Europe's common foreign policy completely died, the European Commission split with the member states on a nearly endless list of issues, Germany and France looked beyond Europe to secure their political goals, the year was a turning point in Christian-Muslim relations and energy relations with the Russians soured.

If anything, the 2005 forecast was overoptimistic. It did not anticipate the centrifugal force being strong enough to destroy the EU constitution, much less result in the political evisceration or outright ejection from office of the two biggest supporters of "Europe:" French President Jacques Chirac and German Chancellor Gerhard Schroeder.

The idea of "Europe" likely will continue eroding, but it will be greatly overshadowed by a new trend as traditional European power balances begin to reassert after a 60-year absence.

The year 2004, in which the European Union ushered in 10 new members, represented the high point in European integration -- but that expansion sowed the seeds of the union's destruction. Therefore 2005 was the year the European experiment began to fall apart, with the defeat of the EU constitution in France and the Netherlands demonstrating that even core countries did not want the union to become over-powerful. During 2006, Germany will re-enter the European system as the dominant power and begin the process of reshaping the Continent.

Germany has been in a geopolitical deep-freeze since 1945. Divided and occupied until 1993, the country has had two main foreign-policy themes: saying "I'm sorry," and meekly lending its financial support to the European project. German policy did become less timid under Chancellor Gerhard Schroeder, but even then, nearly everything Schroeder did was couched in terms of the European interest (which meant mostly French interest). Europeanism was the only approved outlet for German nationalism.

But now there has been a clean break. Angela Merkel is now in charge of Germany, and despite presiding over an unwieldy and uncomfortable coalition government, in her first few weeks on the job she already has emerged as the center-point of European affairs. It was Merkel who seized on the opportunity of across-the-aisle sentiment triggered by Iranian President Mahmoud Ahmadinejad's denial of the Holocaust to make an assertive break with her predecessor's policy. She then used that strength at the December EU heads-of-government summit to forge a position independent of (even if, for now, complimentary to) Paris to become the force that brokered an agreement and prevented yet another EU summit failure. This characteristic will repeat and intensify throughout 2006.

Germany is returning to its traditional role as the core European power. For more than a millennium, the single feature of the European system that has determined events has been Germany's strength, or lack thereof. When Germany is weak -- as it has been for the past 60 years -- other powers are able to rise and assert their interests. But when Germany is strong, it dominates the heart of the Continent and relegates its neighbors to powerlessness -- until such time as they ally to crush it.

This pattern already has cycled three times. Charlemagne's Holy Roman Empire (the first iteration of what is now "Germany") dominated Europe until it fell in Europe's religious wars. Its death is what allowed Britain, France and Russia to rise as major powers. Imperial Germany played a similar dominating role from its rise in 1870 until its fall in World War I, when Weimar Germany's weakness allowed a French and Russian renaissance. And of course Nazi Germany's rise again put all eyes on Berlin, and its destruction led to the superpower standoff -- and, eventually, to the rise of a "united" Europe.

The year 2006 will mark a new turning point as Germany begins to ascend for a fourth time -- which raises the question: What will it do with its rising influence? A new assertiveness does not mean a complete break with the policies of the past -- and Germany under Merkel will certainly not be ready to discard wholesale the foreign policy precepts of the past 60 years. Merkel undoubtedly will follow her predecessors' efforts to unite and federalize Europe -- but bearing in mind what is good for Germany, as opposed to what is good for Europe.

But even when the European leadership aggressively worked to further such federalist goals, Europe's centrifugal geopolitical tendencies led to the Dutch and French rejections of the EU constitution. Under Merkel it will be no different. The EU constitution and most other major integrationist efforts will lie dead throughout 2006 despite German attempts to raise them.

The grand politik aside, more tactical matters will also ensure that Germany enjoys the center stage.

• After a generation at the helm of France, President Jacques Chirac is a spent political force. The only news of note in France in 2006 will be the rising battle between his allies -- past ally Interior Minister Nicholas Sarkozy and present ally Prime Minister Dominique de Villepin -- for the 2007 presidential elections.
  
