inseservices

March 1998

March 1998

Iraq after the U.N. brokered agreement – A note on China

Iraq after the U.N. brokered agreement

The diplomatic agreement reached by the secretary-general of the United Nations, Kofi Annan, seems to have taken out the fuze of the upcoming military strike against Iraq.

All parties seem to be winners because of the diplomatic solution. Iraq have been able to split the international community, they could change, however a small part, of the composition of the inspection teams and the most important aspect they could introduce a clause which states that the U.N. should respect the integrity and sovereignity of Iraq.

The U.S.A. can claim that their threat of violence has forced Iraq to obey the resolutions of the U.N. and that Iraq will not be able to become a threat to region at least at the short term.

And the international community is safe for the moment from another conflict and the proliferation of WMD.

Consequences of the solution

The diplomatic solution leaves a lot of questions unanswered and the problem unsolved. The inspection teams can continue their search for WMD but the threat out of Iraq is still alive.

All parties could gain something with a diplomatic solution but it is essentially nothing more than to maintain the status quo. Iraq is struggling to survive with as much military equipment and capabilites as possible. The U.N. on initiation and with strong support of the U.S.A. are doing their best to limit the capablilites of Iraq.

The solution has improved the Iraqi position a little. It has especially improved its international position in the Arab world. But it is not enough to change the political situation in their favor. The neighbouring Arab states want to improve the relations with Iraq but they still fear the ambitions of Saddam and his cronies.

Iraq can and will restart the harassment of the weapon inspectors of the U.N. within a couple of months. The creeping movements are aimed to hollow out the inspections the U.N. bit by bit. As long as the conflict does not turn into violence Iraq will be able to improve its diplomatic position. Time is working on the side of Iraq, more countries are willing to have normal relations with Iraq, which means that the embargo is just matter of time before it will be ended.

The Iraqi position have been improved by the statement in the clause that the U.N. and the inspectors have to respect Iraqi integrity and sovereignity. This means that they could possibly slow down or even limit inspections because it would violate Iraqi honour/sovereignity.

It is and will be in the future an illusion to think that the inspection teams will refrain Iraq from getting WMD. The inspections can at best slow down the development and production of WMD. The knowledge to built those weapons is in the possesion of Iraq and to built them is just a matter of time and funds. Especially if one considers the fact that most parts necessary to construct them are dual capable, the large stock piles of spare parts which do not fall under the UN resolutions and the unaccounted systems or part of systems which are still in Iraq.

The U.S. on the other side are relieved of an impossible situation. The planned air strikes would be a fruitless affair. Now they are in the position to assess their position and return with a better plan. The U.S.A. should have a comprehensive and clear Middle East policy which is fair to all sides. But what ever policy they want to execute they should pull it though and should not hesitate because of some negative consequences.

There are essentially two options to deal with Iraq. First force Iraq to obey the UN resolutions and try to remove Saddam out of power. This could be done by supporting indirectly Iraqi opposition groups or include the use of violence. Indirectly supporting opposition organisations will not be to succesfull if one will consider there performance in the last years.

If the UN or the U.S.A. decides to use violence they should only do so with the support of a number of Arab countries and with more means available, which includes at least limited ground warfare to directly support the opposition movement to get Saddam out of power.

The use of violence might be possible if Iraq, Saddam, violates the UN brokered agreement. The U.S.A. might gather enough political support to go for a military solution. But this will bring more hardship on the Iraqi population and will not guarantee a pacified Iraq after the operation.

Another military strike would force the U.N. to remove Saddam out of power he would otherways be a highly dangerous opponent with which no dialogue is possible.

The other option, more dangerous and difficult, would be to re-integrate Iraq into the world community with a number of regulations and controls which would limit the influence and power of Saddam and his armed and security forces. But at the same time Iraq has to be supported in the reconstruction of the country. Only people who’s basic needs are fullfilled are capable to work towards a more or less democratic society. Or at least a country which does not pose an immediate threat to its neighbours.

The use of military forces to solve the threat of Iraq might be more satisfactory to the U.S.A. as the sole superpower which is capable to defeat all military opponents. The military solution will not deliver more stability to the Middle East. On the contrary it will create a new alliance against the U.S.A. under the leadership of Iran. And this is an absolutely unwanted development.

A note on China

China has remained relativily untouched by the disturbances in Pacific area. The national currency have been able to keep its value. But China has not fallen victim to the destabilising developments as the other countries have. The Chinese economic development is not that advanced and to regulated by law and the rigidity of the communist party to be victim of the “Asian disease”.

The socio-economic problems of China are of a different nature. The rapid economic development has created large differences in China. There are geographical differences, the coastal provinces get developed but the inner countryside provinces stay behind. Economic differences, the farmers cannot compete with the industrialised workers, the large state owned companies are unprofitable but the privately owned and joint venture companies are booming. And finally a whole new class of pour people come into existence in the cities in the coastal areas. These people who fled the countryside to improve themselves find theirselves in slums with none or just part time work.

The worse off people see the workers in commercial companies and the small business people who are making more in a month than they do in a year. This creates friction and tensions which could create a very dangerous situation.

The situation is downplayed by the Chinese government. For example, there are officially around four million unemployed but the real number might be three times that large. Then there is also a very large group of people living under the existence minimum. The living conditions of these people are below any standard and this situation requires a quick and effective solution.

China is in need of an operation plan which takes care to eliminate the deficiencies of the rapid growth of the last years. A plan which will stimulate a balanced growth in all regions of the country and which also modernizes the agricultural sector. The establishment of a new small/medium sized industry and service sector, countrywide, will deliver prosperity based on internal demand which promisses long term growth. This will make the cities less attractive to migrate to and it will give the urban areas a chance to implement infra-structural plans which are aimed to promote business development without using to much funds as is happening now to rather unproductive sectors like housing and feeding the large number of unemployed.

Another important area is the insurance, pension and social security sector. Without a decent social security organisation economic development could be very short lived and the resulting aggravating socio-economic problems will become a danger to the society and the political system.

February 1998

February 1998

Security changes in the Asian-Pacific region – Iraq, the next battlefield?

Security changes in the Asian-Pacific region

The Asian-Pacpific region

The Asian-Pacific region stretches from the northern territories of Australia in the South to the southern tip of Sahkalin island in the North. This wide area with many different countries with even more different peoples have been the prime example of a successfull economic development. The GDP’s, the technological capabilities and even the self esteem of these countries was booming.

The large currency devaluations in Thailand, Malaysia, Philippines, Indonesia and South Korea and the following economic breakdown in essentially the whole Asian-Pacific region destroyed many big dreams in the region. The wish to become a developed country in their own manner and on the the fast lane was dashed within a couple months because of the already to often mentioned reasons.

Only a couple of countries could remain untouched by the problems in the region. China, Hong Kong and Taiwan could remain more or less stable with a negative reaction on the stock markets and a slow down in sales/exports. But even they, epecially China, have their economic problems. The large inefficient and uncapable Chinese state industry is a heavy mortgage on the economic development of China.

The exception is Japan. The economy of Japan has been depressed since the bubble economy of the eighties bursted. The crisis in Asia have been the reason for the further decreasing of the stock market and the bankruptcy of some large financial institutions. The bankruptcies were also an internal Japanese problem because of failing government policies and control and inappropriate bookkeeping and management in the companies. Japan is however strong enough in resources and knowledge to get business on order again if they are finally willing to settle the problems in the financial sector. But this will need a change of culture in Japanese politics and business customs.

The security situation

The security situation of the Asian-Pacific region will not be inbalanced by the recent difficulties. The independent movements and/or small leftovers from the communist insurgencies in some countries will try to benefit from the economic difficulties but in the end their causes will be to insignificant for the people to change something. They have other things on their mind then ideology or etno/religious -nationalism. To quote Berthold Brecht; “first food than the moral”.

The border squabbles which a large number of countries in the region have with eachother will also be in a state of suspension on the short term. All countries in the region will be to occupied in getting their economies on order before they will be able to settle their border differences.

The military equipment programmes which are planned and partly implemented by numerous countries, like Thailand, Malaysia and the Philippines, will be stretched, deferred, refinanced and even some very ambitious programs like the submarine program in Thailand be cancelled. The major equipment provider to the region, the U.S.A., is supporting this policy and is pressing companies to be flexible on the delivery schedules and payment on the orders of the countries in trouble.

The U.S.A. wants to maintain the stability in the region. It is important for them to keep the programmes alive to protect the security of each country, to satisfy the needs of the military establishment and at the same time support the economy through the offset and compensation programmes associated with the sales. Ofcourse the U.S.A. also wants to protect its market.

The two countries, China and Taiwan, who are in the position to influence the situation are at the same time also the most controversial in their support. Both countries will be tempted to bind the support to conditions and this will have a worsening effect on the stability on the longer term.

China can and has supported some countries who are suffering from the crises. The resources of China are however limited. The Chinese currency reserves are about 140 B. US dollar. This sum might look very big, as it is, but if we consider the resources needed to avoid a devaluation of the Hong Kong dollar and the internal economic problems of China, the money will be very badly needed by the Chinese themselve. If the support which given by China is politically connected then they will create a lot of hard feelings for the future. Finally the Chinese statement that they will not devaluate the Yuan, the Chinese currency, are nothing more then words. First they have already devaluated the Yuan in 1994 with 35 % and second another devaluation would be bad for the Chinese economy because they will loose the trust of international investors.

Taiwan is in a similar position, it also can and has supported a number of countries. The Taiwanese financial resources are about the half of China but the Taiwanese economy and industry is in much better shape than the Chinese one. Taiwanese entrepeneurs are already involved in the South-East Asian economies through large investments. These investments of Taiwan in S-E Asia are part of the South-movement of the Taiwanese government to be less dependent on China where the bulk of Taiwanese investments are placed. This familiarity with the S-E Asian markets will make Taiwanese support very usefull in the recovering phase.

Taiwan might be, even more than China, tempted to get a kind of recognition from the countries they help. But this will increase the hostility between China and Taiwan and it forces the Asian countries to choose sides.

Most of the countries in trouble will accept the support but they will not recognize Taiwan and continue to view the relations the same as before the crisis. The acceptance of Taiwanese support could however be already to much for the Chinese wishes. China only seems to accept Taiwanese support if it is absolutely free of any political connection.

The Asian economic disaster will limit the differences between a number of countries on the short term. The policy implemented in this crisis will however set the stage for the future cooperation in the Asian-Pacific region. If China and Taiwan are to much focused on eachother the results could dangerous. On the long term the tension between China and Taiwan could raise to unprecedented levels. This will place a number of countries, like Indonesia, Malaysia and the Philippines, in a dilemma. They have already differences with China and want to limit Chinese power but they also do not want to make China to a direct enemy because of Taiwan.

The crisis has proved that the U.S.A. is indispensable in the region. They are the stabilising factor which are able to help with economic problems as with possible political tensions in the area. China is faraway from being the power it wants to be in the region. They do not have the means to solve economic problems and are viewed as a country with geographical ambitions.

Iraq, the next battlefield?

The fullfillment of the U.N. resolutions, of eliminating all Weapons of Mass Destructions, WMD, seems to get more difficult as the second Gulf War is further away. The search of inspection teams to capabilities to build and the storage of WMD is being hindered by Iraqi security forces and by the refusal to let inspections teams into presidential palaces and properties.

The U.S.A. is however pressing for the fullfillment of the resolutions. They are supported by the U.K. Most of the other states agree with the U.S.A. that Iraq has to give up all capabilities which are related to WMD. They are however less willing to use violence to reach that goal. The large majority of Arab countries are against using military means where as Russia and France could be persuaded to agree to the use of air assaults but they will not actively support the assault.

The Arab countries, France and Russia are even pressing for the elemination of the embargo towards Iraq. They think cooperation and trade relations will be more successfull.

As the last remaining superpower the U.S.A. is determined to press Iraq into obeying to the U.N. resolutions. Iraq on the other hand is using all means available to split the international community. Saddam has interpreted the new situation in the Middle East very good. With exploiting the inconsistencies of the U.S. Middle East policy and the policy of offering a little and making at the same time objections to the composition of the inspection teams and refusing entry to some places he could forestall a creation of a new alliance against Iraq.

Problems with an assault on Iraq

An attack on Iraq will be a very difficult operation. The problem is not the launching of air strikes and missiles into Iraq but everything associated with an assault.

The U.S. will not be able to get the same support for this action as it had in the second Gulf War. It will be an operation with just a handfull other countries like the U.K. and political backing of Kuwait. The U.S. will loose a lot of friends in the Arab world especially their two biggest allies, Saudi Arabia and Egypt. These two countries would have a lot of difficulties to justify the support of a U.S. lead attack on an Arab country. Especially if one considers the large fundamentalistic organisations in those countries.

As mentioned above the launching of air strikes and missiles is not difficult. The problems start with the sense and usefullness of an air strike, the identification of the right targets and the proper elimination of those targets.

