Show Hide image

Catastrophe averted?

The leaders of the rich countries went to Washington to save the world from sliding into deep recess

Vincent Cable

Shadow chancellor, Liberal Democrats

By the low standards of economic summitry, the G20 meeting rated quite high. There was a predictable, no doubt pre-written, communiqué, full of the usual banalities. And the meeting suffered from the absence of the world's most important politician, who hasn't yet taken up office. But, these necessary caveats aside, there were important achievements.

The first is that the meeting took place at all. The ludicrous pretence of the G8 (or G7) that the old western powers should set the global economic agenda has been punctured for good. On a purchasing power parity basis, China has the second-biggest economy in the world and India the fourth. It has been clear for some time that China is lender of last resort to the global system (by, in effect, underwriting US government paper) and the main source of global incremental demand (and commodity price inflation). The Chinese self-parody as the pupil sitting meekly at the feet of a dominant, but erring, master defies belief. It is obviously right that China, India and the other main non-G7 countries should be at the top table.

The second achievement was the clear realisation that unless governments hang together they will hang separately. Enough has been learned from interwar history for us to understand the follies of beggar-my-neighbour economics. Perhaps a warning shock was being sent across the bows of the incoming Obama administration not to reinvent the protectionist tariffs of the 1930s in a new guise, directed at China or Mexico in particular, or aiming to salvage the US auto industry through public subsidy. But this new-found concern for open markets has not yet communicated itself to EU or Indian or Chinese trade negotiators, who show no enthusiasm for lifting the block on trade liberalisation under the Doha round.

While trade policy is on the back burner, macroeconomic policy co-ordination is not. With a few exceptions - Germany notably - there is recognition of the need for aggressive monetary and fiscal policy and for large-scale intervention to recapitalise banks. These interventions can be and are being undertaken nationally. But governments acting in isolation attract critical attention from capital markets and currency speculators, as Gordon Brown is discovering. Structures like the G20 are the best safeguard against chaotic, unilateral action.

Will Hutton

Economic commentator

It was remarkable to gather so much economic and political power in one room to address a common agenda. That was the good news - along with commitments to co-ordinate fiscal expansion, to expand the lending power of the IMF and World Bank (Japan's $100bn loan to the IMF will increase the Fund's lending capacity by 40 per cent), to boost cross-border supervision, to tackle credit rating agencies, to reassess mad accounting rules and require member countries to attack the bonus culture in the financial services industry. A year ago such an agreement would have been inconceivable.

The bad news is that much of this is shutting the stable door after the horse has bolted. Four things have to be recognised: that the world has profound imbalances between high-saving, high-surplus areas in Asia and the Gulf and low-saving, structural deficit countries in the transatlantic economy (Germany excepted); that a system of floating exchange rates and private banks can no longer take the weight of recycling those savings; that unless the system is de-risked and the burden of adjustment is placed on deficit and surplus countries alike, the global system faces breakdown; and finally, that the business model used by the banks to recycle surpluses - securitisation and hedging in the $360trn global derivatives market - is broken.

In plain English, China must accept that its currency must appreciate; Britain and America, that they cannot run their economies on foreign savings; and all players that there has to be a system of semi-fixed exchange rates between the yen, the euro and the dollar.

One tough reality is that, for all their new economic weight, China, Brazil, Russia and India do not have fully convertible currencies - nor do they want to accept the discipline involved in having convertible currencies.

Ann Pettifor

Fellow, New Economics Foundation

Over the past decade, the Group of Eight leaders turned their exclusive annual meetings into jamborees. Rock concerts, protesters and celebrities added populist glitz. However, the real purpose of the meetings - international co-operation and co-ordination - was ducked. At last year's G8 Summit in Heiligendamm, Germany, George W Bush and Gordon Brown vetoed Angela Merkel's agenda item for co-operation over tighter international regulation and financial oversight of capital markets. That task, they argued then, could safely be delegated to "the invisible hand". Now that the fantastic, self-regulating machinery of free markets has proved grossly malfunctional, it is good to hear talk of enhanced co-operation and regulation.

But, in places, the joint statement issued by the 20 world leaders borders on the delusional. The phrase "We must . . . ensure . . . that a global crisis, such as this one, does not happen again" implies that they are avoiding the next war when they are still losing this one.

