Latin America Extends a Helping Hand to Europe

• Mass unemployment and a hard quest for fiscal austerity have led Europe to the brink of abyss. This situation resonates with the “lost decade” in a number of despairing Latin American countries.

• Because of the hard blow delivered by its series of the financial crisis, Europe is losing skilled professionals.

• European investors do not want to miss out on the opportunities in the rising Latin American economies.

• Europe, and especially Spain and Portugal, will need to learn from the mistakes and relative successes being exhibited elsewhere in Latin America.

Europe is in the midst of a new round of fiscal and monetary controls, and conversation is shifting toward a “latinoamericanización” of Europe. The Old World is breaking along a North-South divide, with impoverished communities as well as mounting social dissatisfaction in the South coming to resemble at least part of the Latin American reality in the 1980s and 1990s. Yet in every crisis lies opportunity, and this financial meltdown could provide the opening to begin to more effectively bridge commercial and cultural gaps between the two sides of the Atlantic. Latin America, despite its continuing economic inequality, poverty, and sprawling informal sector, may still have a good deal to teach Europe.

Europe In Trouble

In 2007, the German writer Walter Laqueur was among the first to sound the warning. The social welfare state, Laqueur pointed out to his colleagues, had begun “to depend on a fragile economic base and public debt was exploding.” [1] He was right, and today in Spain, Portugal, Greece, and Ireland the welfare-capitalism model is collapsing, with Italy and France not far behind in the shortcomings they are being forced to face. Austerity, the favored economic remedy, has only produced further stagnation. The Old World is facing something much worse than Latin America´s “lost decade,” the region’s devastating economic depression of the 1980s.

The European Union (E.U.) crisis was possibly foreseeable. But while Germany and the European Central Bank (ECB) hold the view that Europe’s economic difficulties are the result of fiscal profligacy, an overly generous social model, which guaranteed access to public health and education, employment protection, as well as relatively early retirement, this standard conservative critique forgets other fundamental factors. As Iulia Stalisnav-Eminescu of Eurostat Press Office has rightly noted, “14 out of 27 E.U. member states reported debt to GDP ratios over 60 percent. Greece at 156.9 percent, followed by Italy at 127 percent in 2012.” [2] As has been pointed out, the origins of the crisis go well beyond the supposed welfare generosity and public debt. Instead, as in the United States prior to 2008, one of the triggers of this financial debacle was the easy credit-fueled debt in households and financial bank institutions and their historically low interest rates. The private sector, especially in regard to European mortgage companies, has fallen into a condition of over-indebtedness.

In the European Union, easy loans paid for pricey imports, with Germany as their main exporter. Meanwhile, southern European nations ran up considerable debt as wages increased. On the other hand, Germany has no nationwide minimum wage and can go below one euro per hour, especially in the formerly communist East German states. According to the Confederation of German Trade Unions, based on legally-employed workers, there are now seven million wage earners receiving less than €4 ($5.52 USD) per hour. [3] In contrast, nations like Ireland and Spain, noted Hans-Werner Sinn, professor of the University of Munich, the “labor costs… had increased by 30-40 percent more than they had in Germany during the same period.” [4] The Spanish workers, despite the severe economic recession and high rate of joblessness (26 percent), are fighting to keep their minimum wage of 8.5 euros ($11.73 USD) per hour. Consequently, Italian and Spanish manufactured products now face a competitive disadvantage in relation to German goods.