The use of airpower to solve problems can be usefull if the attacked party is sensitive towards the effects of such an air strike or in coordination with combined arms assault. In the case of Iraq, it will not be very effective. It is not possible to cripple the whole society by the use of massive air strikes. The results will be devastating, if not only military and industrial sites are attacked but also the infra-structure and other civil targets are destroyed. The long term civilian casualties, especially by the following epidemics, will be very high in the populated areas but the regime will still be in power. Beside that it will not change the leadership of Iraq, an assault on civilian targets is politically unacceptable.

To change the policies of Iraq one have to remove Saddam out of power or find a way to live with him. There are three ways to eliminate him. First, have the luck to get him in an air strike. This will be very difficult because Saddam is fully aware of this threat and therefore impossible to pinpoint. Further the U.S. have to violate executive order 12333 which forbids the elimination of foreign heads of state. But the executive order is the least of all problems.

Second, hope that an internal coup d’etat removes him from power, but the secret service is very capable in eliminating possible threats to Saddam.

And third, move in with a ground force, but this is political not feasible and if the forces have to stay on for a longer term it will be very dangerous.

The identification of targets will prove to be very difficult. After several years of research the inspection teams still have not yet found all sites. Thereby the Iraqis have become, because of the second Gulf War and the embargo period, specialists in hiding equipment/goods from being found. The military forces will be spread around the country and everything connected with WMD will be hidden. For example biological weapons can be designed and build in a large house, chemical weapons can be manufactured in a farm with a couple of large barns. Only the construction of nuclear weapons need a larger space but this can be done at several smaller sites. And finally you can hide a lot of production capacity in the existing agri-chemical production complexes. With the exception of the existing production sites all other sites will be impossible to target.

The number of clear targets is limited and they will be moving around to make it even more difficult to target them. One should remember the impossibility of the allied forces to capture one missile Scud launcher in the second Gulf War.

Finally a number of complexes will be bunkers who are very deep and well constructed. The U.S. will not be able to destroy these bunkers with existing conventional weapons and the ones in development. Even when they have received the ground plans of German and Yugoslav construction companies who builded a number of those sites. To destroy these sites you need a small nuclear device. The use of nuclear weapons could however create a precedence. As a result every self-respecting defence force will find that it needs nuclear devices to protect the interests of their country. Especially the nations in the Middle East.

Conclusion

The use of military means, air strikes, to force Iraq to obey the U.N. resolutions will be a fruitless affair. The U.S. is certainly be capable to hurt Iraq very badly but it is not enough, as long as they do not use ground forces, to remove Saddam out of power. The impact is not of that scale that the power structures will be destroyed. The Iraqi people will be the ones who will suffer most of an massive air strike. The position of Saddam will most probably be improved after an assault. The national and international “admiration” of Saddam, as the only man who has guts to resist the only superpower in the world, will grow. If it does not kill him it will make him stronger.

The U.S.A. will probably use violence, strike Iraq, to try to make Saddam obey the resolutions. The results will be minimal, with some luck Saddam will allow the inspectors more space to move but they will not find more then they have done till now. He will continue to tease the U.S.A. and the U.N. and this will weaken the influence of the U.S.A. in the Middle East.

The U.S.A. would be better advised if they would use the threat of force with diplomacy, the carrot and stick method. If Saddam gives in to the wishes of the U.N. he will get more freedom to move. The oil for food program is nice but it is not enough to persuade Saddam to obey to the U.N. resolutions. Saddam maybe an unpleasant leader to deal with but he is in power and will most probably be so in the future. Somebody who is participating in the world community can be more or less be controlled. If somebody has nothing to loose he will be more likely to react contrary to what is expected if he is under threat.

A comprehensive Middle East policy from the U.S.A. with equal treatment and chances for all countries in the Middle East will be more promising to regain the influence the U.S.A. has lost since the peace process has fallen apart. The U.S.A. as the remaining superpower has the obligation to have a balanced policy and to be a fair broker in world politics.

January 1998, II

January 1998, II

Portfolio management in 1998

1997 have been a year of incredible growth figures in the stock market. The first three quarters of the year were an investors dream. It seemed as the market knew only one direction: Up. The last quarter brought back the reality, what can go up can come down. Volatility was the word which can be best used for the situation in the final quarter of 1997. Big number number losses but relatively small percentage losses have been recorded, which could be straighten out within one or two months. But the year as a whole have been good to the investor.

Disappointing figures and some profit warning of some companies and especially the spreading economic and financial crisis in Asia created havoc, not only on the Asian stock market but they also had a major impact on the western stock markets. The markets in the West could recover from the bad news out of Asia but the uncertainty is still out there and waiting to strike back.

The volatility of last year will also be very active in 1998. Uncertainty about the outcome of the crisis in Asia and disappointing sales and profits in the coming year especially in comparison with the preceding years will limit the growth of the stock market. Only a small number of companies will show some impressive growth. 1998 will be the year of carefull stock picking.

A portfolio example

The balanced portfolio of 1998 will show some changes. The portfolio as a whole will be in the first six months of 1998 more defensive. The exposure to Asia should be limited and a higher percentage should be into bonds.

The coming months will be very volatile. The crisis in Asia will influence all other markets. Therefore you should put most of stocks outside Europe and the U.S.A. on hold. New investments should be into bonds and companies with the ownership and the majority of their sales into Europe and the U.S.A. They are the only companies with a better chance to gain something.

The allocation could be as follows; 55-60 % into stocks, 30-35 % into bonds and 10 % into property. The geographical allocation of the stocks could be; 38 % Europe, 37 % U.S.A., 5 % Eastern Europe, 4 % Russia, 3 % Japan, 2 % Hong Kong / China, 3 % India, 6 % South America and only 2 % in South-East Asia.

If your financial situation permit it you can invest directly into stock markets outside your home country. This can be done to the majority of the developed countries in the world. Beside the direct investment into particular companies one can invest into country or region funds which are offered by most of the major financial institutions. Fund investing is recommendable to countries like India, Russia and regions like Eastern Europe, South America and Africa. The regulations in those countries/regions, the scale of the market or the lack of available information about companies makes such a fund an attractive alternative to direct stock acquisitions.

Fund investing

As we have mentioned above fund investing can be a viable alternative if your financial resources are limited or if you want to invest in emerging countries with tight protective regulations, a small stock market or companies without a clear administration and information policy.

China and some South East Asian countries are examples of these peculiar countries/regions. To benefit from the possible profits in these markets several China/Asian/Tiger funds are available. At the moment it is however very dangerous to invest in these funds. The economic climate is to volatile to justify an investment.

India seems to be untouched by the developments in Asia. The Indian economy is showing stabile growth figures. The opening of the market have paid off. Several Indian companies, especially in the software sector, are becoming world players. The Indian stock market has shown an equal growth. The Indian law however is still restrictive to foreigners who want to buy Indian stocks. By investing in an Indian country fund you can circumvent these problems and still profit from the positive developments in India.

The situation in Russia is more complicated. The Russian economy has shown some improvement in the last year but the Asian crisis has become a threat to this growth. The Russian currency, the rouble, is because of the introduction of a new rouble with lesser zeroes and the Asian problems in trouble. The Russian government should be restrictive in their expenditures, improve the tax collection, limit organized crime and support the business development without the use of nepotism. If Russia can meet these conditions the growth will continue in 1998. Russian country funds will be an intersting investment next year.

Eastern Europe can be divided into two parts. The countries who are allowed to enter the European Union in the first wave and the ones who have to wait for the next round. The economic performance of the first group, Poland, Hungary, Czech Republic, Letland and Slovenia, can be described as positive despite the little problems some countries, like the currency and trade problems of the Czech Republic, have to rebuild their economy. An investment in a region fund with those five countries will be a good investment. The countries, like Rumenia, Bulgaria and the other Baltic states, who have to improve their economic and political situation before they are allowed to become a member of the European Union are worser off. An investment in a fund with those countries will show a worser performance. Unless you are willing to take a bigger risk this investment can better be avoided.

Africa, the former lost continent, is improving their political and economical situation. Stock markets from Morocco, Uganda, South Africa and Namibia are promising to show some growth in 1998. In a region fund with a number of these countries in their holdings could be an investment opportunity.

South America, the continent which have achieved growth which equals the growth of an emerging Asian country in the last years is now experiencing some negative effects of the Asian crisis. Especially Brazil is the most under threat from the devaluations. The Brazilian currency is under threat and the inflation is rising again. The government is having difficulties solving the problems. The impact of the Asian crisis on the other South American countries is not that extreme. The economic growth will be somewhat limited by the crisis. But a large number of companies will be able to stay profitable. A South America fund is a valuable addition to your portfolio. South America will recover faster from the consequences of the Asian crisis than most of the Asian countries.

Asia

The economical situation in Asia is horrorable. The financial system in a number of Asian countries have nearly collapsed. Only the intervention of the IMF and the international community saved them from bankruptcy. A large number of companies, in the insolvent countries, are also in deep trouble. They can not produce to market terms, they have accumulated a large stock of products, they have invested into to many unproductive glamour projects and are therefore unable to fullfill their credit obligations.

Especially Korea, Indonesia, Philippines and Thailand are affected by this unhealthy situation. Malaysia, Singapore and Taiwan are heavily influenced by the economic downturn in Asia. Japan and Hong Kong / China also have problems, which are similar to the other Asian countries, but because of their respectively financial and industrial resources and the protected currency and large promising home market they will be able to solve the problems with other means then outside support.

It is uncertain to what level the governments in Asia will implement the advise of the IMF, do the Asian governments really support the international demands? Only cosmetic changes to satisfy the IMF and the international community will not be enough to solve the problems. And if the Asian countries would try to export themselve solvent by price dumping they will also hurt their own businesses and economies. On the short term it will generate an extra flow of money to Asia but the already very small profit margins will become losses on every product they sell. This will become even worser on the longer term. If the Asian countries have to procure raw materials and equipment from other countries they will have to pay more because of the weakened value of the Asian currencies.

The Asian economic and financial crisis will affect all other markets in the world. Even at these low stock prices in Asia a buy could be unprofitable. We advise therefore not to invest fresh money in Asia and you should have liquidated or hedged your other holdings. Only a small number of companies in Asia will offer some growth but not enough to justify a buy or enlargement.

If you are willing to accept a higher risk one should limit its acquisitions to Japan, Taiwan, Hong Kong and some lonely riders in South East Asia. In Japan we like Canon, Matsushita, NEC, Sharp, Sony and Yamanouchi Pharma. In Hong Kong we like HSBC, , Hutchinson Whampoa, Swire Pacific and Cheung Kong. In Taiwan we like companies like Formosa Plastic and Taiwan Semi. Other companies in the region which will improve quicker and better from the losses of the last months are Singapore telecommunications, the telecommunication companies in the region look all very promising, Singapore Airlines and Sime Darby.

Europe

The economic situation in Europe is despite the large number of unemployed in some European countries good. All countries in Western Europe promiss an increase of GDP of around 2,5 – 3 % in 1998. All member countries of the European Union except the three who do not want to enter and Greece who does not qualify seem to become members of the single European currency, the Euro.

The economic growth of Europe will be less by 0,5 to 1 % due to the crisis in Asia. The first six months of 1998 will be the most influenced by the crisis. After that the economy will be able to adjust itself better to the new situation and the situation in Asia could be turned in the right direction.

Together with the U.S.A. Europe’s stock markets will show the best performance. The consumer markets of countries who lagged behind in the last years seem to take off in the coming years. This will stimulate the European economy, considering most of the external trade from the European countries is with eachother. The introduction of the single currency will stimulate the trade in the European Union. Companies which are prepared for the Euro can exploit the advantages of a single currency best and this will be very clearly in their stock price.

A number of European stocks will therefore be very promising. Some financial institutions with little exposure in Asia, the pharmaceuticals, the insurance sector, some telecommunication / technology companies, luxury equipment producers and some food companies.

In Germany we like BMW, Daimler Benz, Porsche, Siemens, Mannesman, Preussag, VEBA, VIAG, RWE, Deutsche Bank, Dresdner Bank, Allianz, Muenchener Ruck., Fresenius Medical, SAP and Wella. Those companies are very well positioned on the internal market and also have the U.S.A. as their most important export market. Other companies like BASF and Bayer who also have a large medical operation can see a profit next year but this depends on the performance of their chemical operation which have heavily invested into Asia. The Asia crisis could have a positive on the chemical industry if a number of Asian chemical companies are taken over or closed. But it can also have a negative effect if they would produce even more than needed and dump it on the market.

In Switzerland we expect a lot of Novartis, Roche, UBS, Nestle, SMH and the Zuerich Group. The Swiss multinatonals have the majority of their markets in Europe and the U.S.A. which will boost their sales in 1998.

The FTSE in London had a respectable growth figure in the last year. But also 1998 will bring a number of opportunities. We have listed British Aerospace, British Petroleum, British Telecom, Cable & Wireless, SmithKline Beecham, Glaxo Wellcome, Cadbury Schweppes, Diageo, Asda, Safeway, Tesco, Unilever, Scottish Newcastle, Barclays Bank, Royal Bank of Scotland and General Accident.

