Mercosur

common market of the south

Nuestro Norte es el Sur

Contents

1. 2. 3. 4. 5. 6. 7. 8. 9.

Introduction General characteristics of the Mercosur Historical background Member countries Role and potential Objectives Difficulties and obstacles Issues Securities Market

10. Economic Situation in the countries of Mercosur 11. Statistical data 12. The Economic relations of Eu with Mercosur Final Remarks Bibliography

ABBREVIATIONS

ALADI CET FDI FTAA ECLA EPZ EU GDP GNP IDB IMF INTAL ITD LA LAFTA LAIA MERCOSUR NAFTA OECD TBI UNCTAD VAT WTO

Latin American Integration Association Common external tariff Foreign direct investment Free Trade Area of the Americas Economic Commission of Latin America Export processing zones European Union Gross domestic product Gross national product Inter-American Development Bank International Monetary Fund Institute for the Integration of Latin America and the Caribbean Integration, Trade and Hemispheric Issues Division Latin America Latin American Free Trade Agreement Latin American Integration Association Southern Common Market North American Free Trade Agreement Organization for Economic Cooperation and Development Tax on business earnings United Nations Conference on Trade and Development Value added tax World Trade Organization

1. Introduction

There have been a lot of attempts in Latin America in the past years to strengthen and widen their regional trading arrangements. As in previous years, efforts to deepen integration among members of existing schemes in the Americas have focused mostly on market access and institutional issues. In South America, the Southern Common Market Mercosur is following its program of integration, and has widened the scope of its free trade area by signing association agreements with Chile and Bolivia and an economic cooperation agreement with the European Union. The creation of Mercosur is certainly the most economic significant fact for the economies of Brazil, Argentina, Uruguay and Paraguay. The Southern Cone Common Market was created in 1991 not with the aim, as its name would imply, of achieving just an economic integration of its member states, but rather of creating a meaningful entity encompassing the political, productive and social aspects of its member states. By joining forces, its four member states (Argentina, Brazil, Paraguay and Uruguay) represent the single largest market in Latin America, with 210 million inhabitants and a total GDP of US$1.1 trillion, representing the fourth largest economic entity in the world.

2. General characteristics of the Mercosur

The Mercosur, Mercado Comn del Sur (Common Market of the South) is an ambitious economic integration project which includes the founding members Argentina, Brazil, Paraguay and Uruguay. In 2008, Venezuela, Chile and Bolivia became associate members. Peru, Ecuador, Colombia have expressed their willingness to join the group, and Mexico has shown a growing interest. Mercosurs main objective is to increase the efficiency and competitiveness of the all member economies by opening markets, promoting economic development in the framework of a globalized world, improving infrastructure and communications, making better use of available resources, preserving the environment, generating industrial complementation and coordinating macroeconomic polices. Achieving a common external tariff is one of the main goals of the block.

FACTS
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Full members: Argentina, Brazil, Paraguay, Uruguay Full member pending ratification: Venezuela Associate members: Bolivia, Chile, Colombia, Ecuador, Peru Headquarters (secretariat): Montevideo, Uruguay Official languages: Spanish, Portuguese Combined GDP: US$ 1.1 trillion

LEADERS The Mercosur presidency rotates between member states every six months. Mercosur institutions include the policy-making Common Market Council and the Common Market Group, which implements policies and monitors compliance with the council's decisions. A Mercosur parliament was inaugurated in December 2006. It began meeting in May 2007 in the Uruguayan capital Montevideo. Initially, the parliament will have no power other than persuasion.

3. Historical background
The very first attempt to create a common market in Latin America occurred in the early 60s with Treaty of Montevideo establishing the Latin America Free Trade Association (LAFTA). The Treaty provided for the creation of a free-trade zone by negotiations between its member states: Argentina, Brazil, Chile, Mexico, Paraguay, and Peru. Uruguay, Colombia, Equator and Venezuela also joined the Association later on. LAFTAs goal was the achievement of a regional common market in 12 years time. This would be accomplished mainly because of the markets development and growth that was to happen as a result of the removal of protectionism measures through multilateral negotiations, resulting from tariff reductions. LAFTA was accepted as a mechanism to provide greater trade liberalization to the most developed countries of the region (Argentina, Brazil and Mexico). As regards the other lesser developed countries, the objective was to stimulate their industrial growth and to complement their economies. The LAFTA trade opening developed reasonably well in its early years, but it

lost impetus as of 1965. The distance between its original objectives and the results was very great.

