At the end of the Paraguay War, the country had to cede territories to its neighbors, especially to the powerful Empire of Brazil.

But what if the story was different? What if Brazil seizes the opportunity to establish a monarchy in Paraguay under the command of Princess Isabel and Count D'Eu, daughter and son-in-law of Dom Pedro II? What changes would we have in South America in the long run?
 
Argentina may or may not oppose this, and the postwar rulers of Paraguay were exiles who made it to Argentina earlier and retained close contacts with Buenos Aires. So even if Brazil did a great deal of legwork in the war I'm not sure whether Argentina wants it muscling in on their prize.
 
At the end of the Paraguay War, the country had to cede territories to its neighbors, especially to the powerful Empire of Brazil.

But what if the story was different? What if Brazil seizes the opportunity to establish a monarchy in Paraguay under the command of Princess Isabel and Count D'Eu, daughter and son-in-law of Dom Pedro II? What changes would we have in South America in the long run?
Why would Brazil want that? AFAIK Dom Pedro wanted Dona Isabel to succeed him in Brazil (much to the chagrin of the Barões), so if he wanted to do this, maybe a different member of the extended Orleans- Bragança clan would be better. As a side note, given the sorry state in which Paraguay was left, this would be mora a punishment than a prize for the new King of Paraguay.
 
At the end of the Paraguay War, the country had to cede territories to its neighbors, especially to the powerful Empire of Brazil.

But what if the story was different? What if Brazil seizes the opportunity to establish a monarchy in Paraguay under the command of Princess Isabel and Count D'Eu, daughter and son-in-law of Dom Pedro II? What changes would we have in South America in the long run?

Brazil wanted Paraguay as a buffer(and somewhat neutral) state between itself and Argentina, and what you propose wouldn't be seen as one.
 
Why would Brazil want that? AFAIK Dom Pedro wanted Dona Isabel to succeed him in Brazil (much to the chagrin of the Barões), so if he wanted to do this, maybe a different member of the extended Orleans- Bragança clan would be better. As a side note, given the sorry state in which Paraguay was left, this would be mora a punishment than a prize for the new King of Paraguay.

At that time, the Orleans-Bragaça Dynasty didn't yet exist (it began with the union of D'Eu and Isabel). Until that moment Isabel wasn't expected to be Pedro's heiress, they wanted a man as leader of Brazil. The recognized heir was Pedro Augusto, son of Isabel's sister, Lepoldina. Isabel and D'Eu only became heirs five years after the end of the war, when they had their first child.
 
At that time, the Orleans-Bragaça Dynasty didn't yet exist (it began with the union of D'Eu and Isabel). Until that moment Isabel wasn't expected to be Pedro's heiress, they wanted a man as leader of Brazil. The recognized heir was Pedro Augusto, son of Isabel's sister, Lepoldina. Isabel and D'Eu only became heirs five years after the end of the war, when they had their first child.
Oh, I messed up the timeline, sorry about that. Well, if Brazil manages to get Argentina agree with that, I would expect Dom Pedro giving resources to Isabel to improve things in Paraguay. Low tariffs and maybe a small-scale immigration of men (mostly). Paraguay could end up speaking a unique Portunhol-Guaranì pidgin on the long run.
 
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