Eurozone crisis: What Latin-America can teach Europe
9 November 2011
The debt crisis has plunged the eurozone into a situation similar to that experienced by Latin America in the 90's. To emerge from it, Europeans should learn from the mistakes made at the time, writes columnist and former Venezuelan Minister Moises Naim.
A few weeks back I was at a meeting in Brussels, which, incidentally, was held at the same time as the summit at which EU leaders agreed on a plan to stabilise their economies. At the end of the day, naturally I talked with economist friends in various governments who were there with their proposals to back up the negotiations between their leaders. Their stories, anxieties and exhaustion brought back a lot of memories.
In the early nineties I was a minister in my own country, Venezuela, when the government couldn’t pay its debts and the economy had collapsed. Afterwards I worked at the World Bank and was close to similar negotiations elsewhere. In many of these experiences, the failures were more frequent than successes. And we know that failures have a lot to teach.
In informal talks with my European friends, the parallels of Europe’s crisis with the crises that had rocked other countries were obvious. And yet just as striking as these similarities was the unwillingness of my friends to acknowledge that the experiences and mistakes of Latin America hold important lessons for coping with the crisis in Europe.
“Europe is different,” was the almost automatic response. “We have the euro, our economies and financial systems are different, and so are our institutions and culture,” they insisted. All this is true. But there are other realities that are also true.
Between 1980 and 2003, Latin America went through 38 economic crises. The region, its authorities, its politicians and even the public have learned from the experience of these painful episodes. Perhaps the most important lesson is what one might call “the power of the package.” The package is an economic package that is complete, coherent, credible and politically sustainable over the long term.
Promising a country almost perpetual austerity doesn’t work
Also – and this is very important – it not only cut public spending and austerity, but also fairly distributes the costs of economic readjustment between different social groups, strengthens social safety nets for the vulnerable, brings in structural reforms that generate more employment and, above all, gives hope for a brighter future.
Unfortunately, just as powerful as the healing effect of a comprehensive and coherent package is the temptation to avoid it. The mistake that recurred most often in Latin America was trying to meet the crisis with fragmented and piecemeal measures and thinking it was possible to put off the most unpopular decisions indefinitely. This is what has been happening in Europe.
You only have to look at what’s going on in Italy or Greece to recognise the Argentine experience, for example. But sooner or later, reality wins out and half measures fail. This paves the way for simultaneous efforts in the diseased sectors of the economy: excessive debt and runaway spending, undercapitalised and poorly regulated banks, uncoordinated fiscal and monetary policies, low international competitiveness and regulations that inhibit investment and job creation.
Tackling one or more of these evils while leaving the others alone doesn’t work. Promising a country almost perpetual austerity to pay debts to foreigners doesn’t work either.
Europe can learn from our mistakes and successes
When some critics note contemptuously that Europe is looking more like Latin America, they have in mind the Latin America of the past, which was plagued by economic crises. But there is another way to see it: the best thing that could happen to Europe is to look like the Latin America of today.
The continent that has been able to navigate the global crisis without capsizing, which is managing its public finances prudently and knows how to regulate its banks. The best countries in the region, including Brazil, Chile, Colombia and others, have been growing in recent years, creating jobs and expanding the middle class.
Furthermore, and to the surprise of many, “Latin America today has the most solid financial system in the world”, says José Juan Ruiz, an economist at Banco Santander and keen observer of the global financial scene.
It’s not that Europe is sliding into the poverty, inequality, corruption and violence so common in Latin America. It’s that Europe can learn from the mistakes and successes of a region that knows more than any other about economic crises, bank failures, external shocks and the effects of squandering, high debts and the empty promises of populism.
I hope that Europe manages its crisis as the new Latin America has learned to. In this sense, to wish for a Latin-Americanisation of Europe is to wish for better things.
Translated from the Spanish by Anton Baer