The challenges for North-South political coordination in a changing international power structure: the EU and Latin American in the G-20 [Draft]

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1 IPSA. Madrid 2012, XXII World Congress of Political Science Panel: (Re-) shaping multilateralism? The Interaction Between the European Union and Global Institutions The challenges for North-South political coordination in a changing international power structure: the EU and Latin American in the G-20 [Draft] Author: Dr. Juan Pablo Soriano Autonomous University of Barcelona (juanpablo.soriano@uab.cat) The changing international power structure, and the current global economic crisis, had revealed the increasing importance of international forums where both traditional and emerging powers met to discuss and negotiate. The meetings of the G-20 are one of such relevant forums. The G-20 is made up by the financial, economic and political representatives of 19 countries and the European Union (EU). Among these 19 countries, there are three from Latin America (Argentina, Brazil and Mexico), and four from the EU (France, Germany, Italy, the United Kingdom Spain, although not a permanent member has been invited to all the summits since 2008). 1 Since 2008, and despite the imperfections of this coordination mechanism, the G20 has become today the indispensable forum to 1 The G20 is formed by the Group of Eight industrialized countries (Canada, France, Germany, Italy, Japan, Russia, United Kingdom, and United States), Argentina, Australia, Brazil, China, India, Indonesia, Mexico, Saudi Arabia, South Africa, South Korea, Turkey, and the European Union (EU). In the Summit of Los Cabos, México, on June 2012, Colombia, Chile, Peru, Benin and Cambodia attended as guests. 1

2 discuss global economic problems, surpassing the United Nations, and even the G8. In numerous occasions, and in many official documents, the EU and its Latin American partners have pledge that there is an urgent need to step-up its biregional dialogue. And specifically, they have mentioned their shared willingness to increase the convergence of positions in the G20 as a specific issue of its macroeconomic and financial dialogue. In the first semester of 2012, EU s and Latin America s willingness and capabilities for political coordination in financial matters were tested in Mexico during the summit of the G20 in Los Cabos. The results showed the difficulties for coordination between these two regions of the world. Although both regions arrived to Los Cabos internally divided, it was the Latin America countries the ones that showed the deepest problems, and the lack of political willingness for coordinating a common position that could benefit the whole region. If the collaborative efforts between this to regions represent the viability and possibilities of international coalitions among north-south countries to cope with the challenges of global economic governance, then, we are in trouble. The experience has proven to be quite disappointing. The international economy is changing very rapidly, and some of the changes are seen with the crisis that began in 2008, after a slight recovery in 2010, in late 2011 the world economy again showed signs of difficulties, especially in the developed world. In this context, Europe s economic crisis has become a global problem, therefore it should be expected that many important countries around the globe, including the ones from the developing South, want to participate, in a way or another, in finding a solution to the European crisis (or at least urge the Europeans to build one). In this context, the G20 summit of Los Cabos showed an 2

3 unprecedented pressure to the European Union, from emerging economies to take all the necessary measures to resolve its debt crisis. The G20 meeting in Mexico showed the political representatives of the major world economies negotiating an economic rescue plan for Europe. All this, while the leaders of the emerging countries (such as Brazil, China, India, South Africa and Mexico) pumped billions of dollars to strength the IMF s economic firewall in case the financial rescue of some members of the Euro zone was needed. For many observers, the summit outlined the new balance of power in the world: developing countries projecting optimism about its economic future, while the leaders of EU were struggling to regain the confidence of the financial markets, and applying the same austerity recipes preached to Asia and Latin America by the Bretton Woods institutions twenty years ago. Four issues that reflect the changing international and regional economic power distribution emerged from the summit in Mexico. First, the enormous pressure on the EU (and especially on the members of the Euro zone) to strength the measures aimed to resolve its debt crisis. Second, the commitment of emerging economies to strength the financial capabilities of the IMF, and by this, changing recent historical parameters of economic relations between north and south countries. Third, the almost permanent division of Latin America with regards to free trade and economic development, which at present is fragmenting the region in two blocs: the Pacific realm countries, and the countries of the Atlantic realm. And fourth, the huge challenges that EU-Latin America cooperation and coordination still face towards the development of global economic governance. Let s analyze these four issues in greater detail in the next sections. 3

