Mexico is in Good Position to Cushion Damage From the Euro Zone Crisis

According to the Washington Post, the financial crisis buffeting Europe was fueled by bank regulators who made it artificially cheap for European countries to borrow. This prompted some to run up debts they could not ultimately cover.

According to economists and banking analysts, “…the governments of countries such as Greece and Portugal, which borrowed beyond their means, are now facing the prospect of default. This is something that could stagger the European financial system and undermine the world’s economic recovery.” Before the Euro Zone, individual countries issued bonds in their local currency and could print more of it, whether in francs, lire or drachmas, if a crisis was making it difficult to pay off their loans. Today, with the European Central Banking in charge of euros, local governments no longer control the “printing press”.


Yet even as individual governments lost the power to pay off debts by printing money, the politics and regulations of the Euro Zone encouraged banks, insurance companies and other financial firms to load-up on government bonds and countries to issue them.

The euro, the dream of many a politician in the years following World War II, was established in Maastricht by the European Union (EU) in 1992. To join the currency, member states had to qualify by meeting the terms of the treaty in terms of budget defi- cits, inflation, interest rates and other monetary requirements. Of EU members at the time, the UK, Sweden and Denmark declined to join the currency.

Since then, there have been many twists and turns for the countries that use the single currency. In little more than a decade, banks in France and Germany have larded up on bonds from Greece, Portugal, Italy and other countries whose ability to repay has been called into question. This practice puts the banks themselves at risk. Greece, Portugal and Ireland have sought emergency help over the past year after their borrowing costs rose to unsustainable levels. Others like Spain, Italy and Belgium are facing increased borrowing costs as well.

Recently, the European leaders reached a “three-pronged” agreement describe as vital to solve the region’s huge debt crisis. This means that the Eurozone ministers approved, according to the BBC a multi billion euro Greek bailout aid.

But there have been widespread reports of deep divisions between France and Germany. In particular, the two need to agree on how to increase the firepower of the Eurozone’s bailout fund, the European Financial Stability Facility (EFSF), from its current 440 billion euros. France has proposed turning the EFSF into a bank so that it could borrow from the European Central Bank, but Germany has refused to sanction such a move, arguing it would compromise the ECB’s impartiality.

Antonio Borges is the Chief of the European Department of the IMF. At the end of September of this year, He had recommended this: “The European Central Bank is the only agent that can really set an example for the markets.” The world is holding its breath in expectation. The global fear of a possible new recession is quite real as the world clamors for a new European focus, one that is stronger and more coordinated. The Mexican peso has also been invaded by a feeling of uncertainty. President Calderon along with the Governor of the Bank of Mexico, in fact, recently called on the Congress to allow the changes required to face the external crisis along with the additional risks implicit in the European economic crisis.

Recently, when the fear that Greece wouldn’t be able to meet their debt commitments, it shocked the international stock markets and also impacted the Mexican Stock Exchange with a 1.10% decline and the rate of the Mexican peso closed over 14 units on the American dollar for the first time in years.


After that happened, President Felipe Calderon went out in the defense of Mexican finances, claiming that they are healthy. He used the argument that just in the month of September, 111,000 new jobs were generated in Mexico. So he then prompted Congress to approve his structural reforms in order to have stability over the long term. “We feature the conditions to make these reforms in terms of the improvement of our country,” President Calderon said in the Stock Market Forum in 2011, “not only to avoid a decrease as to what is happening in other parts of the World.” Agustin Carstens is the Governor of the Bank of Mexico (BANXICO). He said: “In the best of scenarios Europe and the U.S. will have a somewhat modified growth in the following years.

This is something that will result in a lower impulse of Mexico’s national economy. This is the reason why it is urgent that the structural reforms be approved.” Three years after the blast from the world economic crisis, the fears continue in the U.S. as well as in the European Union of the possibility that it will spread throughout other economies. This time it is different for Mexico, according to President Calderon.

