mediano y largo plazo. 
El artículo de hace unos meses de Doug Nolan, "The Unwind", al que pueden acceder mediante el "link" anterior, describe claramente la situación precaria de la economía global, los mercados financieros, las deudas y el crecimiento económico mundial, por lo que me abstendré de mayores comentarios.  También pueden acceder al  articulo de Doug Nolan, "New World Disorder".  
 
La reciente creciente y notable volatilidad de los mercados financieros, las dudas hamletianas de la Reserva Federal sobre las tasas de interés y la reciente volatilidad de las bolsas, son solo una pequeña muestra de la descomposición de las economías y los mercados globales.

En realidad no podía ser de otra manera, si tenemos en cuenta que no se ha hecho nada en los últimos años para reparar los profundos desequilibrios estructurales en los fundamentos de la economía global, sino que más bien, por el contrario, se ha seguido "maquillando" por parte de los bancos centrales la insostenible situación económica y financiera global, profundizando los desequilibrios y la inestabilidad vía el constante crecimiento de las deudas, aumentando las ineficiencias y dilatando el necesario ajuste. El crecimiento estructural de la economía global es cada vez más frágil, dudoso e insostenible.


Hasta la crisis del 2000 y luego de la del 2008, ahora así llamada la Gran Recesión, la demanda global había sido “subvencionada” por un sistema financiero manipulado e intervenido, creando una demanda y una economía global ficticia, una recuperación así llamada "subprime", liderada por la FED mediante un crecimiento desproporcionado de las deudas, imposible de auto-sustentarse en un crecimiento de la economía real en el largo plazo. 


Deuda, deuda y más deuda, parece ser el mantra de la FED.

Desde entonces, la FED y el resto los bancos centrales de todos los países más importantes del mundo se han negado y se siguen negando a reconocer esta realidad, aceptando el inicio de un ajuste inevitable y estructural, regresando a un nivel real de la economía global de alguna manera manejable. Aún siguen abocados al esfuerzo de una gran represión financiera, manipulando e inflando irresponsablemente los mercados financieros vía una política monetaria de emisiones inorgánicas de papel moneda sin respaldo y muy bajas tasas de interés, o hasta tasas de interés negativas en muchos países del primer mundo. Actualmente se estima que existen aproximadamente 7 trillones de dólares de inversiones en tasas de interés negativas.

Las deudas de consumidores, empresas y gobiernos, eran y son insostenibles.

Por ello creemos que los bancos centrales no aumentarán de "motu propio" las tasas de interés de manera importante a corto plazo, salvo que este aumento provenga final y sorpresivamente de una crisis generada por la desaparición de la confianza de los inversionistas globales en los mercados financieros. Mas bien los bancos centrales seguirán, en la medida de lo necesario, con su política de seguir emitiendo e inyectando moneda sin respaldo a los mercados, bajando las tasas de interés a niveles aun mas negativos e interviniendo los mercados de capitales mediante compras de bonos y de acciones, distorsionando cada vez mas los precios de los activos financieros en todo el mundo.

Inmediatamente sus deudas se volverían obviamente impagables y la crisis que tanto han tratado de evitar reconocer, sobrevendría inevitable.

Solo para mencionar al país con la economía más importante, la deuda de los Estados Unidos de Norteamérica ha crecido por encima de los 18 trillones de dólares, a más del 100% de su PBI. Y si incluimos las deudas contingentes internas, como el Seguro Social y los Fondos de Pensiones, algunos analistas calculan que la deuda norteamericana podría llegar a sumar entre los 80 a 120 trillones de dólares, es decir, entre 5 a 7 veces el producto bruto anual. Y en aumento.

Para un análisis detallado del desarrollo de esta problemática y la verdadera situación actual, ver los artículos del blog, aquí, aquí y aquí.

Esta situación se ha seguido agravando en los últimos años y es insostenible en el mediano y largo plazo.  (ver articulo)

Para evitarlo, es que los bancos centrales han tenido que esforzarse en mantener ficticiamente una apariencia de normalidad en el "statu quo", inyectando cantidades innombrables de papel moneda sin respaldo a los mercados financieros y reducido las tasas de interés a niveles nunca vistos por largo tiempo, desde que la historia económica recuerda. (QE1, QE2, QE3, Q4, Abenomics, China, etc….)

Todo ello nos hace presumir que todo ello se lleva a cabo por el fundamentado temor a perder el control del esquema Ponzi mundial, que es lo que son ahora la economía global y los mercados financieros, y por ende se derrumbe el castillo de naipes enfrentando de golpe un ajuste económico enorme y hasta la posibilidad de una revolución social incontenible, guerras, etc.

El hecho es que el esfuerzo de política monetaria intervencionista llevada a cabo por la mayoría de los bancos centrales del mundo, en los últimos 15 años, más intensa y desproporcionadamente desde los últimos siete años, además, ha producido la transferencia más importante de riqueza que se recuerda en la historia, de manos de los pensionistas y los ahorristas, hacia las clases privilegiadas y los bancos. 

Mas importante todavía, se ha distorsionado y manipulado fundamentalmente las reglas de la economía del libre mercado con consecuencias funestas y aun impredecibles en el mediano y largo plazo para los consumidores e inversionistas del mundo, incrementando la locación  ineficiente de los recursos de inversión, además de multiplicar el costo de la inevitable implosión de los mercados financieros, tanto de las acciones, como de los bonos y otros instrumentos de inversión financiera.

Todo esto para no mencionar a los derivados financieros, estimados por algunos analistas en más de 1 cuatrillón de dólares (1000 trillones de dólares),  que se ciernen como una espada de Damocles, sobre todo el sistema financiero y económico internacional.

El mismo FMI ha advertido hace ya unos meses de la posibilidad que la economía global está entrando a un periodo de "stagnación" y a una probable nueva recesión, con las consecuencias que ello implicaría. (ver articulo) Y recientemente ha vuelto a reducir su estimado de crecimiento para la economía global de 3.6% a 3.2%. No nos extrañaría que estos estimados se sigan reduciendo en el futuro cercano, especialmente si tenemos noticias negativas del desarrollo de la economía China, en la que algunos analistas esta comenzando a prever un "hard landing" y de la enorme deuda interna de la economía China, influenciando negativamente de manera importante  a los mercados financieros globales.

Obviamente estos organismos no pueden decirnos toda la verdad. Ello sería propiciar ellos mismos el adelanto inevitable del descalabro global, el caos y el ajuste sin anestesia, con resultados imprevisibles. 

La pregunta de fondo es ¿hasta cuándo se podrá o podrán mantener esta realidad bizarra?
Y eso nadie lo puede responder con seguridad. La confianza de los inversionistas en los mercados financieros es la verdadera incógnita.