4 1. The pressures from the south There are circumstances in which historical processes that had been developing under the surface are condensed into a single fact. The meeting of heads of state of G20, held in Mexico, showed the full extent of the global power shift experienced since the international financial crisis of September 2008, which was the first of its kind in the era of globalization. The meeting in Los Cabos certainly was not planned to produce a solution for the Euro zone debt crisis. However, the scene of the G20 summit in Mexico was an example of how much things have changed for the EU since the begging of the crisis, and how much the changes in the international power structures (both political and economic) have affected the EU s international role and image. Although the agenda for the Summit had several priorities, it was the EU financial and monetary crises what captured the attention. 2 Many developing nations attending the summit arrived to Mexico with one big preoccupation: that the Europe s turbulences didn t affect other parts of the world. I fact, all non European G20 leaders urged EU governments to solve its crisis. Brazil, Russia, India, China and South Africa, the so-called BRICS countries, were in the forefront of publicly expressing its concerns about the European issue. The United States also contributed to add pressure during the bilateral meetings President Obama held with Angela Merkel, and later with all the European partners 2 The agenda for the G20 summit in Mexico included five priorities: (1) economic stability and structural reform for growth and employment; (2) strengthening of financial systems and procurement of financial inclusion for economic growth; (3) improve international financial architecture in a interconnected global economy; (4) mitigate negative effects on price level and volatility of commodities, in particular those affecting food security, and (5), promote sustainable development with focus on infrastructure, energy efficiency, green growth and financing the fight against climate change. See, Priorities of the Mexican Presidency, Mexico City, December 13, 2011 (Electronic version: 4

5 of the G20 (Germany, France, Italy, the UK, and Spain, that has been a permanent guest in the last summits). For many observers Obama and Merkel represented two different strategies to cope with the crisis. The first calls for stimulus plans to generate consumption, growth and jobs, while Germany has been defending and promoting fiscal austerity as the best option to generate confidence, stability, and growth. European leaders battled this pressure, even in an aggressive tone, stating that the current economic crisis was originated in the United States, with the collapse of financial products related to real estate, and subtly criticize China and other nondemocratic countries at the summit. Not all members of the G20 summit are democracies, but we are democracies and make decisions democratically. This means taking more time, said the President of the European Commission, Jose Durao Barroso, at the start of the summit. The tone was even harder when Durao Barroso told reporters: Frankly we did not come here [Mexico] to take lessons in terms of democracy, or how to manage the economy, because the EU is a model that we are very proud of. 3 All the important discussions during the G20 summit at Los Cabos where held behind closed doors, and the European officials at all times denied having received pressures for accelerating dealing with the crisis. However, previously, during, and after the encounter, the representatives of the countries attending the summit manifested their dissatisfaction, or even frustration, with the pace in which the EU was dealing with its crisis. Although it is controversial to state that the change in Europe s, and especially Germany s position, has been the result of the pressure received from the BRICS countries (and also from the US), the fact is that after the summit, for the first time, all the European admitted the possibility that the EU 3 Citation needed. 5

6 rescue fund could buy bonds from the Euro zone peripheral countries, a move which could sharply reduce the debt cost for these countries. 4 Although the Final Declaration of the summit says the G20 gives all its support for the anti-crisis measures adopted by the EU, it also states, black and white, Europe's promises to end the crisis. In the declaration, the Europeans are committed to take the necessary measures to safeguard the integrity and stability in the area, improve the functioning of markets and break the feedback loop between sovereign debt and the banks. In addition, the G20 declaration has put duties for the EU in the coming months. Such as advancing bank union, make the reforms needed to strength European competitiveness, and invest in job creation and growth. It is highly probable, that if it were not for the pressures of G20, we would have never seen these commitments. It is true that the EU already had plans to resolve its banking issues, but now the world we will see them in six months, not five or ten years. 5 4 It must be said that other member states from the EU, such as France, Italy, and Spain, were also promoting this approach. 5 The Leaders Declaration of the G20, convened in Los Cabos on June 2012, states in its fifth point that the Euro Area members of the G20 will take all necessary policy measures to safeguard the integrity and stability of the area, improve the functioning of financial markets and break the feedback loop between sovereigns and banks. In its eleventh point, the declarations states: We welcome the significant actions taken since the last summit by the Euro Area to support growth, ensure financial stability and promote fiscal responsibility as a contribution to the G20 framework for strong, sustainable and balanced growth. In this context, we welcome Spain s plan to recapitalize its banking system and the Eurogroup s announcement of support for Spain s financial restructuring authority. The adoption of the Fiscal Compact and its ongoing implementation, together with growth-enhancing policies and structural reform and financial stability measures, are important steps towards greater fiscal and economic integration that lead to sustainable borrowing costs. The imminent establishment of the European Stability Mechanism is a substantial strengthening of the European firewalls. We fully support the actions of the Euro Area in moving forward with the completion of the Economic and Monetary Union. Towards that end, we support the intention to consider concrete steps towards a more integrated financial architecture, encompassing banking supervision, resolution and recapitalization, and deposit insurance. Euro Area members will foster intra Euro Area adjustment through structural reforms to strengthen competitiveness in deficit countries 6