  
• In the United Kingdom, 2006 likely will see a transfer of power from Prime Minister Tony Blair to Gordon Brown (currently chancellor of the exchequer). The necessary period of consolidation will all but guarantee a lower stature for London on the European stage.
  
  
• Italy will hold elections. Regardless of how the controversial Prime Minister Silvio Berlusconi fares, whatever government takes office (or remains there) will not hold. In order to increase its electoral chances, the Berlusconi government has moved back to Italy's old proportional-representation system -- the one responsible for producing, on average, a new government every 11 months since 1950.
  
  
• Which leaves Merkel's Germany -- regardless of its position as the Continent's geographic center and the union's largest economy -- as the only horse in the race.
  This hardly means the Europeans will fall diligently in line behind the new German leader. The European experiment is ultimately an exercise in seeing how much sovereignty states are willing to cede to an organization they cannot control. The fact that Berlin will be speaking the loudest within such an organization is likely to make the union's smaller members less confident in the European Union's future -- not more.
  
  
• Furthermore, Russia's reassertion of its national interest cannot help but cause friction along the European Union's eastern border -- the Central European states, in particular Poland, Romania and the Baltic trio, are if anything more terrified than ever of Russia. This will guarantee that the United States will remain engaged to the detriment of any pan-European restoration.

Latin America: Increasing Anti-U.S. Sentiment

As we predicted in 2005, much of Latin America has reached a high point of social discontent, punctuated by rising social pressure regarding growth and wealth-distribution that placed Latin American leaders in a difficult political position. The past year saw the culmination of social and political change that will affect the region for the foreseeable future.

The region is in the midst of an 18-month election cycle and will see a political shift during 2006. Candidates from all ideological backgrounds will distance themselves from the United States, in part because of the growing disdain for U.S. policies in Latin America and throughout the world. The rise in anti-free trade and anti-U.S. sentiment that came to the forefront of political and social sectors during 2005 will cause a swing further to the political left as the election season continues. Candidates in Peru, Ecuador and Nicaragua will compete to be seen as the most anti-American, in order to gain votes. Some nominees, such as Bolivian President-elect Evo Morales and Peruvian presidential candidate Ollanta Humala, look to Cuban President Fidel Castro and Venezuelan President Hugo Chavez as examples for Latin America to follow.

The leftward shift will increase the strength and influence of socialist and populist movements -- but right-wing groups should not be disregarded. In 2006, the region's newly elected left-wing leaders will try to pursue an ideological path -- but they also must address the realities of the economic sphere. As a result, the region's emerging leaders will fall into two categories -- moderate socialists similar to Brazilian President Luiz Inacio "Lula" da Silva, and populist revolutionaries like Chavez.

Brazil personifies the moderate socialist path. Da Silva entered the presidency as a center-left candidate, but inched toward the economic right after taking office. He faces a tough political future during 2006. Corruption charges that arose in 2005 against his Workers' Party (PT) continue to plague da Silva's presidency. The charges, combined with an emerging economic downturn, have affected public opinion and will impact the October presidential election. Da Silva has pledged not to change the country's economic model, in order to keep investors happy, but in the lead-up to the presidential election he will likely increase some social programs in order to placate the traditional left-wing constituency of the PT. Political concerns and outcomes aside, Brazil will remain on neoliberal economic and centrist political paths during 2006.

In Venezuela, Chavez will continue advancing his Bolivarian Revolution throughout the hemisphere, using energy interdependence and ideology to influence regional counterparts like da Silva, Morales and Argentine President Nestor Kirchner. Chavez's success in the December 2006 presidential election is almost certain. Opposition groups, who boycotted the December 2005 legislative elections, will attempt to regain some of their standing and legitimacy by playing up the fact that voter turnout was low; but 2006 will largely be a period in which Venezuela is run by Chavez for Chavez, with little interference.

Chavez will also continue his antagonism toward the United States and foreign companies. Caracas negotiated deals in 2005 with 32 oil companies, pressuring them to enter into joint ventures with state-run oil company Petroleos de Venezuela SA. As of this publication, 31 companies have signed. A larger push to consolidate foreign company assets under Caracas' control throughout 2006 can be expected as Chavez follows through on threats to expropriate land and collect back taxes from foreign firms.