Por ello ahora tenemos que seguir preguntándonos seriamente, ¿Cuál de todos los potenciales "cisnes negros", conocidos o no, que hoy se ciernen sobre la economía global ,y que son muchos, económicos, sociales y geopolíticos, podrían ser el detonante de la nueva catástrofe?

Solo la historia nos responderá a esta crucial pregunta.


Por ahora, podemos especular que las próximas elecciones norteamericanas en Noviembre próximo son y serán un factor de gran importancia para el comportamiento de la FED, manipulando los mercados lo mejor posible, para influenciar de manera  positiva a la administración saliente, o dicho de otra manera, para evitar perjudicarla lo mayor posible, con un ajuste enorme y anticipado de las grandes incoherencias en la que se encuentra la economía norteamericana y la global como consecuencia de dichas intervenciones de los bancos centrales, en especial de la FED. 

Mientras tanto, en medio de este mundo bizarro, tenemos que insistir nuevamente y más que nunca, que la experiencia y la prudencia, el análisis y la inteligencia, la vigilancia y la paciencia, son los socios más importantes en las decisiones de políticas y estrategias de inversión a corto y mediano plazo.

En un cambio importante de ciclos como en el que pensamos que estamos envueltos hoy día, y en el que más allá de lo circunstancial, el pasado y el futuro se bifurcan y se oponen, los riesgos para los inversionistas son profundos. (ver articulo)

Con estas  anotaciones y advertencias que espero les sean de utilidad, me despido de Uds. con un cordial abrazo hasta el regreso a mis actividades, Dios mediante, a inicios de la tercera semana de Mayo próximo, cuando estaré nuevamente a su gentil disposición.

Gonzalo

PD. Para leer los artículos pueden subscribirse directamente entrando al blog:  www.gonzaloraffoinfonews.com


How to Pull the World Economy Out of Its Rut

Larry Summers warns of “secular stagnation,” a term from the Great Depression.

By Peter Coy


Crazy things are happening in the world economy. In Europe and Japan, interest rates have turned negative, something long thought impossible. In the U.S., workers’ productivity is improving at the feeblest five-year rate since 1982. China is a confusing welter of slumping growth and asset bubbles.
Through it all, Federal Reserve Chair Janet Yellen practices the central banker’s art of draining the drama from any situation. She insists that conditions are returning to normal, albeit slowly. Her favored approach, “data dependence,” is nonpredictive and noncommittal, like finding your way in the dark by pointing a flashlight at your toes.
Lawrence Summers, the Harvard economist who almost got Yellen’s job, has no patience for such patience. Since losing out to Yellen in 2013, he’s been jetting around the world—from Santiago to St. Louis to Florence, Italy—to argue that the world economy is in much worse shape than central bankers understand. Focusing on monetary policy alone, he says, they’re doomed to fall short of reviving growth. They need to reach out to the governments they work for, he argues, and insist on strong fiscal stimulus in the form of infrastructure spending and the like. As an intellectual brawler from way back, he’s in his element.
The jury’s still out on Yellen vs. Summers. Boring does not equal wrong, and provocative does not equal right. If the U.S. economy heals nicely over the next few years under business as usual, Yellen’s incrementalism will look smart. But the longer things stay weird, the more Summers appears to be onto something.
“My sense is that if Larry’s hypothesis is true, it’s a total game changer. It will affect how we think about macroeconomic policy for the next several decades,” says Gauti Eggertsson, an Iceland native who worked in the Federal Reserve System for eight years and is now a macroeconomic theorist at Brown University. In November, after Summers presented his ideas at the Peterson Institute for International Economics, its president, Adam Posen, himself a former policymaker at the Bank of England, blogged that “all of us in the profession have a lot of work to do” to respond to the “disturbing questions” Summers raised.

System for eight years and is now a macroeconomic theorist at Brown University. In November, after Summers presented his ideas at the Peterson Institute for International Economics, its president, Adam Posen, himself a former policymaker at the Bank of England, blogged that “all of us in the profession have a lot of work to do” to respond to the “disturbing questions” Summers raised.
For economic policymakers, the most disturbing question is why global growth remains paltry and uneven. The annual growth rate of gross domestic product in the U.S. in the January-March quarter was just 0.5 percent. The euro zone was stronger than the U.S., at 2.2 percent; Japan, which has been flipping in and out of recessions for a quarter century, shrank 1.1 percent. Deflation once seemed to be a strictly Japanese problem—now it’s a worldwide threat. Pessimism about growth prospects is reflected in low forecasts for long-term interest rates. The annual yield on German 10-year notes is only 0.13 percent.
It wasn’t obvious in the summer of 2013, when President Obama was choosing between Yellen and Summers, that Summers would turn out to have such out-of-the-box ideas. Obama said that “when it comes down to their basic philosophy on the future of the Fed,” the differences between the candidates were so small “you couldn’t slide a paper between them,” according to Democratic Senator Dick Durbin of Illinois, who attended a meeting with the president. Both were highly credentialed—she as a longtime Fed official who was a labor economist at the University of California at Berkeley’s Haas School of Business; he as Treasury secretary under Bill Clinton, former Harvard University president, and former head of Obama’s National Economic Council. If anything, Yellen seemed more likely to be an activist Fed chair and “would probably be more committed to keeping stimulus in place until the economy was definitely recovered,” Michael Feroli, chief U.S. economist at JPMorgan Chase, said at the time.
But in November 2013, after Yellen was chosen but before she replaced Ben Bernanke as chair, Summers went to the International Monetary Fund in Washington and raised the specter of “secular stagnation,” a term coined in the Great Depression by Harvard economist Alvin Hansen, who lamented “sick recoveries which die in their infancy, and depressions which feed on themselves and leave a hard and seemingly immovable form of unemployment.” “Secular” is econospeak for long-lasting, as opposed to cyclical. Hansen’s warnings about secular stagnation seemed to be disproved when U.S. growth accelerated in World War II and then remained strong after the war stimulus ended.
For Summers, bringing the idea of secular stagnation back into the academic debate was like putting on a moldy old coat from Grandpa’s attic. But revive it he did. “Now, this may all be madness, and I may not have this right at all,” he told the IMF audience, before coming around to saying, “we may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back below their potential.”
In other words, Summers claimed world economies could be so imbalanced that even zero interest rates would be too high—and for many years, not just briefly as economists had believed. The speech lit up the Twitterverse and drew heavy news coverage. Journalists’ attention has waned a bit, but Summers has kept developing the concept on his blog, in his Financial Times columns, in speeches, and in papers written with other economists, including Brown’s Eggertsson, who’s translated Summers’s thinking into the formal language of general-equilibrium economics. The real world is helping Summers’s case. The longer stagnation lasts, the more it looks secular rather than just cyclical. “I’ve come to a growing conviction” that the theory is right, he says.
To be clear, Summers is challenging much more than when and how much the Fed should raise interest rates. True, he criticized it for voting in December to lift the federal funds rate by a quarter of a percentage point after seven years at just more than zero. But that’s an ordinary argument over how high to set the monetary thermostat.