7 In this new scenario of structural change, the US now shares its international power with a small group of emerging countries, and the big loser is Europe. The numbers speak for themselves. The world economy as such is not in recession. All estimates said global gross domestic product (GDP) will rise in 2012 just under 3%, which is low but not too disturbing. In 2012, the US will grow about 2% and emerging countries will grow an average of 5%. In contrast, the European economy will be the only one with a negative growth rate. While the European Union is still an internationally relevant region, its GDP now is only 20% of global GDP. 6 The world is witnessing an economic power shift. 2. Changing North-South economic relations. The most important decision that emerged from the meeting of the leaders of the G20 in Mexico, on June 2012, was the creation, within the International Monetary Fund (IMF), of a special fund of 456,000 million dollars. This fund has two important characteristics. The first is a historically unprecedented fact: the emerging world (formerly peripheral or underdeveloped) contributed 30% of that huge amount of money. China committed 46,000 million, and Brazil, India, Russia and Mexico accounted and to promote demand and growth in surplus countries. The European Union members of the G20 are determined to move forward expeditiously on measures to support growth including through completing the European Single Market and making better use of European financial means, such as the European Investment Bank (EIB), pilot project bonds, and structural and cohesion funds, for more targeted investment, employment, growth and competitiveness, while maintaining the firm commitment to implement fiscal consolidation to be assessed on a structural basis. We look forward to the Euro Area working in partnership with the next Greek government to ensure they remain on the path to reform and sustainability within the Euro Area. 6 Citation needed. 7

8 for 10,000 million dollars each. Other emerging countries, like South Korea, pledged to give 15,000 million to the special fund, Turkey 5,000 million, and Colombia, that is not even a member of the G20, will contribute 1,500 million dollars. The second feature is that the special fund, never assembled in other circumstances of crisis, is mostly aimed to rescue the European economies. It seems that gone are the days when the IMF, with funding from the highly developed countries, had to lend billions of dollars to the peripheral nations in Asia, Africa or Latin America. Now is the reverse: Latin American nations like Brazil and Mexico are helping to prevent the strangulation of the former colonial powers. The president from Argentina highlighted the ironic fact that during the summit emerging economies were asked to contribute more money to the IMF to save European economies. Developing countries, which have so far avoided the economic collapse, use the summit to obtain a formal and written commitment to accelerate the over positions of power in the IMF after seeking a greater voice for years. The contribution committed by the quintet formed by the BRICS (Brazil, Russia, India, China and South Africa) is subject to the implementation of a 2010 agreement to reform the structure of IMF, which implies a 6% increase in the percentage of votes held by the BRICS, and the appointment of two representatives of the bloc in the IMF directory. This restructuring agreement is still pending ratification, but the emerging powers are pressing for its ratification and implementation. Given their different histories, material capabilities, and political and economic models coordination of the BRICS is not always easy and straightforward. However, since 2008, they have been showing that they are increasing their coordination capabilities in the G20, and in other international economic and financial forums (such as the IMF). 8

9 3. The (endless) division in Latin America For the first time, a Latin American country hosted the summit of G-20 in June This was a great opportunity not just for México, but for the entire region, to establish its role as important actor in the building of the new rules for world economic governance. However, despite that three countries of Latin America are full members of the G20, and even though that two other countries (Chile and Colombia) were invited by Mexican government, the region didn t arrive to Los Cabos summit with a coordinated position. On the contrary, the region went divided to the summit. Two groups of countries were clearly visible in Los Cabos. The difference between these groups is not just a question of geography, but of ways for developing their economies, and integrating with the world. On the one hand, the countries of the Pacific realm (Mexico, Colombia and Chile) promoting free trade and the combat of protectionism to promote economic recovery; and on the other, the countries of the Atlantic realm (Argentina and Brazil), defending public spending and imposing trade barriers as the way to get out of the crisis. Although Brazil is also part of a group of emerging economies known as the BRICS countries (which include Russia, India, China and South Africa), its coordination effort with Argentina clearly was part of its strategy for the G20 Summit in Mexico. In the last four years, Latin American has witnessed the creation of many new regional and sub-regional forums that, paradoxically, have complicated coordination between the governments of the region. And it isn t clear yet how this new regional forums will relate with the old ones, especially with the sixty-four year old Organization of American States (OAS). This new institutions include: the Union of South American Nations (UNASUR), created in 2008, and formed by 9

