What Lessons Can Europe Learn from Latin America?

Q: Since the global economic recession in 2008-09, several European countries have struggled with debt crises that many analysts have likened to Latin America’s struggles in past decades. What do the two situations have in common? What differentiates them? What lessons can Europe learn from Latin America and how should Europe handle its ongoing financial crisis?

A: Kevin P. Gallagher, associate professor of international relations at Boston University: “Latin America holds many lessons for the Eurozone debt crisis. Restructure now and reform your trade treaties. The Latin American experience shows that kicking the can down the road does more harm than good. Bailouts use global and domestic taxpayer funds to lend evermore to debt-ridden nations who have to use the money to pay back creditors rather than put their economies on a recovery path. Thus, the underlying economic environment doesn’t change and the nation eventually defaults. This happened in Brazil, Uruguay and, of course, Argentina. In contrast to the Eurozone experience though, alongside restructuring, Latin American currencies plummeted, which Greece cannot do under the euro. It is also true that Latin America happened to be endowed with key primary products in the middle of a commodity boom. Greece is not so lucky. Despite calls by the IMF to establish a sovereign debt restructuring mechanism after the Argentina crisis, the world’s attention went elsewhere. As I show in my new study, The New Vulture Culture: Sovereign Debt Restructuring and International Investment Treaties, in the absence of conscious global economic governance, we may be left with a de facto regime: the thousands of international trade and investment treaties that have jurisdiction over government debt. Argentina has been sued under trade treaties for its restructuring. Europe, and Latin America, should reform their trade treaties to allow nations to prevent and mitigate financial crises.”

A: Daniel Marx, executive director of Quantum Finanzas and former secretary of finance of Argentina: “In Latin America, the crises were usually triggered by external conditions, such as a deterioration in terms of trade or a sudden halt in capital flows (connected to an event such as a drop in emerging markets investment due to interest rate movements in the United States or the dollar parity). In contrast, in certain European countries, there is an accumulation of imbalances that took place over several years and that no longer seem to be financeable through the debt markets. In fact, what you see in the mounting debt ratios is the result of deficits, both seen in fiscal and current account deficits, that have been financed over the years thanks to meaningful access to credit given the fact that they are members of the European Union. To overcome the situation, they must go through some sort of rebalancing to make their fiscal position and the debt positions sustainable over time. Even in the private sector in certain countries, there are situations that are facing sharp corrections, like in real estate, construction and banking. In Latin America, rebalancing was often boosted by external conditions. But, that seems to me, would be less of a factor in those European countries. Nowadays, although prevailing base interest rates are lower, current deficits are deeper-rooted and the accumulated debt burden is much higher. The other thing I would like to stress is the connection between debtor countries and the multilateral credit institutions. In Europe, indirectly or directly, the amounts that official credit institutions and multilaterals have been willing to make available are much higher than in Latin America. The sooner Europe faces the situation, the better. Nevertheless, you ought to have a credible strategy to straighten the imbalances in flows prior to tackling the financial engineering applied to debt proposals aiming at a liability structure you could sustain. Dealing with the fundamentals is at least, if not much more important, than just pure finances.”

A: Desmond Lachman, resident fellow at the American Enterprise Institute: “While the Europeans will be the last to recognize it, the Eurozone is presently embroiled in a garden variety emerging market debt crisis with which the Latin America of old was all too familiar. Have we not all been to this horror movie before: a rapidly approaching day of reckoning due to a lethal combination of out-of-control budget deficits, reckless domestic bank lending, overvalued exchange rates, too much public and private sector indebtedness and the most fixed of exchange rate systems to boot? A major difference from earlier Latin American crises is that the European crisis is playing out simultaneously not in one but in four countries–Greece, Ireland, Portugal and Spain. This makes it both difficult to control and all the more dangerous for the global economy since it has the potential for triggering a full blown European banking crisis. Had European policymakers not been overly complacent over the past decade, they might have learned a lot from Latin America’s sad past experience with misguided macroeconomic policies, especially under fixed exchange rate regimes. This might have helped them to avoid their present sovereign debt crisis. Now that they are neck-deep in the mess, it is too late for those lessons. However, it is not too late for European policymakers to draw the following three lessons from Latin America’s past experience with crisis resolution. First, denial by policymakers in an effectively bankrupt nation of a solvency problem is not a good idea. Second, sticking with a currency arrangement beyond its useful shelf life is an exercise in futility, as is trying to service a clearly unsustainable debt level. Third, having a well thought-out Plan B is to be highly recommended, especially when one is soon to be faced with the aftershock of defaulting on one’s sovereign debt and exiting the euro.”

A: Mark Weisbrot, co-director of the Center for Economic and Policy Research: “There is much that the Euro countries can learn from the Latin American crises of the 1990s. Greece especially can learn from Argentina’s experience. Argentina was stuck in a devastating recession for three and a half years. It applied the IMF medicine, but that only made things worse. Finally, the country defaulted on its sovereign debt at the end of 2001 and broke its peg with the dollar. The economy took a nosedive but just for one quarter; it then recovered robustly and grew 63 percent in real (inflation-adjusted) terms, pulling more than 11 million people (of a population of 39 million people) out of poverty. And it is growing rapidly today, despite being shut out of international lending markets since the default. Greece clearly needs to default, and if necessary leave the euro; otherwise this continued shrinking of the economy, 16 percent unemployment and other punishment could last indefinitely. Ireland, Portugal and Spain also need counter-cyclical policies if they are to recover. Spain is barely growing but not enough to reduce its 21 percent unemployment; Portugal just signed on to an agreement that promises two more years of recession; Ireland has lost about 17 percent of GDP per capita and tripled its unemployment rate. All of these countries should refuse to accept any further pro-cyclical policies and be prepared to default and/or leave the euro if the European authorities and IMF will not allow their economies to grow. That should be the bottom line.”


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