Some efforts had been made in order to prevent LAFTA from ending. This way, one of the solutions presented was in fact implemented in 1969, through the Cartagena Sub-Regional Integration Agreement. It was when Bolivia, Chile, Colombia, Equator and Peru created the Andean Group as an attempt to give dynamism to the region's integration. Cartagena Agreement intended to implement a duty lifting program, a common external tariff, a differentiated treatment as regards foreign investments. Despite the pragmatism of the initial proposal in 1987, the participants of the Andean Group at that time reunited in Quito, recognized that the Cartagena Agreement had been totally disregarded by the signatories.

At the beginning of the 80s, due to the growing external balance difficulties faced by Latin American countries and due to the creation of other economic blocs and to a growing protectionism, the integration process reached a new dimension. The Latin American Integration Association-LAIA was created to replace LAFTA. It used other means to attempt integration of member states and an economic preference zone was established. New instruments were defined to allow regional trade between the participants. This created favorable conditions for the growth of bilateral initiatives, as a prelude to the institution of multilateral relationships in Latin America. The emphasis on those bilateral agreements was a consequence of the particularities of each country member as well as the recognition of the failure of the previous experience based on multilateral agreements and the recent experience of the agreements signed by Brazil, Argentina and Uruguay in the mid 70s. Among the new instruments created by LAIA, the RCP-Regional Customs Preference (PARPreferencia Alfandegaria Regional), which became effective in 1984, had a special importance. The RCP established a gradual reduction of customs duties on imports of regional goods among member countries, taking into consideration their level of development. It sought to adopt more flexible and pragmatic instruments of integration, as compared to those of LAFTA. Argentina and Brazil have been rivals historically because of opposite political and economic interests. The search for increasing trade liberalization was mainly accomplished by the bilateral agreements signed by Brazil and Argentina in July 1986 called PEIC (Program for Economic Integration and Cooperation). This program, focused on the creation of a common

economic space, concluded several sectoral agreements aimed at increasing trade in products included in various sectors such as energy, transport, nuclear energy and air transport. Under the LAIA system these two countries initially signed 12 commercial protocols but in 1988 they were already 24. Brazil and Argentina signed, in November 1988, the Treaty for Integration, Cooperation and Development (TICD), setting the stage for a common market between them within ten years. It was established that this agreement would be open to all other Latin American countries. The Treaty introduced radical changes in the mechanism for sectoral negotiation through the list of products used by PEIC. Its objective was the elimination of all tariff and non-tariff barriers on the trade in goods and services by a gradual process. For the first time an agreement was reached to proceed with the gradual harmonization of economic policies and coordination of monetary, fiscal and exchange with the purpose of constituting a common market. The success of this new strategy resulted in a significant increase in trade flow between both countries. Thus, in July 1990, by signing the Act of Buenos Aires, the Presidents Fernando Collor de Melo (Brazil) and Carlos Menem (Argentina) decided to accelerate the integration process started in 1985 by anticipating to December 1994 the establishment of a free trade area. The Act introduced an important change in the previously applied strategy. Instead of adopting sectoral protocols, which looked for commercial and industrial complementation among sectors, a general and automatic integration scheme was adopted. The impact of this measure was immediate. In 1990, Paraguay and Uruguay were invited to participate with Brazil and Argentina on the establishment of a market until the end of 1994. As a result, the four countries signed the Treaty of Asuncion on 26 March 1991, providing for the creation of a common market among the four participants, to be known as the Southern Common Market MERCOSUR.

4. Member countries
Comprising Argentina, Paraguay, Uruguay and Brazil, the Southern Common Market - MERCOSUR represents a total population of 190 million individuals, living in an area larger than the total surface of the european continent, covering more than 12 million square kilometers. In 1993, the total Gross Domestic

Products (GDP) of these four nations was approximately US$ 715 billion. Brazil has a territory of 8.5 million square kilometers and 155 million inhabitants, as well as the largest economy within MERCOSUR. Argentina, the second largest MERCOSUR nation, has 2.8 million square kilometers in area. The Argentine economy has been one of the fastest growing in the last few years. Paraguay, with 406 thousand square kilometers and a population of 4.6 million, has a growing economy. Uruguay in turn has the smallest population, calculated at some 3.1 million inhabitants, and the smallest territory in MERCOSUR - 177 thousand square kilometers.

