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Brazil-EU Relations: Beyond the Eurozone Crisis

Brazil-EU Relations: Beyond the Eurozone Crisis

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This policy brief looks at the economic and political ties between Brazil and Europe.
This policy brief looks at the economic and political ties between Brazil and Europe.

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Published by: German Marshall Fund of the United States on Aug 14, 2012
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11/22/2012

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Summary:
The debate in Brazilon the future of Europe is still
supercial, but has a particularconcern for the impact the crisis
will have on its growth rate.
There have been adjustments in
the expansion plans of Brazilian
companies that were already
operating in Europe before
the crisis began, and manyother Brazilian multinationalcorporations have gone bargain
hunting in Europe. Europe is
still not considered as friendlyplace for business as the UnitedStates, Japan, or even China.
This has diverted Brazilian
investments and companies to
other regions where regulations
are less burdensome. A morepragmatic approach is neededto establish rules enhancing competitiveness in the Europeanlabor markets, with easierimmigration rules to attract
foreign talents. While the new
Brazil is not entirely dependenton Europe for its future growth,Brazil should look to Europe as a
vital partner in building the newworld order.
Brazil-EU Relations:Beyond the Eurozone Crisis
by Marcus Vinícius de Freitas
1744 R Street NWWashington, DC 200091 202 683 2650F 1 202 265 1662E ino@gmus.org
August 2012
Paper Series
 
E
TheEuroFuture Project
 
F  
How the Mess in EuropeAffects Brazil
What the European Union
1
— oneo Brazil´s largest trading part-ners — will be like aer the eurocrisis remains a mystery. Te euro,not Europe, is in crisis. Brazil, asurvivor o many economic crises, isan example that such crises shouldinspire Europe to reassess and renew its role on the world chessboard andbuild more resilience into its integra-tion process. Getting back on track,however, has been much slower thanexpected and shows that Europe stillaces many internal doubts about itsuture. Tis crisis is not the euro´sault alone. It is also the ault o thelack o leadership, common vision,and discipline in scal matters.Te euro, despite having deprivedindividual countries o exibility insetting monetary and scal policy, hasbeen essential to expedite nancialexchanges and lower transaction costsin Europe, with a positive impact on
1 Brazil was one of the rst countries with whom the EUhas established diplomatic relations. Since the EU-BrazilSummit in Lisbon in 2007, Brazil has been recognizedas one of its main global interlocutors by the EU-BrazilStrategic Partnership in order to strengthen co-operationand develop a deeper dialogue. Issues such as climatechange, the international nancial crisis, and regionalsituations have created a positive, yet developing 
relationship.
economic growth in the last decade.
2
 However, the lack o undamentals,such as a unied scal policy, uniormbanking regulations, and a more solidand more democratic governance,have backred, a direct result o the“we want integration, but not somuch” approach.Te crisis has increased the dividebetween North and South, Eastand West, between more and lessendowed economies. Te latter havegreatly beneted rom the transer o community unds.
3
Tis divide may be the root o uture crises i Europeails to address this challenge.Te Brazilian debate on the utureo Europe is still supercial, but hasa particular concern or the impactthe crisis will have on its growth rate.Brazilian companies, already oper-ating on the continent beore thecrisis, have been revaluating whetherit would make sense or them tocontinue operations. On the otherhand, the crisis has been an incentiveor Brazilian companies willing to
2 Around 330 million people live in the eurozone, wherethe average ination rate stands at 2 percent.3 Those member countries failed to put these funds intoproductive use, spending on public or private consump-tion (Greece, Portugal) or booming the residential con-struction sector and over-sizing the exposure of banking sectors (Ireland and Spain).
 
2
E
TheEuroFuture Project
 
F  
Europe will remain an importantplayer in world affairs andglobalization, despite the bumpy
road ahead.
integrate their production chains to acquire crisis-aectedassets.For quite some time, Brazil and Latin America were o theEuropean radar, considered more o an Iberian matter, withPortugal and Spain playing an important interlocutory role.Despite some initiatives, discussion o closer economiccooperation has moved at a turtle’s pace on both sides o the Atlantic, particularly due to Brazil´s insistence on thereduction o European subsidies on agriculture, still anunresolved matter. As a consequence, trade has not beenas intensive as it could be, despite the act that Europe buysBrazilian manuactured goods.Te European crisis has had an impact on Brazil in threedierent areas:
•
the spill-over eect rom Europe´s trade reduction withits current number one trading partner, China, now Brazil´s main trading partner, too;
•
the decrease in exports to Europe due to protectionistmeasures; and
•
an overall impact o the European crisis in worldwidegrowth, which has aected the Brazilian GDP, reducingthe expected growth rom 3.5 percent to 2.5 percent in2012
.
4
 