 These are weird times. Growth is weak. Interest rates are negative. Is there a way out?

Summers’s deeper argument is that world growth is stuck in a rut because there’s a chronic shortage of demand for goods and services and a concomitant excess of desired savings. The U.S. and other industrialized nations tend to save more as their populations age, he says. Meanwhile, growing inequality puts a bigger share of the world’s income in the pockets of rich people; they can’t spend everything they make, so they save it. The investment that would ordinarily soak up those savings is falling short. That’s partly because the new economy is asset-lite: Companies such as Uber and Airbnb prosper by exploiting assets (cars and houses) that already exist. Software, which is pure information and doesn’t require the construction of factories, accounts for a bigger share of the economy. Slow growth in output and productivity reduces investment as executives lose faith in the payoff from capital spending.
Exhibit No. 1 in Summers’s case: Interest rates have been trending down for 30 years, even after taking into account the decline in inflation. The interest rate, like any price, reflects supply and demand. It’s fallen because the demand for loans is weak and the supply of loans from savers, who have extra cash to deploy, is strong. It used to be thought that interest rates couldn’t go below zero, but the Bank of Japan and the European Central Bank, among others, are so desperate to kindle growth that they’ve pushed some rates below what used to be called the “zero lower bound” into negative territory.
Despite opposing the Fed’s December hike, Summers continues to worry that an extended period of ultralow and even negative rates will cause bubbles in assets like stocks and housing, as desperate investors chase after higher returns. He says fiscal policy needs to play a much bigger role than it has. How? On the investment side, he favors government spending to fix America’s dilapidated roads and bridges, combat global warming, and improve education—big, expensive projects that would provide value while soaking up excess savings. A favorite line: “The United States right now has the lowest infrastructure investment rate that it has had since the second world war.” On the savings side, he favors, among other things, changing the tax code to get more money into the hands of lower-income and middle-class families who’d spend rather than hoard it.
This, of course, sounds a lot like the agenda Obama has been pushing unsuccessfully for the past eight years. “To me, it looks like an opinion masquerading as a theory,” Arnold Kling, a former Fed economist, wrote on his blog in 2014. Congress shows no interest in any measure that smells like fiscal stimulus—especially now, with lawmakers hiding under their desks until after the election. Summers responds that his prescription is separable from his diagnosis; conservatives might prefer to fix the problem with, say, export promotion, the elimination of wasteful regulations, and big tax cuts to induce companies to build factories.
Summers has been getting more of a hearing from central bankers around the world. His message to them: Think bigger.

The Fed traditionally restricts itself to managing the “business cycle”—fluctuations of output around a supposed long-term upward trend. Summers questions the very existence of a business cycle, an inherently optimistic concept implying that what goes down must come up. When output declines, his research shows, it never quite gets back to its original trajectory. Productive capacity suffers lasting damage, in part because laid-off workers lose skills. That makes it imperative to avoid a recession whenever possible. Yet Summers says the odds of a U.S. recession in the next three years are “significantly better than 50-50.”
Lately, he’s added the idea that secular stagnation is infectious, spreading between countries by trade and investment flows. A stagnant country can try to cure its unemployment problem by pushing down the value of its currency and running a big trade surplus; that worsens unemployment in its trading partners, which suffer trade deficits, according to recent work by Eggertsson, Summers, and others. Beggar-thy-neighbor trade theory, in other words, is alive and well.
Summers argues that central bankers should stop focusing on the business cycle, stop jealously guarding their independence, and work with other institutions to solve the deep problems that have gotten the economy into this condition. “Central banks like to say … ‘Well, yeah, productivity growth’s a problem. That’s not our problem, though.’ ‘Inequality’s a problem. That’s not our problem, though,’ ” Summers said in a question-and-answer session after his Peterson talk. “I would suggest that no major central banker in the world is seriously engaged with this as an issue.”
or21_new_B_02
Illustration: 731


One big fact is hard to square with Summers’s idea that the economy suffers from a shortfall in demand—namely, the 5 percent U.S. unemployment rate. If Americans spend a lot more, as he desires, there might not be enough workers available to handle the demand. The result could be a bidding war for talent, climbing wages, and unacceptably high inflation.
Princeton’s Alan Blinder, a former Fed vice chairman, is one of a group of economists who argue that economic stagnation emanates from weak supply, not weak demand. “When I go to sleep at night worrying about the economy, I’m never worrying that Americans won’t spend enough,” he says. Robert Gordon of Northwestern University similarly says growth is impeded by a lack of innovation—a supply-side explanation.
Summers, no surprise, has an answer to those objections. He says there may be more slack in the labor market than is sometimes recognized. And he says the demand-side and supply-side explanations for stagnation aren’t mutually exclusive: Weak demand growth can itself damage the supply side of the economy—i.e., the people and machines who make stuff. Unemployment causes workers’ skills to atrophy; companies stop investing in equipment and software.
Strengthening demand can turn that vicious circle around and gradually raise the economy’s productive potential, Summers says. Far from crowding out private investment, government spending could induce more of it.
When interest rates can go negative, all of the verities in economics are up for grabs. Economists joke that the questions on their doctoral exams haven’t changed in 50 years, but the answers have. The joke “captures a truth,” Summers says.
He seems to relish being in the midst of the upheaval. “That’s the effect of living backwards,” the White Queen told Alice in Wonderland. “It always makes one a little giddy at first.”


