In his presentation Mr. Holz asked if, eventually, MERCOSUR could be another lost dream. He has good reasons to ask this question because the record of Latin America in integration experiences is not necessarily a good one. However, we could give some reasons to think that, this time, MERCOSUR could be a more possible dream, perhaps a very difficult one. Europe's experience shows how difficult it is to build an integration area among sovereign states, it will take time. Although - and this will be the main idea of my presentation -, it is rational to think that from the business and the political point of view MERCOSUR will have a long life. And this is the reason why MERCOSUR is a popular idea in our countries and also why it is called a state policy. That means, for example, that in the case of Argentina, the policy is not only of our government, but of all political parties.

The main candidate of the opposition for the next elections in October Fernando De la Rua, visited Brazil with his political and economic team and he delivered the same message our government is delivering with respect to the high value and strategic importance of MERCOSUR and eventually how to deal with some of the problems we have. If my friends in the opposition criticize us, it is because they want more MERCOSUR, not because they want less. The situation is similar anywhere. Perhaps, we must have in mind that, from a practical point of view MERCOSUR does not have equal economic importance in medium terms, as it has, for example, in Brazil, Argentina, Paraguay or in Uruguay. But no one in Brazil is against the idea of MERCOSUR. SO this is the first point, I would like to make: MERCOSUR is a realistic idea with strong popular support. There is no government which could afford the cost of the failure of MERCOSUR. And this is crucial to understand how governments or presidents are dealing with the present difficulties of MERCOSUR.

Now, let me explain the methodology we are employing in working together. Then I will talk about the current agenda -I don't like to call it crisis - we are facing today. Finally a very brief comment on the international agenda of MERCOSUR, which - it seems - could go hand in hand with the international agenda of the European Union, or at least that's what we hope.

Our methodology is not to follow a text book process. We are not trying to understand how you have done it in the European Union in order to try to do the same in our region; that would be unrealistic, naive. Even though, we are doing in some way the same you are doing in Europe and what even Mexico, Canada and the United States are doing in NAFTA. In one case, it's a free trade area, in your case a common market, and in our case a custom union. You are trying to work together among sovereign states voluntarily, because this is your convenience, and this is also our case. We are working together- this is crucial to understand the current situation - because we are like minded countries. At some point, we discovered that, as Roberto Alemann said, we have no reason to have any kind of political or boarder conflict, and also, we found out that, we were trying to install the same policies in our countries: particularly in the two biggest economies: Brazil and Argentina. Therefore MERCOSUR is a by-product of what we have been doing on the national level. And that is why the current problem doesn't introduce any radical changes in both the economic and political fundamentals. It explains that we decided to work together; first on the bi-lateral level Argentina Brazil in 1986 and then at the sub-regional level in 1990: MERCOSUR was then, established as a by-product of what we have been doing in terms of democracy, economic modernization, and in terms of trying to have better conditions to compete and negotiate in the international arena.

An environment for democracy and modernization

Finally, the same as you did, our goal is to develop an economic and political regional environment suitable for democracy and modernization. That's all about. This is also why we don't have necessarily defined final products. What we wanted was to build a common market. But we only introduced a general definition of a common market. And we didn't say when the common market should be achieved. In that moment, 1990, our countries defined as a direction, a step by step methodology. When problems occur, our presidents meet, and define the direction to solve the problems for ministers and particularly for secretaries and under secretaries. They are the ones who must do the work in the common market group. They represent the body, which is supposed to prepare the process making decisions for ministers and presidents.

The basis of success of this methodology is the mutual perception of a win-win situation. Somebody asked, what would happen, if Argentina systematically looses in MERCOSUR. It will happen what happens anywhere, when you meet to work together and you discover that you have superior costs working together than being outside of the society. But this is not our case, we are not loosing. Together, we are winning, as well as we are loosing. And this is the reason, why when we have this kind of problem, we meet, we fight, and we try to find the solution together. This is the present description of what happens. This is not theory.

There is also another key element in our methodology, crucial to explain what happens today: We never try to go ahead of reality and of what is possible. This explains how cautious we are with the idea of having, for example, a common currency. We know that some day, we will have to develop a common currency. When President Menem launched the idea, he knew perfectly well, that for the moment it was impossible from a real point of view to have a common currency or central bank. But, he knew quite well that - if we send a message: come and invest here, because we are developing a common market - we must explain how we are going to deal with the problems originated in the fact that we could have different monetary policies or change rate policies.

