China is losing a war. It was around this time just last year that President Xi Jinping declared China was going to war against financial risk, poverty and pollution. Reducing debt, cutting excess industrial capacity and inducing bureaucrats to curb pollution were to be his main weapons. A statement released after a Politburo meeting late Wednesday suggests China is shifting gears to deal with a more pressing threat: “growing downward pressure on the economy.” (The statement was released just after we noted disappointing Chinese factory data.) Beijing still says it wants “quality” growth, but also notes that “some enterprises are having operational difficulties and long-term accumulated risks are exposed.” According to the statement, China must act swiftly to “enhance predictability and take timely countermeasures.” That most likely means economic stimulus, though there are also reports the government will loosen real estate controls and focus more on capital markets. In the short term, this will benefit the Chinese economy – and the global economy – but there are limits to just how long China can prop things up without the U.S. relaxing its tariffs on Chinese exports.

Italy’s economy looks bad too. An IHS Markit factory index found that it shrank more last month than it had in four years and, perhaps more important, that it registered a contraction. Output fell for the third month in a row. Tempting as it is to dismiss the findings as a mere reaction to Italy’s populist government, the real explanation is high unemployment, tons of debt and general economic malaise that has confounded growth since 2008. Italy is not alone in this regard; the purchasing managers’ index data for Europe was broadly disappointing, and we noted last week our concern over data coming from Germany. But no country in Europe is more vulnerable than Italy when it comes to a potential economic downturn, and besides France and Germany, no country is more important to the future of the European Union.

Poland and Germany are in the same boat. German Chancellor Angela Merkel’s party did so badly in regional elections last week that she announced she wouldn’t run again. The week before that, Poland’s ruling party also had a disappointing performance in regional elections, casting doubt on its ability to maintain its position next year. Today, Merkel is in Poland to meet with the prime minister. She met with him earlier this year to try to ease tensions between the two countries, which disagree on the extent and use of the EU’s power. That trip was ultimately fruitless. Indeed, Poland’s president traveled to Germany himself last week and said Poland wanted to open discussions about how Germany should pay its World War II reparations. And yet despite the bad blood, Poland and Germany need each other right now. Merkel is trying to hold the EU together, and it would do Poland’s ruling party some good to be seen as more moderate on the EU.

Australia follows through. Australia and Papua New Guinea formally agreed to a joint naval base to be located on Manus Island. Lombrum Naval Base was originally built by U.S. forces in 1944 as part of the campaign to retake the Pacific from Japanese forces. The deal is not unexpected: Australia finished upgrading infrastructure at the base last month and has been in negotiations with Papua New Guinea for some time. The agreement means the two sides will jointly develop the base and work to enhance interoperability between their navies. In the words of Australia’s prime minister, the purpose of the base is to “strengthen engagement with the Pacific for the Pacific’s sake because this is our home.” That’s as clear a message as any that Australia does not look kindly on China’s attempts to engage with the Pacific.

Axis of Evil, meet Troika of Tyranny. In a speech yesterday in Miami, U.S. National Security Adviser John Bolton declared the existence of a “Troika of Tyranny” consisting of Cuba, Venezuela and Nicaragua. More important than the name-calling was the assertion that the U.S. was not about to back away from Central and South America but was, in fact, ready to crank up the pressure to try to overthrow the current political systems in Havana, Caracas and Managua. Bolton also said Brazil was poised to become a closer ally of the United States in light of its election of a “like-minded leader.” In Bolton’s comments, it’s hard not to hear overtones of former President George W. Bush’s 2002 Axis of Evil speech, which identified Iran, Iraq and North Korea as primary U.S. targets – targets that remain major problems for the United States to this day. It’s not hard to understand why Washington is directing more of its attention to this part of the world; Moscow and Havana are about to sign an agreement for Russia to modernize Cuba’s railway system, while the presidents of El Salvador and the Dominican Republic, countries not covered in Bolton’s speech, currently are in China hoping to secure better ties. Both Moscow and Beijing have an interest in capitalizing on anti-U.S. sentiment in Central and South America, and the U.S. is signaling very clearly that it won’t abide it, or the governments that spout it, without consequences. Still, it remains to be seen how far Washington will go. Teddy Roosevelt once said, “speak softly and carry a big stick.” The U.S. isn’t speaking softly now – and time will tell how big the stick will be.

Honorable Mentions

  • The Turkish lira is still struggling to recover, falling below 5.5 on the dollar for the first time since August.
  • Turkey’s foreign minister met with Qatar’s foreign minister and declared excellent relations in all areas.
  • The Brazilian judge who has been leading a major anti-corruption investigation has accepted President-elect Jair Bolsonaro offer to become justice minister.
  • The U.S. plans to grant a sanctions waiver to at least eight countries on imports of Iranian oil. Countries include Japan, India, South Korea and perhaps even China.
  • The National newspaper reports that security in Basra is deteriorating again and that a new round of political protests against the Iraqi government may soon be in the offing.
  • The United Kingdom and Oman have agreed to a new bilateral defense agreement.