Bolivia will continue down a left-wing path during 2006 and distance itself from the United States. However, Morales will go through a learning period in the first half of 2006 as he balances the needs of his Movement Toward Socialism party (and those of the poor and indigenous groups that are his core constituency) with the economic pragmatism required to appease elite factions that control the purse strings. Morales will skate a fine line between upholding a populist revolution and reviving the economy through market processes.

Argentina appears likely to maintain its current socialist path in 2006. Kirchner will further consolidate his friendship with Chavez and look to Caracas to support Argentina's economy through bond sales and energy shipments. The success of Kirchner's Justicialist Party in October elections gave the president a political mandate. As a result, Kirchner will broaden the scope of his socialist economic and social policies throughout 2006. Kirchner, however, may face pressure from Bolivia over natural gas prices and exports as Morales feels his way around Bolivia's foundering economy, forcing the brokering of a natural gas deal with La Paz to keep the lights on in Buenos Aires.

Mexico will hold presidential elections in July -- but regardless of the outcome, the country is likely to remain on a relatively neoliberal economic course. Although former Mexico City Mayor Andres Manuel Lopez Obrador is a left-wing candidate, like da Silva he understands his country's dependence on the United States. Though he has vowed to increase social welfare programs should he win, he is unlikely to radically alter the economic system. Since Lopez Obrador is further to the ideological left than the other two candidates, Felipe Calderon and Roberto Madrazo, it is unlikely that Mexico will swing to an economic extreme no matter who wins in July 2006.

Colombia also will remain on a neoliberal economic course during 2006. Colombian President Alvaro Uribe Velez likely will win the May presidential election. He will maintain close ties with Washington, but will remain wary of angering Chavez. Uribe's primary focus during the election campaign will be demilitarizing guerrilla and paramilitary groups. The National Liberation Army appears on track to disarm completely during 2006, while the United Self-Defense Forces of Colombia will demobilize sufficiently to satisfy Uribe, but will not completely disarm. Meanwhile, the Revolutionary Armed Forces of Colombia (FARC) has the means and motivation to increase attacks during the election season in an effort to undermine Uribe's re-election bid. Therefore, an uptick in violence from FARC can be expected in the first five months of 2006 as the guerrillas entrench their hold on areas where they already have support, over government resistance.

Chile, as usual, remains the exception to the Latin American rule. The left-wing Concertacion party focuses on free-market polices as the key to economic prosperity. Chile will expand its search for economic allies outside of Latin America, looking increasingly toward Asia, specifically China and India, for trade partners. Chile's elections on Jan. 15 pitted the leading Concertacion candidate Michelle Bachelet against billionaire and center-right candidate Sebastian Pinera. Though Bachelet won, it is our expectation that, as in Mexico and Brazil, Chile's economic course would remain unchanged regardless of the election outcome.

The wildcard affecting the region's ideological balance in 2006 is the outcome of Peru's presidential elections in April. Heading into 2006, socialist and former lieutenant colonel Humala began gaining in the polls against the conservative frontrunner Lourdes Flores. The emergence of former President Alberto Fujimori from exile in Japan has added a new dimension to the election by further complicating an already complex presidential race, drawing attention away from many candidates. Should Flores win, Peru will have to address the social discontent people feel toward current President Alejandro Toledo's policies. Should Humala win, Lima will look to Caracas and La Paz for support, affecting the political and social trajectory of Peru and the region. However, regional ideological pressure will not force countries like Colombia to significantly alter relations with the United States.

Sub-Saharan Africa: Shifting of Powers

The United States and European Union will be too preoccupied with other issues to significantly interfere in African political affairs in 2006. This will open the door for more secondary powers to make inroads on the continent. Most notably, China will significantly expand its ties in Sudan, Nigeria, the Democratic Republic of the Congo (DRC) and other countries, hoping to increase its current and future access to resources on the continent. India and Malaysia will make similar efforts. The availability of natural resources -- oil, gas, cotton and a variety of minerals -- will make Africa attractive for the fastest-emerging world economic players, though it is not immediately as attractive to the major political players.

