What’s Up, Family? Europe and Latin America Today

Samuel George on issues in EU – LATAM Relations

You think jammin’ was a thing of the past?

Hey folks–today I had the opportunity to present in day three of the the Friedrich Naumann Foundation’s four day confrence “Hacia dónde se dirige Latinoamérica.” My topic was Europa y América Latina – ¿cooperación en pie de igualdad?

I wrote my notes out in English and figured I could share them here as a quick post.

To see video of the talk (dubbed over in German with a female’s voice, no less) click HERE.

For audio-only in Spanish, see HERE

Europa y América Latina – ¿cooperación en pie de igualdad?

It is a difficult relationship to pinpoint. On the one hand, there are hundreds of years of complicated family history. On the other hand, the relationship is not immediately obvious.

For example, Latin American migration to the United States, or Chinese investment in Latin America are hot topics globally that can be quantified with massive numbers. The European Latin American relationship can be more nuanced.

With that said, today I hope to draw on a couple of lessons from recent history, as well as the current situation. I will conclude with a look to the future with the question of Europa y América Latina – ¿cooperación en pie de igualdad? in mind.

The History

Obviously, Europe and Latin America share hundreds of years of history—some parts of it happier than others. Today, however, the shared culture is most likely a positive in the relationship.

Recently I met with Brazilian insiders in Germany, and they stated in clear terms that a shared culture makes it easier to work with Europeans compared to new investors from Asia.

But today I would like to touch upon a piece of more recent history.

Given the similarities between the Latin American sovereign debt crisis of the 1980s and the European sovereign debt crisis today, Latin America is actually in a position to offer Europe advice; usually the advice flows in the other direction.

In in my paper Surviving a Debt Crisis: Five Lessons for Europe from Latin America, I argue that Latin American policy makers and central bankers were forced to disentangle precisely the same Gordian knots in the 1980s that European policy makers face today. Some ideas succeeded, others failed. All told, they left a body of work that is absolutely relevant to the current crisis in Europe.

When examined from a bird’s-eye view, Europe’s current sovereign debt crisis and Latin America’s sovereign debt crises of the 1980s follow a similar pattern. Both crises began when countries that had historically suffered severe macroeconomic fluctuations were suddenly able to borrow extensively and cheaply on the international markets.

While the “good times” rolled, the general perception was that they would keep rolling and policy makers saw no need to tackle painful reforms. Finally, once this model proved unsustainable, afflicted countries prevented default by accepting bailout packages contingent upon austerity packages.

The lesson from Latin America is that Europe has been sucked into a false debate of austerity versus growth. A degree of European austerity is necessary, just as it was in Latin America in the 1980s. But austerity must be understood as an emergency brake. Now, a strategy is needed to restart the engine.

The key lesson from the Latin American sovereign debt crisis of the 1980s is that the question is not austerity or growth but austerity then growth. The other lesson: pounding austerity into a recession does not work.

The Present

Regarding today’s relationship, one key question concerns the potential spillover effects of the European debt crisis on Latin American economies.

In some cases it’s a direct effect. For example, European investment in Latin America has decreased due to tight capital. In other cases, the relationship is indirect.

For example, if European consumption of Chinese goods decreases, this has a negative effect on Chinese growth. In turn, this limits Chinese demand for Latin American commodities. Brazil is one country that has faced both of these consequences, and the euro crisis is one explanation for their growth slowdown.

Financial spillover effects are another concern. European banks, and in particular, Spanish banks such as Santander and BBVA are very important throughout Latin America, particularly in Chile, Mexico, and Uruguay. Concern exists that these banks could become increasingly risk averse, even though they are locally funded and rather profitable.

Also, in a quirk of international finance, Spanish and French banks play a very important role in financing Latin American trade—the short term loans that help get imports and exports on and off ships. The European sovereign debt crisis has led to increased costs of these loans, which is obviously not the best for Latin American trade.

Finally, it is important to consider the spillover effects of the current free trade negotiations between the European Union and the United States, known as TTIP for its initials in English. Here at the Bertelsmann Foundation, we recently led a study to measure how TTIP would affect the rest of the word.

Overall, the model indicates that Latin American exports to Europe would decline by an average of 7.26 percent per country. Brazilian exports to Germany would contract by 7.92 percent. Argentine exports to Spain decline 15.31 percent.

This contraction would have an adverse effect on regional per-capita GDP. Mexican per-capita GDP, for example, would decline 7.24 percent.

Now, it is important to understand that these measurements were taken based on Latin American trade strategies in the 1990s and 2000s. These strategies could be changing.

As we see with the Pacific Alliance, some countries are adopting European models of free trade. This is a trend we need to keep an eye one—will Latin American countries align their policies with European trade policies. And if so, will it create more trade?

The Future

So as we look to the future, I want to first return to the original question at hand: “Europa y América Latina – ¿cooperación en pie de igualdad?” To me, this question seems to be asking whether Europe and Latin America are and will be partners of equal status, or whether Latin America is still a “junior partner.”

This is a tricky question to answer. On the one hand, the quality of living, in terms of education, infrastructure, and access to technology, employment and health care remains higher in Europe.

With the possible exception of Brazil, Latin American countries do not have the diplomatic power of European countries.

In these terms, it is difficult to imagine Europe and Latin America acting as truly equal partners on a global scale—a point recently underscored by the embarrassing grounding of Bolivian President Evo Morales’ plane in Austria last July—that would not happen to a European president.

But at the same time, Latin America has an opportunity for rapid growth at a moment when European growth has completely stalled, and will likely be low in the near future.

In this sense, there is true opportunity for partnership. The European Union is the largest foreign direct investor in Latin America. The EU’s willingness to investment in greenfield manufacturing, as well as research and development projects represents the high quality investment for which Latin America yearns. This is in stark contrast to Chinese investment which often focuses exclusively on raw resources.

Through historical developments, Europe has an inside track to benefit from Latin American growth. And in this sense, Europe needs Latin America, just as much as Latin America needs Europe. Both sides would benefit from a deeper, more equitable relationship.