The French economy will also see some improvement which will be translated to the stock market. Some export oriented companies but also a few companies with only the French market as a target will show some improvement. In France we like Canal +, Carrefour, Promodes, Danone, Elf-Sanofi, LMVH, L’Oreal, Rhone-Poulenc, Louis Vuitton, Generale des Eaux, Society Generale and Total.

The Dutch AEX market will, with their large multinational companies, offer some opportunities for growth. We especially like ABN-AMRO, ING, Fortis Amev, Koninklijke Olie (Royal Dutch Shell), Unilever, AHOLD, Océ, Baan, Cap Gemini, Getronics, Royal Numico (former Nutricia), Nutreco, IHC Caland, Internatio Muller and AKZO. The fundamentals and the market forecasts of those companies promise growth in the next year.

The Italian market which has performed very well in the last years will also be promising in 1998. We expect more growth from Alleanza, Generali, Mediobanca, Banca di Roma, Olivetti, SAI and Cofide.

The United States of America

The second place were we expect a lot of growth is the U.S. stock market. The economy of the U.S. is still to good to change the course of the market. Companies in the U.S. with a large exposure in Asia will see a slow down in sales in the first six months of 1998. But a large number of companies, small and large cap, will show a positive result in 1998. It will be more difficult to sort them out but if the management, sales, profits, money flow and the product and production facilities are in order things will be promising in 1998. Ofcourse, as mentioned before, the exposure in Asia should be limited to 5 to maximal 10 % of sales.

A number of large cap, quality, stocks look very promising. We like AT&T, GTE, LCI, Bell South and Northern Telecom in the telecommunications sector.

A number of IT companies also offer some growth next year despite the lower stock price in the last quarter of 1997. We like Intel, AMD, Motorola, First Data, Computer Sciences, Honeywell, IBM, Compaq and Dell. Other companies which were badly hit could also see improvement next year, but later and at a higher risk, we mean HP, Lucent Technologies, Applied Materials, Unisys and the biggest gamble of all Oracle.

The financial sector, especially the regional institutions will offer growth in 1998. Like BancOne, Fifth-Third Bancorp and First Bank System. But also Salomon and American Express possess enough stength to continue their growth. The large international banks who are more exposed in Asia should not be written off. In three to six months the situation could be stabilised in Asia and Citicorp, J.P. Morgan, BankAmerica and Chase could easily regain the losses they experienced because of the Asia crisis. The crisis could have a positive effect on the large banks if Asia is implementing the conditions which were demanded by the IMF.

The insurance sector will show a good performance in 1998 and certainly the U.S oriented insurers like Travelers and Allstate.

The retail sector will have no interference of the Asia crisis and it is therefore an interesting investment, you could think about Kroger, Dayton Hudson, Kmart and Ingles Markets.

The food companies are also less affected by the crisis. Companies like Anheuser-Busch, Archer Daniels Midland, Sara Lee and Kellogg. But we also see an opportunity for consument producer Procter & Gamble.

Another protection against the Asian influence are the energy providers like Colonial Gas, Eastern Utilities and Atlantic Energy.

The oil producers and services industry is because of the slump in oil prices less attractive at the moment. But the demand for oil will increase in the future. On the short term they will more or less keep their value but on the longer term they will become expensive. We like large producers like Exxon, Texaco and Mobile. But also the smaller producers like Occidental Petroleum, Amarada Hess and Phillips are attractive. The oil services industry also possesses a bright future. We like Schlumberger, Diamond Offshore, BJ Services, Baker-Hughes and Transocean Offshore in this category. The reason to chose the services companies is that they possess the knowledge of deep-ocean drilling.

The best perfoming sector in 1998 will be the pharmaceutical companies like Bristol Myers-Squibb, Eli Lily, Merck and the darling of the stock market Pfizer.

Further we like General Electric, Lockeed Martin and Raytheon. We also like companies which are mainly domestically oriented like AOL, Staples, Schering-Plough and Sunbeam. And finally the first quarter of 1998 will also be profitable for the transport sector. We like AMR, Delta Airlines and Federal Express.

Not only the large cap companies will see growth. Also a number of small cap companies are very promising. The P/E ratio of small cap companies is at 14 or 15 where as the P/E of the S&P 500 companies is around 20. The orientation on the U.S. market is an another advantage. The small cap companies will maybe capable to beat the performance of the large cap companies in the first months of 1998.

In the small cap league we like Imperial Credit, Redwood Trust, Commerce Capital Investment Services, Method, Vesta, Swiss International, HS Resources, Miravant Medical, IRT technologies, Technitrol, Guildford Mills, Baker Fabrics, US freightways, Comair, Hot Topic and Landries.

January 1998, I

January 1998, I

An Outlook on 1998, I

Areas of Tension and instability

The world have not become a saver place to be, in the last year. The same will be valid for 1998. There are several areas in the world where intra-state and interstate conflicts are imminent or already in existence.

We will try to list those problems and the chance if those conflicts will have an impact on to the political, economical and social security of the country, region and the world.

Europe

Europe, excluding the territory of the former Sowjet Union, is together with North America one of the safest areas in the world. The problems in Europe are largely concentrated in the Balkan.

The United Kingdom and Spain

There are a couple of intra-state problems with small and at the moment rather insignificant terrorist groups in Spain and the United Kingdom. The IRA in the U.K. is trying to solve their problems by negotiations. The ETA, which stands for a seperate Bask country is losing support from the people living in Bask country. The people living in Northern Ireland and Bask country are getting enough of the mostly random violence of both organisations. Especially because some of the victims of their assaults were local people. A peace agreement between the IRA and ETA and the respective goverments is however very difficult to accomplish. The leaders of both organisations and the involved governments are hampered in their actions by the radical/extreme elements on their sides. The terrorist organisations have however lost a lot of their strength and certainly the support of their people who desperately are looking for peace.

Former Yugoslavia

The other problems in Europe are intra-state conflicts or potential conflicts with the potential to become inter-state wars. Yugoslavia has dissolved itself into five countries. Slovenia, Croatia, Macadonia, Serbia and Bosnia-Herzegovina.

The first two have returned to normal countries, Macedonia has some problems with a minority, the Albanians, but this will probably not turn into violence. But the other two are still in a conflict like situation.

Serbia has a number of problems with the Albanian majority in Kosovo. The Albanians in Kosovo get less and less satisfied with the situation. The policy of civil disobedience and non-violent resistence seem to near its end. An increasing number of Kosovo-albanians want to use violence to get more freedom or even independence. The Kosovo- albanians however do not possess the equipment to become a danger to the Serbian dominance. They will need the support of other countries to become a threat to Serbia. According to the Kosovo-albanians they will receive outside support and this will lead to a new war on the Balkan. In reality most neighbouring countries are not in a situation to support the Kosovo-albanians, they have enough problems of their own. A civil war with the ambition to spread over the Balkan is not very likely in 1998. The resistance of the Kosovo-albanians will be limited to an underground Albanian society and some local actions against Serbian officials, but any open resistance will be suppressed very quickly by Serbia.

Most of the friction is still in Bosnia, the NATO led SFOR will forestall any form of agression of one of the sides but this will not create peace. The Serbians, Croats and Bosnians show in the mean time no inclination to start living together again. And this mutual acceptance is necessary to get a functioning peace in Bosnia and fully implement the Dayton accords.

Greece and Cyprus

The final area with tensions are born out of the differences about the exact line of the border between Greece and Turkey and their proxies on Cyprus. A peace agreement seems to be out of question but a better cooperation is one of the possibilities.

The difficulties which Turkey experiences about its membership of the European Union might however be used as a lever, way of revenge, by Turkey against any negative decision about entering the E.U. A worse relationship between Turkey and the E.U. or Greece will directly be translated to the situation on Cyprus.

1998 will probably bring no improvement to the tensions between Turkey and Greece and their counterparts on Cyprus. The situation will become even worser but it will not escalate into war. War is simply at the moment not an acceptable option to the political constellation in the area.

Russia and the former territory of the Sowjet Union

The intra-state problems in Russia seems to make a lesser impact in 1998. The state of the Russian economy is still to weak and the level of organisation in minority groupings in the area of the Russian federation to low to instigate any problems on the short term. On the longer term there are still a number of unsettled questions which might create a rather dangerous situation.

The Caucasus

A number of peoples in the Caucasus are not satisfied with the situation they are living in. Not only the Chechnyans want to be an independent nation but also several others like the people of Dagestan, North Ossetia and the Tsjerkessk have similar ambitions. Chechnya have become in facto an independent state but there is still no final agreement with Russia. The Chechnya intirim government is not the sole contender to power. There are a number of warlords which have their own policy and do not hesitate to assault Chechnyan government officials and even operate in Russia. The outcome of the Chechnya question is far from solved. If the political and economical situation of Russia improves a lot, Russia may start reviewing their position in the Caucasus and try to turn back the clock.

The Caucasus is a very volatile area. The conflict between Armenia and the oil rich Azerbaidzjan and the internal problems of Georgia with Abchasia and South Ossetia are still not settled. The situation can be described as a cease fire. All parties are preparing themselve and gather international support to solve it by military means. Russia is also playing a major role in the continuation of these conflicts. It is in the interest of Russia to keep those imbalances alive because that is the way they can keep a lot of influence in the region as long as Russia is not capable to do it by political, economical and military strength.

The new Asian republics

The new countries which came into existence after the dissolution of the S.U. like Kazachstan, Oezbekistan, Turkmenistan and Tadzjikistan have also a number of problems. Kazachstan for example is afraid of Russian involvement in their internal affairs because of the very large Russian minority who is living in the north of Kazachstan. Oezbekistan and Turkmenistan have only insignificant problems. The biggest problems are centred in Tadzjikistan. They not only have external security problems but has also internal problems about who is the legitimate government. All three receive a lot of Russian support including troops to protect the borders with Afghanistan. The three countries are under threat of Afghanistan, especially the expansion of their peculiar form Islamic government and Afghan “terrorist” groups who cross the border to support their allies in the three above mentioned countries.

But we envision for 1998 a preservation of the status quo in the former territories of the S.U. None of the countries and groupings in the area are strong enough to change this in the next year.

The Middle East

The Middle East will remain the most volatile area of this planet. The political, economical and religious contradictions combined with the availability of a massive weapons inventory and the will to use them makes the Middle East a powder keg which only needs to be ignited by a simple misunderstanding.

The threat on the long term will be even more dangerous than the ones listed above. The changes in the climate, the scarcity and the increase use of water by the countries in this region will make the distribution of water the factor which is the determinant of war and peace. All countries will view an unfair distribution or even diverting of water resources as a reason to go to war. The beginnings of this future tragedy is allready visible in Egypt, Syria and Israel. The threats Egypt has made at the adress of Sudan, if they change the flow of the Nile. Or the tension between Turkey and Syria about the irrigation projects on the Eufraat river in Turkey. Or the policies of Israel to keep control over the water resources in the Golan and the West Bank are examples of the problems to come.

Israel

The main potential conflict at the moment is the “Arab” world against Israel. The existence of Israel is still for some Arab countries unacceptable. Where the peace process promised some improvement and even wide acceptance of Israel, the policies of Netanyahu destroyed every hope on further cooperation. A military clash will be not very likely. The military dominance of the Israeli Defence Forces is still to large to be broken by the combined defence forces of Egypt, Jordan and Syria taken together. Even taken in consideration the improvements these three countries have made in the last years on their inventory and operation modus of their military forces.

The bad relations between the Arab states and Israel will primarily have a negative effect to the economic development in the region. The promising developments of the last years will be finally destroyed within the next year.

The deplorable economic situation combined with the dwindling water resources will prove to be real danger, on the long term, to peace in the Middle East. 1998 will see a maintenance of the status quo, none of the countries is able to question the dominance of Israel. But alliances and capabilites will change very quickly and the law of relative depreciation will eliminate the power of Israel.

Lebanon

Lebanon is still no sovereign country, the country is still divided by external forces. Even when the Lebanese are trying to rebuild their state after the war, civil and external, of the last decades.

Several foreign countries are dominating powers in Lebanon. Syria occupies a large part of the country and they are promoting the establishment of a Syrian friendly government in Lebanon. Israel has a security area in the south of Lebanon which is controlled by the South Lebanese army with the support of the Israelian Defence Forces, IDF. And Iran is supporting the Hezbollah organisation which is very active with combatting and ambushing the South Lebanese army and the IDF and they are even launching surface to surface missiles into Israel. Finally the older militias in Lebanon like the Amal and of Walid Dschumblat are regaining their power.

The Hezbollah with overt an covert support from some militias and even sometimes from the Lebanese army is occupied, succesfully, in trying to force Israel out of the Lebanon. The invincibility of the IDF have been hurt badly by recent actions of those organisations. There have been shown up several flaws in the equipment and operation modus of the IDF and the allied South Lebanese army.