Last but not least, another decisive element of the methodology is that we have great flexibility in the instruments; there is no text book. We are trying to deal with the different situations and at the same time preserving the final direction. This is a greater concern in our case as well as it is a greater concern in Canada with respect to the United Stales. That is absolutely normal.

Finally, I would like to send a message, as a member of government, that a key element of this methodology is, that it is World Trade Organization consistent. We are doing things according to the international trade rules.

Let me say a few words about the present agenda. First of all, we acknowledge that we have a serious problem, and this is in some way, good news. The bad news is, when governments deny that they have a problem. We recognize that we have a serious problem with MERCOSUR. The origin of the problem is an important element, but not the only and not the key element: the devaluation of the Brazilian currency, the Real. Roberto Alemann mentioned in his final comment something about the Real devaluation. Even the Brazilian don't know where the real exchange rate between Argentina and Brazil will stay for the next three to four months. By analyzing what has happened in the last six weeks, we can predict that in the near future, there will be changes. But more important than the evaluation for MERCOSUR - that is the reason why we have a problem -, is the simultaneous decline of economic activities in the two main countries. In 1992 and 1993, we have had a situation of exchange rate disparity. But we never had - this is completely new - a situation where at the same time, both Argentina and Brazil have a decrease in their GDP.

A lack of clear rules

The third element of the problem is that we don't have clear rules of how to deal with this type of situation problem because we haven't yet developed any kind of macroeconomic co-ordination instruments. We haven't yet met to define this kind of rule of the game as you had done in the original treaty of Rome, article 107. We did not do so, because before the Brazilian crisis, it would have been the equivalent of recognizing that one of the countries was preparing for its devaluation.

The main effects of the problem are not - as we thought at the first moment particularly industrialists in Argentina - on the import trade side. Some people thought that Brazil might invade our country with Brazilian goods and they were claiming from the government to apply import restrictions. The answer of the two presidents, when they met last February, was very clear: "We are not going to apply restrictions. We are going to expand trade and not to restrict trade!" In fact, at present, the more important impact is on the export trade side. But this impact is not necessarily related with devaluation, but with recession: The decline of Argentine exports to Brazil began in the last quarter of 1998 due more to the Russian default than to the Brazilian effect. This is an important point to have in mind, particularly, for us the government trying to deal cautiously with this problem.

The third effect could be observed from the investment side: perhaps in some sectors, companies think that it should be cheaper to move facilities from Argentina to Brazil and to produce there. But, at present, there are no serious reasons to justify such a decision taken by a company, because for the moment, it is impossible to know exactly, which will be the relative competitive situation between the two countries - sector by sector- once the macroeconomics in Brazil obtain a degree of reasonable stability. Perhaps in the future, one of the reason why business firms should want to transfer facilities could be (he fact of devaluation, but up to now, it is impossible to take this reason for serious.

How we handle our problems

Moreover, the current situation has effects on the credibility of MERCOSUR. We have a concern regarding the credibility not only within our country, our people, but also in foreign investors. And that is one of the reasons, why this kind of meetings like ours today are important as they enable us to give at least our position, our own point of view of the problem.

Now how are we trying to handle the problem? Definitely, we make a distinction between management crisis and some structural problems that could have contributed to this situation of MERCOSUR. The methodology of management crisis was decided by the presidents when they met. In their opinion, it is impossible to know which will be the effects of the current situation; therefore it is impossible to define a general formula because there is no general problem. What they want us to do is to monitor trade, identify problems, and then to try to solve them at the sectorial level together with the business firms, leaders in the sector, through business organizations. They established a monitoring group under the command of the Secretary for Foreign Trade in Brazil and me in Argentina. We agreed to monitor the imports very closely, and we are meeting online by telephone almost every day trying to see how we could convince sector X or sector H to meet and, at least, to agree on some transitory formula to prevent an invasion of products from one country to another. In some sectors, this methodology is working very well. I could mention, for example, the paper and the plastic sectors in which the business leaders have agreed on temporary measures. These are private sector measures not approved by government, but we are following the results of these conversations very closely.