Among African countries, it is Sudan -- with its plans to double oil output to 1 million barrels per day by the end of 2006 -- that will emerge as the most dynamic economic player. Progress in Khartoum will be seen in an attempted peace deal with the Darfur rebels, the normalization of relations with countries in the Horn of Africa, and attempts to attract more business into the country, while further implementing the January 2005 peace agreement with the former rebels in the south. In the DRC, elections scheduled for April and June will establish a permanent legal authority in the country. Leading up to the elections, both Kinshasa and the international community will make efforts to quell insurgent elements in Katanga in order to capitalize on the speculation that the possibility of political stability in the country will bring vast new opportunities for resource wealth, including speculation on oil. The trend also will appear in southern African countries, because of their cotton and agricultural resources, as well as in west African countries, where the current period of relative stability will lead to increased agricultural outputs, most notably cocoa.

While the United States will not attempt to prevent secondary powers from expanding their influence on the continent, Washington will continue engaging these countries politically -- at least enough to maintain a place at the table. Additionally, the United States will engage several African countries on security matters in order to prevent the spread of terrorism and jihadist ideology, seen most often in the Horn of Africa and West Africa.

The lack of pressure and direct interference from Washington and the European Union will lead to a devolution of the levels of democracy currently seen in Africa. As African countries begin to realize that India, China, Malaysia, Iran and others do not care if they play by a democratic gamebook, the benefits they currently receive from the United States and Europe will become less appealing. The trend will be especially pronounced in countries that will become nearly or completely debt-free in 2006, including Uganda, Ethiopia, Senegal, Zambia, Mali and Ghana.

Meanwhile, the major powers on the continent will be largely preoccupied with political crises of their own. South Africa will face political turmoil because of problems within the ruling African National Congress (ANC) that will seriously threaten the party's internal political succession in 2007 -- raising concerns that internal divisions might cause the ANC to splinter, and calling into question the prospect of a peaceful succession of the country's presidency in 2009. These problems will peak in 2006 during ANC Deputy President Jacob Zuma's trials on charges of rape and corruption, while all sides of the tripartite alliance use the March 1 local elections to gauge their standing within the coalition ahead of the 2007 battle.

Nigeria also will experience political problems because of President Olusegun Obasanjo's desire to seek a third term in 2007. Obasanjo is limited to serving two terms under the constitution, and faces dissent both within the ruling People's Democratic Party (PDP) and among domestic opposition parties over his push to pass the necessary constitutional changes before PDP primaries are held late in the year.

As these problems hurt the credibility of African leaders at home and in the international community, the established African powerbrokers who typically work with African institutions, the United Nations, the United States and the European Union during major African crises will not be able to effectively function. A new tier of "elder statesmen" African leaders will emerge to deal with budding problems on the continent, while other formerly influential leaders attempt to help fill the void, including Libyan leader Moammar Gadhafi and former Mozambican President Joaquim Chissano.

Global Economy: U.S. and Asian Growth, and a Case of 'Eurothritis'

In spite of the tone in the American media, the economic story of 2005 was the strength and sustenance of the American boom. When preliminary fourth-quarter growth statistics are released in February 2006, they will likely indicate that the U.S. economy has been growing in excess of a 3 percent rate for the past 10 quarters. The United States has not experienced growth that powerful and even since the 1980s.

All of the underlying factors that made that growth possible -- a transparent banking sector, efficient allocation of capital, a culture of entrepreneurship, a flexible labor market, the willingness to allow firms to fail -- remain in place. Barring a string of events similar to the Sept. 11 attacks or Hurricane Katrina or the development of bird flu into a strain that gives the human race a run for its money, there is little reason to expect U.S. growth to slow appreciably in 2006.

That is doubly true since commodity prices are expected to fall back somewhat from their strong growth in 2004 and plateauing in 2005. A leading reason for the recent high prices in energy and other industrial commodities has been that the demand generated strong global growth -- the strongest such growth, in fact, in more than 20 years. This growth is not likely to fade. In fact, there are even some indications that it could accelerate. But the nature of the growth in one particular country will be of a qualitatively different type.