The poor management of public administration and widespread political corruption in the most affected southern European nations are other factors that contributed to the harmful economic downturn. Greece exemplifies better than any other E.U. country that the failure to pay taxes has been catastrophic. According to a report by the Hellenic Foundation for European & Foreign Policy (EIAMEP), “the Greek state is losing 13 billion euros annually in tax evasion and corruption.” [5] One quarter of Greece’s GDP is untaxed, compared with 9 percent in the United States and 13.3 percent of Germany’s GDP in the dark. To illustrate the precariousness of Greek tax policy, Forbes highlighted that only 324 out of 17,000 swimming pools in a rich Athens suburb paid taxes. [6] Greece, Italy, Portugal, and Spain have little, if any, accountability for government officials. As Spanish writer Antonio Gala summed up, “It seems that [Spain] is governed by a collection of fools who have gathered to play a game of cards or dominoes, and do not know the rules.” [7]

The European Professional Class: The Great Escape to Latin America

One response to these economic developments is that many European investors and highly qualified professionals have been leaving “to make their fortune in the Americas.” This year the European economy will grow by 0.1 percent while the Latin American economy will continue to grow at a steady 3.5 percent. [8] The former colonies, it seems, are the last hope for European professionals. According to the Spanish Statistical Office, 128,655 Spaniards left the country between 2010 and 2011, 60 percent of which adopted Latin American countries as their new residence. “Unfortunately, the best choice for unemployed youth is to leave Spain,” noted the JP Morgan Investment Bank. [9] The same path was chosen by 705,615 Portuguese citizens who have left for Brazil. [10]

Thirteen years ago, the brain-drain phenomenon was reversed. During an economic crisis in Ecuador, one million of its citizens emigrated, mostly to the United States and Spain. Now, the current European economic crisis has left 65 percent of Ecuadorians in Spain unemployed; as a result, 40,000 have returned home, while another 50,000 more will cross back over the Atlantic this year. [11] Argentina, Colombia, Peru, and Brazil are also seeing the return of their citizens from Europe. Moreover, 174,597 Brazilians left Portugal just this past year to return to the motherland. [12]

For Latin America, the arrival of waves of highly qualified professionals is having a huge impact. Several Latin American nations are launching science and technology projects to take advantage of their newly acquired talent. For example, the Argentine city of Córdoba is quickly becoming the Silicon Valley of South America, sporting the development of “a total of 33 companies [which] have agreed to open offices in the complex so far.” [13] The fast-growing software industry requires qualified workers, and Argentina and other Latin American nations are looking to the European skilled labor force to fill this need. [14] Adding to this trend are local content requirement laws such as that approved by the Argentine government three years ago, “increasing the tariff on imported electronics by 30 percent. The increase in locally assembled products over imported products is attributed to this law.” [15] Meanwhile, Argentina’s Conectar Igualdad (Connect Equality) program is promoting internet access in all Argentine schools. According to The Global Information Technology Report for 2012, “the nation is in the middle of a massive roll-out of three million computers with the aim of providing a computer for all secondary school students and teachers.” [16] By the end of 2012, the industry employed nearly 67,000 workers and increased revenues to almost $3 billion USD. [17]

Small countries, like Ecuador, also want to be players. President Rafael Correa’s administration (2007-present) has high expectations for Yachay, a new university that he “hopes will one day compete and collaborate with Silicon Valley,” Correa said.  “In addition to support from South Korea and CalTech,” he continued, “the Murdoch Developmental Center in North Carolina has expressed interest in a partnership, as have a few European institutions” in the surrounding Andean highlands. [18] The first 200 students of Yachay will begin courses at the end of this year.  Speaking on the Yachay University, José Andrade, an Associate Professor at the California Institute of Technology, said: “I am personally in love with it. It’s one of the greatest things that I’ve seen in this country, ever.” [19] Andrade is Ecuadorian and has played a key role in CalTech’s increasing involvement with the development of Yachay.