The hostilities in Lebanon will not lead to a new all out war. But the future will depend on the negotiations with Syria and Israels policy towards the security zone. The continuation of a low intensity war will go on in 1998 with no clear winner in sight.

Turkey

Turkey faces some external problems with their neighbours. They have problems with Greece about the demarcation in the Aegean Sea and Cyprus. And the relation with Syria is strained because of the diversion of water of the Eufraat river and the close relations of Turkey with Israel. The external pressures will not lead to an armed conflict. It only will be a diplomatic one.

The internal problem is much more dangerous. The problem is the insurrection of the Kurdish people. The main organisation of the Kurds, the PKK, is still very active even when the Turkish military forces have tried, several times, to destroy them by following the PKK in their hideouts in Iraq. The suppression of the Kurdish people will not only limit the economic growth of Turkey but it will also create a bad international position. The only friend left to Turkey is essentially Israel. They are the only country which is willing to help Turkey with advanced military equipment to combat the PKK without to many questions asked. In contrary to the U.S.A. and the E.U. The contacts with the E.U. are already strained because of the unwillingness to let Turkey enter the E.U.

Iraq

The threat of Iraq has been downgraded by the second Gulf War and the succesive boycot and inspections of the United Nations. Another military adventure of Iraq will be very unlikely. The neighbouring states could spend their resources on improving their military capabilities where as Iraq had to spend their scarce reources on remaining in power.

The cat and mouse game between Iraq and the U.N. about the full implementation of the U.N. resolutions are only an annoyance. The threat of Iraq is more of a psychological nature. As long as Saddam Husein is in power with its ambitions of become a nuclear state, Iraq will present a danger to the security of the Gulf and the world.

Iran

The threat of Iran is based on its possesion of oil and the proximity to even larger quantities of energy resources. The military capabilites are not enough to fight a major conflict. But it is enough, especially because of the recent acquisition of modern diesel-electric submarines from Russia and surface to surface missiles from China, to stop the shipping of oil through the Strait of Hormuz.

The support of Iran of terrorism has been a menace in the last years but it seems as Iran is changing their policy of supporting these terrorist organisations. The political costs have outgrown the profits of this policy.

There are two external areas of tension. Iran feels more threatened by the rise of the Taliban in Afghanistan. This fundamentalistic government in Afghanistan is, beside the difference in religious interpretation, even for Iran a bridge to far. Iran actively supports some groups against the Taliban. The other external problem is with the United Arab Emirates. Iran have took possession of two small islands in the Gulf and stationed there some forces. But this will not lead to the use of arms by one of the two sides.

Egypt

The situation in Egypt is much more stabile. Internally there are some problems with a islamic fundamentalistic party, the muslem brotherhood, but this still can be controlled by the security forces. The only external threat is with Sudan which have tried, according to the Egypt government, to destabilise Egypt. Further, as mentioned before, the increase use by Sudan of water out of the Nile increases the tension with Egypt which is dependent on this source of water for their survival.

Saudi Arabia

The last area of tension in the Middle East is between Saudi Arabia and Jemen about the exact line of the border. It is expected that there are some large deposits of energy resources in this borderarea. Any problems will not emerge on the short term and if they do they will be solved by negotiations.

Asia and the Indian sub-continent

There are several areas of tension in Asia and the Indian sub-continent. This area which promisses to become the largest economic region in the world in the next century is abound of internal and external differences. The economic boom of the last decade made it possible for the countries in this region to improve their capabilities and they might be tempted to use the power they gained recently if a situation arises.

Korea

The Koreas, North and South Korea, are technically still at war with eachother. The ceasefire still holds and will probably hold also in 1998. The very bad economic situation in North Korea seems to make any military adventure very unlikely. North Korea could however use violence as a last resort to give them some breathing space and maintain their power but this will be very unlikely. The negotiations between the Koreas, China and the U.S.A., which started in 1997, will give some hope on a better future. The negotiations will stabilise the political situation on the peninsula.

The economic and especially financial problems which surfaced in 1997 in South Korea limits the support opportunities of the South to the North. The negotiations will become very difficult and lengthy because of the specific political situation and the financial difficulties. If a reunification will ever happen is doubtfull, and if it happens it will be a very lengthy process spanning more than 3 or 4 decades. Especially if one considers the difficulties Germany experiences with their unification. And East Germany was better developed than North Korea and West Germany much wealthier than South Korea.

China

China is another example of strong economic growth and a number of internal and external trouble spots. Beside the problems like poverty and unemployment which have their origin in the economic and social changes, the internal problems of China are with independence movements in Tibet and Xinjiang. The people living in these areas have none or little communality with the Chinese. The Chinese government is trying to solve the problems by increasing the number of native Chinese in these regions and with special economic growth programmes. The Tibetians and the muslem people of Xinjiang will continue to fight for their independence on the short term. Especially the muslems will be the most dangerous enemy to China. Whatever treaty China will have with their Islamic neighbour countries, the muslems in Xinjiang will receive overt and covert support from their brothers in race and religion. Where as the Tibetians could destroy the international goodwill/position of China. Both struggles for independence will pose no threat to the integrity of China in 1998. But the problems should not be underestimated it could become a brake on the economic development of China and a lot of violence in the coming years to suppress any opposition to the integrity and government of China.

A mixed internal and external trouble area is Taiwan. China considers Taiwan as a renegade province and therefore an internal problem. But if Taiwan claims independency it could become also an external problem. The proclaimation of independency would immediately demand a reaction of China. It would mean war but the capabilities of the Chinese armed forces are not strong enough to win a war with Taiwan. China will therefore try to isolate Taiwan and destroy its economic capabilities of which they are capable. But the proclaimation of independence will be very unlikely. Both sides are fully aware of the precaurious situation and the advantages of the status-quo.

The external problems are all border questions. China has differences with nearly all neighbours with the exception of the former Sowjet republics, Afghanistan, Pakistan, Birma and Laos.

China has some minor differences with Japan about the nationality of some small uninhabited islands in the East Chinese Sea.

The problems are of a bigger scale with Vietnam. China and Vietnam both claim the Paracel Islands where beside the natural resources some energy resources are suspected.

And finally China has a potential conflict with all states on the South Chinese Sea. The origin of this conflict are the Spratly Islands with their rich natural resources and probably large energy and mineral resources.

China does not possess the capabilities to enforce their claim on the islands on the short term. But if the economic boom continues as in the previous years, China will enforce their claim at the end of the first decade in the next century.

Whatever the arguments they use now, if the economic growth continues as before, China will be the dominating country in Asia in the next century with the attached political and military power. And at that time conflicts will be nearly unavoidable.

Cambodia

The situation in Cambodia is troublesome. The internal problems which already are going on for several decades seem to find no ending. The elections did not bring one clear winner and therefore the old communist party, CPP could stay in the government in coalition with FUNCINPEC, the party of the royalists.

The communists under the leadership of Hun Sen could oust the royalists. The king could stay as the head of state but with effectively no power. Hun Sen seems to be in control with only a little resistance left by small groups of royalists and the last remainnants of the Khmer Rouge.

Hun Sen will have difficulties in getting international recognition but there is no internal threat which can replace him in 1998.

Philippines

Beside the problems about the Spratly Islands, the Philippines have no external threats. The only problem of the Philippines is of internal origin. There is still a secession movement of the muslems, the Moro National Liberation Front MNLF, who do not want to live under the mainly Christian Philippines and demand their own nation. And small parts of the NPA, New People’s Army, who wanted to create a communist state on the Philipinnes.

The scale of this insurgency by the MNFL and the NPA is to small to dominate the Philippine politics and the differences with the MNFL are already nearly solved by negotiations. The NPA is also nearly destroyed only a couple of very small groups are still struggling to survive. In 1998 we expect therefore no big problems in the Philipinnes.

Indonesia

The situation in Indonesia is similar to the one in the Philippines. The only external problem is with China about the Spratly Islands. The internal problems are however bigger than in the Philippines.

Indonesia is plagued with an “agressive” opposition party, the PDI, who demands their rightfull place in Indonesia. They want to act as a opposition party and want the same rights as the sitting Golkar party. The Indonesian government annoys the opposition parties and is trying to make any normal political work impossible. The downturn in the economic situation only makes the problem worser and the need to start some changes in the current political and economic system more pressing.

The dissatisfaction of the population with the political system and the economy have to be met by the government, if they fail to do so more violence can be expected in 1998.

The Indonesian government is further entangled in a secession war on the island of Timor. The former Portogese colony which is occupied by Indonesia for more than 20 years continues to fight against the Indonesian occupation.

The “freedom” fighters of Fretilin are however not strong enough to win the war against the Indonesian defence forces. The status quo will be maintained on Timor. With now and then an uproar of violence.

The other two internal problems of Indonesia are on Sumatra and on West New Guinea. The people of Sumatra want to achieve independence or autonomy status of Indonesia. The energy and natural wealth of Sumatra makes the case of more right/independence a national security issue. There are two organisations who are fighting the Indonesian forces. The peoples movement Aceh merdaka, “for a free Aceh”, is a political movement which is not very violent and could be satisfied by an autonomy status. And the muslem organisation GPK who is engaged in a guerilla war with Indonesia and will be only satisfied with independence.

The other insurgency in on West New Guinea. The people of West New Guinea do not feel comfortable in Indonesia and are fighting for independency. The OPM is the leading organisation in the fight against the Indonesian forces. They get support from Papua New Guinea.

The chances for the people of Sumatra and West New Guinea to succeed are very slim. The Indonesian forces are capable to control the situation but sometimes they have to use excessive violence to suppress the movements. The fighting strength of the movements get lesser by the year. And finally the migration plans of the Indonesian government will destroy the independence plans of the original population. The coming years will see a decrease in violence on the outer islands of Indonesia.

Papua New Guinea

The problems in Papua New Guinea are centred around Bougainville. The people of Bougainville feel exploited by the national govenment who only extract the resources without returning something to the local community.

The Bougainville Revolutionary Army, BRA, demand secession or at least autonomy of their region. After several years of fighting the conflict has come to a standstill. The mines on Bougainville are closed since the fighting started.

The government is not strong enough to counter the BRA with force and have now started negotiations under the guidance of New Zealand. This development will stop the violence on the short term. The final outcome is unsure but the space of movement is not that large for the government, which makes a positive outcome more likely.

Sri Lanka

The security situation of Sri Lanka is undermined by the battle against the Tamil Tigers, LTTE, who fight for an independent state in the North of Sri Lanka. The defence forces of Sri Lanka have improved their position in the battle against the Tamil Tigers but they are far away from victory.

Negotiations with the LTTE have been fruitless and were only used to reinforce both sides military. 1998 will therefore see a continuation of the fight against the Tamil Tigers. The government will try to limit the territory and military power of the Tamil Tigers and at the same time try to persuade the Tamil people by a “hearts and mind” campaign to stop supporting the LTTE. But this will take time and Sri Lanka will see next year a lot of violence before a peace-like situation will return.

Bangladesh

The internal problems of the Bangladeshi government with the tribal peoples of the Chittagong Hill Tracts seemed to be solved by the peace accord at the end of 1997. Some hardliners at both sides will oppose to the accord but they will probably not be able to destabilise it. The refusal to the accords will be local. The Bengali and the Hill people will fight eachother at local disorganized actions. But they do not possess the capabilities to let grow in a national issue.

Afganistan

The situation in Afghanistan is still very worrisome. The Taliban has been able to conquer two-thirds of the country but they failed and will continue to fail to conquer the last third. The Taliban which have introduced an extreme form of islamic fundamentalism are only recognized by three countries in the world.

The opposition against the Taliban are belonging to five different parties. They cooperate in the same way as they did against the Sowjets. The northern peoples were also in the fight against the Sowjet occupation from 1980 till 1988 very succesfull.

Until recently the victories of the Taliban were on known territory against warlords of Pathan decent, the Taliban is also Pathan. The Pathans have got war-tired which made the victory relatively easy. When the Taliban tried to do the same thing in the North where the Oezbek and Tajik people pose the majority things became very difficult. This five party alliance which came into existence after the rise of the Taliban will continue to fight the Taliban in 1998. They will get support from their neighbours in the North. All countries which are bordering Afganistan are supporting the alliance against the Taliban. Those states consider the Taliban as a threat to their countries. With the exception of Pakistan which is supporting and acknowledging the Taliban government.

The civil war in Afghanistan will continue without a chance for one of the sides the create a decisive victory. The status quo will be maintained in 1998 and the tragic epic will continue.

India

The biggest democracy on earth, India, is at the same time one of the most diversified country in the world. It is multi-cultural, -linguistic, -religion and -racial. Sometimes there are some difficulties between all these groups but in general living together has been relatively peacefull if one considers the quantity and intensity of the different groups.

There have been people/groups/sects which demanded more autonomy or even independence from India like for example the Sikhs. But all these movements lacked the support and the stamina to gain there goal.

