Europe Can Learn From Mexico Crisis, G-20 Host Says

European nations, struggling to end their debt crisis, should look at Latin America’s triumph over decades of financial crashes as a blueprint for resolving their woes, said officials at a summit of the world’s biggest economies in Mexico.

Mexican President Felipe Calderon used the two-day summit of Group of 20 finance officials to urge policy makers to follow his country’s example and take decisive action to prevent turmoil in Europe from further hurting global economic growth.

Latin America has so far proven resilient to global volatility after countries including Brazil and Mexico cut spending over the past two decades. In contrast, European nations are still trying to halt contagion more than two years after Greece’s debt crisis emerged. The International Monetary Fund forecasts Latin American economies will grow 3.6 percent in 2012, three times the expected pace for advanced nations.

Luis Tellez, chief executive officer of Bolsa Mexicana de Valores SAB, the nation’s stock exchange, said Europe isn’t acting fast enough to staunch the damage.

“While Europe took years to make decisions, we made decisions with the U.S. and the IMF in two months,” said Tellez, who was chief of staff to then-President Ernesto Zedillo during the Tequila crisis that followed devaluation of the peso in 1994.

Mexico, Latin America’s second-biggest economy, shrank 6.2 percent in 1995, when the government used a $50 billion IMF bailout to avoid default after floating the peso against the dollar. A 50 percent devaluation ignited inflation that peaked at 52 percent and sparked capital outflows across the region.

Mexican Advantages

To be sure, Europe lacks several advantages Mexico had in reversing its decline. Greece’s debt ballooned last year to about 160 percent of gross domestic product, while Mexico began its fiscal tightening prior to the Tequila crisis. Struggling nations like Spain and Italy are part of the 17-nation euro zone, meaning they can’t boost exports the way Mexico did by devaluing the currency.

A strong U.S. economy also helped drive Mexican growth of 5.5 percent in 1996. Mexico sends 80 percent of its exports to the U.S. and its growth is tightly linked to that of its northern neighbor.

‘Too Timidly’

Still, as occurred in the past in Latin America, politicians in Europe today are failing to act decisively to contain growing deficits, said Claudio Loser, a former director for the Western Hemisphere at the International Monetary Fund from 1994 to 2002.

“The Europeans believe that their experience is unique, when it’s not,” said Loser in a phone interview yesterday. “They didn’t see the gravity of the problem in 2008 and 2009, and then they tried to solve the problem too timidly.”

While Greece on Feb. 25 formally asked investors to exchange their government debt holdings for new securities in the biggest sovereign restructuring in history, economists from Citigroup Inc. to Commerzbank AG say Greece may still default amid a fifth year of recession.

The European Union’s 130-billion euro debt bailout, approved last week, will probably fail because it is “fundamentally poorly designed and poorly implemented,” said Guillermo Ortiz, chairman of Grupo Financiero Banorte SAB and a former governor of Banco de Mexico.

“The program is a brutal intrusion,” said Ortiz, who oversaw Mexico’s response to the Tequila Crisis as Finance Minister under Zedillo. “There’s no light at the end of the tunnel.”

Stabilizing Expectations

Mexican central bank Governor Agustin Carstens, a former IMF Deputy Managing Director, also drew on the tough lessons learned by Latin America since the 1970s to give advice to Europe.

“First, during financial crises, expectations must be stabilized as soon as possible,” said Carstens, who worked in the central bank’s economic research department during the Tequila crisis. Then, when tensions ease, nations must be “focused on creating institutional arrangements capable of preventing and avoiding the reemergence of those crises.”

In the case of Mexico, those arrangements include a law that caps deficit spending. Brazil, after it devalued its currency in 1999, put a ceiling on borrowing at all levels of government and threatened public officials with jail sentences if they don’t meet strict spending limits. The so-called fiscal responsibility law helped lower the country’s debt to its current 36.5 percent of gross domestic product, compared with 63 percent in 2002.

Chile, the world’s largest copper producer and the region’s highest-rated borrower, went even further and enacted laws requiring it to boost savings during periods of fast growth.

Risks for Region

While Latin American economies have so far shown strength, trade and capital flows to the region could slide if Europe’s economic situation worsens, Loser said. Oil prices that are rising amid tensions in the Middle East are also a concern if they lead U.S. consumers to curtail purchases of Mexican manufacturing goods, said Sergio Luna, chief economist at Citigroup’s Banamex unit in Mexico City.

“We’re all in the same boat, and it doesn’t matter whether the hole is in first, second or third class,” Calderon told officials in a dinner at the historic Chapultepec castle Feb. 25. “It’s the same boat and we have to fix it.”

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