Even more questionable is the call for continued "economic growth". In a world of finite resources on a planet with limited capacity to absorb toxic emissions, and with bushfires encircling Los Angeles, we would have hoped that world leaders had some awareness of the threat of climate change and of the limits to economic growth. But no. The gravest threat to global security - our rapacious attitude to the earth's resources - is once again whipped up with talk of "market principles, open trade and economic growth".

Jesse Norman

Senior fellow at Policy Exchange

One might have thought the G20 summit a good moment for some straight talk from the Prime Minister. Instead, the political wind machine was cranked up to full blast. The summit would be a second Bretton Woods. Gordon Brown would forge a new global consensus on co-ordinated intervention to stimulate growth (while, of course, leading reforms to prevent the banking crisis from ever recurring). Luckily virtually none of this was true, or the summit would have been a hopeless failure. With fiscal measures already widely adopted, the G20 hardly needed Brown's leadership. No surprise that he returned empty-handed.

Labour has moved from despondency to a manic desperation to remain in office. The result is that the ever-fragile concept of truth in politics has wholly been cast aside. Thus the humiliating bank nationalisation has been dressed up as an act of far-seeing economic statesmanship. And a sensible warning from the shadow chancellor that current economic policy puts sterling at risk has been condemned for breaching an irrelevant semi-convention dating from the time of fixed exchange rates.

Alex Brummer

City editor, Daily Mail

There is a golden rule of international financial meetings. The larger the "G" number, in other words the more countries involved, the less likely it is that any worthwhile or binding decisions will be taken. So while it was wholly encouraging that the G20 summit brought a number of emerging market leaders to the top table of finance, including China, Brazil and Russia, there was never any real prospect of the event becoming the new Bretton Woods.

Furthermore, the summit took place in the final days of the lame duck administration of George Bush. Once it became clear Barack Obama was going nowhere near the confab, the event became even more of an irrelevance.

European leaders may like to blame Wall Street and Anglo-Saxon capitalism for the credit crunch and the recession now spreading through the Group of Seven like wildfire, but there is no hope of concerted international action without the new White House and Federal Reserve on board.

Almost all that was agreed could have been decided before the leaders left home. The commitment to reviving the Doha trade round is pure motherhood and apple pie. The prairie populists on Capitol Hill are unlikely to be enthusiastic.

At the core of the proposals was the commitment to use fiscal measures, tax cuts and public spending to kick-start global economies. But despite Gordon Brown's enthusiastic embrace of a new Keynesian big-spending approach - as advocated by Nobel prize-winner Paul Krugman - he neatly forgot to mention that such big-spending ways were only for those countries with a "policy framework conducive to fiscal sustainability". The UK with its ballooning budget deficit, which could hit £100bn or more next year, is clearly in no such position.

It is hard to fathom in what way the G20 was "historic", as the Prime Minister claimed in the Commons. There is little original in a bunch of old ideas designed to remove risk from the financial system and control executive pay. That is what regulators should have done before the banks ploughed into the iceberg.

James Buchan

Author and financial commentator

What is the Financial Stability Forum? What is "mitigating against pro-cyclicality in regulatory policy"? What, if anything, has the G20 summit in Washington on the weekend of the 15 November achieved?

Nothing very much, is the answer to all three questions. In the twilight of a discredited US administration, and with President-elect Barack Obama absent, the meeting was never likely to achieve a great deal or generate excitement in the US. Yet the final declaration, drafted with suspicious ease by the delegations on Saturday night, has something for everybody but not enough of anything to scare the financial horses.

Nicolas Sarkozy, the French president whose idea the whole thing was, gained some support for more institutional government of trade and finance, but no super-gendarme international of the type that has been directing financial traffic in the French imagination since the 17th century. As Jean-Pierre Robin wrote in the Figaro: "Those with fantasies of supranational supervision will need to change therapist." The US, jealous of its commercial sovereignty even when it is going about without its shirt, put paid to those Gallic dreams and also gained some platitudes about free trade.

The new commercial powers, not only Brazil, Russia, India and mainland China but also rich oil producers such as Saudi Arabia, received diplomatic recognition of their deep pockets. "The world's geopolitical structure has a new dimension," the Brazilian president, Luiz Inácio Lula da Silva, said. "There is no logic to making any political and economic decisions without the G20 members - developing countries must be part of the solution to the global financial crisis."

