Writing for both the Latin America blog and the Europe blog often has its advantages, and with so little attention being paid to Latin America at this past weekend’s G8 Summit at Camp David I am given some space to discuss how the global economy affects Latin America and other developing regions.
The late 90s made famous the term ‘contagion’ as when Turkey had the flu, Russia caught a cold, and when Argentina had the flesh eating disease, Brazil and South Korea had the chills. These emerging markets often had an effect outside of their borders, but towards other often unrelated emerging markets, leaving the main economic players, well, still playing. The reason for this was that there were no real BRICS at the time that anyone cared about, at least not enough to make them a mainstay in your local bank’s investment products being offered. Now with the globalization of markets, or more so the lack of confidence in the tripod of the global economic system, many people would invest in currencies they might still have never heard of, or in markets they will never personally visit in their lifetime. The truth is that the tripod of the global economic system is exactly that, a balanced relationship between economic powers that if undermined, hurts everyone, including those emerging markets that were isolated in the global system of the late 90s and early 2000s.
Each leg of the tripod has its own internal issues and external issues as related to other legs of the international system. Regions outside of this tripod may wish to be independent, but often are linked to a greater or lesser degree to one or more of these stabilizing powers. The first leg that must be mentioned is the United States. While it has its own links to NAFTA and the rest of the Americas, it often stands independent in its own economic condition and can drive the global economy with its commercial, political and currency influences as the last standing economic giant of the Cold War. The United States will not likely disappear as an economic leg for quite some time, despite what many outside and inside of the US believe to be the case. With recent positive economic news sugaring many local American’s often salty outlook and Obama crushing predictions, investors are regaining confidence in a market that never really went anywhere, but was winded for a few years and will return to its natural state of being.
Europe as the second leg was the focus of much of the G8 Summit. Mr. Hollande, as the new voice of the French Presidency and Greece’s possible rejection of the aid package from the EU dominated the Summit. The possibility of Greece leaving the Euro altogether and the nervousness of investor confidence in the Eurozone will affect the entire tripod and everyone under it, but there must be some points made as well on the Greek condition. I am sure everyone is sick of hearing about the same issues in Greece for the last year and tired of waiting for a global economic crisis to return us back to 2008. I personally believe that it would be healthier to return Greece to a non-Euro state like Britain with a face saving measure that respects Greek democracy while giving them economic flexibility to solve the issues without being tied to a high value currency. The overarching spirit of the Euro and the intent to not admit that some accession states may not have been ready, despite qualifying in the process, places the pride and respect of the political classes against the anxiousness of investor confidence. Greece will not leave the EU, just the Euro currency, a currency that is not used by many member states. Greece ultimately will decide on its own condition as related to the Euro, and it would be best to work on the political reputation of the Eurocrats and convincing investors that other accession programs worked in Spain, Portugal, Ireland and Italy than dragging out problems with Greece. The pushing and pulling of the international system on Greece may push Greeks past the point of no return, and may start to violate the rights of the Greek people in the process. This will just drag out the inevitable exit from the Euro, and the inevitable is not a bad position to be in for Greece. It does not mean Greek leaders should be congratulated in any way, but Greek citizens will have to decide how to deal with their own government and system. The lingering condition, placing the need to keep Greece attached to the leg of the tripod beyond the desires of its citizens or the ability of its people, is starting to sound more like an excuse than a democracy. It has not reached the point of going to the European Court of Justice, but it does show a collective fog that may do well to allow in some fresh air.
The third leg has always been the one that has really had the most change over the last 200 years, currently being occupied by the BRICS. The leg is solidified mostly by the Asian members of the BRICS in China and India, but also Asia as a whole with Japan, South Korea and Indonesia making up a source of investment and funding for the rest of the world economy. Recently economic information from Brazil and China has showed those two nations as both slowing or growing depending on what month the publication is released. While the BRICS and Asia may do well, it likely will be the leg that has the most volatility in the long run as many investors do not fully understand what the long term returns may be, or even their investment rights in many of these countries. This leg has the most interesting position for non-tripod nations as they are the current source of investment away from having ties with the US or EU. Much of this however is dependent on China’s needs for national resources, but this is also conditional on the need for production in China to sell to the US and EU and China’s future internal market. So while demand from the US and EU runs China’s production, the effect on Latin America in this G8 process is linked to all three legs as places like Latin America, Africa and the Middle East supply the entire production model in China, that is purchased in Asia and by Western powers. Unlike previously when the Soviet Union was independent of the other legs of the tripod, this may be the first time since the late industrial revolution where the tripod truly is planted in all three legs, tying emerging markets to Greece, and investors to countries they will never personally know.