Apart from Yachay, Ecuador launched the Prometheus Program, which as René Ramírez, Ecuador’s Minister of Higher Education, noted: “finances temporary or permanent stays to foreign scientists and Ecuadorians living abroad, providing facilities and incentives that will allow them to devote full time to scientific and academic activities.” [20] With an investment of $8.3 million USD, Prometheus will focus on creating post-graduate programs in Ecuadorian universities to promote scientific investigation. The Ecuadorian government has contracted 250 foreign professionals to become involved with this initiative. [21]

Flood of European Investment in Latin America

While Europe has faltered, Latin America has slowly bounced back from the global 2008-2009 recession. Latin America boasts political stability, abundant natural resources, and a gradually emerging middle class market. It is a good place to invest, and investors are flooding in. Each month four or five more European companies arrive in Brazil, and the trend is clearly strengthening. [22] We find ourselves in an era in which, as Detlef Nolte, president of GIGA Institute of Global and Area Studies, observed “some European nations look like Latin American countries in the late 1980s or in early 1990s.” [23] High unemployment, brain-drain of highly qualified professionals, and inflation were associated miseries of the 80s and 90s in Latin America, the same conditions currently are underlining the fragility of Spain, Portugal, Greece, Ireland and Italy. Due to the crisis, one of the several consequences was that poor Latin American families could not make ends meet or supply their children with enough food. Malnutrition and poor school performance increased sharply, whilst at the same time, the gap between rich and poor widened, just as occurred in the public school system in Málaga and other Spanish cities where students head straight to the school cafeterias in hope of having a meal.

Europe is also seeking to re-launch trade talks with Mercosur (the Southern Common Market) to energize its economies. Spain has been especially active, building on the trade ties forged between 1980 and 1990 when investors aggressively acquired banks and airlines, and developed a lively tourism industry in Latin America.

Now, the European Union is looking for investment opportunities in Latin American public transportation, including in airports, highways, and railways. Opportunities in telecommunications and hydropower projects are another big draw for new European investors in Latin America. These countries plan to spend over $200 billion USD in long-term infrastructure in the region over the next several years.

It is certain that Latin America has had a good decade and that inequality is in decline, but it should be recalled that, despite the commodity boom in the last 10 years, the exploitation of its abundance of natural resources does not automatically benefit society as a whole. The region is still the most unequal one in the world. As Jim Yong Kim, president of the World Bank, points out, “Latin America …[is] home to 8 out of 10 countries with the world’s highest rates of income inequality, as measured by the Gini coefficient.” [24]

This disparity is fueling social tensions and volatility, like with last month’s mass demonstrations in Brazil. “Despite lower poverty levels overall, 167 million people in the region are still considered poor, and among those, 66 million people remain in extreme poverty, noted a report of the U.N. Economic Commission for Latin America and the Caribbean (ECLAC). [25] While urban unemployment fell by 400,000 across the region, still around 15 million remain jobless. [26]

On the positive side, Latin America has 580 million potential consumers. Although the United States is still the primary investor, China and now Europe are becoming increasingly important actors in the region. However, the European Union is making plain that it does not want to lose out in the race to claim this favorable investment setting. “Between 45 and 50 million people will join the ranks of the middle class in Brazil by 2014… and any investor cannot ignore this opportunity,” emphasized Luis Alfonso Lima, President of Sobeet, an institution devoted to surveying foreign investment in Brazil. While Lima and others’ definition of middle class seems to include those making just over $3,000 USD (PPP) a year, he does have a point: Brazil’s market is the largest in Latin America. According to the last report of the Instituto de Empresa IE Business School, a non-profit business education program in Spain, the European Union will doubtless continue to increase its investments in the region during 2013, with special concentrations in Brazil, Mexico, Colombia, and Chile. [27]

Of course, not all agree in Latin America that foreign investment is a good thing. In Ecuador, investors face opposition from indigenous communities, as well as heated public debate over environmental destruction. The government and powerful private interests host these foreign businesses, which include those involved in extractive mining and infrastructure building, like highways and hydroelectric dams. [28] In Peru and Bolivia, communities do not trust the government to address their concerns about pollution and other health-related problems caused by the important mining industry. The environment and respect for the local communities are some of the new issues that will need to be taken into account by governments and investors in Latin American settings.