At the same time, we need to open a discussion on some structural reforms. This is complicating our agenda, because in the meantime, we must finish the negotiation on the automobile sector, we must include sugar, services and government procurement in MERCOSUR, and we must finish all these negotiations before the end of the year. But we have the feeling in Argentina - this is my opinion, not necessarily the opinion of MERCOSUR - which we need to improve the macroeconomic coordination. Perhaps we need to introduce some kind of escape clauses within MERCOSUR that could be exceptionally and temporally used when we cannot solve the problems with the methodology mentioned before. We need to make progress on the enforcement of the rules of the game. We want to be flexible but we also need to be predictable - otherwise we can not attract investors. And finally, we need to do something at the sectorial level; perhaps working sector by sector, trying to bring business leaders together and trying to persuade them that MERCOSUR must be a win-win-situation! There is no possibility for any sector not to have a win-win-approach; this is completely dear for everybody dealing with MERCOSUR.

Our main priority is WTO

Finally, on the international agenda our main priority is the World Trade Organization. This is the real framework for us to work and liberalize trade services, the real framework for us. Meanwhile, to the second best, we need to negotiate both with the United States and Europe particularly because we lost competitiveness as a result of preferential agreements already developed by them. The case of Mexico is a very good example. So, in the second best scenario, the priority is to deal with these two areas simultaneously and perhaps to have preferential' agreements with both of them at the same time or with the one that moves more quickly. And we have indeed something to negotiate.

And let me add that it would be a great mistake of the Europeans to underestimate the possibility for MERCOSUR to have good negotiations with the United States We must discuss market access, the regulatory framework for transportation, telecommunication, energy and technical standards which are crucial at the hour of defining the origin of investment. Any partner, those who are already within MERCOSUR with heavy investment in MERCOSUR, should not underestimate what could be negotiated in the field of market access. And obviously there must be trade-off. Neither the Europeans nor the American can expect that we will unilaterally open more our markets, particularly for equipment and capital goods.

Our projections - in a reasonable optimistic scenario, for the year 2005 - in terms of imports of MERCOSUR of equipment - that is capital goods, informatics' telecommunications, consumption electronic goods, automobile and non-automobile transport equipment - , is that MERCOSUR will be importing (in different growth scenarios) between 108 billion dollars and a maximum of 142 billion dollars at the 1997 level. The average import tariff for these goods runs from 12 percent in capital goods, 11.5 in informatics' telecommunications, to 35 in automobiles. And this is, from our point of view, the core of what will be negotiated between the European Union and MERCOSUR and between this bloc and the United States.

Eventually, in the best scenario, if the World Trade Organization succeeds in other fields like agriculture etc. it will be possible, as Roberto Alemann said to have non-preferential agreements between the European Union and the United States.

Prof Dr. Michael Michael Stürmer:

This was a very authoritative view, thank you Mister State Secretary; including very optimistic remarks concerning the WTO persuading all of us to agree on agriculture and that agriculture should be liberalized. You designed a very strong role for an enlightened know-all and do-all government. I hate to think what happens if governments are less enlightened, than they seem to be at present. And from time to time this happens. Nations, sovereign democratic nations can vote foolish governments into power. There are several examples around. Although this is a more philosophic question, it is also a very real question, because it bags the question: To what extend do you need very firm institutions? We had a recent case of a finance minister, who discovered that he could somehow govern against industry, but not against reality, which has been created over many years. This is an important issue: it is very important for the long term investor. If we mortgage our house, how sure are we that it's worth it?

Peter Korsch,
BRUCKHAUS WESTRICK HELLER

Given the fact that MERCOSUR - which is the topic of our discussion - consists of more than Brazil and Argentine: In this concerted action between Brazil and Argentine you spoke about, how do you include the other partners? And how does this crisis, which is in my opinion not a Brazilian, but a MERCOSUR crisis, reflect on the other members of MERCOSUR?

Prof. Dr. Felix Peña:

I put an accent on the participation of Argentina and Brazil because - in the economic point of view - together they are the biggest partners of MERCOSUR, and because historically they have been the origin of the common market. But definitely we are working together with Uruguay and Paraguay within the common market group. Ten days ago we had a meeting. But always since the beginning - I was involved in the origin of MERCOSUR in that moment in Foreign Affairs, now I'm in the Ministry of Economy - we had negotiations at two levels: the bilateral level and the common market level. Personally I think, and perhaps other people share this opinion, that we should try to expand as soon as possible the "noyau dur", the core of MERCOSUR to Chile. There are indeed problems with the adaptation of Chile to the common external tariff, but economic realities are economic realities, and most of you, I suppose, when speaking about MERCOSUR include Chile in your strategies. It seems to me, that it might be possible to negotiate in a way that we separate the element of common tariff from the element of common discipline in trade policy. And perhaps we can build something where Chile could make a great contribution to the good image of macroeconomic performance of MERCOSUR.