He said: “Mexico features a strong economy, and even though we face difficult international conditions, as other economies are, at the bottom line our economy will continue growing.” The present Mexican economy is stable. In Mexico, President Calderon commented: “We are able to pay our debt which is only 32.2 % or our GDP. This is a lower figure than the average of the countries that take part in the Organization for Economic Co-operation and Development (OCDE). For most of them it is upwards of 62% of their GDP.”Greece’s debt is over 150% of GDP.

President Calderon also announced that the international reserves of other Countries is US$136 billion. This amount of money is enough to pay the debt of Mexico twice. But first, Mexico needs the previously mentioned “Structural Reforms” approved. Jose Antonio Meade is the Ministry of the Treasure of Mexico. He reports that the Mexican Economy has now sent to the Deputy Chamber an integral economic package that is focused specifically on taking care of the nation’s growth and investment.

Analysts from the private sector have reduced their expectation for economic growth along with generation of new employment in Mexico by the end of 2011 as well as for the year 2012. But this has also increased their fear of inflation, even though many feel the exchange rate will remain steady under pressure. The Journal Reforma published the “Poll about the expectations of the Specialist in Economy of the Private Sector” in September of this year (2011). It was conducted by the Bank of Mexico. The results estimated that the GDP will grow 3.77% and 3.57%, respectively, in the years 2011 and 2012.

According to the same information, the main factors that might limit the rhythm of economic activity in the following months might be weakness in external markets, the instability of international finances, public insecurity and the absence of structural changes in Mexico. The same poll also indicated that the figures for employment might grow in the year 2012 (583,000) compared with 2011 (565,000).

In other places of the World, as it happens in Mexico, there are people working to establish better regulation of the markets and this includes foreign currencies. The G-20, for instance, is looking to establish regulatory changes in the markets. In this way, Craig Donohue, General Director and Council of the Chicago Mercantile Exchange, recognizes that the regulators have to be cautious about the decisions to be taken. “The crisis of the years 2008 and 2009,” he concludes, “weren’t only provoked because of derivatives, but there were also other kinds of problems related to the mortgage market and lending practices by big financial institutions and the banks.”


Conclusion: What is Mexico doing to deal by the Eurozone crisis? The Mexican economy is avoiding the chaos made by the Euro economic troubles. In 2011, by the month of February, according to the BBC, it recovered from the sharp contraction shown in the year 2009 to grow by 5.5% according to last year, the fastest annual rate in ten years according to the official figures. What has been part of the strategy: according to the National Statistics Institute, agriculture, manufacturing and the services sectors all made strong improvements that have given a sustainable development to the country, aside to the Globalized economic issues that have affected most of the world.

According to this same data, the manufacturing sector was one of the key drivers with a growth rate of 6.1% in 2010. By having a more balanced economic growth, Mexico is looking to have more options in case that some economies and industries are depressed, said former Ministry of the Treasure Ernesto Cordero.

CNN published a quote of Gabriel Casillas of JP Morgan: “Manufacturing was stronger, but most importantly the services sector grew significantly”. Mexico is not currently troubled by high inflation, which is currently running at 3.8%, down from 4.4% at the end of last year.

According to the Ministry of the Economy, Mexico features a stronger economy to face the global economic issues, compared to the previous warnings of global crisis. It reports that at the end of the year 2011, the total exports increased from US$ 229.6 billion to US$298 billion. Even better is that from the span of time of January to June of this year (2011), the total exports of Mexico reported US$171.1 billion, better than the US$141 billion recorded during the same span of time of last year (Jan – June 2010).

Despite the still dubious news on the European front, there are some very positive facts about the industrial and manufacturing activity in the U.S. that are counteracting the possibility of a weak Mexican currency. Mexico is also raising its total production in diverse industries in 2011, compared to the previous years. Among the benefited industries is the oil production along with the automotive, machinery, aerospace and food industries. Also construction, electricity, water and gas supply are among the industries that have increase its production. That’s also good news to Mexico, along with the sustained and balanced economic development of the national economy of Mexico.