Latin American investors, on the other hand, have mostly ignored Europe, in part because their preference has been to meet Asian demand for natural resources. According to Anza Galo Igor, Communications Director of the Spanish Instituto de Empresa, this leads to “the question of whether or not the Latin American private enterprises will are likely to turn the Iberian peninsula into one of the priorities to invest in, even more when the Spanish [firms] … have lost much of their value.” [29] The E.U.-Latin American relationship goes further than just European investments. Also significant are the remittances being sent to Latin America from Spain, Portugal, and elsewhere in Europe. Taken together, this money sent home represents a substantial amount of income flowing into countries like Brazil. In Ecuador, remittances in some years reach the third largest source of external revenues, just after oil exports and tourism.

Hopes for Rapprochement between the Old and New Worlds

The European Union and Latin America share a common history as well as the Spanish and Portuguese languages. Both regions are afflicted by fragmented political systems, social instability, poverty, and the dissatisfaction of many of their citizens. The hard times in Europe, along with Latin America’s improved economic performance, are creating a situation for some promising areas of collaboration.

What Europeans need to understand, however, is that this great land that used to be a European colony remains, as a whole, an anti-colonialist bastion with a strong sense of sovereignty. Latin Americans expect mutual respect, but a recent event suggests a contradictory reality. In light of the embarrassing incident this past July, when the Bolivian presidential plane carrying President Evo Morales was denied access to the airspace of Portugal, Italy, Spain, and France, it seems that at least some European officials carry rather unreconstructed attitudes toward Latin America, perhaps even some timeless assumptions of Old World superiority. The aircraft diversion was implemented on the “suspicion” that the plane was carrying Edward J. Snowden, who leaked top-secret U.S. and British government mass surveillance to the press. This unusual treatment of the Bolivian plane touched a sensitive nerve in the region. It deepened mistrust toward Europe, and underscored vestiges of colonialism and racism against Latin America and Morales, the first indigenous person to be elected president in Bolivia. Argentine President Cristina Kirchner denounced what she regarded as “vestiges of a colonialism that we thought was long over.” She added, “we believe this constitutes not only the humiliation of a sister nation but of all South America.” [30] In regard to the same controversy, Ecuadorian President Rafael Correa tweeted that, “we must claim our independence, sovereignty and dignity. We are all Bolivia!” [31] If Europe wants to increase its influence in the region, it must seriously consider Latin America’ sensitivities.

These are times of big challenges for the European Union and Latin America. Spanish analyst José López Sánchez has observed that, “the New World [is] …the best reference for Europeans on how to emerge from capitalism’s failure.” [32] There are new forces and voices in Europe. One is that of the European “indignados,” who echo the frustrations of the Occupy Wall Street movement. In Latin America, the youth in Chile, Brazil, and Argentina have been pushing for a reversal of the orthodox-neoliberal economic model. It remains to be seen if a newly empowered society will emerge. López Sánchez has his own approach:

“The law of uneven and combined development of society requires that sometimes revolutions arise in the most unexpected places. This law explains that, as of now, Europe is stepping back while Latin America, as past evidence suggests, has no reason to suffer from an inferiority complex. Its progress will prove whether Latin America takes its momentum to the ongoing economic recovery for granted.” [33]

Conclusion

Latin America cannot look up to Europe anymore, after its financial debacle. Not too long ago this side of the Atlantic suffered the same economic adversities as Europe is currently experiencing. As the Peruvian actor Janson Day said, “We know Europe is going through hard times; we have been there, so we know how painful it is.” [34] After 70 years of prosperity, as in the words of López Sánchez, “the fear is that the welfare cuts widen the inequality gap. The end of prosperity in a ‘wealthy’ Europe can spread discouragement through Latin America or refresh the notion that a permanent ongoing social war, accompanied by regression, are components of capitalism´s daily life.” [35]