I suspect the winner is Gordon Brown. The next meeting will be held under his presidency in London in April. The Washington ragbag of proposals to reform or tinker with the current system, such as reminding us about the Financial Stability Form and mitigating against that regrettable pro-cyclicality in regulatory policy, appeals to his technical vanity and plays to his technical strengths.

Paul Mason

Economics editor, Newsnight

There was a sense in Washington, despite the throbbing engines and bulletproof glass, of powerlessness. The communiqué was stronger on the causes of the crisis than on co-ordinated solutions. Policymakers are right to stay focused on the near-term dangers: these are country-level debt default, the rising cost of borrowing for non-financial companies, rapid job losses and - via feedback - further destabilisation of the banking system. We are moving into the phase of fiscal stimulus but there are powerful technical arguments that say without "quantitative easing" - that is, printing money to stimulate demand - it doesn't work. The same people who told me it would come to recapitalisation, that the TARP (troubled assets relief programme) would not work, are now saying: nationalise the banks and print money.

Despite the urgency of the focus on near-term dangers, what was obvious at G20 was the lack of vision as to the future growth model of capitalism. The problem was seen as a failure of regulation; the solution a pretty weak brew of re-regulation that will get diluted even more as the lobbyists begin to have influence. But the problem is more fundamental: the growth model based on high debt instead of high wages has failed and will be hard to revive.

Peter Mandelson

Secretary of State for Business

We have been caught in a global whirlwind of extraordinary force.

It has brought with it a fear that has gripped the world economy and taken hold here at home. We are seeing it every day, with fear among consumers that is depressing demand; fear among banks that is inhibiting them from lending; fear among small- and medium-sized businesses that banks are just about to cut off their credit lines. The choice facing us and governments around the world is this: do we act decisively to counter and overcome this fear, or do we become paralysed by it and fail to act?

The government has already shown its willingness to take the bolder course as the first mover in setting about stabilising the banks. What is needed now is action to stimulate the demand essential for recovery. The UK economy, like economies in the rest of the world, needs a shot of adrenalin.

The Bank of England has already made a significant cut to interest rates. This monetary stimulus now needs to be matched by a fiscal stimulus. And because this is a global crisis this is best done if the benefit of the measures taken nationally is maximised by the same measures being taken around the world. That was the message from the international conference in Washington, as governments recognised the need to take the action necessary to stimulate their economies.

People will say, "But you are resorting to borrowing in order to deliver the stimulus that's needed." My answer to that is, what is the alternative? We certainly haven't heard one from the Conservatives.

David Cameron and George Osborne, trapped by their desire to oppose everything the government does, refuse to accept the scale of the challenge the world's economies now face and the prescribed international action. Their stance appears to be, if the rest of the world disagrees with us, it is because the rest of the world is wrong. The result is incoherence and an Opposition at sixes and sevens. One minute this is "do all it takes" and the next it is - as we heard this week - leave the recession to "take its course".

Sitting on our hands watching houses repossessed and businesses go to the wall is certainly not the approach being urged on me by people I have been speaking to up and down the country. They want their government to act to stimulate demand in the economy here and now. With all due prudence, that is what we are going to do.

Diane Coyle

Author and economist

The G20 meeting confirmed a robust and rapid response (by past standards) to recession, even in the US operating under a rump free-market administration. Policymakers around the world have been shaken to see the financial system at the brink of collapse - on their watch.

Yet it is difficult to predict how severe the recession will be. Bank lending to businesses and individuals is virtually frozen. In many (but not all) areas of the economy, activity has come to a halt. The last financial boom and bust, ending in 2001, had surprisingly little impact on jobs and growth, as the financial bubble had become increasingly untethered from anything real. Today's vicious circle of evaporating liquidity is much more serious, but lower interest rates and bigger government deficits will help. The underlying trends are easier to outline. Some challenges are clearly unaltered, such as climate change and our ageing society.

The technological opportunities are still there, too, in communications, the internet and biotechnology. Globalisation will be less driven by finance in future, but it will not be unwound. It would take a generation to turn back the clock on economic linkages, and the cultural impacts are permanent. In fact, the crisis has underlined our interdependence across national borders.

What has changed is the political economy of globalisation. In the triad of efficiency, fairness and freedom which dominates political choice in democracies, fairness will take priority in the years ahead, and the drive for ever greater productivity gains will retreat. The semi-nationalisation of the banks has started to shift the boundary between public and private domains; we will have to think more carefully about how to govern private choices that have big social spillovers. The G20 did not touch on this profound question of governance.

