Brazilian Lessons For Argentina, Cut Deficits Or Face Doom

Fiscal deficits cannot be ignored or maintained through creative financing mechanisms, given their potential to turn into long-term debt able to sink entire economic programs.

Brazilian colors in Buenos Aires
Brazilian colors in Buenos Aires
Rodolfo Santángelo*


BUENOS AIRES â€" I was never so keen on Brazil's economic reforms nor seduced by the strategy of wooing markets and investors, chosen by the social democratic governments of Lula da Silva and Dilma Rousseff. So I have not had to offer any mea culpa explanations of why Brazil's economy has suddenly gone from regional star to sick man of South America.

Brazil's present and future problems reflect a central point we neighboring Argentines, and our government, should understand very clearly. Any efforts to regain confidence, foment optimism and seduce investors can never supplant a consistent, well-designed macro-economic policy. The Brazilian crisis reflects the revenge of macroeconomics, seeing what happens when an economic program is ill-conceived and financed only by capital inflows and a hefty supply of hope.

A good economic program must be both politically viable and socially tolerable. Without ample social and political backing, it is practically useless. But it should also have macroeconomic coherence. Finding that meeting point of social, economic and political viability without giving any one of them undue precedence is fundamental to competent governance.

Brazil"s current problems are actually less difficult to solve than those of Argentina in 2001-2002, because it has a floating exchange rate and the economy functions with the local currency. But the very strict inflation targets fixed by the Central Bank have not been consistent with the rest of the economic policy.

Four-year limit

A stable, relatively low annual inflation rate of 6-8% was a luxury Brazil could not afford alongside other policy components, especially its fiscal and exchange-rate policies. It entered a vicious cycle where every hike in local interest rates to meet inflation targets would worsen its consolidated fiscal numbers, because the government was the biggest debtor. As the Central Bank insists on imposing its monetary dominance regardless of income shortfalls, the treasury must pay more to borrow while recession worsens, hampering the efficacy of initial adjustments designed to solve the deficit problem.

Sunset over Sao Paulo â€"Photo: GAF

It is the opposite of Argentina's problem where revenues are key, and the Central Bank and monetary policies are subservient to the fiscal deficit. In Brazil the primary deficit (spending deficit excluding interest payments) is close to zero and the hole is entirely "financial" due to the very high interest rate and enormous public debt.

In Argentina, servicing debt is not the main problem because the rate in pesos is low and public debt, accurately measured, is half that of Brazil in terms of GDP percentage. The origins of the problem are almost entirely in the form of a primary spending deficit â€" in great part for ridiculous energy subsidies.

In both cases the size of the deficit is at the heart of the problem, regardless of how it is being financed. In Brazil, the Central Bank did not lose reserves because the private sector brought in foreign capital.

When the public sector finances a fiscal deficit with internal debt, it pushes the private sector out of the credit market because of the high interest rates. In Argentina, financing without issuing bonds fueled inflation, either openly as in 2014 or surreptitiously, as in 2015. The cause of the current inflationary spurt is the belated effects of government overspending in recent years, over and above the immediate trigger of ending multiple rates.

There is no substitute for reducing the fiscal deficit. Finding financing alternatives to Central Bank bond issues can be a good bridge if the deficit is also being reduced. The medium-term objective should be to reverse within four years (2016-19) the excesses of the previous four. The primary deficit grew from 0.8% of the GDP to more than 5% in Cristina Kirchner's second presidential term. The new president, Mauricio Macri, must bring that back to zero, while meeting all debt and interest obligations.

Brazil shows us that there is no playing around with the macroeconomic reality for long, as its vengeance can be brutal. The government has time to design a program that is politically viable, socially tolerable and economically consistent. It must start now, and aim to eliminate, not finance, the fiscal deficit in four years.

*Santángelo is Director of MacroView S.A.

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How Facebook's Metaverse Could Undermine Europe's Tech Industry

Mark Zuckerberg boasted that his U.S. tech giant will begin a hiring spree in Europe to build his massive "Metaverse." Touted as an opportunity for Europe, the plans could poach precious tech talent from European tech companies.

Carl-Johan Karlsson

PARIS — Facebook's decision to recruit 10,000 people across the European Union might be branded as a vote of confidence in the strength of Europe's tech industry. But some European companies, which are already struggling to fill highly-skilled roles such as software developers and data scientists, are worried that the tech giant might make it even harder to find the workers that power their businesses.

Facebook's new European staff will work as part of its so-called "metaverse," the company's ambitious plan to venture beyond its current core business of connected social apps.

Shortage of French developers

Since Facebook CEO Mark Zuckerberg announced his more maximalist vision of Facebook in July, the concept of the metaverse has quickly become a buzzword in technology and business circles. Essentially a sci-fi inspired augmented reality world, the metaverse will allow people to interact through hardware like augmented reality (AR) glasses that Zuckerberg believes will eventually be as ubiquitous as smartphones.

The ambition to build what promoters claim will be the successor to the mobile internet comes with a significant investment, including multiplying the 10% of the company's 60,000-strong workforce currently based in Europe. The move has been welcomed by some as a potential booster for the continent's tech market.

Eight out of 10 French software companies say they can't find enough workers.

"In a number of regions in Europe there are clusters of pioneering technology companies. A stronger representation of Facebook can support this trend," German business daily Handelsblatt notes.

And yet the enthusiasm isn't shared by everyone. In France, company leaders worry that Facebook's five-year recruiting plan will dilute an already limited talent pool, with eight out of 10 French software companies already having difficulties finding staff, daily Les Echos reports.

The profile of Facebook founder Mark Zuckerberg displayed on a smartphone

Cris Faga / ZUMA

Teleworking changes the math

There is currently a shortage of nearly 10,000 computer engineers in France, with developers being the most sought-after, according to a recent study by Numéum, the main employers' consortium of the country's digital sector.

Facebook has said its recruiters will target nations including Germany, France, Italy, Spain, Poland, the Netherlands and Ireland, without mentioning specific numbers in any country. But the French software sector, which has so far managed to retain 59% of its workforce, fears that its highly skilled and relatively affordable young talent will be fertile recruiting grounds — especially since the pandemic has ushered in a new era of teleworking.

Facebook's plan to build its metaverse comes at a time when the nearly $1-trillion company faces its biggest scandal in years over damning internal documents leaked by a whistleblower, as well as mounting antitrust scrutiny from lawmakers and regulators. Still, as the sincerity of Zuckerberg's quest is underscored by news that the pivot might also come with a new company name, European software companies might want to start thinking about how to keep their talent in this universe.

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