Emerging Markets Should Go for the Gold

CAMBRIDGE – Are emerging-market central banks overweight in dollars and underweight in gold? Given a slowing global economy, in which emerging markets are probably very grateful for any reserves they retain, this might seem an ill-timed question. But there is a good case to be made that a shift in emerging markets toward accumulating gold would help the international financial system function more smoothly and benefit everyone.
Just to be clear, I am not siding with those – usually American far-right crackpots – who favor a return to the gold standard, in which countries fix the value of their currencies in terms of gold. After all, the gold standard’s last reign ended disastrously in the 1930s, and there is no reason to believe that a return to it would turn out any differently.
No, I am just proposing that emerging markets shift a significant share of the trillions of dollars in foreign-currency reserves that they now hold (China alone has official reserves of $3.3 trillion) into gold. Even shifting, say, up to 10% of their reserves into gold would not bring them anywhere near the many rich countries that hold 60-70% of their (admittedly smaller) official reserves in gold.
For some time, the rich countries have argued that it is in everyone’s collective interest to demonetize gold. Sure, we hold a lot of gold, these countries say, but that is a vestige of the pre-World War II gold standard, when central banks needed a stockpile.
Indeed, back in 1999, European central banks, seeing no reason to keep holding so much gold, entered a pact to start reducing their stocks in an orderly fashion. The sales made sense at the time for most of the participating countries: The real backing for their debt was the tax reach of their governments, their high levels of institutional development, and their relative political stability. The 1999 pact has been revisited periodically, though since the most recent edition in 2014, most rich countries have taken a long pause, still leaving them with extremely high gold reserves.
Emerging markets have remained buyers of gold, but at a snail’s pace compared to their voracious appetite for US Treasury bonds and other rich-country debt. As of March 2016, China held just over 2% of its reserves in gold, and the share for India was 5%. Russia is really the only major emerging market to increase its gold purchases significantly, in no small part due to Western sanctions, with holdings now amounting to almost 15% of reserves.
Emerging markets hold reserves because they do not have the luxury of being able to inflate their way out of a financial crunch or a government debt crisis. Simply put, they live in a world where a large fraction of international debt – and an even larger share of global trade – is still denominated in hard currency. So they hold reserves of such currencies as a backstop against fiscal and financial catastrophe. Yes, in principle, it would be a much better world if emerging markets could somehow pool their resources, perhaps through an International Monetary Fund facility; but the trust required to make such an arrangement work simply is not yet there.
Why would the system work better with a larger share of gold reserves? The problem with the status quo is that emerging markets as a group are competing for rich-country bonds, which is helping to drive down the interest rates they receive. With interest rates stuck near zero, rich-country bond prices cannot drop much more than they already have, while the supply of advanced-country debt is limited by tax capacity and risk tolerance.
Gold, despite being in nearly fixed supply, does not have this problem, because there is no limit on its price. Moreover, there is a case to be made that gold is an extremely low-risk asset with average real returns comparable to very short-term debt. And, because gold is a highly liquid asset – a key criterion for a reserve asset – central banks can afford to look past its short-term volatility to longer-run average returns.
True, gold does not pay interest, and there are costs associated with storage. But these costs can be managed relatively efficiently by holding gold offshore if necessary (many countries hold gold at the New York Federal Reserve); and, over time, the price can go up. It is for this reason that the system as a whole can never run out of monetary gold.
I don’t want to create the impression that by shifting into gold, emerging markets would somehow benefit at the expense of advanced economies. After all, the status quois that advanced-economy central banks and treasuries hold vastly more gold than emerging markets do, and a systematic shift by emerging markets will bid up its price. But this is not a systemic problem; and, in fact, a rise in gold prices would close part of the gap between demand and supply for safe assets that has emerged due to the zero lower bound on interest rates.
There has never been a compelling reason for emerging markets to buy into the rich-country case for completely demonetizing gold. And there isn’t one now.


Erdogan's Big Prize

Europe At Odds over Visa Freedom for Turks
. 

Brussels is likely to open the door for visa-free travel to Europe for Turkish citizens, even if Ankara doesn't fulfill all the conditions imposed. Many in Europe are concerned that it could trigger a wave of new refugees from Turkey itself. By SPIEGEL Staff

Until late in the evening, the visit had gone unusually harmoniously. The meeting between German Chancellor Angela Merkel, EU Council President Donald Tusk and EU Commission Deputy President Frans Timmermans with Turkish Prime Minister Ahmet Davutoglu in Gaziantep felt almost like a family get-together. Davutoglu even brought a cake for Tusk, who had celebrated his birthday the previous day. But at 10 p.m., the conversation turned to the EU liberalization of its visa policy for Turkey. Timmerman asked for understanding: "We as the Commission have to prove that you have fulfilled all the conditions," he said. Otherwise there would be problems with EU member states and the European Parliament.

It was the moment that Davutoglu's expression suddenly darkened. "We have delivered," he had told the group earlier. "The number of refugees has gone down and we now expect the EU to deliver on its commitments and that visa liberalization will happen."

Ankara's logic is simple: Given that Turkey is solving Europe's refugee problem, the country's 79 million people must be provided with visa-free travel to the EU, even if Ankara hasn't yet fulfilled all 72 of the conditions set out by Brussels. That's the price. Europe must turn a blind eye.

It's likely that it will do so. On Wednesday, the European Commission is expected to make a decision on whether to move forward with the visa liberalization process and there is much to suggest the EU executive will decide in favor. During a meeting on Wednesday of this week, members of the Commission agreed that if Turkey fulfilled as many of the 72 conditions as possible between now and then, that it will make a favorable recommendation. Sources with knowledge of the Commission proceedings said the number of outstanding conditions would have to be single digit in number. "The count will take place on Wednesday." So far, Turkey has met around 50 of the demands.

The deal with Turkey, negotiated by Chancellor Merkel, envisions the introduction of visa-free travel for Turkish nationals by the end of June if all goes according to plan. At that point, any Turkish citizen will have the right to travel to the EU and remain here for up to 90 days at a time without needing a visa. If it approves the provision, this would mark the first time the EU has ever made such a recommendation without requiring that all the conditions first be met. In other words, Turkey is in fact being given allowances, despite all claims to the contrary. In March, Merkel had assured that, "The Turks must fulfill all conditions, there will be no exceptions." EU Commission President Jean-Claude Juncker seconded her in April: "The criteria will not be watered down in the case of Turkey." But so far it hasn't yet.

For Turkish President Recep Tayyip Erdogan, visa-free travel is the big prize. To secure it, he has even threatened to allow the refugee deal with the EU to collapse, meaning that Turkey would no longer prevent refugees from making the journey across the Aegean Sea to Greece and the EU. He gave Europe a choice: either the refugees or visa-free travel.

A Wedge Through Europe?

It's a move that has the potential to drive a wedge through Europe, and to ruffle domestic politics in Germany. Many European leaders fear any concessions made by Europe to Turkey could play into the hands of the right-wing populists. The Alternative for Germany (AfD), the Freedom Party of Austria (FPÖ) and France's Front National could take advantage of the issue in order to stir up sentiment against Muslim visitors from the country. It could also jeopardize the current fragile peace between Merkel and Horst Seehofer, the governor of Bavaria and head of the Christian Social Union (CSU), the Bavarian sister party to the Christian Democratic Union. Seehofer has been one of the most powerful and outspoken opponents of Merkel's refugee policies.

"People have woken up to the issue of visa-free travel," warns Stephan Mayer, of the CSU, who is also the domestic policy spokesman for the joint CDU-CSU parliamentary group in the Bundestag. "It's an issue that worries a lot of people. I think there's a threat that the AfD will try to take advantage."

Erdogan himself views the dispute over visa-free travel as a test of his own power. And he's certain that he has the better cards in this game of poker than Merkel and the EU. "The European Union needs Turkey more than Turkey needs the European Union," he said in Ankara earlier this month.

