In recent discussions on economic issues, the free trade agreement between the European Union and the South American bloc Mercosur has taken center stage. The agreement is controversial due to its potential negative impact on European agriculture. However, countries like Germany and Spain actively support this initiative. While Mercosur raises justified concerns among farmers, it also presents an interesting area for investment. Besides Brazil, which dominates this bloc, Argentina’s economic situation is also showing significant improvement.
Mercosur (Southern Common Market) is an international economic organization established in 1991 by Argentina, Brazil, Paraguay, and Uruguay. Bolivia joined the group in 2024. Venezuela was suspended from membership in 2016. Several other countries are associated with the organization. Member states form a common market and are linked by a customs union. Mercosur can be seen as the South American equivalent of the European Union.
In 2023, the nominal GDP of Mercosur countries was approximately $3 trillion, with $2.2 trillion attributed to Brazil. In comparison, the EU’s GDP was $18.3 trillion, about six times larger. Mercosur plays an important role in the economic integration of South America, promoting trade and political cooperation among regional countries. This allows member states to jointly negotiate trade agreements with other countries and economic blocs, increasing their bargaining power on the international stage. One such example is the agreement currently being negotiated with the European Union.
The EU-Mercosur agreement has been in negotiations for over 20 years, and the talks are now nearing completion. Meanwhile, the discussion within the European Union is heating up. Germany, which sees South America as an important export market, and Spain, for which the region is a natural partner, are among the supporters of the agreement. In contrast, Poland, France, and Italy – countries with significant agricultural sectors – oppose the deal. Farmers and agricultural producers argue that South American farming standards are lower, making food from that region cheaper than European products. Similar arguments surfaced during the TTIP free trade agreement negotiations between the EU and the United States.
In the context of the agreement, the coming months will bring intense political debates within the EU, with uncertain outcomes. South America is a region with growing economic potential. Besides Brazil, the world’s attention is on Argentina, where the president is striving to implement key economic reforms. The main challenge remains tackling high inflation, which dropped from over 25% monthly in December of last year to 2.7% in October 2024 under the current administration. Declining inflation allowed for another interest rate cut on December 6 – this time by 300 basis points to 32%. Notably, the current global cycle of interest rate cuts began in South America.
South America is not only a significant trading partner for Europe but also an attractive market for global investors. Many companies in the region play a global or regional economic role. Among Brazil’s top companies are Petrobras (PBR) – a major oil and gas producer, Vale S.A. (VALE) – a leader in metals and minerals, and Embraer S.A. (ERJ) – an aircraft manufacturer whose shares increased by 93% over the past year. The Brazilian banking sector includes Itaú Unibanco Holding (ITUB), Banco Bradesco (BBD), and Banco Santander Brasil (BSBR). In Argentina, notable companies include MercadoLibre (MELI) – one of South America’s largest e-commerce platforms, and YPF Sociedad Anónima (YPF) – an oil and gas company. In Colombia, Ecopetrol (EC) stands out for its oil production activities.
Investors might also be interested in ETFs focusing on the region, such as EWZ, which tracks the MSCI Brazil Index, and ARGT, linked to the MSCI Argentina Index.
Mercosur is a dynamically developing region with enormous economic potential, sparking both concerns and hopes. Decisions regarding the trade agreement with the European Union will have far-reaching consequences for both farmers and investors, making it one of the key topics in the coming months.
Paweł Majtkowski, eToro Analyst in Poland
Source: Manager Plus – Mercosur: Farmers’ Concerns and Investors’ Hopes