Associate members
Mercosur's five associate members : Chile, Bolivia, Colombia, Ecuador, and Peru do not enjoy full voting rights or complete access to the markets of Mercosur's full members. They receive tariff reductions, but are not required to impose the common external tariff that applies to full Mercosur members. Of these countries, Bolivia is being considered for full membership. But the decision is complicated by Mercosur's history with Bolivia, as well as the common external tariff. Bolivian President Evo Morales has criticized Mercosur, saying, "What I've discovered is that the CAN [Andean Community of Nations] as well as Mercosur are tools that only benefit businessmen and wealthy people, instead of the poor people" (People's Daily). Brazil would like to see Bolivia accepted, in part because of their shared border, Brazilian Foreign Minister Celso Amorim said in a 2007 interview with the Financial Times. The possibility of full membership for Bolivia may also prove problematic because Bolivia's tariffs are actually lower than those of Mercosur. "They'd have to increase those tariffs to join," which would have a significant impact on prices within Bolivia, says the Financial Times' Latin America editor Richard Lapper. He says Mercosur may allow some exemptions to Bolivia to remedy this problem, as Brazil is very interested in having increased access to Bolivian gas. Granting exemptions, however, would anger already disenchanted Uruguay and Paraguay, Mercosur's smallest full members, which have not been allowed similar exemptions. "Can Mercosur keep a straight face in exceptions to the common external tariff, but say it's not OK for Uruguay and Paraguay to negotiate a bilateral free trade agreement with the United States, since that would undermine the common tariff?," asks Agustin Cornejo of the Institute

for International Economics in the Wall Street Journal in 2007. Uruguay, also angry over an ongoing dispute with Argentina over a paper pulp mill on their shared border, has gone so far as to sign a Trade and Investment Framework Agreement (PDF) (TIFA) with the United States. The TIFA sets the stage for future trade liberalization and economic relations with the United States. But signing a Free Trade Agreement (FTA) with the United States would violate Mercosur's charter, which forbids bilateral agreements with nonmember countries. If the TIFA does eventually lead to the creation of an FTA with the United States, the leadership of Mercosur would either have to disbar Uruguay from the bloc for violating the charter, possibly causing Paraguay to resign as well, or it could choose to rewrite its charter altogether, thereby allowing members to sign bilateral agreements with nonmember countries.

5. Role and potential

Some South Americans see Mercosur as giving the capability to combine resources to balance the activities of other global economic powers, especially the North American Free Trade Agreement (NAFTA) and the European Union The organization could also potentially pre-empt the Free Trade Area of the Americas (FTAA);[10] however, over half of the current Mercosur member countries rejected the FTAA proposal at the IV Cumbre de las Amricas (IV Summit of the Americas) in Argentina in 2005. The development of Mercosur was arguably weakened by the collapse of the Argentine economy in 2001 and it has still seen internal conflicts over trade policy, between Brazil and Argentina, Argentina and Uruguay, Paraguay and Brazil, etc. In addition, many obstacles are to be addressed before the development of a common currency in Mercosur. In 2004, Mercosur signed a cooperation agreement with the Andean Community of Nations trade bloc (CAN) and they published a joint letter of intent for future negotiations towards integrating all of South America. The prospect of increased political integration within the organization, as per the European Union and advocated by some, is still uncertain. Bolivia, also a member of CAN and an associate member of Mercosur before the UNASUR process started, plays a crucial part in relations, says Marion Hrmann, since Bolivia is traditionally

seen as a mediator between the Andean countries and the rest of South America. Regional Integration: Key Role for Bolivia The bloc comprises a population of more than 270 million people, and the combined Gross Domestic Product of the full-member nations is in excess of US$3.0 trillion a year (Purchasing power parity, PPP) according to International Monetary Fund (IMF) numbers, making Mercosur the fifth-largest economy in the World. It is the fourth-largest trading bloc after the European Union. The working of Mercosur has not met with universal approval within interested countries. Chile has to a certain extent preferred to pursue bilateral agreements with trading partners, and there have been calls from Uruguayan politicians for this example to be followed.

