Some weeks ago I was in Brussels, and by chance found I was sharing the same hotel as many members of the delegations to the EU summit, with whom I had numerous conversations after work or at breakfast. Their tales, anxieties and exhaustion (working nonstop through months dominated by emergencies, bad news and frustration) brought back many memories.
In another age, in the early 1990s, I was a minister in Venezuela, when the government couldn't pay its debts and the economy lay prostrate. Later I was at the World Bank, and a party to similar negotiations in other countries. Failures often outnumbered successes. And we are supposed to learn from failures.
In my Brussels conversations, I was struck by the surprising similarities between this crisis and those earlier ones. Surprising, too, was the general reluctance to admit that the Latin American experience holds lessons for the handing of the EU crisis. "Europe is different," they said. "We have the euro, our economies and financial systems are different, besides our institutions and culture." All true. But there are other realities, also true.
From 1980 to 2003, Latin America suffered 38 economic crises. The region, from its technocrats to its public opinion, have learned from these painful experiences. Perhaps the most important lesson is "the power of the package." The "package" is a set of economic measures that is complete, coherent, credible and politically sustainable over time. Importantly, it offers not only austerity, but also a fair distribution of adjustment costs between social groups, a reinforcement of the safety net for the most vulnerable, structural reforms to generate employment, and, above all, hope for the future.
The curative effect of such a package is great, but so is the temptation to skimp on it. The most recurrent error in Latin America was that of treating the crisis with partial, fragmented measures, thinking it possible to indefinitely postpone unpopular decisions. This is what is now going on in Europe. You need only look at Italy or Greece to discern the Argentinian experience, for example. But sooner or later, reality prevails and half-measures fail. This paves the way for making simultaneous efforts in the infirm areas of the economy: excessive debts, runaway public spending, under-capitalized and ill-regulated banks, uncoordinated fiscal and monetary policies, low international competitiveness, laws that inhibit investment and job creation. To attack one or several of these ills, leaving the others intact, doesn't work. Nor does offering a country perpetual austerity to pay debts to foreigners.
When some critics say that Europe is looking more like Latin America every day, they are thinking of the Latin America of the past, when it was plagued with economic crises. Looked at in another way, the best thing that can happen to Europe is to look more like today's Latin America, which has been weathering the world crisis well, handles its public finances prudently, and takes care to regulate its banks. The region's best countries, Brazil, Chile, Colombia and others, have been growing, generating jobs and broadening their middle class in recent years. To the surprise of many, "Latin America now has the world's most solid financial system," as one well-placed observer said to me the other day.
This does not mean that Europe should adopt the poverty, inequality, corruption and violence so common in Latin America. But it should learn from the successes and failures of a region that knows a great deal about economic crises, bank failures, external shocks, the effects of squandering, excessive debt and the empty promises of populism. Let's hope Europe can handle its crisis as the new Latin America learned to do. In this sense, a little Latin Americanization of Europe is a desirable thing.
The Carnegie International Economics Program monitors and analyzes short- and long-term trends in the global economy, including macroeconomic developments, trade, commodities, and capital flows, drawing out their policy implications. The current focus of the program is the global financial crisis and its related policy issues. The program also examines the ramifications of the rising weight of developing countries in the global economy among other areas of research.
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