The exception has been mainly the secessionists in the state Kashmire in the North of India. Since the independence from the U.K. this area has been in trouble. The muslem majority did not feel at home in India. They would have preferred it to be independent or be a part of Pakistan. One-third of Kashmire belongs to Pakistan which therefore has claim on the other two-thirds in India. This gives the conflict an inter-state flavour.

The Kashmiris will continue to support the organisations who fight for independency or becoming a part of Pakistan. They will use force to achieve it but the Indian security forces will prevent much of it. The military strength of the Kashmiris is to small to make an impact. The alleged support of Pakistan is not enough to change the situation but it increases the tensions between India and Pakistan.

This brings us to the major security problem of India. The border problems with Pakistan. The conflict with Pakistan is not new, the two countries already waged two wars with eachother about the state of Kashmire. Both countries do not trust eachother and live behind two heavily guarded borders. The tension is at the highest in Kashmire on the Siachen Glacier. Indian and Pakistani military forces clash regularly with eachother on this glacier. This middle-intensity war goes on since 1984. These artillery and fire-arms exchanges happen in one of the highest and harshest areas in the world.

The politicians of both countries have tried to solve the differences by negotiations but the demands and expectations of both sides are still to much focused on getting everything. The tension between India and Pakistan will continue in 1998 with now and then an exchange of fire. The chance that a new war will start is not very likely, the politicians of both countries are to carefull to let the situation escalate. The costs of war are to expensive on what can be gained.

Africa

What was called the “lost continent” in the last decade, it has made its come back. Africa has returned to the map of the economy and the political affairs. A number of African economies are booming and promise growth for the future. The change of government in a number of southern African countries changed former alliances and new markets and resources are discovered again.

Beside the good news there are also some negative developments. The genoïcide, the corruption, the suppression of the opposition parties, civil war and the several criminal/political organisations who are raiding through a number of countries.

Algeria

The move towards a democratic country have proved to be a nightmare. The fundamentalistic party, FIS, which won the elections in the early 90ies have been put out of power by the defence forces. The defence forces have taken over the government, with consent of the West, to save the country from islamic fundamentalism.

The country has turned into a killing field since the take over of power by the military. The internal situation is very bad in Algeria. The government seems to be unable to combat and defeat the FIS and their armed forces the Islamic Salvation Army and the independent Armed Islamic Group, GIA.

The islamic organisations seem to be free to spread terror and destroy the economy of Algeria. The economic situation and the future seems to get worser by the day. The elections which were staged by the government are won by the president and his party but the number of voters was low. There is no end in sight to the internal problems of Algeria. All negotiations are boycotted by one of the sides so any deal which could mean an end to the conflict has no chance.

Senegal

After many years of peace in Senegal a new threat has emerged against the unity of Senegal. In the south of the country an independent movement have made the call for seperation of Senegal. The movement is partly religiously inspired, the muslems have the idea that they are not good represented by the central government. Not only the political and economical power is unfairly distributed but also the religious values are undervalued by the government.

The situation should not be underestimated. The use of violence is until now limited but if the question is not properly adressed the situation could easily get out of control.

Liberia

The elections which were held in 1997 have put Charles Taylor in the position of president. The warlord who ousted the former president and started a civil war is finally in command. The result of the election is largely due the wish of the people for peace and as Taylor seemed the strongest contender he has got the vote.

The African peace force is leaving the country to leave Taylor in power. Taylor should have, or at least started, to build a new army and police force from all former factions in the civil war. But as it seems Taylor is primarily using the troops from his own faction to police/control the country.

The other factions of the civil war are not strong enough nor possess the legitimacy to question the position of Taylor. But in the long term the ethnic factions will rally against Taylor and this would probably mean another conflict in Liberia. But for 1998 Taylor is in the position the consolidate his power without a threat from another party.

Nigeria

The dissolving of the government by general Sani Abachi, the president of Nigeria, and the low turn out during the following elections at the end 1997 did not improve the position of Abachi. The position of Abachi in questioned by the international community and by the people of Nigeria. The lack of support from the people of the North or the people of the South increase the weak position of Abachi. Its only ally seems to be the defence forces of Nigeria.

We will see an increase of violence in 1998 in Nigeria. The violent suppression of any opposition will be the only way for Abachi to stay in power. As long as the many different ethnic groups in Nigeria act independently against Abachi he will be able to withstand them. But if the northern or southern people can find an operation modus to work together one of the sides can take over control.

But the dominating North which is used to a power position, will not easily accept the South in command. On the other side, the more and more self-conscious people of the South, and most of the energy resources are located in the South, are not that willing anymore to accept the North as the natural leaders of the country.

This constellation of power, resources, tradition and most importantly the changes which could start in Nigeria will promise a new civil war in the near future. 1998 will be the year in where the possible alliances will start to cooperate. The government will react through the increase suppression of the opposition. Which in the end speeds up its collapse.

Congo – Brazzaville

The civil war in Congo seems to be over. The new president Denis Sassou Nguesso seems to have the support of a number of countries like Angola and France. This creates an opportunity to consolidate his power and start to rebuild the country.

The options of the former president Pascal Lissouba are limited. He still has a number of forces under his command. The forces are only a fraction of the former national army. They have fled to the North of the country after the defeat against the militia of Nguesso. To regain power Lissouba will need the support of other countries. This support will be however limited to non-existent and this will change the remaining forces of Lissouba quickly into an armed gang. Unless Lissouba gets support from abroad he will be finished within a year.

Congo – Kinshasa

The forces of Kabila have taken over the country with an astonishing speed. There are only a couple of internal security threats left to be solved.

First there are some foreign organisations operating from Congolese territory into Uganda. These are being countered in a joint operation with Ugandan forces.

Second there are several movements in Congo who want more autonomy or even independence from Congo. These movements already exist since the independence from Belgium. A number of provinces could become semi-independent during the Mobuto regime who was only interested in getting money out of the country. Who was satisfied as long as the money arrived and the provinces called themselve to be part of Zaïre.

Especially the provinces of Shaba and to a lesser extent Kivu see opportunities for themselve if they would be independent. At the moment they are not violent or are considering using violence to gain their goal. But the central government in Kinshasa should take care not to underestimate the wishes of the provinces. They could easily mobilise the people, funds and international support to start a fight for independence.

Rwanda

The Tutsi minority has regained power after a lengthy guerilla war and the massacre which the Hutus committed against moderate Hutus and Tutsis in general. The new Tutsi government could install their power structures in the country but there are still several Hutu groups which resist the new situation.

The Hutu extremists operate from within Rwanda and out of Congo. The Tutsi dominated Congolese army is cooperating with the Rwandan army in the fight against the Hutus. This conflict will continue and intensify in the coming years. The Hutus will prove difficult to defeat especially because the conflict will have a guerilla nature and the conflicting parties will not come easily together to negotiate. The political differences and the genoïcide has created to much hate and distrust.

Burundi

The internal situation is also stressed in Burundi. The Hutus and Tutsis show an equal dislike towards eachother as in Rwanda. The situation is only kept better under control by the government.

The tensions in Burundi will increase in the coming year. The Hutus resist the division op power as it is in Burundi. The Hutus organize their resistance and even use violence against the government. It seems as Burundi is on the way to a civil war. The Burundi government is distributing weapons to their people, the Tutsis, to defend themselve against the Hutus. The Hutus who remained in Burundi and the ones who return from the Congo and Tanzania are concentrated in several areas which will diminish the support to the Hutu organisations. This is positive to reduce the violence on the short term but it is no solution to end the conflict. The spiral of violence is still in action in Burundi.

If this development can not be turned in another direction civil war will be unavoidable in Burundi. The situation is worsened because of the support the ethnic groups receive from eachother in the Congo, Rwanda and Burundi triangle.

Uganda

The Ugandan government under the leadership of Museveni has pacified the country after decades of civil war. Uganda only has some minor internal conflicts with a couple of small but very agressive groups like the West Nile Liberation Front and the Party of God. The first group operates out of Eastern Congo and the latter out of Sudan.

Both groups “excel” in spreading terror but they are not capable to make an impact on the government. In cooperation with the Congolese army the Ugandan army is trying to eliminate the West Nile Liberation Front. The elimination of the Party of God has to be done on their own because they do not receive any support from the Sudanese government who is supporting the Party of God.

The use of guerilla warfare and the inhospital terrain makes destroying both organisations very difficult. The violance will therefore continue in 1998 but time is working against those small organisations with none or limited outside support.

Sudan

The islamic fundamentalistic government of Sudan is trying since decades to eliminate the christian and indigenous beliefs in the south of Sudan. The goal of the Sudanese government is to make the whole of Sudan an islamic country.

In the south the people are resisting the northern dominance and at least two organisations are fighting against the north. The SPLA under the leadership of John Garang is the largest and there is a smaller organisation which is split off the SPLA.

Since the southern organisations cooperate with a couple of northern tribes with the same goal of eliminating the islamic government they are more succesfull in defeating the northern forces. Before that cooperation the south was only active in the southern parts of the country, but now they are also operating in the north of the country and push the government to the negotiation table.

The conflict will continue in 1998, the internal situation will deteriorate. The government forces will be pushed even further in the defensive and the already bad international relations will worsen. The Sudanese support for terrorist organisations brought them only two friends, Irak and Iran. Two countries who can not give the necessary support when you are dealing with a civil war.

Somalia

The internal situation in Somalia seems to get better after the peace accords between the 40 warlords are signed. The two largest warlords, Aideed and Mahdi, support the agreement. Even the warlord, the ruler of Somaliland, in the north of the country is participating in the accord. This could reunify Somalia as one country instead of the several small entities which each its little leader.

The solution to the chaos in Somalia, the Accords of Egypt, will not be easy to fullfill. The number of participants with each his own interests makes it difficult to satisfy all those little wishes of each warlord. The conflict will renew with increased intensity if one warlord has the idea that his interests are violated.

The bad economic and social situation in Somalia, which is deteriorated even further by the natural disasters of the last years, gives a peace accord a better chance. But only time will tell what will happen. Somalia will continue to be a dangerous country with no clear government. Despite all good intentions of the Accords of Egypt the situation remains volatile.

If the international support organistions and NGO’s would return to Somalia the warlords could be tempted to startover their “racketeering” operations and this would mean the end of the Accords of Egypt.

South and Middle America

The political situation in Latin America has shown an impressive improvement. The former dictatorships are replaced by democracies with the exception of Cuba.

There are still a number of sensitivities between a number of South American states but they will most likely not trigger a war between two of more countries. The problems we mean are the traditional fears between some countries. Like Chile and Argentinia, Argentinia and Brazil. But these fears are appropriately dealt with through increased cooperation between several countries. Or about the purchase and stationing at the borders of “new and advanced” equipment. For example the acquisition of Leopard I MBTs by Chile which is experienced by Bolivia as threatening.

There are four areas of tension remaining in Latin America.

Mexico

The Mexican government has some problems with leftist organisations like the CND who want to improve the living conditions of Mexican farmers and the poor people in general. Some of those organisations have a strong indian-identity. Like the Zapatistas in the province Chiapas. The Zapatistas fight for more rights and the re-allocation of land to the original and poor people in Mexico and Chiapas in particular.

In some parts of the country those organisations can make a small impact on the local government. It can make life difficult at local level but the leftist organisations are not strong enough to resist the security forces of Mexico. Negotiations are the only way to change the situation but all negotiations are stalled because both sides are sticked to their views. Only time and international pressure can bring change to the Mexican society.

The actions of the Zapatistas and the like will be a nuisance in the future and can be controlled by the security forces. They can therefore not make a lasting impact on the government. Except if the government does not adress to the needs of the worser off in the country. Appropriate action is needed to avoid a massive support to organisations like the CND and the Zapatistas. If they would gain coutrywide support this could mean a revolution in Mexico.

Columbia

Columbia seems to be a country with a government without any influence. The security forces are not able to go where they would like to go. The “no-go areas” are controlled by communist guerilla organisations which are paid and funded by the coke-business.

Columbia is degraded to the unsafest country of South America. The communist guerilla is governing, effectivily, parts of the country. Beside the political defeat even criminal gangs, who cooperate with the communist guerilla in the coke business, seem to be free to do what they want. Kidnapping and racketeering have become part of the normal civilian and business life.

It will be very difficult for the government to restore order in the country and gain back the territory given up to the guerilla. The government should be able to do it with support of the international community. They will however demand that also the government itself should restore integrity in their ranks.

In the mean while Columbia will be a dangerous place to be in 1998. The chaos will continue as it did in the last year with the government only in command in the larger cities and some parts of the countryside.

Ecuador

The situation in Ecuador is about border differences with Peru. Since Peru was granted large parts of territory in the protocoll of Rio de Janeiro, which was administered before by Ecuador, differences were unavoidable.

None of the two countries have ever accepted the protocoll and several small exchanges of fire have happened. Since the last armed conflict in January 1995, there has been signed a cease fire and an international force is patrolling the border. This last cease fire did not solve the conflict. Negotiations should bring a peace treaty but as none of the parties is willing to give up any of their demands, peace will be difficult to achieve.