6. Objectives The Southern Common Market promotes:

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The free transit of produced goods, services and factors between the member states. Among other things, this includes the elimination of customs rights and lifting of nontariff restrictions on the transit of goods or any other measures with similar effects;

Fixing of a common external tariff (CET) and adopting of a common trade policy with regard to nonmember states or groups of states, and the coordination of positions in regional and international commercial and economic meetings;

Coordination of macroeconomic and sectorial policies of member states relating to foreign trade, agriculture, industry, taxes, monetary system, exchange and capital, services, customs, transport and communications, and any others they may agree on, in order to ensure free competition between member states;

The commitment by the member states to make the necessary adjustments to their laws in pertinent areas to allow for the strengthening of the integration process. The Asuncin Treaty is based on the doctrine of the reciprocal rights and obligations of the member states. Mercosur initially targeted free-trade zones, then customs unification, and finally a common market. The common market will allow (in addition to customs unification) the free movement of manpower and capital across the member nations, and depends

the grating of equal rights and duties to all member countries. Because member states will implement the trade liberalization at different speeds, during the transition period the rights and obligations of each party will initially be equivalent but not necessarily equal. In addition to the reciprocity doctrine, the Asuncin Treaty also contains provisions for the most-favored nation concept. This concept is that after the common market is formed, member nations are to automatically extend to the other members any advantage, favor, entitlement, immunity or privilege granted to a product originating from or intended for countries that are not party to the Latin American Integration Association (ALADI).

7. Difficulties and obstacles

Although the idea of Latin American economic integration had had its origins at the beginning of the 50s, under the impulse of the ECLA and having different purposes than those existing nowadays, a more effective regional integration just happened to come lately. In this way, the countries involved in what some people call project of integration (Mercosur) have among themselves the characteristics of being democracies that were recently implanted. They all face internal adjustment problems (inflation) and external (external debt) and have important agroindustrial systems, even though suffering strong disadvantages in terms of trade due to the European protectionism policy. In contrast to the previous motionless years, nowadays there is a clear disposition (inclination) of the governments of the region to act in two distinct plans (levels): the strengthening of sub regional schemes of integration, and the adoption of commitments in order to create free trade areas. Mercosur and other instruments of integration show, without doubt, this new era", more mature and advantageous to all countries of the region which are making efforts to create a powerful economic space, not only in terms of regional but also in terms of international trade. Perhaps one of the main difficulties is the harmonization of economic policies. The traditional stabilization policies, via fiscal and monetary adjustments and those via price controls, so common in Latin America, create an obstacle to meet the goals of integration.

The Common External Tariff, another important factor characterizing the Common Market, in view of the enormous difficulties that its adoption conveys, will be adopted definitely only in 2006. Paraguay and Uruguay, in particular, with their free market economies, a unique rate exchange and no restrictions on capital movements and the dividend remittances to the original country of investment can aspire to be Mercosur financial centers. Regarding agroindustrial policies, the Mercosur countries must meet some natural comparative advantages and put an end to the unfair practices in agricultural trade. The industrial sectors in Paraguay and Uruguay are very incipient. In contrast to the lack of industrialization in those two countries, Argentina is a leader in the food processing sector. Brazil has also a very good industrial and technological productive structure, besides counting on a subsidies program for the agriculture sector, and sometimes, with an export promotional regime points in which there can be noticed some differences from Argentina. The Brazilian rural sector does not accept the agricultural sector zero tariff for the free trade area, while the member countries do not achieve harmonization of economic policies. The major difficulties in the agricultural area are related to wheat, dairy products, fruits, sugar, alcohol, and, to a lesser extent, poultry. The free flow of goods will also require the standardization of technical and sanitary specifications for agricultural and manufactured products of the member countries as well as improvement of the criteria to determine the origin of the products, since the Annexes of the Treaty of Asuncion present some omissions. With regards the fiscal situation, Brazil and Argentina have very distinct profiles. Brazilian products are in general highly taxed, chiefly by indirect taxes. Meanwhile, Paraguay and Uruguay have very low tax rates and Argentina, because of its domestic market opening, has also lower taxes when compared to Brazil. It is, thus, necessary that member countries achieve tax system harmonization, in order to make taxation as neutral as possible over the costs of production. One of the main aspects in the integration process of energy sources among the Mercosur countries is to better adjust the use of natural sources in economic and environmental terms. This will permit growth of efficient energy production with cost reduction. Thus, parallel with the development and operation of the first free trade agreement, the countries of the subregion promoted joint hydro-electric projects on the frontier rivers which are among the most