Europe is in a clear state of decline. The social claims, such as that of “indignados” in Spain and in Greece, will be highly enriching only if Europeans accept that for a long time they allowed rampant corruption, and slowly permitted the economic and political machine to undermine their social achievements. Meanwhile, the exodus of creative professionals and investments to Latin America, is making it plain, in the words of López “that Europe was not such a successful social and economic model as it was supposed.” Secondly, “it is alarming that in human history (almost) nothing is irreversible, therefore people should stay awake to stop the next financial crisis.” And, finally, even in Europe “democracy has still a long road ahead.” [36]

Olga Imbaquingo, Research Fellow at the Council on Hemispheric Affairs

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References

[1] Arias, Juan. “Análisis Escalofriante Sobre la Decadencia de Europa,” El País. February 1, 2012. http://blogs.elpais.com/vientos-de-brasil/2012/02/analisis-escalofriante-sobre-la-decadencia-de-europa.html 

[2] Emenescu-Stalisnav, Lulia. “Structure of Government Debt Statistics in Focus 20/2013.”
 http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Structure_of_government_debt

[3] Palmer, Jon. “The real cost of German labour reforms,” The Guardian. October 26, 2012. http://www.theguardian.com/money/2012/oct/26/real-cost-labour-reforms-germany

[4] Shaughenssey, Haydn. “As G8 Assembles, Are Germans Prescribing 40% Wage Cuts for Spain, Ireland, Plus Greek Exit?” Forbes. May 18, 2012  http://www.forbes.com/sites/haydnshaughnessy/2012/05/18/as-g8-assembles-are-germans-prescribing-40-wage-cuts-for-spain-ireland-plus-greek-exit/ 

[5] Nikolas, Katerina. “Greece loses 13 billion euros in tax evasion and corruption,” Digital Journal. December 14, 2011.  http://digitaljournal.com/article/316094

[6] Hill, Kashmir. “Greece To Track Citizens’ Purchases To Solve Tax Evasion Problem,” Forbes. October 06, 2011. http://www.forbes.com/sites/kashmirhill/2011/10/06/greece-to-track-citizens-purchases-to-solve-tax-evasion-problem/ 

[7] Hermoso, Borja. “La Verdad es que Este País Está Gobernado por una Colección de Tontos,” El País. August 11, 2012. http://cultura.elpais.com/cultura/2012/08/11/actualidad/1344710420_983550.html 

[8] “América Latina Crecerá 3,5% en 2013, Menos de lo Previsto Según Cepal,” Elexpectador.com. April 23, 2013. http://www.elespectador.com/noticias/economia/articulo-417848-america-latina-crecera-35-2013-menos-de-previsto-segun-cepal

[9] “Crisis Lleva a Españoles a Buscar Suerte en Latinoamérica,” Portafolio. November 2, 2012. http://www.portafolio.co/internacional/crisis-lleva-espanoles-buscar-suerte-latinoamerica

[10] Hatton, Barry. “Españoles y Portugueses Buscan Fortuna en Antiguas Colonias,” Terra. April 26, 2011. http://noticias.terra.com.pe/internacional/espanoles-y-portugueses-buscan-fortuna-en-sus-antiguas-colonias

[11] “Trabajo Seguro’ Para los Ecuatorianos en España que Quieran Volver a Casa,” El Mundo. April 4, 2013. http://www.elmundo.es/america/2013/04/26/noticias/1366961130.html 

[12] “El Número de Brasileños que Regresó del Exterior se Duplicó en una Década.” La informacion.com. April 27, 2012. http://noticias.lainformacion.com/asuntos-sociales/inmigrantes-ilegales/el-numero-de-brasilenos-que-regreso-del-exterior

[13] DeStigter, Becky. “Technology Opportunities in Latin America (Part 2).” The International Entrepreneur. November 5, 2012.

 http://www.the-international-entrepreneur.com/the-international-entrepreneur-technology-opportunities-in-latin-america-part-2

[14] Ibid.

[15] Ibid.