1998 will see a continuation of the tensions like in 1997, an armed peace is the best which can be reached in 1998. On the medium term a new armed conflict is one of the possibilities. An uparmed armed forces of Peru and Ecuador and the rise of internal difficulties in Peru makes the start of the war more likely.

Peru

Beside the territorial differences with Ecuador, Peru is struggling with another problem. Two leftist organisations, the Shining Path, Sendero Luminoso, of peasant decent and the more intellectual MRTA, is making life difficult for the government. The Shining Path is ambushing the government in the countryside where as the MRTA is more aimed at the city.

The goals of both organisations is to improve the living conditions of the poor through a communist program. The effectivity of both organisations is low. They do not have the resources and even more important they do not have the support from the people to succeed.

The security forces have been able, in cooperation with the people, to eliminate large parts of both organisations including the top. They probably only have 10 % of the fighting strength they used to have for a couple of years.

The Shining Path and the MRTA are not beaten and they will reorganize themselve and fight back. The government has to improve the living conditions of the people and relief the farmers of the service in the Rondas Campesinas, the village militias which are for a large part responsible for the losses of the Shining Path. If they fail to do that the government could easily loose the support of the people.

The future of Peru could be promising if they take the right decisions. 1998 will not show an increase in violence but it will be the year which decides about a peacefull or war ridden Peru 2000.

December 1997

December 1997

The threat of IT – Turmoil in Asia

The threat of IT

IT, or information technology, has become a major factor in the civilian world but also in the defence sector. IT improves the quality of life, things go faster, better and with lesser input.

IT means more than just the collection and dissemination of information. It encompasses the whole spectrum of everything what you can do with information. The jamming, the falsification, the manipulation, the collection, the processing, the emitting, the targetting, dissemination and so on. Information does not only play an important role in the military but also in all parts of the civilian society. The goal of IT in the defence forces is to reach a superior management of your own forces and to attain the ultimate victory as described by Sun Tzu: “vanquishing the enemy without fighting”. The decisive force multiplier of the future is therefore information. The side who possess the information dominance will most probably win the next conflict.

The giant leap forward because of the introduction of IT has also shown the achillesheel of modern society and their armed forces. IT is very susceptible to intrusions from the outside. With only limited resources you can enter IT systems and change their operation modus or even destroy it. Where as military systems are more or less protected against such intrusions, however they are certainly not invincible to intrusions, civilian systems are on the other side very easy to penetrate.

Most countries but also terrorist organisations are putting more attention into capabilities to exploit the weaknesses of the modern society. They are not only targeting military systems but especially civilian systems which are an absolute necessity like power systems, telecommunication, finance systems, sewage and water purification complexes and logistic systems which supply the necessary items to an urbanized society. If you destroy the command and control systems of modern society it will come to a standstill within a week. The same is ofcourse true for the defence forces as we have seen in the second Gulf War when the Iraqi forces were immobilized when their C3, Command, Control and Communications, systems were destroyed or jammed.

The military and especially the governments of the more developed countries are preparing themselves to fight the war on information. Several study groups have been launched to find out the weaknesses of our modern society and ways to eliminate or at least minimise the impact of IT warfare on a developed society.

This is just the beginning of a new kind of countering modern warfare. Therefore should the efforts to stay ahead in IT warfare be intensified. Study groups and firewalls to limit intrusions into IT systems are not enough. The intruders should be automatically tracked and indentified and at best active systems should be introduced to strike back at the intruder and eliminate his IT capabilities.

We should never forget that the development in the IT sector is moving ahead at an astonishing speed. And the basis of IT is knowledge which can be learned by everybody and can be moved across borders without a possibility to stop it. That is why we should continuously improve the capabilities on IT to stop rogue states and terrorist groups exploiting the possibilities of IT.

Turmoil in Asia

The Asian miracle has turned sour. The peculiarities of the Asian countries, like the protected home market, the availability of easy and cheap loans and the system of nepotism and cover ups, were the main reasons for the dramatic economic situation. After the devaluation of most of the Asian currencies and the subsequent fall of the stockmarkets all over Asia the last of the walls of Asian prowess fell down. The already stressed Korean economy and the problems in Japan were the last nail to the self esteem of Asia.

The Korean system which created in two decades the worlds tenth economy became victim of the trap they had created themselve. The Korean government builded there economic rise on a number of large companies, the Chaebols. Those chaebols were supported by a protected home market and very cheap loans to grow into global operators in a number of sectors, like steel, memory chips, electronics and cars. The already stressed markets were flooded by cheap products from Korea and the price was driven down even further. Then the devaluations of the Asian currencies destroyed the already small profit margins of the chaebols. The repayment of loans of as well the chaebols and the Korean government became increasingly difficult and finally the weakest of the chaebols had to file for bankruptcy and the government had to ask for support of the IMF.

This is a short summary of the beginning of the economic downfall in the northern Asian region. In the mean time the drop of the Nikkei, the Tokio stockmarket, under the 16.000 level forced the financial institutions in Japan to asses their position.

The Japanese financial powerhouses, or better former powerhouses, are finally coming to terms with their actual financial situation. Several institutions including the fourth largest and oldest broker, Yamaichi, went out of business. But it seems as Japan finally is introducing the necessary steps to clean up the mess after the bubble economy of the eighties bursted.

The bad loan problem has to be solved. As long this is not the case the Japanese banks will continue to feel the pressure of insolvency and they will not be able to grant loans to new enterprises which could stimulate the growth of the Japanese economy. As long as the bad loans stay on the balance sheet the Japanese economy will be in a vicious circle with only the export market as a small relieve.

The Japanese government has to open up the market and introduce harsh measurements and regulations to eliminate this problem. A number of banks will go bankrupt because of this but the survivors will emerge stronger as ever before. This is the only option to pull Japan and a great number companies out of the problems.

An economical and financial healthy Japan can than be the stimulant to push all other Asian countries to introduce the necessary steps to regulate their economies. Only after new regulations are introduced and the specific Asian “values” eliminated international investors and the national investors will be willing again to invest and re-start the economic boom. The devaluation of the currency, as happened because of the internal problems, will not suffice to solve the problems. It will promote the export on the short term but it will also destroy investment opportunities on the long term.

The investments are the pre-condition to stimulate trade and the economy. The importance of capital will only increase in the future because labor input growth is already to expensive to make an impact. There are other countries which offer cheaper labor costs than most of the Asian countries. The Asian Tigers and Tiger-cubs have to become investors into high tech and innovative production to maintain the impressive growth figures.

Asia is still a very promising region but the market has to be opened, the financial institutions regulated and the government influence minimised. This will be a guarantee to economic growth and political stability. The Pacific area can become the most important area in the next millenium but only if they can get their act together. This has nothing to do with Western values but just with a sound fiscal, economic and business policy.

November 1997

November 1997

Consolidation in the French defence industry – Turmoil in Asia

Consolidation in the French defence industry

The end of the Cold War, the peace dividend and the following economic problems which surfaced in Europe destroyed the market of most of Europe’s defence industries.

Where as most of western Europe’s defence industries are publicly owned in France the majority of the companies are state owned or they possess a controlling stake in the firm. While the others could adapt to the new situation the French companies could not. The structures and the staff of those companies stayed the same.

Several governments in France tried to change the situation but the difficulties with the law, a number of employees at the large defence contractors are civil servants, unions and also their own policy were the reason that none of the plans could be implemented to streamline the defence industry.

The Chirac government tried to merge the French defence industry, through privatisations, into several leading groupings which at their turn could be merged into an European group with a stong French influence.

The election brought however the socialists to power which limited the influence of president Chirac. The socialists were not favour of privatisation which is nearly a precondition for further cooperation with other European companies.

The socialist led government also wanted to revitalise the defence industry. To keep the election promiss, to stop the privatisations, they propose a part privatisation were the government still wil be the dominating power.

Essentially this means that there will be a very large French defence company with mergings and holdings in all important defence producers. The privatisation of Thomson-CSF is called off. Instead it will merge or exchange stocks with Aerospatiale, Dassault and Alcatel. Another Thomson-CSF joint-venture with DASA, TDM formerly Thomson Brandt, should on the other hand exchange stocks and merge with GIAT. Further alliances with smaller companies will be constructed as well with the objective to create a very large company with allround capabilities for land and air forces systems.

This new Thomson-CSF conglomerate would be the leading company in Europe in electronics and aerospace and a major player on nearly all other fields. This state-owned or at least state controlled giant will possess none what so ever attraction to cooperate with. The future of such large gouping will be bleak because they will not be an attractive partner in the next major armaments programmes. And cooperation with European partners will be absolutely necessary to finance those programmes.

The creation of an European defence industry to support the major programmes or to counter the large US companies will only be possible without the Thomson-CSF conglomerate. The French gigant would in every cooperation/merger automatically take over the leadership of the operation. The French government ownership/control increases the dominance of the grouping. And this will be unacceptable to the other partners in any future cooperation.

The consolidation of the French defence industry is a necessary long overdue affair. But the creation of one dominating French group will prove to be the wrong way. Any further European integration will be impossible. It would have been wiser to create two or three French companies which could integrate in the European scene on terms of equality.

Turmoil in Asia

The Thai currency crisis and the collapsing stock market of Bangkok was the initiation of a crisis in first South East Asia which later also hurted Hong Kong and even reached the Western stockmarkets.

The fast growing economies of Asia which seemed to be unstoppable were in fact mixed with fatalities like nepotism, failing currency management, lack of financial regulations in the banking system, an underdeveloped infra-structure and uncompetitive production and services in the commercial sector. The countries is Asia and especially South East Asia did actually possess more economic and also political problems than one might have thought.

The “tigercubs”, Thailand, Indonesia, Malaysia and to lesser extent the Philipines, experienced the largest declines in the value of their currencies and the stockmarkets. But the fatalities mentioned above are also the widest spread in the “tigercub” countries.

The advantage of South East Asia was their cheap labor, a relatively well educated population, an advantageous investment climate and a promising market for the future. The “tigercubs” where able to develop theirselves into prosperous economies. This prosperity was at the same time the major cause of the nepotism, a failing currency policy, the bad loans, the lagging development in the infra-structure and the failing business development.

These difficulties could have maybe overcome by a continuing economic growth and foreign investment but the rise of the US dollar made the local currencies an easy target to the international money traders. And it was this weakness which the start of the nightmare, the devaluation and the consecutive drop of the stock market. But the internal weaknesses of the “tigercubs” were to many and already to far penetrated in the society that a happy end was very unlikely.

Hong Kong was dragged into the crisis mainly because the Hong Kong government tried to keep money traders out by rising the intrest rate to keep the connection with the US dollar and because of problems which came forward at the development/building companies in the already overpriced real estate/property market.

The Hong Kong collapse was the start for a worldwide drop in stock prices. All markets are for a more or lesser extent influenced by the Asian economies/markets. The international finance system is interdependent to a larger extent than most had imagined. The Western world will however be able to recover itself from this correction within a month. The Asian region however will need much more time to restore the trust of the investors before they will comeback.

It is therefore of the utmost importance that the Asian “tigercubs” governments start with the reconstruction of their economic system. Those changes are necessary because without it they will never receive the support of the IMF and neighbouring countries, the trust of international investors and to get back on the fast track of growth.

The Asian stockmarket is now however cheaper than ever before, they have lost more than a third of their value in the last month. It might be early but a number of stocks look very interesting at the moment. This same is true for the Western world most stocks are becoming very attractive.

In Asia one should limit its purchases to Hong Kong, Taiwan, Japan and possibly Singapore. The companies which are active in the electronic-, trading, finance and transport sectors with a high export potential will show the best results in the last two months of this year.

The western stockmarkets will also see a lot of growth, before the end of the month it will have reached the same level as at the beginning of October 1997. We maintain our listing as given in our report of August II, 1997. They are as we call them quality stocks with a lot of potential even if we have reached the same high levels as we have seen before. You could add to that list Merck, Miravant Medical, J.P. Morgan, BankAmerica and Banc One, after the decline these stocks are bound to show some impressive growth in the next quarter. The energy and oil exploration companies will also see some extraordinary growth, the coming winter and especially the rise in tension in the Middle East are the main cause for it. You could think about Mobil, Occidental Petroleum and Atlantic Richfield.

October 1997

October 1997

Israel, an outlook – Rotating stocks into small and mid caps.

Israel, an outlook

Since the election of the Benjamin Netanyahu coalition into government the situation in the Middle-East has changed dramatically. Not only the political landscape changed but also the economical and social situation turned into misery.

Netanyahu promised in his election tour peace with security but the reality brought, ones he was in power, insecurity without peace. The peace process has been put on ice. The Israeli government considered the needed action to sustain the peace process as a danger to the security of Israel. It restarted the building and enlargement of settlements on the West Bank, it demolished houses of Palestinians which were allegedly illegal and it did to a certain extent destroyed the economical buildup of the Palestinian entity.