important in the world. Currently, the charges for power in Argentina are high if compared to Brazil. Brazil and Paraguay have an excess of energy production, in view of the construction of 12,600 MW Brazilian-Paraguayan Itaipu Hydroelectric on the Parana River and the 3,100 MW Yacireta one constructed by Argentina and Paraguay on the same river. Uruguay has scarce and expensive energy, but when the 1,890 MW Salto Grande dam, on its border with Argentina, is operating at full capacity, the situation should improve. These undertakings could bring about positive change in relations among the countries as occurred in the last decades, especially with the signing of the tripartite agreement between Argentina, Brazil and Paraguay. The agreement solved the differences regarding the utilization of the hydroelectric resources of the Parana River, which has one of the greatest potentials on the planet. Thus, formulating an integration plan as well as a survey on the opportunities to exchange energy production is extremely important. Besides any other effort, it is vital to encourage studies on investigating new technologies to preserve and save energy and to create credit lines through international agents with a view to implement the integration in this sector. The free circulation of human resources demands the creation of an integrated system of technical and professional certificates for those who do not have a college degree. There must be established ways to make the diplomas equivalent on the various levels - university, technical and high school, diminishing the bureaucracy on recognizing foreign diplomas. It would also help in achieving a better coordination of policies and programs of education in order to obtain a reasonable educational standard. Transportation is another question of great importance, since one of Mercosurs goals is to accelerate the circulation of goods and services, with transportation and insurance reductions cost. The growth of trade in the subregion has not been accompanied by an integrated solution of the problems in the transport sector, and that is creating bottlenecks for the near future. Therefor it is necessary to enhance the railroad, highway and maritime systems. In addition to that, the reduction of customs bureaucracy would facilitate trade within the region, resulting in better exports and services. Mercosur has 200,000 km of paving roads, 68,000 km of railroads, an ocean coast of 12,000 km and an extension of 3,000 km on navigable rivers. The annual movement is superior to twelve million tons, 70% of which between Argentina and Brazil, being 90% (ninety per cent) by maritime means.

An emergency program has to be created to quickly restore the transportation system, as well as equipment and installations of regional interest. In southern Brazil, states such as Rio Grande do Sul and Mato Grosso do Sul already took the initiative to rehabilitate their highway system, although, with external loans.

8. Issues
Mercosur has been riven by disputes among its members. When Brazil's car industry became increasingly competitive, aided by the devaluation of its currency in 1999, Argentina responded by imposing tariffs on Brazilian steel imports. The spat was resolved in December 2000 when the two countries signed a bilateral agreement to end the crisis. In 2006 Argentina and the bloc's smallest country Uruguay clashed over plans to build two large pulp mills along the border - the biggest foreign investments Uruguay had ever attracted. Argentina said it feared pollution and the impact on tourism and fishing. The matter went to the International Court of Justice (ICJ), which ruled in favour of Uruguay. Argentina pledged to continue its fight against the mills. The bloc's smaller members, Paraguay and Uruguay, complain of restricted access to markets in Argentina and Brazil and have sought to set up bilateral trade deals outside Mercosur. The organisation's rules forbid this. There is also the long-outstanding issue of Venezuela's membership. The country was accepted as a full member in July 2006, pending ratification by the other member states, but four years later its status remained in limbo as Paraguay had not yet officially approved the decision. This was mainly on account of objections raised by the Paraguayan Senate, which has expressed doubts over the democratic credentials of Venezuelan President Hugo Chavez. Critics have accused Mercosur of becoming politicised and moving away from its freetrade origins. Talks to secure a trade accord with the EU began in 1999 but were suspended in 2004, with subsidies for European farmers and tariffs on industrial goods being among the stumbling blocks. The two blocs agreed to resume negotiations on a free trade agreement at talks in Madrid in May 2010, despite opposition from several key European nations including France.

Negotiations on a planned, US-backed Free Trade Area of the Americas (FTAA) are similarly mired, with some Mercosur leaders rejecting US free-market policies.

