Brazil and the EU

The European Union is getting closer to asking emerging economies, like China and Brazil, for help to combat the eurozone debt crisis. In Brazil's case, any financial contribution would be relatively small, but it would give the South American country the chance to improve relations with the EU, while raising its profile on the international stage.

Earlier this week, the Brazilian finance minister, Guido Mantega, confirmed that his country was interested in providing financial assistance to Europe. Mantega denied reports in the Brazilian media, however, that his government had already made an offer of 10 billion euros ($13.8 billion) to the International Monetary Fund.

"We have made no such proposals to date, but that does not mean that we will not put concrete figures on the table in the short or medium term," Mantega said after the G20 summit in Cannes last week.

At the French summit of leading industrial nations, President Dilma Rousseff stressed that Brazil felt obliged to help.

She added, however, that the aid would not be direct in the form of purchases of government bonds from the European Financial Stability Facility, EFSF, but rather indirectly through the International Monetary Fund.

"Together with other BRIC countries, Brazil is prepared to strengthen the IMF, but our help depends on whether the Europeans implement the measures they have announced, such as strengthening the role of the European Central Bank and resolving the Greek debt crisis," Finance Minister Mantega said.

Important trade partner

Sergio Vale, chief economist at the Brazilian consulting firm MB Associados, is skeptical about financial help for Europe. Brazil, he said, has total currency reserves of $352 billion, or roughly one-tenth of China's $3.2 trillion.

Brazil is hardly in any position to "even minimally" help Europe, Vale cautioned.

"We could, in return, demand from the Europeans that they lower their farm subsidies, but in light of the current crisis that hardly seems plausible," he said.

Claudio Frischtak - chairman of the international consulting firm InterB and a former economist at the World Bank - is convinced that Brazil needs to demonstrate solidarity with Europe under the circumstances, even if its contribution is limited.

"All the things that have been done so far to stem the growing panic on financial markets have been important symbolic decisions - in particular, the willingness of emerging economies to support Europe," said Frischtak.

The EU is an important trading partner for Brazil, he noted. Figures from the Brazilian Ministry of Trade for 2010 and 2011 show that Brazilian exports to Europe grew more than 20 percent in that period.

"The last thing that Brazil needs is a recession in Europe. And we're on the brink of one," said Frischtak.

With regard to aid from Brazil, Finance Minister Mantega pointed out that the eurozone crisis had already led to capital flight from threshold countries, especially, from countries with low currency reserves.

"Brazil has not been affected yet, but if threshold countries get caught in the maelstrom of the crisis, then the international situation will only get worse," Mantega warned.

Benefits for Brazil

The crisis in Europe also offers other opportunities, according to Brazilian political scientist Tim Wegenast of the GIGA Institute for Latin American Studies in Hamburg.

Improved relations between Brazil and the EU, both political and economic, would be advantageous for Brazil. Beyond the purchase of European bonds, Brazil could invest directly in Europe, for example, by taking over Portuguese companies, he said.

"The advantages for Brazil are obvious: better access to European, and especially German, expertise in areas like alternative energy and state-of-the-art technologies," said Wegenast.

An increase in Brazilian payments to the IMF could accelerate the current negotiations on a bigger role for Brazil at the monetary fund. "This is a question of political power inside the IMF," notes economist Frischtak.

The European debt crisis on the heels of the global financial crisis, which severely shook confidence in the US economy, has left Brazil looking increasing attractive for foreign investors from industrial countries.

Sergio Vale pointed out that there are currently very few countries that are interesting for foreign investors, but "one of them is Brazil."

Brazil has a large and growing domestic market, and, compared to other BRIC countries (Russia, India, China and South Africa), it has stable political and economic institutions.

It may be a time of crisis in Europe, but it's a good time for Brazil to play its cards.

Author: Mariana Santos / gb
Editor: Nancy Isenson