[16] “The Global Information Technology report 2012.” Edited by Soumitra Dutta and Beñat Bilabo-Osorio for The Business School for the World. Pag. 85. http://www3.weforum.org/docs/Global_IT_Report_2012.pdf

[17] Ibid.

[18] Mack, Eric. “Riding Shotgun with the Man Behind an Andean Silicon Valley.” CNet. March 28, 2013.
 http://news.cnet.com/8301-17938_105-57575566-1/riding-shotgun-with-the-man-behind-an-andean-silicon-valley/

[19] Ibid

[20] Vinueza, Robertson. “Ecuador “Imported” 250 Prometheuses for the Generation of Knowledge and Investigation.” Andes. March 4. 2013. http://www.andes.info.ec/en/english/ecuador-%E2%80%9Cimported%E2%80%9D-250-prometheuses-generation-knowledge-and-investigation.html 

[21] Ibid.

[22] Moreno, Carlos A. “Brasil, Imán para las Inversiones,” paginaSiete.bo. May 1, 2013. http://www.paginasiete.bo/Suplementos/Miradas/2013-01-06/Destacados/14-15Mir01060112.aspx 

[23] Fundación EU-LAC. “Bases Renovadas Para la Relación Unión Europea, América Latina y el Caribe,” September, 2012. Pag.29.  http://www.eulacfoundation.org/sites/default/files/Actas%20Seminario%20EU-LAC-GIGA%202012.pdf 

[24] Yong Kim, Jim. “A Latin America With Opportunity for All,” Inter Press Service. July 2. 2013. http://www.ipsnews.net/2013/07/a-latin-america-with-opportunity-for-all/

[25] Rebossio, Alejandro. “Latinoamérica ha Sacado de la Pobreza a 50 Millones de Personas.” El País. March 07, 2013. 

http://blogs.elpais.com/eco-americano/2013/03/latinoam%C3%A9rica-est%C3%A1-en-una-posici%C3%B3n-interesante-pero-la-informalidad-laboral-es-delicada.html 

[26]  International Labour Organization “ECLAC and ILO Predict that Regional Unemployment Could Fall to 6.2% in 2013,” May 21, 2013. http://www.ilo.org/global/about-the-ilo/media-centre/press releases/WCMS_213865/lang–en/index.htm 

[27] “Los Negocios se Mudan de Continente.” Actualidad Endesa.  November 2012. http://www.actualidadendesa.com/journal-article/los-negocios-se-mudan-continente

[28] Freeston, Jesse. “‘Dancing with Dynamite’ in South America,” therealnews.com. Nov 19, 2010. http://therealnews.com/t2/index.php?

[29] Anza, Galo Igor. “2013: Panorama de Inversión Española en Latinoamérica,” IE Business School. Pag. 3. http://static.ie.edu/comunicacion/IE%20INFORME%202013.pdf 

[30] Louise Egan and Hugh Bronstein. “Snowden Search on Bolivian Plane Sparks Latin American Criticism,” The Chiristian Science Monitor. July 3, 2013. http://www.csmonitor.com/World/Latest-News-Wires/2013/0703/Snowden-search-on-Bolivian-plane-sparks-Latin-American-criticism 

[31] Wilkinson, Tracy. “Diversion of Bolivian Plane in Snowden Search Angers Latin Leaders,” Los Angeles Times. July 3, 2013. http://www.latimes.com/news/world/worldnow/la-fg-wn-bolivia-morales-plane-snowden-20130703,0,5686510.story 

[32] López Sánchez, José. (analyst) personal interview by e-mail. May, 2013.

[33] Ibid.

[34] Perejil, Francisco. “Sudamérica ve una Europa Paralizada por el Miedo,” El País. October 17, 2012. http://internacional.elpais.com/internacional/2012/10/11/actualidad/1349974883_506596.html 

[35] López Sánchez, José (analyst) personal interview by e-mail. May, 2013.

[36] Ibid.