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Global Viewpoint

Brazil’s lessons for indebted Europe

Some European nations' debt will have to be forgiven to resume growth. Those responsible for the financial turmoil must pay, rather than the poor. And Europe must unify its fiscal policy.

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Some emerging countries fared better. Such was the case with Brazil, which of its own accord – and at its own risk – launched the Real Plan in 1994 to create a new currency and make several other structural changes to our economy. We drastically modified the bases of our fiscal policy, cleaning up finances at both the federal and state level, and imposed severe regulations on the financial system that were then monitored by our central bank, in line with Basel guidelines [as laid out by the Basel Committee on Banking Supervision – a committee established by the Group of Ten countries in 1975].

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At the same time, while we undertook privatizations, we did not forget about the need to foster competition in the private sector. We also saw the importance of maintaining active instruments of public credit – such as our National Bank of Economic and Social Development and the Banco do Brasil – that would allow our national companies to restructure themselves. In some cases, we created a mixed, private/public system for former state monopolies such as Petrobras.

In addition, from 1994 through today, Brazil nurtured policies that would ensure a real increase in the minimum wage and, starting in 2000, created a social safety net – including the well-known “Bolsa Familia” program that links welfare payments to school attendance, reducing poverty and inequality a little as well.

The current global scenario is an uncertain one. The financial regulation proposed at G20 meetings is facing obstacles to implementation because of diverse national interests. Each central bank operates as it sees fit. The Federal Reserve floods the United States and the world with dollars, and it conducts operations typical of commercial banks without worrying about orthodoxy.

Those responsible for the financial turmoil are not only not punished, but they receive bonuses (in contrast with what happened in the Brazilian program that healed the financial system, which punished bankers). Unemployment won’t come down, because there’s neither consumption nor investment. The European Central Bank and the IMF demand that those countries in virtual bankruptcy make fiscal sacrifices that simultaneously make impossible a return to growth – and, thus, normality.

Interest rates are maintained close to zero, and it is declared they will stay there, but economies don’t respond. In Europe, every country makes the fiscal policy of its choosing and there are no mechanisms for unification. Unemployment and political unrest haunt these countries like ghosts, hand in hand with the threat of default.

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