10 Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Suriname, Uruguay, and Venezuela; the Community of Latin American and Caribbean States (CELAC), formally created in December 2011, and integrated by all the nations of the Continent with the exception of Canada and the US; and the Pacific Alliance, just created in June 2012, and formed by Chile, Colombia, Mexico and Peru (Panamá and Costa Rica are associate members). Unlike the CELAC and UNASUR, the Pacific Alliance emphasizes economic issues, such as the free flow of goods, people, capital and services. It is a group of countries clearly promoting a free trade agenda between them, and that is looking to Asia to expand its trade. So this means potential convergence and coordination with the economic and trade positions of the US and Canada, in the Americas, and with the ones of the EU countries. The EU sees Mexico as an asset against the protectionism of other governments in Latin America. The President of the European Commission President, Jose Manuel Durao Barroso, said that the EU and Mexico are partners with shared mentality, in a statement of ahead of the summit. Among these points of agreement, Europe emphasizes the role of Mexico as "a key ally in the fight against the risks of protectionism in Latin America and globally." 7 In recent years, Brussels has repeatedly expressed concern about restrictive trade policies of Latin American some countries, with special emphasis on Argentina. In the case of Mexico, the situation is almost the opposite, because the country has since 2000 a free trade agreement with Europe that covers the exchange of goods and services. At the G20 meeting, Mexico, Colombia and Chile reiterated its commitment to free trade as a key instrument for promoting global growth. According to this group of countries, the world has to resort to trade to stimulate economies, because is the 7 Reference needed. 10

11 most powerful tool to generate the jobs. Argentina and Brazil are critics of this model. The delegations of both countries held several meetings before the Los Cabos summit to coordinate their positions. They maintain that the governmental stimulus and protection of the economy are essential for economic recovery and job creation. 8 Brazil and Argentina encourage the G20 to build global leadership to end the drain of resources to the financial sector, and to reorient those resources to the productive sector, to deal more effectively with the current global economic crisis. From the point of the government of Brazil, the road to global recovery is not through spending cuts, but by measures to stimulate growth. Also, Brazil criticized the bailout for Spain on the basis that it was deepening its crisis not resolving it, placing in danger all the Euro zone economies, and with this compromising all the efforts the G20 has made. All of the above show that Latin America, as a whole region, was not capable of assuming leadership on of the most pressing issues of the world economy. And it seems quite a difficult task for Latin America to find common ground for greater cooperation in the G20 before the next summit to be held in Saint Petersburg, under Russian chairmanship, in Besides, Argentina went to the summit with the stigma of having nationalized a company in another country on the G-20 (the case of the Spanish YPF), trade disputes with the EU and the US, and in a political campaign to recover the Malvinas/Falklands Islands. 11

12 4. Challenges for EU-Latin America cooperation and coordination on global economic governance. The countries of the EU and of Latin America have stated in several occasions that multilateralism is the most suitable answer to address global problems. Also, both regions have stressed several times that one of its key objectives is to build a real political dialogue between them to strengthen the international influence of both regions. Therefore, the strategic partnership between the two regions should have emphasized coordination and cooperation in the main international institutions, such as the G20, but this has not been achieved yet. After the 2008 economic crisis, the G20 became the main global forum to address worldwide economic and financial problems. Its increasing importance is testimony that the need to develop a new platform for global economic governance was clearly associated with the increasing global role of emerging countries (such as Brazil and Mexico), which currently represent more than half of global GDP. The trend towards the formation of different sub regional blocs in Latin America, and the absence of a real process of intra-regional coordination (as showed in the G20 meeting in Mexico) demonstrate that the region is becoming more heterogeneous. This situation arise some questions for the EU: Does the EU require increasingly differentiated policies in its relation with the different sub regional groups of Latin America? The future of Latin America, as a region, in the next decade would be of more fragmentation (built around UNASUR-Mercosur, on the one hand, and the Pacific Alliance on the other), or the region will the gradually develop and consolidate a real Latin American Community around the CELAC? 12

13 Does the EU should support any of these two scenarios? Is there political will and resources on the part of the EU to develop a strategic relation with Latin America that could be translated into increasing convergence in forums like de G20? Which could be the US and the Chinese relationships with Latin America in the medium term, and how does the EU should react? Finally, the future economic scenario is complicated both for the EU and for Latin America. Both regions are struggling with economic slowdown in the middle of global uncertainty. In any case, we think that both regions should commit themselves to promote multilateralism as the operational framework for solving the problems of the international economy, and the G20 is the best place to start. 13