Iain Macwhirter

Political commentator

The G20 was largely a throat-clearing session and was never going to put in place the foundations of a new international financial system. Progress on the stalled Doha trade talks is encouraging but provides no guarantee that protectionism will not raise its head in the coming economic slump.

It is inevitable that countries faced with financial collapse will try to defend their economies by any means possible. Britain is already far down the road of "beggar my neighbour" economics by the "managed" devaluation of the pound, a crude attempt to boost UK industry by lowering the prices of British exports and creating a de facto tariff wall around imports from abroad. It won't work because Britain does not make much of anything any more except debt, and the world has plenty of that already.

But the collapse of the pound will seriously damage what is left of UK financial services. No one in their right minds would put money into the UK economy now, with the property market collapsing, UK banks insolvent and government borrowing likely to reach £100bn in the next 18 months.

Gordon Brown seems to believe that sterling is like the dollar, and that people will buy our dud pounds whatever the likely losses. However, as we are discovering, sterling is not a reserve currency and unlike the US we cannot force other countries to pay our debts. The future for our battered island is likely to be hyperinflation punctuated by appeals to the International Monetary Fund for emergency aid. Forget about spending our way out of recession - the UK government simply lacks the resources to fund the huge borrowing that would be required. Something will have to give. Brown will have cause to regret being so beastly to the Icelanders.

Richard Reeves

Director of Demos

James Carville, the hardened political aide to Bill Clinton, said that if he was reincarnated he'd want to come back as the bond market: "You can intimidate anybody." Right now it seems odd to think of any financial markets threatening anybody. But it is one of the ironies of the current economic situation that the capital markets still have some serious muscle.

Western governments, faced with recession, need to throw a lot of money at their ailing financial institutions - money that can be raised only by selling Treasury debt, mostly to the capital-rich investors of the Far East. For Gordon Brown, this is likely to become a more difficult sell, as Prudence is given the push and the pound takes a nosedive. Even national exchequers invite sceptical scrutiny in this new, nervous world.

The financial crisis is at heart a loss of faith. The word credit derives from the Latin credo - "I believe". When the Titanic of the financial world - in the shape of Lehman Brothers - was allowed to sink, the bonds of trust stretching around the world were snapped. In an instant, everyone stopped believing in each other.

A number of sensible measures should be on the agenda when the G20 reconvenes next year, including legislation to ensure bonuses in financial services are paid on the basis of five-year performance; new "pro-cyclical" provisioning rules requiring finance houses to increase their store of capital in economic upturns; and tougher, independent regulation of the rating agencies whose doe-eyed assessments of banks built on a mountain of paper helped get us in this mess.

There is, however, no quick technical fix for such a dramatic loss of confidence. Trust can be lost in the blink of a market-trader's eye - but it will take years to rebuild.

TEN THINGS THEY ACHIEVED

  • 1 Created a road map aimed at stabilising the world economy and overhauling the banking system with targets for the end of March 2009
  • 2 Advocated Keynesian big-spending
    “fiscal stimulus”
  • 3 Expanded from a small club making world decisions to recognise the importance of the economies of Brazil, Russia, India and China
  • 4 Agreed to reform international finance institutions, including better transparency and supervision of credit ratings agencies
  • 5 Agreed that the Financial Stability Forum should include emerging economies
  • 6 Banks and hedge funds to hold increased levels of capital and cash
  • 7 Recommended “supervisory colleges” for all major cross-border financial institutions
  • 8 Return to the Doha round – trade ministers to meet in Geneva next month
  • 9 Instructed G20 finance ministers to draw up plans and timeline
  • 10 Agreed to meet again, in London next April

. . . AND FIVE THEY DIDN’T

  • 1 Agree a future growth model for capitalism. Instead they reconfirmed their “shared belief in market principles”
  • 2 Agree detailed plans for regulatory reforms of banking
  • 3 Establish a plan of action for achieving the already endangered Millennium Development Goals
  • 4 Set up an international supervisory body with sufficient power to control global markets
  • 5 Halt the run on sterling, which fell sharply against the euro and dollar

Alyssa McDonald

This article first appeared in the 24 November 2008 issue of the New Statesman, How to get us out of this mess

Getty
Show Hide image

Syria’s world war: how the West allowed Russian and Iran to take control

As the civil war rages on, Syria has become a theatre for great-power rivalry, with Russia and Iran turning cynical opportunism into high policy.

