beyondbrics

Latin American and European Union heads of state are getting together in Madrid for a summit starting on Monday against an eerily familiar backdrop of double-digit budget deficits, heavy sovereign debt loads, intervention from the International Monetary Fund and violent street protests. The only difference this time is that it is Europe – and not Latin America – is causing all the problems.

The irony of this upside-down world will not be lost on Latin American politicians used to being lectured by the developed world on prudent economic management. The likes of the outspoken Brazilian president Luiz Inácio Lula da Silva may be unable to avoid a touch of schadenfreude. And European Union leaders will do well to swallow their pride and listen hard.

Whatever the tone of the two-yearly encounter between the two regions, Latin American delegates, with perhaps a couple of exceptions, can probably be relaxed about the possibility of serious contagion from their crisis-besieged counterparts across the Atlantic.

Brazilian finance minister Guido Mantega said as much at a recent conference in Rio de Janeiro. “Europe’s crisis isn’t going to hurt Brazil,” he said. “There may be some turbulence in financial markets, but it will pass.”

Citigroup, in a recent report, sent a similar message. It says that while mild contagion in Latin American financial markets is inevitable, the region’s diversity of export markets should provide a cushion against the impact of weak growth or contraction in Europe. It calculates that exports to the worst-affected economies – namely Portugal, Ireland, Italy, Greece and Spain – account for just 10 per cent of total shipments from Latin America. And rather than exporting problems from their domestic market, Spanish companies are building up their Latin American businesses to offset declining profits at home.

Going further, Mauricio Cárdenas, director of the Latin American Initiative at the Brookings Institution, suggests the EU crisis could actually benefit Latin American “Latin America now looks as risk-free as any area in the world,” he said in a recent interview for the Inter-American Dialogue. “So I think we’ll see a surge in capital flows and compression in spreads in the next few months.”

These are strange times, indeed.

Related reading:
Latin America’s economic bonanza, FT