by Joe Chappell
Nov 6 2011
As Greece assembles an interim unity government to lead during its ongoing financial crisis which has nearly toppled the Greek government and raised serious questions about its future in the eurozone, are there vital lessons European leaders can learn from Latin America?
The emerging market crises of the 1980s and 1990s demonstrated that policies of combining austerity measures with short-term loans to remedy issues with liquidity can lead to growth stagnation, social unrest, and destruction of wealth. Furthermore, earlier this year, the World Bank released a report that addressed how macroeconomic risks, such as sovereign debt defaults, and exchange rate devaluations, can lead to the collapse of banking systems.
As discussion regarding the crisis in Europe has shifted in recent months from how a default by Greece would affect bond holders to banks and a potential failure of the financial sytem, not just in Greece, but also in other at-risk countries, the current problems in Europe start to look increasingly similar to those of emerging economies of the past. Looking back at the crises Argentina and Uruguay faced from 2000-02, the World Bank reports that "macroeconomic factors that are largely irrelevant in explaining depositor behavior during tranquil times can rapidly become the main driver of market response during crisis episodes" and "a crisis in one country (Argentina) can contaminate the banking system of a neighboring country (Uruguay) in a matter of days." Just today, there is evidence of how the Greece fallout is directly affecting Italy.
This summer, the Inter-American Dialogue's daily "Latin America Advisor" published a question posed to economic, international relations, and policy experts addressing the connection between Latin America's past struggles and Europe's current crisis. Here are some of the responses:
"Despite calls by the IMF to establish a sovereign debt restructuring mechanism after the Argentina crisis, the world's attention went elsewhere. As I show in my new study, The New Vulture Culture: Sovereign Debt Restructuring and International Investment Treaties, in the absence of conscious global economic governance, we may be left with a de facto regime: the thousands of international trade and investment treaties that have jurisdiction over government debt. Argentina has been sued under trade treaties for its restructuring. Europe, and Latin America, should reform their trade treaties to allow nations to prevent and mitigate financial crises."
- Kevin P. Gallagher, associate professor of international relations at Boston University
"In Europe, indirectly or directly, the amounts that official credit institutions and multilaterals have been willing to make available are much higher than in Latin America. The sooner Europe faces the situation, the better. Nevertheless, you ought to have a credible strategy to straighten the imbalances in flows prior to tackling the financial engineering applied to debt proposals aiming at a liability structure you could sustain. Dealing with the fundamentals is at least, if not much more important, than just pure finances."
- Daniel Marx, executive director of Quantum Finanzas and former secretary of finance of Argentina
"Had European policymakers not been overly complacent over the past decade, they might have learned a lot from Latin America's sad past experience with misguided macroeconomic policies, especially under fixed exchange rate regimes. This might have helped them to avoid their present sovereign debt crisis. Now that they are neck-deep in the mess, it is too late for those lessons. However, it is not too late for European policymakers to draw the following three lessons from Latin America's past experience with crisis resolution. First, denial by policymakers in an effectively bankrupt nation of a solvency problem is not a good idea. Second, sticking with a currency arrangement beyond its useful shelf life is an exercise in futility, as is trying to service a clearly unsustainable debt level. Third, having a well thought-out Plan B is to be highly recommended, especially when one is soon to be faced with the aftershock of defaulting on one's sovereign debt and exiting the euro."
- Desmond Lachman, resident fellow at the American Enterprise Institute
Read the complete Q&A
Tomorrow we will look at what the Greek crisis means for European CEOs, and how executives can learn from the financial turmoil that has plagued both the U.S. and Europe.
This article was written by Joe Chappell from the Association of Executive Search Consultants (AESC). BlueSteps is the exclusive service of the AESC that puts senior executives on the radar screen of over 8,000 executive search professionals in over 70 countries. Be visible, and be considered for up to 75,000 opportunities handled by AESC search firms every year. Find out more at
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