Articles / Rubric: Global

Brazils Solution for Europe
The article is published in: July - August 2012

In the June summit of the Big Twenty, held in Los Cabos this year, one of the main topics was the European crisis. Many of the summit’s participants had ideas and opinions for the correct way to handle the crisis, including countries like Brazil, who has a reputation for coming up with creative financial solutions to save their economy from “dangerous” global trends. But in the end, one question remained: is Europe willing to follow these recommendations?

Economic Solution
Brazilian politicians have, on numerous occasions, openly criticized the policies and attempted solutions of their European counterparts. Of course, they have a better idea than most on what it takes to defeat a crisis. After all, Brazil is very good at creating economic miracles. In the late 1990’s, the Brazilian government took control of the country’s inefficient enterprises and placed them all in private hands. The result of the privatizing was so successful, between the years 1997-2000, Brazil was ranked first globally in terms of the income derived from the transfer of state property to private ownership. Just from the sale of the Telebras telephone company, the Brazilian treasury earned $19 billion – the third-largest economic transaction in the history of the world. In the end, the modernization and diversification of the economy, as well as the billions of dollars of investments in the manufacturing and innovative sectors, seem to have been extremely successful.

Today, Brazil’s national production covers 90% of the domestic demand for manufactured goods, and 80% of the demand for machinery and equipment. The aircraft construction industry is also blooming, and Embraer, a Brazilian aviation company, is ranked third in the world, right after Boeing and Airbus.

Last year, Brazil became the sixth strongest economy in the world, moving ahead of Britain. And the country has just recently become involved in the oil sector, which means that Brazil’s potential has not yet run out. Luckily, the European crisis has had very little affect on the Brazilian economy. Even though the country’s banking sector is tied to the Spanish economy, which is currently experiencing difficulties, Brazilian industries experience a much small impact from Europe’s problems.

When Life Gives You Lemons…
“Of course, if the crisis occurred in China, the Brazilian economy would suffer much more severe consequences,” says Marcos Troyho, the Director of the Research Center of the BRICS countries (Brazil, Russia, India, China, and South Africa) at Columbia University. “But the European Union still remains an important source of investment money and a market for almost one-fifth of all Brazilian exports. Trade, however, does not play too much of a significant role in the national economy. Exporting goods only amounts to 10% of the country’s revenue – the main source of economic growth in Brazil is domestic consumption. That is why the crisis has had such a small impact on the trade sector, while its impact in the investment sector was much larger. Brazil is becoming a victim of the negative repercussions caused by the deepening economic crisis in the Eurozone, and it is also affected by global investors’ reluctance to take risks. All of these problems have led to a devaluation of the national currency, an issue which, if it continues, could cause Brazil’s confidence in its economy to drop.”

However, even with the national currency depreciating every day, the Brazilian government still manages to find the bright side of things. According to the government, the current collapse of the currency is only occurring after several years of steady growth relative to the dollar – in 2009, the growth rate for the Brazilian Real was 34%, and in 2010, the Real grew by 5%. And right now, their currency costs twice as much as it did ten years ago. The Minister of Economy, Guido Mantega, also noted that the falling currency, which dropped by 15% over the past three months, is “…even beneficial for the economy – it will allow the government to reduce its spending on industries that are experiencing difficulties.” Most importantly, the depreciation of the Real will not lead to inflation because of the falling prices for commodities (especially agricultural) worldwide, which usually provokes inflation in Brazil. The most astounding thing to note, however, is Brazil’s willingness to take the sour situation and, just like the popular saying, make lemonade.

Brazil’s president, Dilma Rusef, recently announced new measures created to stimulate the economy, placing emphasis on the measures aimed to trigger the growth of domestic consumption and private investments, as well as other measures designed to create jobs, reduce a series of taxes, lower interest rates, and simplify the process of obtaining a loan. These measures mainly apply to the aviation and automobile industries, the latter of which makes up one-fifth of the entire national economy.

In addition, Brazil’s oil and gas reserves provide Brazil with even more confidence for the future – the country ranks ninth globally in the extraction and production of petroleum and petroleum products, and it is expected to become one of the world’s top five petroleum leaders soon. And the upcoming FIFA World Cup in 2014 and the 2016 Summer Olympic Games leave investors with no other choice.

According to economic forecasts, the strongest economy in Latin America this year will exceed last year’s economic GDP indicator of 2.7% - the forecast for 2012 is between 3.5 and 4.5%. While these figures are not a breakthrough (to compare, GDP growth in 2010 was 7.5%), they are not bad when today’s global situation is taken into account. In Britain, for example, the total GDP growth for 2011 was 0.8%.

Photo by Rodrigo Soldon

When answering the many negative opinions that critics have voiced – namely the fact that in today’s financial situation, only a miracle can save Brazil –, the government remains relentlessly optimistic. “We have to be patient. After all, the economy is not a car, where you can just turn the wheel a bit and instantly go right or left. It is more like a big transatlantic ship; you need to wait for it to pick up speed,” says Guido Mantega, who has been minister for eight years.

Helping the Eurozone Financially
Brazil is ready to help Europe with more than advice – along with the other developing countries, it is willing to provide a much more concrete contribution by giving the European Union funding to ease its debt crisis in exchange for more rights in the International Monetary Fund (IMF).

Even the worst case scenario – such as excluding Greece from the Eurozone – would not spell disaster for Brazil, according to Guido Mantega. As an example, the minister points to the 2008 crisis, during which the Brazilian economy did much more than survive. After the worst part of the crisis, Brazil’s foreign exchange reserves doubled. And the current crisis, Mantega says, is much “softer” than the crisis four years ago.

Dilma Rusef is no less optimistic. According to her, the Brazilian economy is “300% ready for the crisis”. “We will fight the crisis, create jobs, invest in productions, and increase social spending,” says Rusef.

Brazil advises that European governments adopt similar measures for their own failing economies. In discussions with Angela Merkel, Rusef harshly criticized the chancellor and made her displeasure regarding the methods that Germany and Europe are using to try and save their countries known. “We are concerned that this economic tsunami will not force the developed countries to think about increasing investments and stimulating consumption.”

Rusef’s predecessor, Luiz Inacio Lula da Silva (who served as president from 2003-2011) was even less shy about expressing his opinion. “I urge the Europeans to spend less money on their banks and more on their impoverished citizens. Europe is experiencing less of an economic and more of a political crisis. Most leaders lack the determination to cope with the crisis due to the large investments in social development,” he says. It is this recipe, according to Lula da Silva, that helped him achieve such striking results in his time as president. “We have proved that you can increase wages without causing a rise in inflation. It is possible to redistribute incomes and avoid price increases. You can find the right balance between exports and growth in the domestic market. We have proved that investing the state’s money in the fight against poverty stimulates economic growth from the bottom, which then travels upwards throughout society.”
Only one question remains – whether or not Europe decides to take Brazil’s advice.

Text: Elena Shesternina

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