It is getting harder to make sense of Syria’s agony. In fact, unless a distressing photograph of a suffering child – most recently Omran Daqneesh in Aleppo – goes viral and reminds us all for a moment of the human cost, it is probably harder to get anyone to pay any attention at all. The situation is increasingly complicated, politically and morally. There is a shifting array of militias both supporting the regime and on the opposition sides, all with their own internal tensions. None of the external actors seems to be fighting with quite the same purpose as the others. No one is articulating a vision of what a post-conflict Syria should look like: perhaps because there isn’t one, except for the harsh, reductionist version offered by Islamists. The one thing that’s sure is that this conflict isn’t about the Sykes-Picot Agreement, whose hundredth anniversary fell in May, triggering a flood of sanctimonious commentary. The borders we see in the modern Middle East were the product not of a 1916 Anglo-French stitch-up, but of the Paris Peace Conference, the Treaties of Sèvres and Lausanne, the League of Nations mandates, subsequent interstate agreements in the 1920s and sometimes – as in the case of Saudi Arabia and much of the Persian Gulf, or Yemen – even later. Nor is it about Israel, whose own dilemmas seem ever less exceptional as we look at other communal conflicts across the region.

Russia in particular has made cynical ­opportunism into high policy. As a party to the conflict, it has managed in the past year to kill roughly 2,500 civilians, including over 200 children and 28 medical staff (more than Islamic State). But it is also apparently Washington’s preferred partner for peace. Russia has historically had predatory designs on Iran but the latter now lets it use one of its airbases, a dubiously constitutional act that Russia gleefully proclaims to the world, to the apparent disquiet of some in Iran. It is aligned with Bashar al-Assad but also with some Kurds. It co-ordinates tactically with Israel but fights alongside Hezbollah. Russia was previously hostile to Turkey, which opposes Assad but is now trying to halt the advance along the Syrian-Turkish border of the same Kurds whom his air force is bombing. Turkey is making eyes at Iran. And the Chinese have just offered extra training to Assad’s army.

The problem is not that borders are disappearing but that some states are fragmenting within these borders. This produces horrors such as Islamic State and other, publicly more cautious and sometimes divided, but still savage Salafi-jihadi groupings such as Jabhat al-Nusra (JaN) or Ahrar al-Sham (AaS). It also provides other states with an excuse to colonise the hollowed-out husks of their neighbours in ways that might prove far more enduring than the international settlements of the 1920s.

If you happen to be in the Israeli-occupied Golan (as I was recently) and drive up beyond Katzrin to the de facto border with Syria, you can see through field glasses the movement of armed groups associated with JaN or IS. The most significant of these, Liwa
Shuhada’ al-Yarmouk, occupies an enclave in southern Syria, to the south-west of the Golani town of Quneitra, whose main buildings were dynamited flat in the 1973 war. They are surrounded by elements of the Free Syrian Army (FSA) and other armed opposition groups, including JaN.

This is remarkable. This border was for four decades the quietest of all Israel’s frontiers with its enemies. When you ask senior Israelis – civilian and military – what this means for them, they shrug and say things like, “At least they are behaving themselves,” by which they mean, of course, that they are not attacking Israel. But if you probe, you discover a wider unease. This is only partly assuaged by the efforts Israel has made over the past three years to keep tabs on the situation by, for instance, offering medical treatment at Israeli hospitals to well over 1,000 wounded Syrians (by some accounts double that number), mostly opposition combatants. The treatment is delivered partly by Druze doctors whose historically irredentist community straddles the border.

If you go next to Jordan and talk to senior Jordanians, you will detect a similar unease. Some of it comes from the same concern about the threat from Salafi-jihadi groups – the murderous Abu Musab al-Zarqawi was Jordanian, after all – or the continued presence on Jordan’s northern border of increasing numbers of refugees whom the country simply cannot absorb. Some comes from greater Russian activity on the same border, most notably the recent air strikes on the FSA outpost at Tanf, halfway to al-Bukamal,
one of the major crossing points on Syria’s border with Iraq and, together with its counterpart in Iraq, al-Qaim, the nearest hub of Sunni jihadi insurgency. But in both countries there is a feeling that the conflict in Syria may ultimately produce a realignment of forces within Syria and Lebanon that will constitute a far more formidable threat to Israel than anything we see today.

