Will Temer Douse the Flames?

After the Brazilian Chamber of Deputies accepted President Dilma Rousseff’s impeachment, the Senate approved it, and she will be tried in the Senate in a proceeding that has to finish within 180 days. The President of Brazil in the interim is Michel Temer, who was Dilma’s Vice President—and who is almost as unpopular as she. Few observers give high odds for her return to power. Brazil’s future now appears to be in the hands of Temer’s government, and so your humble correspondent offers here informed speculation as to what the government may do—also what it most needs to do in the current economically stressed circumstances.

First of all, Interim President Temer appointed as his Finance Minister Henrique Meirelles, the former chairman of the country’s central bank. Meirelles is well accepted by investors and has a solid background. He was chairman of BankBoston and performed well as Brazil’s central banker during the first presidential term of Dilma’s mentor, Luíz Inácio “Lula” da Silva. He seems aware of the urgent need for structural reforms, especially in the area of Brazilian labor policy and the country’s shaky Social Security system.

Brazil does not have the aging population of the United States, Japan, or the European countries, but its Social Security system is completely unfunded and unsustainable nevertheless. We Brazilians spend more than 12 percent of GDP on retirement pensions, which represents a more than $15 billion deficit. Employees in the public sector are the largest problem, but private sector retirees will lop off larger and larger pieces of the cake. Some people retire at only 50 years old, and that has to change.

Few Brazilian politicians have the courage to fight this war. They get by on the hope that the bomb will explode only when they’re out of office. The ticking is getting louder with each year, though, and action must be taken. Does Temer have the courage? While as I said, he is not popular, he doesn’t need to be—he has no intention of running in the next presidential election. (This was part of the deal between Dilma’s Workers Party {Partido dos Trabalhadores, or PT} and the main opposition, the social democrats.) So he has the opportunity to do something here. Nobody expects a huge reform, which would be necessary, but a modest move in this direction would at least give the country time to breathe.

Besides Social Security, labor legislation is the other urgent item. Our labor code comes from the time of Getúlio Vargas (Brazil’s populist dictator between 1930 and 1954), and was inspired by Benito Mussolini’s labor charter of 1927, the famous Carta del Lavoro. It’s a fascist law that treats all employers as thieves and the trade unions and the state as saviors. Its “social achievements” have meant, in practice, massive unemployment, a lot of black market economic activity, and no rights at all. More than 11 million Brazilians are jobless right now and something around a third of the whole economy exists in the gray zone, beyond the reach of Brazilian law.

Public finance is a shambles. The government announced a fiscal deficit of almost $50 billion for 2016, which is much larger than Dilma’s team said it would be. It’s a more realistic figure, but some think it will be even larger. If we take into account the empty coffers at the state level that will probably be bailed out by the federal government and the state-owned companies, such as Petrobras, we’re talking about an astronomical amount of money, something more on the order of $150 billion. Brazil is broke. That’s the truth we have to face here. And that’s why Temer can’t make any mistakes when it comes to the economy.

As if this were not enough of a challenge, he will have to make the reforms and cut public spending in the face of a strong political storm. The public is very down on the PT, but it still controls the labor unions and “social movements.” They have promised to make the new government’s life a living hell, as they don’t recognize its legitimacy. They keep characterizing the situation as a coup d’état, ignoring all the legal and constitutional burdens that were met during the process that has led to the impeachment.

The socialist dictators in Cuba and Venezuela have put in their two cents and accused Temer of conspiracy against democracy, which is manifestly ridiculous given who is making the charge. It could be only noise, but taking all that into consideration, and the power for mobilization the radical Left has in the media and the universities, Brazil will not have an easy time moving forward. And Temer has to not only survive but last until the next presidential election, which is in 2018. Otherwise, the PT and its allies could be back in power.

How can someone be optimistic about Brazil in this amazingly precarious scenario? Well, we’ve been through hell already; at least now we’re able to dream about our future. We were on Venezuela’s path, and now we’re talking about structural reforms and a more capable government, a less ideological one. We are not going to heaven any time soon, and we know that the next few years will be very tough. We’ve had a house on fire; the job at hand is to douse the flames. And then rebuild the house’s structure. After that, we can think about decoration and painting.

The hope of the most optimistic among us is that Temer will be able to get at least part of the needed reforms approved and put our economy’s train back on the track. It’s not going to be easy, and it’s not priced in the market yet. But if the Interim President were to truly begin this process, we could reach 2018 with a newly elected President able to move the country even further from the Left’s disastrous statist policies. And if that happens, Brazil could be not just different from Venezuela; it could be like Chile, but with 200 million people. Just imagine that.