Meanwhile, EU Enlargement Commissioner Johannes Hahn of Austria has admonished Turkey to "negotiate, not threaten."

But the Turkish president has never been shy in confrontations with his opponents -- be they the political opposition, the military or the secular opposition. Toughness is his recipe for success. His unwillingness to compromise also helped catapult him to the presidency. This is not one for the kinds of face-saving solutions or ornate compromises that are common in the EU.

For years, the EU had treated Turkey like a supplicant. And now Erdogan is seizing his opportunity to chasten Europe's leaders, Merkel first and foremost. There have been plenty of examples, too. In Dresden, the director of the Dresdner Sinfoniker orchestra has claimed that Turkey's delegation to the EU tried to strong arm the European Commission to defund a concert planned for Saturday commemorating the 100th anniversary of the Armenian genocide. Then there is the case Turkey is bringing against German satirist Jan Böhmermann for insulting Erdogan. Finally, there's Erdogan's battle against journalists who are critical of the Turkish leader. This year again saw certain foreign journalists prevented from remaining in the country. All of these incidents clearly demonstrate that Erdogan isn't ready to adjust to European standards. And now the president of the Turkish national parliament, Ismail Kahraman, is calling for an Islamic constitution for the secular country. In Turkey, said Kahraman, a member of Erdogan's Justice and Development Party (AKP), "there is no place for secularism."

The question now is how far Europe is willing to go in its self-denial. It's likely the European Commission will provide an answer next week. "It's not possible for Turkey to fulfill the criteria 100 percent. We know that," says one German official with knowledge of the negotiations. The official says the situation will not ultimately be black or white -- it will be gray. "It's like when you tell your kids that you will take them on vacation if they great straight A's," says another EU diplomat. "Are you really going to cancel if they get a B?"

But what if there is also an F or two in there? One of the points of contention is a Turkish anti-terror law so broadly defined that it makes it possible for Erdogan to go after anyone he decides to label as a terrorist, even journalists who report critically about him. Inside the European Commission, some believe this law gives a "blank check" to Turkish security agencies to do as they please. Parts of Turkish law are also inconsistent with the European Convention on Human Rights.

Even in Ankara, many doubt that anything will change fundamentally in the coming weeks.

Ertugrul Yacinbayir, the country's former deputy prime minister, says the government has no interest in undertaking a reform of the anti-terror law. "They will never implement all of the EU's conditions," he says.

Erdogan's strategy is that of agreeing to many of the conditions. But he has done little in a few, decisive areas. It is a course of action he hopes will make it as difficult as possible for the Europeans to turn away from their visa pledge. When a 20-person EU delegation traveled to Ankara to negotiate the details of the visa deal, around 60 well-prepared Turkish specialists were waiting for the Europeans. They addressed issues like combatting corruption and altering laws against money laundering. For the last four days, there has even been a daily video conference between Commission representatives and Turkish government experts in order to clarify problems.

Erdogan Unequivocal

Even critical EU diplomats readily admit that Turkey has in fact moved forward with a number of draft laws. In its last progress report on visa liberalization for Turkey in March, the Commission reported that "a number of important steps forward" had been made. And this week, a long-awaited letter arrived confirming, for example, that Iraqis and Afghans who are returned from Greece to Turkey are now able to submit applications for international protection. "We have implemented almost all conditions," says Selim Yenel, Turkey's ambassador to the EU. "We want the agreement to be implemented in its entirety and for all Turkish citizens."

At public appearances, Erdogan leaves no doubts about his expectation that visa-free travel will be implemented in June. The president plans to keep to his word, having pledged visa-free travel to voters. He can ill afford a failure on the issue. "Erdogan is prepared to go as far as he has to," says Metin Corabatir, president of the Research Center on Asylum and Migration (IGAM) in Ankara. "If the EU rebuffs Turkey, then the deal will be history. Then Erdogan will hardly be willing to serve as Europe's doorman."

The issue of visa-free travel for Turks is also a political hot potato for Merkel domestically. It could re-escalate delicately patched over differences she has with the CSU's Seehofer over her refugee policies. The CSU opposes visa-free travel and Seehofer has recently been making sure that everyone knows it. In an interview with the Bayernkurier, a newspaper that serves as the party's mouthpiece, the politician said he could only warn against it, saying that visa-free travel might lead to the importation of "internal Turkish problems" to Germany.

It's sentiment shared by Bavarian Interior Minister Joachim Hermann, likewise with the CSU.

"In my opinion, the unlimited free entry of Turks and Kurds to Germany is indefensible for security reasons," he says. Hermann sees a danger "that the Turkish-Kurdish conflict will be imported and carried out on German soil."

The critical voices aren't restricted to the CSU; they can also be found in Merkel's own CDU. The party's domestic policy expert in parliament, Wolfgang Bosbach, for example, notes that the federal government had "always rejected" visa-free travel for Turks "because it feared a considerable increase in irregular migration, and not without reason, particularly in light of the critical situation in the Kurdish regions." From the perspective of security, he says, visa freedom is problematic.

Will Visa Waiver Bring Influx of Turks?

Interior Ministry officials in Berlin fear that the lifting of the visa requirement will lead to a massive spike in the number of Kurds applying for asylum here. Visa-free travel would give them the ability to take a normal flight to Germany as a tourist and then submit their asylum requests once they land -- applications that in many cases would have a good chance of success. There are already 11,000 Turkish nationals living in Germany after having been provided with asylum due to state persecution at home. If President Erdogan continues to escalate the conflict with the Kurdish population in southeastern Turkey, that number could rise even further.

Fears also persist in Berlin that the policy will result in an influx of poverty migrants from Turkey who will go off the grid and make ends meet with under-the-table jobs rather than leaving after 90 days as stipulated under the visa-waiver program.

Gareth Jenkins, a prominent British expert on Turkey, believes that a substantial number of Turks would come to Europe and either apply for asylum or disappear into the underground economy, especially in Germany and the Netherlands, where so many Turks have relatives.

There are already 400,000 internally displaced refugees within the Kurdish regions of Turkey as a result of the civil war-like conditions there. Many are dirt poor, Jenkins says, "but whether by finding it themselves or borrowing it from others, even they would be able to find enough money to get a passport and pay the €€70 to €€80 it costs for a one-way flight on a budget airline from Turkey to Germany."

It's not just the potential increase in the number of Turks entering Germany that frightens CSU politicians. They also fear that the issue could help to further elevate the right-wing populist AfD. Reservations about a visa waiver for Turks among the German population are significant. A poll taken in March found that 49 percent of Germans reject the initiative.

Gunther Krichbaum, the chairman of the federal parliament's European Affairs Committee, fears that the debate will unsettle Germans. "The people are paying very close attention to what is happening right now," he says. "The EU's credibility is at stake."