***

This does not mean the continued killing in Syria does not matter. It does and it is shameful. The UN’s special envoy Staffan de Mistura said in April that the total number of deaths had reached approximately 400,000, mostly killed by regime action. Half of Syria’s entire population has fled or is internally displaced. For want of an alternative policy, the US administration has been casting around for ways of bringing influence to bear through Russia, which, alongside Iran, is the main external actor in the conflict. This influence remains focused on combating IS, JaN and other jointly designated armed Sunni Islamist organisations, an appalling group of people, but not the only ones by any means. We have had frequent reports of another proposed deal between the US and Russia under which the two countries together would designate areas where there is a confirmed JaN presence for joint or independent targeting – as well as continuing air operations (few of which have been Russian) against Islamic State. You might think that developments around Aleppo in recent weeks would make this less likely: but in Syria, conventional reasoning has ceased to apply.

In any case, the agreement would have little bearing on the operation of the Syrian air force, which would remain free to drop barrel bombs anywhere it liked – as long as it didn’t get in the way of joint Russian-US operations. It would not prevent any other sort of military activity by Assad’s forces – through artillery bombardments or ground-to-ground missiles, for example, which are already the regime’s principal tactics. Clearly it has had no impact on Russia’s current air operations, which redoubled in intensity after opposition gains in Aleppo in the past few weeks. And it would not obviously reduce support from the Gulf and Turkey for elements of the armed opposition.

The thwarted coup in Turkey will complicate matters further. President Recep Tayyip Erdogan had already been making overtures to Assad – who, when I was ambassador to Syria in 2007, publicly claimed that Turkey was Syria’s best friend in the region. Now resurgent with a newly providential purpose but also conscious of his and his government’s vulnerability, Erdogan may, after purging the army and security forces, decide to focus on the constitution, the economy, his internal enemies and the Kurds, who remain, in his view, the main threat to national security, both inside and outside Turkey. His visit last month to Moscow to repair relations with Vladimir Putin (who has been cultivating the Kurds to spite him), Prime Minister Yildirim’s warm words after Foreign Minister Javad Zarif’s visit to Istanbul in March, and the Turkish army’s support for the Arab/Turkmen intervention in the town of Jarabulus, previously a target of the largely Kurdish Syrian Democratic Forces, all point in the same direction. If that means supporting a militia – Nour al-Din al-Zenki, which filmed its men beheading a 12-year-old boy in Aleppo – too bad. As a result, the Turks’ commitment to the fight against IS (never entirely convincing) – or indeed, to any intervention in Syria that does not serve their own purposes – may weaken further, especially if there are more attacks inside Turkey like the suicide bombing of a wedding party in Gaziantep on 20 August.

There are reports that traces of nerve gas have been found once more in Syria. There have also been claims recently of the continued military use by the regime of phosphorus and incendiary thermite, and by both sides of other chemical substances.

I remember vividly the last week of August 2013, when Assad was going to be punished for stepping over that particular “red line”. I was in Riyadh at the time and involved in seeking, on behalf of the British government, senior engagement by the Saudis in an international response, which they were willing to give. The sense of frustration when the UK and US stepped back was palpable. It was palliated a little by the US-Russia deal to remove Syria’s stocks of chemical and biological weapons material and Assad’s agreement to sign the Chemical Weapons Convention. There have been numerous suggestions since then that this deal was never as clear or complete as proclaimed. But most people shrugged the objections off as the best being the enemy of the good. What was a barrel of chlorine between friends? It was a great international achievement and showed what could be achieved by not doing “stupid shit”.

If the nerve-gas and other reports are true – and a UN investigative report suggests they are – it maybe doesn’t look such a great achievement after all. It may even begin to look like an enabler for Assad – in the same way as all the subsequent little bargains with the Russians do and, indeed, the mother of all international achievements, the Iran nuclear deal. It will also represent yet another erosion of international norms, the very thing that we in the West say we value above all else.

