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Geopolitics

When Corruption Meets Austerity: Dilma Rousseff's Nightmare Scenario

Brazilians are furious as their personal prosperity slips away amid reports of runaway corrruption. All the while, President Rousseff looks forced to impose new austerity measures. Which way out?

March 15 protest in Rio de Janeiro
March 15 protest in Rio de Janeiro

-Editorial-

The streets of Brazil are rumbling.

The seemingly daily reports that power brokers have been using Petrobras as a cash till to settle political favors for years — under the eyes of the Workers Party of the recently reelected President Dilma Rousseff and her predecessor, the once popular Luis Inacio Lula da Silva. The payments are thought to have begun when Rousseff headed the Petrobras board of directors between 2003 and 2005.

The spreading dissatisfaction burst out into a nationwide protest against Rousseff that drew at least 1.5 million people Sunday across scores of cities.

Demonstrators demanded Rousseff be removed from her presidential duties amid the Petrobras scandal. Days ago a Supreme Court judge approved the investigation of 34 parliamentarians (32 of them allied with the president and including the heads of both legislative chambers) for suspected involvement in the energy company scandal.

The misuse of state oil funds could end up shaking Brazil's political and institutional stability to the core. It is the biggest alleged case of bribery in the country's history, and the timing couldn't be worse. The economic policies of the first Rousseff presidency have led the country toward a mix of recession and inflation that will be difficult to revert without structural reforms and a strict austerity plan.

The Brazilian GDP is expected to shrink 1% this year while inflation already exceeds 7%, as the real currency has lost 15% of its value this year. Meanwhile, in something far from the control of the political leaders, a massive drought is threatening to force more water and electricity rationing in the country's main economic region, the São Paulo state.

Losing friends

When she began her second term late last year, Rousseff seemed to understand that Brazil's government needed a heavy dose of reality. But the various reforms and austerity plans she has announced need parliamentary approval and her main political ally, the PMDB (Democratic Movement Party of Brazil), has already started to criticize her in public and hint that it may not vote for her legislative proposals. The PMDB's votes in parliament are crucial for the passage of such measures as tax hikes on salaries and stricter preconditions for unemployment and pension benefits.

PMDB legislators have said they may not back austerity plans that "affect the rights of workers." Some have threatened to call the treasurer of Rousseff's Partido dos Trabalhadores (PT, Workers' Party) to testify at a parallel inquiry parliament has set up on Petrobras, as Congress wants to know if any Petrobras money financed Dilma Rousseff's campaign. In that case the PMDB would be passing straight to the opposition and effectively tying the hands of the government to pursue its legislative agenda.

All of this would likely in turn lead to a credit downgrade for Brazil, making foreign credit more expensive and discouraging investment.

Dilma Rousseff has already shown her ability to forge alliances when nobody thought it possible. If she does it again and wins approval for the austerity measures the country needs for future growth, she will still have to face the wrath of the public. The millions of Brazilians who emerged from poverty under Lula, are increasingly hard pressed to pay their mortgages or otherwise maintain the level of consumption.

They realize that today they could simply slip back into the poverty they left behind a decade ago, and were among those shouting loudest in Sunday's massive protests.

The first thing Rousseff must do at this stage is to exhibit the best of her political and communication skills to simply tell Brazilians the truth, and to convince them to tighten their belts. But she may also need a new political alliance to start implementing her austerity plan sooner rather than later.

If she cannot do both, she may not complete her second term, but we certainly hope she will, given Brazil's present institutional fragility. She is not the perfect solution for Brazil, but as they say: better the devil you know.

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The deteriorating conditions among Russia’s front line troops, chronicled by a handful of foot soldiers who have spoken out, may explain why Ukraine’s recent counter-assault has been so successful.

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