The Bundestag, though, doesn't have the power to stop the visa-waiver plans. It must be approved by the European Council, the powerful EU body that represents the leaders of the 28 member states, and by the European Parliament, but not by the German parliament. But Manfred Weber, the group leader of the Christian Democrats in the European Parliament, is calling for just that. "Given the importance, especially for Germany, it would surely be good if the government in Berlin were to underpin the refugee treaty with a decision by the Bundestag, including any possible visa liberalization," he says.

In order to assuage critics, the German government is advocating a "snap-back mechanism."

Germany and France distributed the proposal among their EU partners on Thursday. The mechanism would stipulate that the visa waiver program could be suspended if it turned out that large numbers of Turkish citizens were fleeing to Europe in order to apply for asylum or to illegally immigrate. There are "justified fears" of such a scenario, German government sources say.

The German view is that this emergency brake should be sufficient to persuade those with lingering doubts on the European Council and in the European Parliament, where members never had much enthusiasm for the deal with Turkey in the first place. "The chancellor has made herself vulnerable to blackmail through the Turkey deal," warns Alexander Graf Lambsdorff, a member of Germany's Free Democratic Party and a European parliamentarian.

He says he would have preferred to see the visa-waiver applied in stages, first to researchers or businesspeople, for example.

There is also resistance in the European Council. Austria and France are currently having to do battle with strong right-wing populist parties, and their enthusiasm for letting Turks travel to Europe without visa restrictions is accordingly slight. Hungary and Poland are also opposed.

It remains unclear whether some kind of emergency brake will suffice to bring around the opponents in the European Council. Because for as long as the EU is dependent on Ankara on the refugee issue, Europe will hardly be in a position to pull that brake -- assuming that Erdogan even accepts such a brake in the first place.


By Christiane Hoffmann, Peter Müller, Ralf Neukirch, Maximilian Popp, Christoph Schult and Wolf Wiedmann-Schmidt


Barron's Cover

Islamic State in Retreat

An unlikely coalition is beating back ISIS, pointing to more Mideast stability and economic growth amid low oil prices and shifting power dynamics

By Jonathan R. Laing           
.

cat
Members of an Iraqi counterterrorism unit signal victory last December during their successful campaign to retake Ramadi, which had fallen to ISIS in May. Photo: HMAD AL-RUBAYE/AFP/Getty Images
 
 
It’s easy to be pessimistic about the prospects for the Middle East over the next decade. This is especially so given the number of security consultants such as ex-Central Intelligence Agency director Michael Hayden who regularly appear in the media predicting continual civil war for the Mideast and the inevitability of heightened jihadi terrorism in the West. In fact, Hayden regularly likens the current situation in the Middle East to the Thirty Years’ War in 17th-century Europe, in which religious strife produced a bloody conflict that drew in all the great powers. According to Hayden, the Mideast has just started on a similar cycle.
 
Of course, such apocalyptic rumination is great for consulting fees. But Barron’s doesn’t share these dire assessments, a view encouraged by recent discussions with academics acquainted with the complex geopolitics of the region, as well as observers who live in the Mideast or frequently travel there.

For example, we expect an important source of regional violence, the Islamic State, also known as ISIS or ISIL, to see its power and territory greatly diminished by the end of 2017. The major reason for a more optimistic outlook is that the Islamic State caliphate has suffered a string of territorial losses, including key cities such as Tikrit, Ramadi, and Sinjar in Iraq and, more recently, Palmyra in Syria.

Continued progress depends on an admittedly fragile coalition of regional and global powers coordinating their military and diplomatic efforts even more closely than they’ve begun to do recently. Working together could actually improve relations among the participants, lending political stability and promoting much-needed economic growth in the region.

WE’RE NOT SO NAIVE as to believe the Middle East will suddenly fix itself. It won’t. The Islamic State is still training terrorists and sending scores of them from its battle zones in Syria and Iraq to Europe and even possibly the U.S. (See map below.) Likewise, the Islamic State has inspired terrorism by homegrown players. We expect both forms of terrorism to continue.
Despite recent military defeats, the Islamic State sprawls over swaths of Iraq and Syria, and its affiliates have established areas of control in Libya, the Egyptian Sinai, and southern Yemen.
 


EUROPEAN TARGETS: Using recruits from around the world, ISIS and its adherents have been able to launch a total of 26 successful terrorist attacks in Europe from January 2014 to March 25 of this year; another 24 have been thwarted. These can be expected to continue.

The Islamic State caliphate has been a magnet for Sunni youths living in the Mideast, Europe, and beyond who resent their lack of economic opportunity and political voice. The Islamic State has attracted volunteers from 90 different nations, according to intelligence reports. For young men it offers a paying job, the fantasy of military glory, and female companionship. The imaginations of many of these recruits are fired by the opportunity for death and the transfiguration of martyrdom. Eternal paradise beckons.

Moreover, the civil wars now raging in Syria and Iraq, in which former governments have been reduced to just another armed faction, are kaleidoscopic in their complexity. Much of the Mideast is now a Hobbesian netherworld pitting Shiites against Sunnis, tribes against tribes, and militias against militias, often in a violent mosaic that outsiders find hard to fathom. (See table.)
 
 
The consequent refugee crisis has cast millions of the displaced into camps in Turkey and Jordan and beyond. In Europe, the fabric of the post-World War II experiment of open borders and liberal social policies has been badly frayed. Xenophobia and extreme political sentiment have surged as a result of the refugee tsunami washing westward from the Mideast.

And there’s the fear—we think it’s overblown—that powerhouses of the Organization of Petroleum Exporting Countries like Saudi Arabia, the Emirates, and Qatar could get engulfed in the Middle East’s ring of fire, interrupting the flow of oil into world markets. Saudi Arabia, for example, is still very much a tribal regime with the financial means to fend off opposition forces both inside and outside its borders.

THE RISKS IN THE MIDDLE EAST are enormous, but we should also consider events that could lessen the damage. In the next year, the Islamic State is likely to be ejected from Mosul, the second-largest city in Iraq, which it captured in a desert blitzkrieg in the summer of 2014.

The Islamic State is also likely to lose its self-declared capital Raqqa, in eastern Syria, according to a number of experts.

“These losses will deal a severe blow to the group’s image as an indomitable expansionary force that has attracted so many recruits from the Mideast, Europe, and elsewhere in the Islamic world,” notes Paul Pillar, who had a 28-year career as a CIA analyst and National Intelligence Council member and later was a member of the Georgetown University faculty.

