As industrialised countries face a recession that may last longer than expected, South America’s largest trade bloc, strengthened by having successfully weathered the global financial and economic crisis, is making strides towards better internal coordination.
(IPS) – As industrialised countries face a recession that may last longer than expected, South America’s largest trade bloc, strengthened by having successfully weathered the global financial and economic crisis, is making strides towards better internal coordination.
“The international context provides the Mercosur (Southern Common Market) with an unprecedented opportunity, as it has recovered very quickly from the impact of the crisis and can reposition itself to advantage in the new scenario,” Octavio Groppa, regional head of the Macroeconomic Monitoring Support Project (MMS), told IPS.
The agenda of the 40th Mercosur Summit, to be held Friday in the southwestern Brazilian town of Foz do Iguaçu, includes the creation of the post of High Representative, a kind of Mercosur foreign minister, and preferential tariff agreements with Egypt, India, Indonesia, Morocco and South Korea.
Brazilian President Luiz Inácio Lula da Silva, hosting his last summit in office, will receive the leaders of the bloc’s other full member states: Cristina Fernández of Argentina, Fernando Lugo of Paraguay and José Mujica of Uruguay. Venezuela is still waiting for the Paraguayan Senate to approve its application for full membership.
Presidents Evo Morales of Bolivia and Sebastián Piñera of Chile will also attend the meeting. Their countries are associate members of the bloc.
Since the last summit in the Argentine province of San Juan, when a common customs code was adopted, the bloc has made strides on issues like trade and convergence, according to the Mercosur Secretariat.
The presidents will finalise details of the offer the bloc will present to the European Union in March 2011, in an attempt to reach a free trade agreement between the regions, a process that was stalled until negotiations were resumed this year.
For the first time in decades, there seems to be a reversal of roles. The global crisis is posing serious challenges for the EU, while the South American bloc has recovered with a fiscal solidity and trade options that it did not possess when facing previous external shocks.
Meanwhile, the joint Mercosur-EU Macroeconomic Monitoring Support Project (MMS) should begin to produce results in May 2011, when data on fiscal accounts, balance of payments or international reserves for each country are harmonised and can be compared.
“The EU wanted to get our countries around a table to talk about macroeconomic policies, but we warned them that we don’t even share a common language, so the bulk of the project was directed to harmonising the statistics,” Groppa said.
In order to do this, economic experts from all four countries analysed the economic behaviour of each, and their conclusions shed light on Mercosur’s performance during the global crisis and pending challenges.
According to Groppa, the crisis in countries of the North could be prolonged, and that would mark the beginning of a change in the economic and political map of the world, with countries like China and India – to which Mercosur exports products – having greater weight.
The relation between debt and fiscal deficit and GDP is a heavy burden in the EU, while in Mercosur, hard currency revenue from trade with Asia has lightened the load, he said.
“The development gap is narrowing, but what we seek is not only greater economic growth in quantitative terms, but growth with social inclusion in order to reduce inequality, which is the big challenge,” he said.
To achieve this, the bloc’s scope for joint action must be strengthened, by means of greater macroeconomic convergence, he said.
One of the MMS project’s research studies, “Coordinación de Políticas en un Contexto de Crisis” (Policy Coordination in a Context of Crisis) by José María Fanelli and Ramiro Abrieu, emphasises that the new global scenario presents Mercosur with both opportunities and challenges.
One way to advance towards convergence is to analyse the impact of the crisis in the region, at a time when the macroeconomic situation of the bloc’s member countries “is very different” from what it was in previous global economic upheavals, the study says.
The authors argue that the bloc’s international political clout has greatly increased, and they highlight the participation of two Mercosur member countries, Argentina and Brazil, in the Group of 20 major economies (G-20) and the Financial Stability Forum.
“This boosts the presence of the region in the global arena, at the very time when the international financial architecture is being redesigned,” a process in which Mercosur has a regional viewpoint to contribute, the study says.
The report finds that the Mercosur countries experienced the crisis as a sudden shut-down of capital flows and collapse of trade, but that the anti-cyclical policies implemented by the left-wing and centre-left governments in power in the region since the early 2000s allowed them to recover rapidly from the shock.
These policies were made possible by the greater economic strength of the bloc, based on intensive trade with emerging Asian countries, large fiscal surpluses, and the accumulation of hard currency reserves.
Argentina, Brazil and Paraguay implemented policies to stimulate investment in infrastructure, in contrast to what they did in previous external crises when the region was characterised by fiscal fragility and bulky debts, the authors say.
“This time Mercosur governments were able to follow a fiscal strategy that is common in advanced economies: anti-cyclical policies,” they state, adding that there was also greater flexibility in monetary and exchange rate policies.
Industrial activity in Mercosur countries fell by an average of eight percent between September 2008 and April 2009, but in the Group of Seven (G7) richest countries in the world, industrial output dropped by 18 percent. In addition, unemployment was appreciably lower in the South American bloc.
Nevertheless, the authors stress the importance of a pact between Mercosur partners to further strengthen their position in economic crises, and they point to the lack of financial development as an obstacle.
The countries have accumulated substantial foreign exchange reserves, which the authors suggest could be managed by regional mechanisms.
The bloc’s total reserves are over 200 billion dollars, equivalent to 13 percent of regional GDP, an unprecedented amount.
In the view of Fanelli and Abrieu, coordination of the countries’ monetary policies is crucial. “It would be a great boost to convergence if there were a clear will to converge, in the medium term, towards similar inflation rates and monetary regimes,” they recommend.