The Netanyahu government could not stop the suicide bombings which happened every time the peace process seemed to get going again. Netanyahu accused the Palestinians for not doing enough to destroy the terrorist organisations of Hamas and Jihad. The Palestinian authorities are however not competent and lack the intelligence organisation to combat those organisations. A further problem with the terrorist organisations is their cell structure which makes eliminating them very difficult. And the Hamas is not only active with violence against innocent civilians but it also has a very large humanitarian organisation. It supports schools, medical centers and poor people. By destroying this part of Hamas would mean an end to the Arafat government in the Palestinian entity. Especially if Arafat is not able to replace the services of the Hamas humanitarian organisation.

The political change

The internal situation in Israel is no more stable than during the previous government, probably even less secure. A large number of people are dissatisfied with the situation. The Israelis because the terrorist organisations continue with their “senseless” bombings and the Palestinians because their chance for an “independent state” is getting very unlikely.

Netanyahu seems to get away with his confrontational policies which supposed to bring more security to Israel while at the same time keep as much influence and territory as possible. The opposition in the Knesset but also the people on the street can not stop nor change the policy of Netanyahu.

The international community disapproves this policy but without backing this disapprovement with any sanctions. And as long as Israel is supported by the U.S.A. it does not have to care to much about the feelings abroad.

This policy will however deliver no security on the long term, it is even doubtful if it can guarantee any security on the short term. All the actions of the Israeli forces in Israel, the West Bank, Gaza and even in Lebanon proved to be very ineffective and expensive in terms of human lives.

The external postion is even as bad. The security zone in Lebanon is becoming more and more a killing field for Israeli soldiers. Even the most elite of the IDF, Israeli Defence Forces, get massacred in Lebanon by a reinvigorated Islamic resistance of the Hezbollah, Amal and even the Lebanese army.

The relations with the Arab neighbours seems to deteriorate with the day. Only Jordan tries to save the peace process. There are even rising tensions with Syria who is accused by some Israeli military officers of preparing a war against Israel to regain the Golan.

The internal and external position of Israel is undermined by the one-sided approach of Netanyahu who promised peace with security but delivered insecurity without peace.

The social and economical situation

Since the election of Netanyahu and freezing of the peace process the economy has turned bad. The growth has returned to low levels, the state expenditures are not inline with the diminishing tax returns and the unemployment is rising again. The peace process was the stimulant of an incredible economic growth in Israel. But the harsh policies of Netanyahu destroyed the confidence of foreign investors, hampered the export of Israeli products and even reduced the consumer demand in Israel.

The weak Israelian economy and the even worser if not to say disatrous economy of the Palestinian entity could be the seed of even more instability in the future. In this situation there easily starts a reinforcing spiral of social misery which leads to a greater attractiveness of extreme religious organisations in Israel, Gaza and the West Bank.

The fundamentalistic groups in both territories are already becoming more powerfull because of a growing membership and especially in Israel because of the important role they play in the coalition government.

The deteriorating economy will reinforce their influence in the society. This will eventually increase the contradiction between the two opposed groups, Judaism and Islamism. Between those two fundamentalistic groupings peace will be impossible and a disaster only a matter of time.

The Israel – Palestine relation

If we consider the difficulties described above it will be absolutely necessary to give the peace process which started in Oslo another chance. The two important parties, the governments of Israel and the Palestinian entity, have to come together again and start talking to implement the Oslo accords.

To get peace with security sacrifices are necessary by both parties. The Israeli goverment has to grant the Palestinian entity the means to build a viable economy in their own territory. By this way Arafat will be in the position to eliminate the humanitarian part of the Hamas and eventually will also be able, with Israeli training and suppport, to eliminate the armed wings of the Islamic terrorist organisations.

The Palestinian authorities in cooperation with Israeli security services should do their best to minimise the influence and actions of the several terrorist organisations. They should do this not only if there is heavy pressure from Israel and the U.S. but make it a part of their policy. If a thorough plan is carefully executed the terrorists will have difficult job to survive.

In the mean time total security will not be possible for Israel but if the peace process will be fully implemented the terrorist threat can be minimised. This together with an economical recovery of Israel and the Palestinian entity will be the only possibility for a lasting peace. The Arabs and the Israelis will not become friends but in this way they can live together. That is a mighty advance on the hostility from this year.

Rotating stocks into small and mid caps

The New York stock exchange showed its volatile behaviour in the last month. The blue chips of the Dow went down and up where as the Russell 2000 seemed to outperform all expectations.

We remain however positive about the future of the blue chips. Therefore we maintain our buy rating on the stocks we listed in our last report. We envisage a continuation of the volatility but at the end of the year we expect the Dow Jones Industrials at around 8.200 maybe 8.400. The large caps, the multi-national companies, with a low P/E rating and an attractive product package and export potential still offers some very good chances to make a more than average return.

The small and mid cap stocks will also see some impresssive growth on the short term. They might even outperform the big caps on the short term. The booming American economy will be a guarantee for the performance of the Russell 2000.

We like the following mid and small cap companies. They will most probably show a better performance than their counterparts. In the defence sector we like Tracor, Stanford Telecom, Viasat and Orbital Sciences. In the transport sector we expect a lot from US freightways, Comair and Atlantic Coast Airlines. Further we like companies like Method, Vesta, Swiss International, HS Resources, Coach USA, Baker Fabric, Analog Devices and Measurement Specialties.

All these stocks could be an interesting investment but we prefer the larger international companies because they offer a better potential on the long term and that is the game we like most.

September 1997

September 1997

Sense and nonsense about diversification – The market in volatility

Sense and nonsense about diversification

Diversification, the policy of companies to move in areas which do not belong to their core or traditional activities. Most of the larger and successfull companies in the western hemisphere at some time tried to diminish their dependency on their traditional activities and increase their sales and profits by buying into or start on their own capabilities in new very promising markets.

In Asia a number of companies started as diversified companies and they became very succesfull in their operations. These conglomerates are active in numerous fields ranging from financing to steelmills and electronics.

What is the right or better policy to pursue, concentrate on the core activities of your company as most business consultants will tell you or diversify or stay diversified as some especially Asian companies do.

The western experience

The activities of companies in the western hemisphere were mostly limited to the fields in which they started. Only if the company was successfull they started to move in to other businesses. Those businesses where in the first time mostly related to their original activities.

The move into other areas was out of a surplus of cash which needed to be invested and the success some new trades, like technology, had shown which was very attractive to an investor.

Only a few companies started as a conglomerate, mostly they where involved in the trading business or put together through acquisitions of an investment house.

The basic idea behind the conglomerate was that the different divisions of the holding could support eachother. The element of synergy should deliver a better and more profitable company. And being involved in more than one business means being less dependent on the well being of that particular business.

The results of those conglomerates were mostly disappointing. Some divisions did very well but the profits of these were used to cover the losses of the loss making divisions. After some time the decision was taken to sell or close down the loss making or worser perfoming divisions and return to the core activities.

A number of respectable companies followed this path like Exxon, AT&T and Daimler Benz. They all tried to move into areas which were new to them. After some time they have sold those divisions which did not deliver what was expected.

The synergy did not produce better results, the divisions could not work together, the costs were going up every month or the divisions were inadequately managed to deliver the return which was expected.

And these four elements are the main problem why diversification did not bring the expected advantages. Synergy is only working if the elements which should work together can do something for eachother. If this is not the case, there is no reason to combine them.

To make diversification effective and create synergy the different divisions should be able to work together. But the divisions mostly have a different business climate and hierarchy. A particular climate and hierarchy can be very succesfull for one business but could be absolutely disastrous in another business. The management team of the holding company should consider this and create and stimulate a system which is best for each business but at the same time be the impartial broker to induce cooperation between the divisions.

If you enter a new business the start up costs can be high and the returns in the first years can be disappointing. These high cost and low returns combined by a incapable system of cost control will make diversification look like a horror trip. Some knowledge and financial stamina is therefore necessary to enter a new business. The new operation should be like a chrystal ball to control the financial situation. At every moment the holding company should be able to evaluate and question the policy of the management but at the same time give them enough space to run the operation.

The management of the holding company and the divisions is equally important to make a conglomerate work. The holding company should support the management of the divisions. They are the specialists and know what is needed to make a certain operation successfull. To much meddling of the holding company will destroy the creativity and profitability of the division. The management of the division should on the first place improve the position of the division and only after that look what it can do for the group or holding.

The conglomerate is not a grouping in which one part is saving the other part but a business concept were one division maybe helping the other division. Each division stays responsible to deliver sales and profits and at the end create a financially strong and independent holding company.

Most of the multinationals in the West considered their diversification plans as a way to support the core activities and become more independent from one business. They were not able or willing to accept the idea that diversification would change the business structure of the company. The management did not behave as the management of a holding company should do. The intrests of the core activities were still the center of there attention.

Only a few companies became successfull conglomerates. A company like General Electric behaves as a good holding company. Another example is General Motors which had a bad start because they wanted to use the capabilities of new acquired companies to support their main car business but later changed their policy after some big disappointments. GM let companies like EDS and Hughes manage themselves with little interference of the GM management and consequently they became very profitable operations.

Conglomerates in Asia

The rise of the Asian economies is based on the performance of a number of large conglomerates in each of the tiger economies. Everybody knows them; Mitsubihi, Matsushita, Mitsui, Hyundai, Samsung, etc. These large companies were build with the help of the goverments in each of these countries. The goverments furnaced them capital, a protected home market and support inresearch and legislation.

The conglomerates operate in nearly sectors of the economy. They have chemical, electronic, steel mills and processing, services, financing companies.

The wide spread of operations where for one part a necessity and one part wanted. It was necessary because all those companies started in relatively backward economies they had to take care that all parts which were needed for the production had to come together at the right time. The only way to do that was to start and operate so many companies themselves.

It was a wanted development because the goverments of those countries sensed that if they wanted to promote the economic development, the economy had to be supported as efficient as possible. To support only a few companies would bring the highest returns and the fastest economical development.

Most of these heavily diversified companies proved to be efficient and successfull. Even when these economies and companies belong now to the developed world the performance of most of those conglomerates did not loose their dynamics and profitability.

The diversified company has proved to be a successfull concept in Asia. The conglomerates could develop itself into global players and the national economies could get out of the misery which was effectively left behind after the second world war.

The conglomerate?

After considering the western and eastern conglomerate it can be stated that a pro or contra is not possible. In the West a conglomerate can be successfull if the conditions are right and the rules as mentioned above are implemented. The return to core activities is easy and profitable but to become or stay a conglomerate can be as profitable and will promise an even brighter future. But the companies in the holding should be in the best case complemental/supplemental, independent, have the appropriate management and the support of the holding company.

In Asia the conglomerate was a necessary and wanted developement to promote the the economical development. But even now the conglomerate is still an efficient and profitable company.

The conglomerate will be in existence in the future and probably with better results on the long term but it is more difficult to manage.

The market in volatility

The Western stock markets showed there volatile behaviour in the last two weeks of August. The markets reached their best marks but also had two corrections. But the market could nearly regain their former position before turning down again.

The US stock market was under the influence of a bad bond market, threats of inflation and computer sell programs. At the same time many investors became nervous about the large caps and started to rotate their holdings into mid and small cap stocks.

The mid and small cap stocks had shown an impressive performance in the last three months. Where as the S&P 500 had a return of 6 % the Russel 2000 showed a healthy 12 %. The situation seems the same as a year ago when the nifty fifty of the Dow became appearently exhausted, the small cap stocks were the one which promised the bigger growth.

It is therefore not a bad policy to look into the stocks of the Russel 2000 to spread the risk in your portfolio. But on the long term, three to five years, the Russel 2000 will not be able to outperform the Dow.

The big players of the Dow could be less performing in the second part of the year but there are still a lot of companies with low P/E ratio which still offer some growth. You could think about Salomon Brothers, NCR, ITT industries and Rowan companies.

The correction of these weeks will not last forever, the economic forecasts are simply to good to make the correction lasting to long. But however do not expect the same impressive growth as in the first half of the year. At the end of the year we expect the Dow at around 8000.

It is however possible to increase your stock holdings, in that case we favour the above mentioned stocks with a low P/E ratio and a number of the stocks we mentioned in our last update.

The volatility will however continue to harass the stock market with even a larger correction, possibly around October, but do not get exited about that, the losses will be recovered within a month. If you want to be on the safe side you could however hedge your holdings but only if you are in need of money in the last quarter of the year. Otherways it is only a waste of money.

August 1997, II

August 1997, II

Financial affairs

Manage your portfolio

Nowadays everybody has to do something to secure an income if one is retired, want to buy something expensive or wants an extra source of income. It is therefore of the utmost importance to start building your own portfolio as soon as possible.

There are essentially two ways to do it. First is ordering your bank or financial institution/advisor to buy some stocks, bonds or fund which will deliver the best return according your accountmanager. Secondly, is to manage your portfolio yourself.