The Islamic State, which grew out of the murderous al Qaeda in Iraq, reminds Pillar of Peru’s Shining Path guerillas, who operated in the 1980s and 1990s. “After the Maoist group controlled much of Peru, it largely self-destructed as a result of its wanton brutality and finally a strong military response. By late 2017, I suspect that the Islamic State will be reduced to some roving guerrilla bands riding around Syria,” he says.

Conquering and holding territory is crucial to the allure of the caliphate. It represents a triumph of Islamic conquest reminiscent of the times of the Prophet Muhammad in the seventh century. The Islamic State also taps into a well-spring of fanaticism that is a part of so-called Salafi Jihadist Sunni Islam, which says that apostates, Shiites, and nonbelievers must be put to the sword.

STANDING BETWEEN the Islamic State and its grandiose plan for a global caliphate is an array of regional Mideast powers and foreign adversaries, says George Friedman, the founder of the private intelligence concern Stratfor and, more recently, Geopolitical Futures, both headquartered in Austin, Texas.

The anti-Islamic State powers include Turkey, Israel, Iran, and Saudi Arabia, bolstered by the U.S., Russia, and the European Union.

The primary reason that this prospective grand alliance has been hamstrung to date, according to F. Gregory Gause III, head of the international affairs department at the Bush School of Government and Public Service at Texas A&M University, is that the Islamic State is only “the second most important enemy” for many of the main players. For instance, Turkey with its restive Kurdish population is less concerned about the Islamic State than with Kurdish militia forces battling the Islamic State to Turkey’s south.

The U.S. and Saudi Arabia regarded Syrian President Bashar al-Assad’s regime as their primary foe in the area. At least until recently, the U.S. fervently wanted regime change in Syria because of Assad’s brutal repression of the rebellion that broke out in 2011 in reaction to the Arab Spring. The Saudis, on the other hand, opposed Assad because Saudi Arabia’s archenemy, Iran, had longstanding ties to Syria and was aiding him in the civil war, sending in military advisors and Iranian-backed military forces from its Lebanese proxy Hezbollah.

And finally Russia, as a longtime Assad ally, supplied Syria with military aid and, beginning last fall, air support with missions flown from Syrian air bases and special forces units. Russia concentrated its firepower on Syrian rebel forces backed by Saudi Arabia, the U.S., and other Western nations.

BUT THIS TOPSY-TURVY DIPLOMATIC situation, which gave the Islamic State a bit of a free pass, is starting to change for the better. A Syrian cease-fire agreement brokered by the U.S. and Russia has somewhat protected from Russian attacks most of the rebel groups, save the Islamic State and the al Qaeda affiliate in Syria, the Nusra Front. Russia and the U.S. are now coordinating their air campaigns in Syria against the Islamic State. Russian air power, in fact, played an important role in the Syrian army’s ejection of the Islamic State from Palmyra.
Recent reports indicate that Russian troops are helping train and advise Kurdish forces along with the U.S. in Iraq and Syria. Even Israel and Saudi Arabia are now enjoying warming relations.

The Iranian nuclear arms deal and the consequent lifting of many economic sanctions against Iran has led to a de facto rapprochement between the U.S and Iran in Iraq. So far coordination is fairly spotty but nonetheless present. Iranian Revolutionary Guard advisors supported Iraq’s retaking of Tikrit and Ramadi from the Islamic State in the past year. (See map below.)

 
CEDING CITIES: Although its sway is substantial, ISIS has lost control of several cities (circled above), including Tikrit, Ramadi, Sinjar, and Hit in Iraq, and Deraa and Palmyra in Syria. The Kurds have gained solid control in northeastern Iraq. The next key fights will be for Raqqa in Syria and Mosul in Iraq
                           
“Truth be told, the U.S. owes both Russia and Iran a debt of gratitude for the latter two’s military involvement in Syria and Iraq,” Friedman insists. “Russia, for its own national interests to be sure, saved the Assad regime from possible collapse with its air attacks and help on the ground. Its help has stabilized the situation. As for Iran, without its militias and advisors helping to stem the Islamic State onslaught in al Anbar Province and Sunni areas further north, Iraq would be in much worse shape militarily today,” he says.

The threat from the Islamic State and general mayhem in the region has exposed a number of national power dynamics that will shape the region in the years ahead. Take Iran, for example.

The nation is often depicted by pro-Israeli lobbyists and neoconservatives as a malevolent force that is already using the money resulting from its lightened sanctions to foment terrorism, engage in illegal ballistic-missile tests, and fund territorial expansion plans.

Yet Iran has shown itself as a less-than-invincible force during the Mideast crisis. Its advisors and Hezbollah proxy forces from Iraq were losing ground in the Syrian civil war, which necessitated the entry of Russian air power last fall.

Iran has faced growing problems in imposing its will on the seemingly friendly Shiite central government in Iraq despite the presence there of Iran’s elite Quds fighting force and a number of Iranian-financed Iraqi militia groups. Some of these militias have been sidelined by Baghdad in recent campaigns because of the bad optics of Iraqi government dependence on foreign-backed fighters operating in Sunni areas. Certainly, Iran retains close ties to many of the powerful Shiite political parties in Iraq. But Iran lacks the military power to transform Iraq into a Shiite satellite. The ethnic divide between Persians and Arabs is just too intractable, and it even outweighs Shiite sectarian common interests. Iran hasn’t been as tough as expected, Friedman avers.

Turkey, with its military and economic stature, past Ottoman Empire domination of the Mideast, and North Atlantic Treaty Organization membership, would seem to be a potential hegemon to bring order to the region. But beyond its obsession with Kurdish terrorism, Turkish President Recep Erdogan’s regime is preoccupied with internal problems created by his increasingly autocratic rule, suppression of the press and political dissent, and imposition of Islamization on a once-secular nation. Some Syrian rebel groups supported by Turkey are still largely deployed against Assad.

The Gulf States—Saudi Arabia, Kuwait, Qatar, Bahrain, and the Emirates—were able to maintain their Sunni tribal autocracies even in the face of the democratizing forces unleashed by the Arab Spring. Saudi Arabia is a good proxy for these nations, with lots of oil wealth even after the year-and-a-half market slide in crude prices. Saudi Arabia likely will be able to control jihadi infiltration within its borders and engage in slow, piecemeal reform to quell political dissent.

The Saudis should weather Islamic State-related upheavals because they have a security and intelligence system sufficient to keep order despite yawning income inequality among their citizenry of some 20 million, plus about 10 million nonnationals, ranging from Filipina amahs and Bangladeshi laborers to high-powered Western oil experts.

Just last week, the Saudi government laid out a bold revitalization plan aimed at cutting dependence on oil revenue and reducing fuel and power subsidies. It has even imposed new fees and taxes to try to bolster the kingdom’s coffers. Among other initiatives announced, the Saudi royal family said it would sell off a small piece of the country’s oil monopoly, Saudi Aramco, and is in the process of raising $10 billion from a consortium of international banks.

