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Is Europe Elbowing The U.S. Out Of South America?

International Outlook


The U.S. has long regarded South America as its business backyard. But while Congress and the Clinton Administration dither over moves to create a free-trade bloc covering the hemisphere by 2005, the European Union is barging in and bolstering its economic links with the region.

Europeans have won many of the top privatization deals since the early 1990s, when governments in South America began opening their markets. Now, they are swooping into private-sector businesses from banking to food. "We can't be left on the sidelines," frets U.S. Commerce Secretary William M. Daley.

FREE-TRADE FACTIONS. While Washington is focused almost exclusively on the 2005 deadline to create the Free Trade Area of the Americas (FTAA), the EU is adopting a piecemeal approach that is winning friends. By 1999, the EU and Mercosur, led by Brazil and Argentina, are expected to begin talks that could lead to a free-trade area. The U.S., meanwhile, hasn't yet agreed with Latin American nations on the objectives, structure, or approach of the FTAA talks scheduled to start next year.

Europe is making diplomatic gains, too. While President Bill Clinton will not make his first trip to South America until October, European and Latin American leaders visit each other often. French President Jacques Chirac and Spanish Premier Jose Maria Aznar both toured the region this year, and Argentine President Carlos Menem went to Germany in May and invited German companies to take part in Argentina's remaining privatizations.

Chile, for one, seems close to throwing in the towel with Washington. Its bid to join NAFTA has been stalled for more than two years while Clinton tries to get fast-track negotiating authority from Congress. Fed up with the wait, Chile has moved closer to Europe and its own neighbors. It has now joined Mercosur as an associate member. And in June, it started formal talks on a separate trade deal with the EU.

Of course, the U.S. is still Latin America's biggest overall trade and investment partner because of Mexico's NAFTA membership. But Europe is pulling ahead in Mercosur, which excludes Mexico. Mercosur's two-way trade with the EU totaled $43 billion in 1995, vs. $29 billion with the U.S.

Europe is winning the race for megabuck contracts to rebuild South America's infrastructure. Spain's Telefonica de Espana, for example, has spent $5 billion buying telephone companies in Brazil, Chile, Peru, and Argentina, where France Telecom and STET of Italy are active, too. France's Electricite de France and Lyonnaise des Eaux have taken over state-owned utilities. And Spanish energy company Endesa owns electric companies in Argentina and Peru.

SUPERMARKETS. In some countries, Europeans have built enormous power bases in the corporate sector. In Brazil, South America's biggest market by far, 7 of the 10 largest private companies are European-owned, while just two are controlled by Americans. Europeans dominate huge swaths of the economy, from auto makers Volkswagen and Fiat to French supermarket chain Carrefour and Anglo-Dutch personal-care products group Gessy Lever.

Not everything between the EU and Latin America is hunky-dory. Brazil, for example, is complaining about European barriers to its coffee exports. But the EU has laid enough groundwork to protect its interests if the U.S. and South America ever succeed in setting up a trade bloc.By Ian Katz in Sao Paulo EDITED BY JOHN TEMPLEMANReturn to top


A vicious power struggle is raging in Moscow among bankers, businessmen, and reform politicians who backed Boris Yeltsin's reelection bid last year. With the threat of a communist resurgence--the glue that bound them together--gone, they are at each others' throats fighting for political and financial power.

The conflict is turning violent. On July 21, a shot was fired into the home of Central Bank Chairman Sergei Dubinin. No one was injured. Earlier this month, Dubinin accused former Deputy Finance Minister Andrei Vavilov and major banks of mishandling over $500 million in government funds. Vavilov, an ally of Prime Minister Viktor S. Chernomyrdin, was bounced from his post by reformer Anatoly B. Chubais. He quickly found a job with MFK Bank, a unit of Oneximbank.

Moscow insiders read the probe into Vavilov as an attack on Oneximbank and former First Deputy Prime Minister Vladimir Potanin, who now runs it. Other financial bigwigs, notably Security Council Deputy Secretary Boris Berezovsky, want to clip Potanin's wings and stymie his acquisition binge. Oneximbank is locked in battle with rival groups for control of both Rosneft, the last big oil company to be privatized, and Svyazinvest, a telecom outfit whose holdings include a 38% stake in long-distance carrier Rostelecom.

Meanwhile, Potanin seems to have lost the protection of Chubais, who is mainly preoccupied with consolidating his political power. In the new Russia, where connections count far more than entrepreneurship, that's dangerous.By Patricia Kranz in MoscowReturn to top

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