This is possible even if you do not possess the same infra-structure and knowledge as the financial houses do. The information delivered by the internet, CNN, CNBC, newspapers and more specialized financial/business magazines is more than enough to do it yourself. Especially because your are investing for the long term result.

Your portfolio should be balanced and aimed at the long term. This way your portfolio does not inhibit not to much risk and also delivers the certainty of getting an extra income. The risks of your investment can be limited by decreasing the size of the stock part of your portfolio.

A portfolio which will deliver growth, an extra yearly income and certainty could be look like this. 10 % should be invested in property funds, 25 % in bonds and the remaining in stocks. To get the most out of stocks, the selected stocks should be the so-called blue chips. The larger international companies with an attractive package of products and a healthy balance sheet. These stocks promise growth and wil take care that you do not have to change the composition of your portfolio every week or month.

The 65 % of stocks should be spread over the stockmarkets of the world. You could select individual stocks in the developed world and for example the Asian/Tiger funds of Templeton or Morgan Stanley in the developing nations. A good division is 30 % in US stocks, 27,5 % in Western European stocks, 7,5 % in Japanese stocks, 7 % in Hong Kong/Chinese stocks or funds, 7 % in South East Easian funds, 8 % in Russian/Eastern European funds and 8 % in South American stocks and funds.

By using funds in developing or less developed nations you can get the profits of the emerging markets and at the same time circumvent the information, legal and financial problems which are connected with investments in developing nations.

Managing your own portfolio will secure your financial future and at the same time leaves you in control of your money. And it is nice to do.

The markets

The performance of the leading stockmarkets of the world has been staggering. There have been growths figures of up to 45 % in some markets, with individual stocks sometimes doubling their value.

The professional investors got nervous about this growth. But they could not get out of the market. The pressure of the market to deliver growth in their portfolio at least equal to the market index forces them to continue the game.

The correction which happened in the second week of August was nothing more than an expression of this nervoussness. A weakness in the bondmarket and the expiration of optionseries in the same week set off the sell programs of several stockmarkets. This correction was immediately taken as an excuse to take profit. The markets lost in week between 5 and 10 % in value but considering the growth of the first half year the losses are minimal.

The price of stocks have got expensive but till now they are still more or less in accordance to the financial situation of the economy. A fundamental analysis of several stocks showed that there is still more growth possible. The market will also recover itself from the losses pretty fast. It is now very attractive to buy some extra stocks in the coming weeks, they are now cheaper than for two weeks.

The US market

The US stockmarket will be even after this correction an interesting place with some growth potential. The growth will not be that impressive as in the preceding 18 months but within two years they will see some very impressive growth.

The following stocks will show some decent growth figures. AMEX and Citicorp in the financial sector. GTE and AT&T in the telecommunications sector. Intel, Motorola, Compaq, Sun micro systems, HP, Lucent technologies, Honeywell, IBM and Dell in the IT sector. Sears and Kroger in the retail sector. Exxon, Texaco and Schlumberger in the oil business. The pharmaceutical sector will also see some growth after a disappointing July. Companies like Pfizer, Eli Lily and Bristol Myers-Squibb. Further we like General Motors, General Electric, Boeing, Northrop Grumman, AMR and Delta Airlines.

The German stockmarket

The German market was the best performer in July of the European stockmarkets. The correction will just be an opportunity the buy some new stocks. The German economy is climbing out of the recession. A change in the tax system as proposed by the government will be a step in the right direction to further stimulate the economy.

German stocks remain high on the list of buy stocks. We like the multi-national companies with a high percentage of export. Companies like BMW, Daimler Benz, MAN, Siemens, Thyssen, Hoechst, Bayer, VEBA, VIAG, RWE, Metro, Dresdner Bank, Deutsche Bank, Allianz, Muenchener Ruck. and Hochtief.

The Swiss market

The Swiss stocks are one of the best performers of Europe. The Swiss companies have to rely on the export market to remain profitable. The question is can the SMI keep that growth as before. The Swiss stocks will be profitable but probably they will not show the same impressive growth as before.

The Swiss pharmaceutical gigants Novartis and Roche will show some growth. Their product range and their research capabilities still hold some nice products for the future. Further we expect some growth from ABB, Nestle ans SMH.

The FTSE 100

The British stockmarket will continue to grow, in line with the US market. The British exporters will adjust to the more expensive pound and the implications of a possible interest rate rise will also not hamper the economic growth. Therefore we maintain our advice for the British market. After this correction to buy some of the stocks of the FTSE 100.

The following stocks are on our shortlist; British Aerospace, British Airlines, British Petroleum, SmithKline Beecham, Glaxo Wellcome, Cadbury Schweppes, Grand Met., Tesco, Unilever, BarclaysBank, Royal Bank of Scotland and HSBC.

The French stockmarket

The CAC 40 is highly influenced by the performance of the French economy. The problems experienced there will limit the growth of most of the French stocks. But some will do better than others.

The companies who can hold against the tide are Elf-Sanofi, LMVH, l’Oreal, Carrefour, Canal +, Dassault Aviation, Soc. Generale and Total.

The South-east Asian market

The Asian market is in difficulties because of the currencies problems of several countries in the region. Only the export oriented companies of Japan and Hong Kong/China will offer some opportunities on the short term. The chances on the long term are very good for the region. Especially the Korean, Taiwanese and Chinese market will outperform the others markets in the region.

The best performers of the Japanese market will be Canon, Matsushita, NEC, Sony, Toyota and Yamanouchi Pharma.

The Hang Seng also has some very good performers; Hang Seng bank, HSBC, Hutchinson Whampoa, New World Development, Swire Pacific, Shangri-La, Shun Tak Holdings and Sino Land.

The other Asian countries are for the private investor, as said before, better covered by country funds. In about two to three years the situation will be different. Those countries are slowly adjusting their laws and finance regulations to a Western pattern afterwards investing in those countries will become much easier.

August 1997, I

August 1997, I

A place for Eastern Europe in Europe

Eastern Europe in Europe

Europe, especially Eastern Europe has to live up to the new demands of a new era. They have to make the choice of integrating into Europe or go their own way. The Balkan, “little” Yugoslavia, Croatia, Bosnia, Macedonia and Albania have however no choice. They are dependent on the goodwill of Western Europe and the U.S. and will be in the short term no candidates to become a member of Europe’s most important organisations.

The political-economical situation has changed dramatically since the dissolution of the Soviet Union. A sharp division between the rich West and the poor East has come into existence. The countries of eastern Europe have applied for membership of the two most important western/European organisations, NATO and the European Union.

They consider membership as a tool to satisfy their security needs and to improve their deplorable economic situation. But sometimes one might think that they do not correctly estimate the full implications of being a member of those two organisations.

TheWest on the other hand wants to support the reconstruction of the East but their approach is characterized by caution and political games.

There is however one great misunderstanding, the East expects to much of the membership and the West is limiting the burden of the enlarged organisations to the financial question.

NATO

NATO experienced some difficulties after the bankruptcy of communism. They had lost their “raison d’etre”. NATO had to re-direct their goals. A new threat had to be “invented”. There are numerous threats available in this world, so NATO enlarged its area of responsibility and first targeted terrorism, international crime, fundamentalism and socalled rogue states as the primary sources of danger to the security in the world.

The end of the superpower status-quo turned many dead believed conflicts and hatreds alive again. And an organisation as NATO is badly needed against so many threats.

Europe also needed NATO to solve or stabilise the continent. The war in former Yugoslavia is an example of the necessity of NATO. But there was another reason for the existence of NATO, the former communist states in Europe wanted to become members of this highly succesfull security alliance. They want to be protected against the might of Russia and at the same time belong to the European family.

The West was very cautious in their actions. Yes, they wanted to enlarge the NATO eastwards, but slowly and only with the most advanced countries. Advanced in the sense of that they possessed the best track record with the introduction of democratic government, a capitalistic economy and reforms in the armed forces. The other countries have to wait for the next round.

This caution is ofcourse sensible but it discourages the other countries in their development and it will give Russia an opportunity organise its resistance better against any further enlargement of NATO. The limited enlargement, with Poland, Hungary and Czechia, is from a strategic point of view also not very effective. It not only weakens the alliance and Europe in a possible conflict but it also splits the alliance because some European countries wanted other countries like Rumania to enter NATO. The U.S. were however against any enlargement with other countries. By stating that there was a conformity over Poland, Hungary and Czechia all other proposals had no chance. Indirectly, it was the U.S. who decided who was allowed to enter NATO. The U.S. president has to persuade the U.S. Congress about the enlargement of NATO. And a way to get the approval of the U.S. Congress was to minimise the cost, so only three countries were invited.

The costs of enlargement is not yet specified. There are several estimates, but none of them is applicable because there is not any certain policy of how to integrate the newcomers. The level of standardisation in equipment and doctrines and the construction of logistic support is still not determined. The cost factor is a bad argument to limit the number of new entrants to three.

The greatest burden to the West is not financial but it will be more of keeping the East in line with the policy of the alliance. There is a potential danger that the new members view NATO as an element they can use as needed and that the bill is paid by the alliance.

The political instability and the still large government controlled economy is a better reason to keep the South-East European countries out of NATO. The reason to keep the Baltic states out for the moment is not to upset Russia. But this will prove to be very ineffective, an enlargement of NATO with the Baltic countries in the future will be more difficult because of the regained power of Russia at that time.

NATO can be an effective instrument to promote peace and stability in Europe. The number of partners should be as large as possible. All partners in the alliance should have the same rights, and more important, understand the rights and above all the duties which grow out of NATO membership.

European Union

The European Union has created a peacefull area in Europe where the economy of its member states can prosper. The free-trading area has slowly developed itself to a union with independent states who have chosen to co-operate which eachother and are even willing to surrender power towards the E.U. This becomes clearly with the introduction of the European currency, Euro, at the turn of the century. Even when some countries do not participate at the start of the Euro, probably they will do later, the European Union is becoming more and more an established entity in this world.

One of the leading ideas of the E.U. is the promotion of economic development. Through the years, economic less developed areas were supported by the E.U. Most countries of Eastern Europe want to become members of the E.U. The reasons for this membership are: they want to belong to Western-Europe; they want an entry to the large market and they want the support of the E.U. to develop their economies.

But the situation is partly equal as with the NATO, the countries who want to be members expect a lot of suppport of Western-Europe. But as a member of the E.U. the member states have to surrender some of their national power to Brussel, follow directives from Brussel and respect the rules of democracy and human rights.

The surrender of national power could be difficult for countries who just regained their rights to govern themselve. The new elected governments may have the tendency to consider every infringement to their national power as unjust.

The members of the European Union have put the entry card into the union to high for some countries. The potential members should accept the rules of a democratic state, respect the human rights and transform their economy. The level of change is, as with NATO, the decisive factor.

The countries invited to become a member on the short term are limited to five, the ones who have maid the biggest progress to change their societies. So Poland, Czechia, Hungary, Slovenia and Letland are invited to join the E.U. on the short term. The other interested countries will have to wait for another eight to ten years.

The E.U. should, between the introduction of the first and second group, support the countries who are not allowed in as much as possible to make the entry of those countries as soon as possible. The E.U. and the NATO should not hold those nations out of the European group but involve them in the enlargement process, even if they are not yet a full member. It is very important to stimulate them to change their country into a democratic market economy.

The new members should not expect to much financial support from the E.U. The E.U. has to change its management, agricultural- and structure fund policy to survive on the long term with so many new but relatively poor members.

But being a member will be good for the economy of the new members. They will get an entry to the large internal market, be a member of Western Europe and they still will receive substantial support from E.U. structure funds.

Conclusion

Most East European countries wish to become members of NATO and the E.U. They consider membership vital to their development and their security.

Only the most promising countries will be allowed to become members of both organisations. The old and new members should not expect to much of the enlargement of both organisations.

The new members should not expect to receive security and financial support as something natural. They also have to make a contribution to NATO and the E.U., the new member have to comply to the rules and participate in NATO and the E.U.

The West, or old members, of both organisations should not underestimate the burden they will have to carry because of the enlargement. The burden will not only be financial as the level of financial suppport is still not determined because there are no detailed plans available which are feasible and politically acceptable to be implemented. The West should also help with advice and co-operation to promote democracy and the market economy in the East.

The West should actively support Eastern Europe to bring them into the fold of the NATO and E.U. Only if those countries accept and implement the values of both organisations a peacefull and socially acceptable economic recovery is feasible.

The West should try to incorporate as much countries as possible into the E.U. and NATO. This will induce all nations to do their best in attaining Western standards in their policy which increases the chance for a bright future.

Caution and a balanced approach towards the enlargement is very good but to much caution will destroy the dynamics of the development process in Eastern Europe. A new Europe has to be in place before new and more serious dangers will surface on the long term. A united Europe which strong connections to the East, Russia, can guarantee freedom and prosperity in our part of the world.

IN-SE Services

Intelligence – Security Services

Auteursarchief: inseservices