It’s ironic that the Islamic State is a threat to Sunni-dominated Saudi Arabia, since the group is the stepchild of the Saudi Wahhabi religious establishment, with its adherence to strict Sharia law and a literalist, conservative reading of the Koran. The Saudi government has long used its oil wealth to support mosques and madrassas all over the globe to propagate fundamentalist Islamic doctrines. In return, the Wahhabi establishment in the kingdom has looked the other way at indiscretions by the 10,000-strong Saudi royal family.

Recent economic and political reform is designed to contend not just with lower oil prices but also Saudi Arabia’s declining influence in the world’s energy markets. As energy guru Daniel Yergin pointed out at January’s Davos World Economic Forum, the Saudis can still set the bottom in global oil markets but can no longer push prices unilaterally to great heights by withholding supply. U.S. frackers have succeeded the Saudis as the key swing producers, because they can rapidly bring on new productive capacity as prices move above the frackers’ break-even costs of about $50 a barrel.

As a result, Yergin sees oil prices likely to be pinned at $60 a barrel or lower for at least the next year, despite all the cuts in global exploration budgets and production levels.

A number of other trends are diminishing the pricing power of Saudi Arabia beyond the leap in non-OPEC oil supplies from, most notably, frackers and Russians. Economist Gary Shilling points to the increasing squabbling inside the cartel that has destroyed cohesion and discipline.

Iran and Iraq, for example, refuse to cotton to any production cuts given their parlous economic situations. Weak global economic growth and a discernible shift in China from goods production to services also are curbing demand for oil, he points out.

Finally, conservation and government-subsidized renewable-energy sources are adding to OPEC’s problems.

AS FOR THE COCKPITS of today’s struggles, Syria and Iraq, many observers see the two states devolving into federal systems in which local regions comprising Shiite, Sunni, and Kurdish populations will have significant autonomy. The lines on the map delineating Syria and Iraq since their fixing after World War I may remain in place. But the two central governments will be so in name only. Thorny issues such as the distribution of oil revenues, administrative power, and military and police control will have to be worked out through difficult negotiation.

The Western powers and Russia will obviously have a hand in the reshaping of the Mideast, relying on a judicious application of balance of power politics to achieve their goals. The blowback of jihadi terrorism in Paris, San Bernardino, Calif., and Brussels is enough motivation. To date, the U.S., Britain, and France have largely relied on air power with limited use of boots on the ground to go after the Islamic State in the Sunni badlands of Iraq and Syria.

Russia has plenty of reasons to join in the effort. The Islamic State took credit for the bombing of a Russian airliner in Egypt last October that killed 224 passengers and crew. Among the most fervent and murderous of the Islamic State front-line troops are Chechens, who Russians fear will engage in terrorist acts in the Russian homeland.

Sectarian divides in Syrian and Iraqi government forces could prove a hindrance to truly degrading the Islamic State. Part of the holdup in the final assault on Mosul, a largely Sunni city, revolves around proper staging. Baghdad must decide on the right mix of Shia, Sunni, Kurdish, and Iran-backed militias to employ without inflaming Sunni sensibilities to the west and south of the city.

A war correspondent we know tells us that the Iraqi military is considerably improved from its deplorable performance in 2014: “The training of the Iraq military by the U.S., British, Australian, and Kiwi advisors is really starting to pay off in better tactical integration of infantry, armor, artillery, and engineering units. We saw this in the retaking of Ramadi this December and January. The Iraqi Golden Brigade is a particularly good unit. For the first time, I’m seeing buy-in by Iraqi forces.”

The U.S.-led coalition’s air campaign and special-operations units are beginning to seriously hurt the Islamic State. Attacks on Islamic State oil facilities and truck convoys have materially reduced the flow of funds into caliphate coffers. An American special-ops mission in northern Syria killed the No. 2 figure in the Islamic State, Abd al-Rahman Mustafa al-Qaduli. The Pentagon also claims to have killed in recent months the Islamic State minister of war.

FORMER CIA ANALYST PILLAR attaches import to the leaking by an Islamic State insider of the group’s personnel records on some 20,000 fighters, complete with family home phone numbers and next-of-kin addresses, to media outlets in both Germany and Britain. The records were authentic, if somewhat dated: A number of the fighters on the list had already been martyred. “The point is that there’s obviously a morale problem in the top reaches of the Islamic State if somebody with high access was willing to engage in treason against the group,” observes Pillar.

Ultimately, the Islamic State will be laid low by blowback from the brutality of the caliphate.

Reigns of terror generally only succeed in countries with deep and perduring totalitarian roots.

The caliphate is hardly Stalinist Russia or Maoist China in its longevity.

In fact, Paul Salem, vice president for policy at the Middle East Institute in Washington, D.C., notes that the Islamic State finds itself largely alone, having alienated rival Sunni rebel groups in Syria and local populations in areas it rules. With cooperation between the U.S. and Russia in the air campaign and Islamic State enemies from Syrian and Iraqi militaries to the Kurds, Turks, rival insurgent groups, and some Sunni tribal leaders, Salem says that time is running out on the caliphate.

WHERE WILL ALL THE MAYHEM in the Mideast stand in a decade? While the physical destruction of the caliphate will delegitimize the area’s appeal as a magnet for recruits around the globe to serve on its front lines or engage in acts of terror at home or abroad, it won’t end jihadi terrorism immediately.

The quashing of the caliphate could fan resentment against existing Mideast regimes and most certainly against the “Crusader forces” in the West responsible for its demise. For decades, Islamic terror groups have fed off the brutality perpetrated by outsiders on Muslims in places like Bosnia and Chechnya. A number of terror attacks still occur in North Africa, sub-Saharan Africa, and Yemen, mounted by groups in the name of al Qaeda even though the central apparatus of the group has been decimated.

But one can only hope that even if self-radicalization in the Sunni communities of Europe and elsewhere is hard to thwart, the Mideast will no longer be the font of trained jihadi fighters returning to their homelands to engage in terrorism. Sadly, however, the Islamic State will retain a powerful Internet presence long after the group is gone, with its arresting videos running the gamut from dreamy depictions of the glorious Muslim past with scimitared warriors on white steeds riding across the countryside to revolting films of executions obviously rehearsed and staged with Hollywood production values in mind.

The Mideast is likely to remain a cauldron of simmering tensions, but at a much lower boil than at present.

The Clash of Civilizations between Islam and the West that political scientist Samuel Huntington predicted over two decades ago doesn’t seem imminent. One can only hope that the struggle ends with a whimper rather than a bang.

While continued military vigilance will be required in the region beyond next year, the main task remaining at that point will be preventing the Islamic State from mounting further terrorist attacks in Europe and the U.S. And that’s no small job.