An agreement by Europe (NYSEArca:VGK) to merge its temporary bailout vehicle, the European Financial Stability Facility, with the permanent one, the European Stability Mechanism, would create a $1 trillion war chest and open the door for other G-20 countries to meet the International Monetary Fund’s request for $500 billion-$600 billion in new resources, on top of its current $358 billion in funds.
European leaders are currently meeting in Brussels about funding the ESM. However, the key to shoring up that kind of capital for this global resource means tapping more than just the countries with the biggest economies.
If the next generation of economic leaders doesn’t step up financially, quite frankly the bailouts themselves are in as much jeopardy as the countries they’re supposed to help!
A Significant Power Shift
At last weekend’s G-20 meeting in Mexico City, it was evident how much things have changed for emerging economies like Russia (NYSEArca:RSX) and Mexico (NYSEArca:EWW), the first two emerging countries to have a turn at a G-20 presidency.
And it’s quite a change to see nations like Brazil (NYSEArca:EWZ) that were once indebted to the IMF now being called upon to support its recovery role in Europe (NYSEArca:IEV) – a challenge it can meet … conditionally.
According to Brazil’s finance minister, emerging-market economies will give more money to help ease Europe’s debt crisis … only if they are given more power within the IMF and if Europe first puts up more cash itself.
That’s a powerful bargaining chip. And if Europe’s problems are as bad as … or even worse than … what we’re seeing, then these emerging countries are entering into a position of even greater power than they might ever have imagined.
‘We’re Going to Need a Bigger Bailout’
Germany’s (NYSEArca:EWG) – the biggest contributor to the bailout funds – willingness to discuss the size of Europe’s debts marks an important shift in perception about how real the financial problems are.
This week, Germany’s parliament overwhelmingly endorsed a second Greek bailout despite growing internal political pressure, essentially clearing the way for throwing extra funds into the International Monetary Fund.
Put together, these packages would total around $1.95 trillion in firepower. It would mark Europe’s biggest effort since the G-20 raised $1 trillion to help rescue the world economy in 2008.
But is it going to be enough to not only bail out the countries that need it, but to contain the contagion from expanding its reach?
And should the emerging markets come through with this financing, well, what’s in it for them?
Emerging Markets to the Rescue?
More say in how the IMF is run, as Brazil stated, is only part of what these up-and-coming key players want. An easing of longstanding trade and/or political restrictions is one of the biggest issues the larger countries must address.
Ultimately, the message from emerging-market countries to the U.S. and Europe is: “Change first and we will support this new free economy that you pretend to.”
According to the IMF, “The international economic environment has continued to be characterized by an uneven performance with weak growth in advanced economies and a stronger, albeit slowing, expansion in emerging markets.”
The emerging markets (NYSEArca:VWO), however, know that their time to shine is coming. And they intend to seize it.
Free foreign trade with emerging economies is the key here. Consider the example of Russia.
Russia is the largest economy that isn’t (yet) a member of the World Trade Organization and suffers shortages due to political restrictions in places like the United States.
Back in December, the WTO’s main decision-making body, the Ministerial Conference, approved the conditions by which Russia may join the WTO. This was the result of highly complex and unprecedented lengthy negotiations between Russia and its trading partners, WTO members, which lasted 18 years. (Russia’s formal entry is expected to take place in mid-2012.)
Here’s what it might mean to the United States directly:
- In 2011, exports to Russia totaled more than $8 billion, nearly matching their pre-recession high of $9 billion, recorded in 2008.
- With the Russian economy growing rapidly over the past decade, U.S. exports to Russia have grown more than twice as fast as U.S. exports to the world, making Russia an important market for several major categories of U.S. exports.
- By some estimates, U.S. exports to Russia could double or triple once Russia joins the WTO and other restrictions are dropped.
The change in Russia’s trade status will require legislation to lift the restrictions of Title IV of the “Trade Act of 1974” as they apply to Russia, which includes the freedom-of-emigration requirements of the Jackson-Vanik amendment.
Russia’s accession to the WTO comes with updates to many of its laws to bring them in line with international standards. So, is it time then for the United States to return the favor?
Earlier this week, the Obama administration called upon Congress to permanently lower trade barriers with Russia. The benefits to making it a full trade partner are easy to see, which include keeping the United States competitive with other markets and ensuring that American companies benefit from increased trade. Whether this is the year that it happens (particularly as it’s an election year) remains to be seen, but it will likely be a hot topic for many months to come.
In other words, emerging economies are the key to our global economy. And as they start to gain influence and, perhaps, the upper hand, these countries will be critical to your success as an investor … now and in the next few years.
That’s my take on it!
Uncommon Wisdom (UWD) is published by Weiss Research, Inc. and written by Sean Brodrick, Larry Edelson, and Tony Sagami. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in UWD, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in UWD are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Roberto McGrath, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Marty Sleva, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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