Comparing Crises: Latin America and Europe

The debt crisis that plagued Latin America in the 1970s and 1980s created a panic that spread throughout the region and, consequently, the world.  The governments of these countries found themselves in somewhat of a disastrous situation when came the IMF’s bailout loans and structural adjustment programs in a response to the crisis.  The majority of Latin American economies “shrank by an average of 7% in total through the 1980s,” poverty increased 8% in just a decade, and “around 6% of the region's income each year was being lost overseas in debt payments,” according to a last year article from The Guardian.  The decision to bailout these countries stemmed from fears of what could result from defaulting on debt, but no interest played more of a role than that of the Western banks that fed the problem through a considerable amount of loaning during the commodity boom in the 1970s. As bluntly put in an article revisiting the crisis, the IMF lent the countries money “so that they could pay back the banks that were threatened with going bust as a result of their stupidity.” While what subsequently came to be known as the Lost Decade was certainly not intended, the interests of the Western banks were most likely taken into more consideration than the actual well being of the Latin American people. As the former Colombian minister of finance Jose Antonio Ocampo argued, the IMF's bailout in the 1980s "was an excellent way to deal with the US banking crisis, and an awful way to deal with the Latin American debt crisis."

All this directly parallels the current financial crisis troubling the Eurozone today.  In one manner of looking at the situation, Greece is in much of the same state as were the Latin American countries: Greece is having to answer to the rest of Europe and the ECB, while Latin America had to do the same to the Western banks of the 1970s and 80s. Additionally, just as the banks faced insolvency if Latin America defaulted on their loans without a bailout, Greece still poses a threat to the rest of Europe unless it too is helped.

The question is then if Greece should be “helped” in the same way that Latin America was helped thirty years ago, or should the world have simply let Greece default on its loans? Different views exist, pulling on different theories and historical lessons.  Some think that the rescheduling of debts will be ineffective, while others do not. This is the “longstanding and unresolved tradeoff that is perhaps the key pending assignment” for Europe today. Regardless, it is worth considering whether or not Europe is taking from what lessons the Latin American debt crisis has to offer.