That country is China.

During the past seven years China has been ruled by two economic policies. The strategy of the Third Generation, overseen by former President Jiang Zemin, espoused growth at all costs. Jiang's generation realized that the Chinese system had many weaknesses within it -- most of which originated with the country's inefficient use of capital -- and as such was vulnerable to social disruptions. The solution was to encourage growth, any growth, in order to maximize employment and keep the people off the streets. The strategy worked, but it -- as designed -- created tens of thousands of inefficient firms that consumed massive amounts of resources. This consumption was perhaps the greatest contributor to the commodity price rises of the past two years.

This strategy conflicted with, and is giving way to, a strategy by the Fourth Generation of leaders led by current President Hu Jintao. Hu's cadre believes that the Jiang strategy has created nearly as many problems as it solved, most notably the racking up of massive debts by firms so inefficient that they have no business being in business. He wants to streamline the system and apply capital more rationally, which means, among other things, closing or consolidating most of the enterprises formed under the Jiang stratagem.

In 2004 the Jiang strategy clearly held the upper hand, as Hu had only become president a year previous. In 2005 global commodity prices plateaued as the Hu strategy was first developed, and then began to be applied. In 2006 as the Hu strategy begins to dominate, the rationalization of resource use will result in a moderation of commodity prices on a global scale.

Which is, of course, bad news for any commodity-producing economy -- read: Latin America -- but good news for any commodity-consuming economy that already is experiencing growth. The United States will do well. The industrializing portions of the developing world will do well.

Japan will do well. Long-time readers know that Stratfor is, if anything, even more pessimistic about Japan's long-term prospects than about China's. Japan's debt problems -- both in terms of non-performing loans held by their conflict-of-interest ridden banks as well as their national debt and pension commitments -- remain the largest in human history. None of these problems have been addressed in any meaningful way, and taken together they will result in the death of the Japan that we know.

But not in 2006.

Under Prime Minister Junichiro Koizumi, Japan has achieved something it has failed to do since 1989: The Japanese consumer has his groove back. So long as people spend, Japan can grow -- even if it continues to sink deeper into debt by the day. The Japanese development model favors throughput over profitability, and now that things are flowing through again, a recovery of sorts is in progress. In 2004, when Japanese policymakers said Japan would emerge from deflation within 12 months, we laughed. The same claim prompted our laughter in 2003 -- in 2002, the claim was so preposterous it elicited hysterical giggles. But in 2006, we are nodding cautiously.

Which leaves us with Europe, whose economy is not relegated to afterthought because it is discussed last; it is an afterthought on its own merits. European growth has been sub-par for the past 15 years, beating out the United States only during the 2001 recession. Many European commentators -- not to mention EU commissioners -- are waxing philosophic about how 2006 will be a better year than 2005. The Germans are particularly excited about this possibility. Yet every year European statisticians ultimately resign themselves to revising their growth forecasts down, not up.

Consider this: all of the ailments European economies traditionally suffer from -- rigid labor policies, weak bankruptcy laws, substandard levels of investment, a culture of subsidization and strikes -- have not been seriously addressed anywhere but in Germany, and even there progress has been gently-gently. There are exceptions here and there of course - the Netherlands has an excellent labor market, the Finns know how to apply and develop technology, and the French have perhaps the world's best-managed system overall -- but the overarching picture is clear: if Europe is to break out of its Eurothritis it will need to change. In some corners of Europe this is being recognized, but that recognition has not yet been followed by action, much less results. Even if 2006 proved to be the year that Europe breaks with its past -- and with the exception of perhaps a German move it will not -- 2006 will not be the year that results are generated.

Europe is unlikely to fall into recession in 2006, but neither is there much reason to expect improvement. Cheaper commodity prices will assist the Continent just as they would boost any consuming economy, but even should the Europeans match the fastest growth they have experienced in the past five years, their collective growth rate would still not breach 2 percent. What news there will be in the global economy will not be coming from Europe.