9. Securities Market
Freedom to Invest Individuals or legal entities that are resident or domiciled in MERCOSUR countries were authorized to invest on Brazilian stock exchanges under CMN Resolution 1968/92. MERCOSUR investors may freely trade on the securities market, without having to operate through an investment fund or portfolio, as is the case of other foreign investors. Likewise, individuals and legal entities that are resident or domiciled in Brazil are authorized to invest on the stock exchanges of the other MERCOSUR member countries. Restrictions The only restrictions on transactions under MERCOSUR are the following: Investors must be domiciled or headquartered in the nation where the investment originates; Companies issuing the securities must be located in any of the MERCOSUR member states; Traded shares and other securities may only be issued as registered securities; Transactions can only be carried out on the spot market; The transactions may only be liquidated on the financial markets of the countries involved in the transaction; The total value of guarantees for investor positions on the options and futures markets cannot exceed the respective investments; and Options and futures market transactions cannot be guaranteed by bank surety, credit insurance or the like. Currency Investments may be made in: United States dollars (US$); Currency of the investment's country of origin; and Currency of the investment recipient's country. Exchange Investments made in currencies other than the real are subject to an exchange contract. Exchange transactions for funds entering into and leaving Brazil will be carried out at floating

exchange rates as provided for in Resolution No. 1552 of December 22, 1988 of the Central Bank of Brazil (tourism dollar). Central Bank Registration Investments coming in from abroad and Brazilian investments leaving the country will be registered with the Central Bank of Brazil, even if they are made in reais. Financial transfers to overseas cannot be made in a currency other than the currency in which the investment was registered at the Central Bank of Brazil.

10. Economic Situation in the Countries of MERCOSUR

Following several years of instability and economic imbalance, in 1994 the MERCOSUR subregion saw a more pronounced trend towards macroeconomic alignment. Virtually all countries in the subregion reported higher growth, which as a whole averaged 6.1 per cent, the highest in a decade. As in recent years, this growth was spurred by strong domestic demand, attributable to different reasons in each country: in Argentina, a sharp increase in investment (18.9 per cent) boosted demand; in the other countries, the rise in consumption stemming from the dramatic fall in inflation in Brazil and increases in real wages in Paraguay and Uruguay was responsible. In Argentina and Brazil this was accompanied by a strengthening of the fiscal position and a downward trend in inflation. In 1994, macroeconomic management in MERCOSUR was characterized almost across the board by the use of a stable exchange rate as a weapon to curb inflation. The most striking success was in Argentina, which for the fourth consecutive year had one of the lowest inflation

rates not only in the subregion but in the whole of Latin America, with an annualized rate of 4 per cent by the end of 1994. Fiscal and monetary discipline in Paraguay brought inflation down to an annual rate of 18.3 per cent by the end of 1994, only three per cent above the target agreed on with the International Monetary Fund (IMF). Uruguay also failed to meet the government's inflation target of 35 per cent, despite efforts to contain the fiscal deficit and the systematic use of a nominal exchange rate as an anti-inflationary "anchor"; by the end of 1994, the country reported an inflation rate of close to 42 per cent. The most dramatic success, however, was Brazil, where the introduction of the "Plan Real" in July 1994 reduced inflation sharply from a monthly level of over 40 per cent up to June to less than 6 per cent in July and under 4 per cent from August through December. At the same time, trade expanded within MERCOSUR. In late 1994 the Argentine trade deficit widened partly as a result of the upswing in investment that pushed the level of imports way above that of exports. Subsequently, the unfavorable balance of trade seems to have swung the other way, which is linked to large degree to the changes in bilateral trade with Brazil, the repercussions in Argentina of the Mexican crisis, and the adjustment measures adopted by the government in response to those repercussions. In Brazil, the trade surplus dipped slightly as a result of a sharp rise in imports of capital goods and fewer exports of manufactured goods, on the heels of strong domestic demand. Brazil accrued a considerable trade deficit in the first four months of this year; however, this trend could be reversed in the second half of the year, when the trade policy and export-incentive measures adopted in April have the desired effect. In Uruguay, the trade gap continued to widen owing to the appreciation of the real exchange rate, although this was partially offset by the recent appreciation of the Brazilian currency. Brazil is one of Uruguay's principal trading partners. Similarly, Paraguay's trade deficit continued to grow despite higher world prices of its principal export products. Through the end of 1994, the net capital flows were sufficient to finance the current account deficits of these countries, and to build up their international reserves. The Mexican crisis and the cumulative impact of upward-trending interest rates in the United States, however, have led (at least temporarily) to a marked decline in short-term private capital flows, which probably will be reflected in a drop in the international reserves of these countries.