According to the World rade Organisation (WO),
5
 Brazilian exports were reduced by almost 17 percent in thelast quarter o 2011 and the rst quarter o 2012, as a resulto the European crisis and slowing growth in China.
6
Teadministration o President Dilma Rousse has pursuedcountercyclical measures to address the situation, in analmost desperate eort to raise consumption as a drivingorce to generate growth in a bearish market.When it comes to investments, there has been a dualscenario. Te expansion plans o Brazilian companies thatwere already operating in Europe beore the crisis have
4 The Brazilian GDP expanded 0.20 percent in the rst quarter of 2012. In 2010, theGDP growth reached 7.5 percent, the highest in the past 25 years. However, it sloweddown to 2.7 percent in 2011, with expected growth at 3.2 percent in 2012. New Brazil-ian Central Bank projections foresee it at 2.5 percent for 2012.5 World Trade Organisation,
World Trade 2011, Prospects for 2012
, July 2012,
http://
www.wto.org/english/news_e/pres12_e/pr658_e.htm
.
6 World Trade Organisation,
Brazil Country Profle WTO Report
, July 2012,
http://stat.
wto.org/CountryProle/WSDBCountryPFView.aspx?Language=E&Country=BR
.
been adjusted. An example is Marcopolo,
7
which opted toshut down operations due to the slow growth. On the otherhand, as the crisis continues, many Brazilian multinationalcorporations have gone bargain hunting in Europe. As aresult, Brazilian policymakers should secure the protectiono Brazil’s ever growing interest in European companies inorder to integrate supply chains. European investors havesought prots rom their operations in Brazil, a country with a comparative advantage over the other BRICS dueto its positive response to the crisis and to its democraticstability.
8
Tis has prompted European companies toexpand investments, despite the inrastructure challengesand the cost o doing business in this emerging market.Europe will remain an important player in world aairsand globalization, despite the bumpy road ahead. TeEuropean integration model, however, which had beenconsidered the most appropriate or a region like SouthAmerica, is no longer perceived as a model. Nonetheless,together with the United States and China, Europe willstill play an essential role in globalization, even though itwill be the third voice in that troika.
9
Since globalizationseems an irreversible trend — it should be rememberedthat Europe was globalized long beore the term becamewidely recognized — and will continue aer the dust o the current crisis settles, the Old Continent will be muchstronger, with a promising uture. It will, however, need to
7 Marcopolo, a major Brazilian bus body producer, shut down its operations in Portugalin 2009 as a result of its poor performance in the European market.8 An investment concept yet to be proven feasible as a political bloc, this term wascoined by Jim O´Neill of Goldman Sachs in 2003 to refer to the emerging economiesof Brazil, Russia, India, and China, forecasting that such economies by 2050 would belarger in United States dollar terms than the G6 (United States, Germany, Japan, UnitedKingdom, France, and Italy). In 2011, upon invitation by the BRIC countries, South Africa joined the bloc.9 The nancial G20, relevant as it may be, has yet to become a more organized body forcollective action, so the reason the troika composed of the United States, China, and theEuropean Union will still remain the most relevant players of the international system.
 
3
E
TheEuroFuture Project
 
F  
The integration process hasconcentrated too much power
with elites in Brussels and has
failed to foster a common, federalidentity.
make adjustments to become one true ederation, with onecommon voice and goal.Europeans will need to expand the mandate o the Euro-pean Central Bank (ECB)
10
and reassess their perspectiveon the preponderance o Germany as the key player o itsuture. Germany, on the other hand, will need to becomemore exible, particularly in terms o its nancial policy.Tis new Europe will not be as relevant to Brazil, China,or the United States unless there is a concerted eort tochange.
What Went Wrong in Europe?
ransparency, a growing lack o popular support reectinga atigue towards Brussels, and a disregard or localcommunities have been the EU´s greatest challengesduring the crises. Te integration process has concentratedtoo much power with elites in Brussels and has ailed tooster a common, ederal identity. Tis tension betweenederalism, opposed by some, and commercial pragmatism,expected by many, has been a driving orce that at timesexpedites the pace o integration, but also restrains it romdeepening. Reconciling such conicting views remains theundamental challenge to urther integration.Te euro was introduced as a tool to achieve integration.Tis was done without all the necessary instruments inplace in order to ensure success. Glaringly absent was acommon scal policy to ensure austerity and sound nan-cial practices by the governments, whose unique histories,cultures, demographic identities, and dierent perspectiveson state sovereignty, have produced heterogeneous needsand goals.Te common currency should have played an importantrole in encouraging convergence. However, the eurozoneailed. Under the umbrella o the common currency, itincluded diering ethics and perspectives on the uture.As in an orchestra, the countries wanted to play the samesong, but they were on dierent pages. Te entire processdemonstrated a lack o strong political leadership
11
or acommon vision.
10 The ECB was conceived to maintain price stability in the eurozone, applying the nobail-out principle, whereby no states within the system would be nanced if needed.Though a temporary success, this has been proven unsustainable in the long run.11 Several countries have changed their heads of government during the crises, not asa result of an ideological shift, but mainly because of the incapability by those in ofce to
deliver better responses to the situation.
Te European crisis provided evidence or the inexistenceo preventive tools to address the issue o moral hazardin public debts, with neither the ECB nor the EuropeanCommission (EC) equipped to solve nancial imbalances.When developing such, they resorted to traditional Inter-national Monetary Fund (IMF) policies to reduce scaldecits and stimulate growth and international competi-tiveness, without the necessary access to loans or monetary policy instruments generally available under normal IMFinterventions. Te ECB was not designed to act as a lendero last resort, only as an instrument or ination control.Tis has added instability and volatility to world nancialmarkets, with investors becoming more risk averse, espe-cially to sovereign debts. Te delay in solving the Greek problem, a weakness o the European leaderships ability to control the situation
12
and address the challenges, hasimposed heavy costs on Ireland, Portugal, Spain, and Italy.Tough the adjustment measures may be considered exces-sively difcult to meet, there is no other real alternative toausterity in handling the crisis.
Lessons Learnt from the Crisis
Tree important lessons should be taken rom the eurocrisis:
•
inexible labor laws and major welare benets havereduced the speed and competitiveness o an economy;
•
the depreciation o currencies and the increase o laborproductivity in the United States and Japan should be
12 The IMF 2012 World Forecast has shown that the European nancial problemsand weak recovery has delayed world economic growth. International Monetary Fund,
IMF Survey 
, July 2012, <http://www.imf.org/external/pubs/ft/survey/so/2012/NEW071612A.htm
>.

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