***

As we approach the end of the second and final term of the Obama administration, experience extraordinary scenes at the Republican and Democratic conventions and await the decision of the American people on their new president in November, what does the balance sheet in Syria look like? Not so good – even for those who see Sunni Salafi-jihadi groups as the main enemy. It is true that Islamic State remains under severe pressure in parts of Syria and Iraq and has lost territory, most recently the strategically sited border towns of Manbij, al-Rai and now Jarabulus in Syria, doubtless reflecting an improved US-led military strategy. Yet IS has also shown considerable resilience. The 21 May audio statement by Abu Muhammad al-Adnani, its official spokesman, on the meaning of victory – now amplified by a recent editorial in its weekly Arabic newsletter, al-Naba’ – suggests that IS is preparing to regroup outside urban centres within Syria and Iraq if it loses Raqqa and Mosul – and to send shards of Islamist violence flying in countries across the world through the agency of true believers everywhere. JaN may just have announced a tactical disaffiliation (though significantly not a break) from al-Qaeda, but this is designed to enable the group to hide in plain sight. It continues to grow in strength in north-western Syria and is imbricating itself in the defence of Aleppo, at the heart of the armed opposition groups acceptable to the West. Past Russian air strikes have only reinforced its position: other armed groups are heavily involved in many of the same battles and it is hard to disentangle them. In any case, no one is going to stand idle as the Russians target one of the most effective groups of anti-Assad fighters.

The Geneva III peace talks on Syria have ground to a predictable halt, with the Russians using their willingness to shape the conflict to influence US policy, too. Meanwhile, the humanitarian situation remains appalling. Aleppo remains doubly besieged, in spite of the latest fighting and opposition success in reopening a narrow access point in the south-west of the city. The Russians, supported by Hezbollah and Iraqi Shia militiamen, are targeting the area and their offer of humanitarian corridors and pauses looks ever more bogus. The UN, whose own relationship with the regime has raised concerns, is warning of another disaster in the making as non-combatants in the deeply divided city become trapped between the hammer of Assad and his allies and the anvil of the armed opposition.

***

As we obsess about Sunni violence, Hezbollah continues to prosper. The Lebanese Shia militia has lost large numbers of men – as many as 2,000 since the start of the conflict. That is more than it lost against Israel between 1982 and 2000: there have been mutterings about this in the Shia community in Lebanon. Hezbollah fighters, too, may be starting to blame the Syrian army’s lack of offensive spirit for some of their casualties, if recent tweets from the Aleppo front line are correct.

They have lost senior commanders, notably (in May) Mustafa Badreddine, the successor to the infamous Imad Mughniyeh, as well as lesser figures such as Samir Kuntar, who beat a four-year-old girl to death on an Israeli beach in 1979. Mughniyeh’s own son was killed last year. And the war in Syria is costing them millions of dollars a month, at a time when their business wing is being squeezed by the US and the Gulf Co-operation Council (GCC) – a cost that Iran, under pressure of its own, is helping to meet. But Hezbollah, like the Iranians, can shrug off such losses. The gains it has made in operational capability – command and control, planning, logistics, complex battlefield management and so forth – and in terms of resupply from Iran make up for them. It has probably doubled its available military forces, to perhaps as many as 45,000 troops. It has rebuilt and improved its weapons stocks: in spite of Israeli interdiction efforts, it is believed to hold well over 100,000 short- and medium-range missiles, whose accuracy is much improved. It has become skilled at using UAVs. It is rumoured to have received air-defence systems via Iran. And, in the wider Levant, Russia’s delivery to Iran of the S-300 mobile air defence system this year, as well as Iran’s reported development of a copycat system, the Bavar-373, potentially gives Tehran the capacity to deny access to US and other aircraft, not just over Iran but over Iraq, parts of the Gulf and perhaps, in the future, Syria.

The Lebanese Shias have no serious political alternative, and no other community in their country can compete. As their armed militia’s presence in Syria corrodes the communal consent on which Lebanon’s own political system rests, their ambitions, like those of their patron and now partner Iran, may be growing.

***

When the conflict ends or stabilises, as one day it will, Hezbollah will almost certainly be militarily stronger, unless Assad loses. It is unlikely to believe in a federal solution in Syria any more than its analogues do in Iraq. Admittedly, it would be easier to achieve such a structure in Iraq, where federalism is enshrined in the constitution and already applies in the Kurdish north. But federalism is anathema to Assad. And in both places, a solution that places real power in the hands of a central authority dependent on Iran is almost certainly the preferred goal. If that entails managing continued low-level conflict with Sunni insurgent groups, so be it.

In the longer run, the big targets remain Israel, the US and its regional partners. Hezbollah and Iran have lost a huge amount of support in the wider Islamic Middle East because of their sectarian involvement in Lebanon, Syria and Iraq. This has not stopped them persistently trying to make mischief: indeed, it, and power games within Iran’s highly competitive governing elite, may be precisely why they do so. That in turn is one reason why the GCC states are now taking unprecedented action against them.