11. Statistical data

Economic segmentation

12. The economic relations of EU and Mercosur

The EU has been working to strengthen its ties with Mercosur since 1992, with the signature of the Technical Cooperation Agreement. In the following years, the relationship between the two blocs has evolved considerably. In 1995, both parties signed an Inter-Regional Framework Cooperation Agreement, which initiated the process towards a definitive Association Agreement. A series of negotiation rounds was carried out starting in the year 2000 with the objective of hammering out the details for a free trade agreement. Beyond the historical and political linkages between the Mercosur member states and Europe, the association with the European Union is important for several reasons. First, from a purely economic point of view, both regions are already intimately tied as the EU is Mercosurs largest trading partner and source of foreign direct investment. Second, as previously mentioned, Mercosurs framework draws significantly from the EU model. In this sense, the experiences from the EU can represent a valuable resource at the time of designing Mercosurs institutions and implementing any necessary policies.

Third, Mercosurs member countries, and in particular Brazil, are interested in raising their

profile in the international geopolitical arena. In this sense, an association with the EU would give Mercosur member states a significant degree of leverage and prestige. Finally, and not unrelated to the previous point, any progress in its association discussions with the European Union could strengthen Mercosurs position in the context of the future FTAA negotiations. From the European point of view, any closer relationship with Mercosur would be valuable because, first, Mercosur comprises two of the three largest markets in Latin America, with product offerings that are largely complementary to those of the EU. Secondly, Mercosur is the only other integration agreement that shares the EUs values and ideals.2 And third, it is an objective of the EU to avoid any deviation of commerce that might arise from the implementation of the FTAA.

Final Remarks
Mercosur is experiencing the negative effects of having gone through the initial stages of an integration process without having established a minimum level of policy coordination that would ensure that its members' economic policies were mutually compatible. Instead, Argentina and Brazil were content with a de facto convergence of macro variables, a convergence that was more the result of a series of coincidences rather than the effect of welldesigned policies. A series of external shocks that started in 1998 triggered a chain reaction that unveiled Mercosur's inherent economic weaknesses and ended in massive foreign exchange swings in Brazil, in Argentina's financial collapse and in massive destabilization of Uruguay and Paraguay, which were affected by the crisis of their two main trading partners. In the context of the serious economic and political crisis that the Southern Cone countries are experiencing, it is imperative that Mercosur strengthen and deepen its economic relations with the European Union. There is much to be learned from the European integration process especially in terms of institution building, governance and policy harmonization and coordination. Given the substantial degree of currency depreciation that all Mercosur members have experienced, it is likely that the path to economic recovery will pass through an expansion in exports. An association with the European Union could expand the opportunities the Southern Cone countries need to regain the path to growth.

Bibliography

1. Robert Schuman, Jean Monnet, Economic Relations of the European Union and Mercosur, Vol. 1 No. 9,University of Miami, October 2002; http://www6.miami.edu/eucenter/mariela.pdf

2. www.dtm.gov.tr, Mercosur, its history, Institutions and Questions. University of Illinois at Urbana Champaign, Department of Economics. 3. Martin. Common Market of the Southern Cone: Mercosur. Working Papers Series 204. Inter-American Development Bank. Department of Integration and Regional Programs. 4. DI FILIPPO, Armando. MERCOSUR: Evaluation and Perspectives Trends in Latin American and Caribbean Integration, Edition No. 49, January - March 1997. 4. http://www.mercosur.int/show?contentid=661&channel=secretaria 5. http://news.bbc.co.uk/2/hi/americas/5195834.stm 6. http://www.britannica.com/EBchecked/topic/375563/Mercosur 7.http://www.insouth.org/index.php?option=com_sobi2&sobi2Task=sobi2Details&catid=0& sobi2Id=10&Itemid=68 8. http://www.imfmetal.org/files/06111015172079/ENGLISH_PORTELA_2_Mercosur.pdf 9. http://en.wikipedia.org/wiki/Mercosur