But Hezbollah can live with this. Assad has reinforced his hold on Damascus with its help and is likely to remain dependent on it for the foreseeable future. It has made the protection of the Shia shrines in Syria a religious mission. It is still trying to recruit sympathisers within the occupied Palestinian territories: the Israelis recently discovered a cache of Hezbollah explosives on their side of the border. More broadly, the public appearance in Quneitra of Mohammad Reza Naghdi, the commander of the Basij – a force brigaded under the Iranian Revolutionary Guard Corps (IRGC) – peering back through his own field glasses towards the watchers on the other side of the border, and the extraordinary report that the Iranian ambassador in Damascus has taken it upon himself to appoint a new head of the Assad regime’s National Defence Forces in the nearby Druze city of Suwayda, show clear intent. And if at some point in the not-too-distant future Hezbollah and Iran are able to launch new operations against or even inside Israel from secured positions in southern Syria, the picture might change again rapidly. With or without nerve gas.

In the end, the struggle against Sunni jihadis will be long and brutal. But there is an answer available if the region’s states – notably Iraq, which in my view is still just about salvageable if we focus properly on the endgame after Mosul – are prepared to reintegrate disaffected Sunnis effectively into their domestic political processes. An Iranian-backed victory for the Assad regime in Syria would make this far more difficult.

The consequences of this struggle that we face in the West are horrific but not a threat to our existence (unless we allow them to be so) and manageable with patient and better-resourced intelligence and police work, better communications and popular resilience.

The battle against Iran’s militiafication of states in the Middle East is less tractable. Iran itself is built on this model. Its deep security state uses it to suppress internal dissent and block reformists. It exported it decades ago to Lebanon. In Iraq, the Iranian-backed Shia militias that constitute the most significant part of al-Hashd al-Sha’abi (the “popular mobilisation”) recently claimed that they were brigaded by Prime Minister Abadi with the rest of Iraq’s official military and counterterrorism forces some months ago. Whatever Abadi’s intentions may have been, they will seek to exploit this to secure a role in any assault on Mosul, the most symbolically resonant Sunni city in Iraq.

The Kurds will, as always, be caught in the middle, trying to play off more powerful ­actors against each other, perhaps tempted to seek sponsorship from Iran and Russia, and surrounded by hostile Arab communities in a cycle of displacement and revenge.

In the absence of the US, all this allows an amplification of Iranian influence across the region that in some ways poses a more general threat to the Middle Eastern order – because it is part of a long-term, transnational design backed by a powerful state – than any other. If Iran can make its projection of power through zombie states and sectarian non-state actors a permanent feature of the landscape, it would be a great achievement, overturning a hundred years of a more or less stable (if unsatisfactory) interstate Arab acquis. This would also prepare the ground for new sorts of conflict within and between states and prove very hard to undo.

That is the source of tensions between Iran and the Sunni Gulf states, which has led the latter – disappointed in the US, rebuffed by Russia but welcomed by Israel – to seek support in surprising places. It is one of the factors in the war in Yemen, which has led to accusations that Saudi-led forces have unlawfully targeted civilians and contributed to the creation of another humanitarian catastrophe. Without political change at the centre, it may lead to Shia-on-Shia conflict over the spoils of a post-Mosul Iraqi state. It has led to war before between Israel, Hezbollah and, indeed, Hamas. It will do so again. Next time will probably be worse. The capacities of all sides have been strengthened. And, given the internationalisation of the Syrian conflict, it will prompt far more states and non-state actors to make unexpected alignments. This will be a new form of instability in the region.

The Middle East will be a huge challenge for whoever is elected the new president of the United States. The usual American approach to conflict management in the region, which rested on clear political resolve, may no longer work: if Russia now shapes the battle space in Syria, who will shape it in Gaza and northern Israel? It will be a challenge for the European Union, which is intimately affected by the collapse of Arab states. And it will be a challenge for a British government that wants to show it is not retreating from a world it helped to shape – only not through Sykes-Picot.

John Jenkins is the executive director of the International Institute for Strategic Studies – Middle East. He is a former British ambassador to Saudi Arabia, Libya, Iraq, Syria and Burma and a former consul general in Jerusalem

This article first appeared in the 01 September 2016 issue of the New Statesman, Syria's world war