The Mercosur Paradox: When Agricultural Lobbying Threatens Europe's Industrial Future

A billion-dollar opportunity for the German economy: Why the Mercosur deal is so important for us

China's quiet triumph: What happens if Europe now withdraws from South America?

It's an economic thriller, one that could hardly be more symbolic: After a quarter of a century of arduous negotiations, the European Union is on the verge of sealing the world's largest free trade zone – or of definitively squandering a historic opportunity. The planned agreement with the Mercosur countries (Brazil, Argentina, Uruguay, Paraguay) promises access to a market of over 715 million people and annual tariff savings of around four billion euros for European companies. But while German industry, from mechanical engineering to the automotive sector, is hoping for the dismantling of immense trade barriers, the project is threatening to collapse at the last minute.

The conflict reveals a profound paradox of European politics: On the one hand, there are enormous macroeconomic and geopolitical interests at stake. These include securing critical raw materials like lithium for the energy transition, diversifying supply chains away from China, and maintaining the market for German high technology, which is currently subject to tariffs of up to 35 percent in South America. On the other hand, a vocal resistance is forming, spearheaded by France, sparked by a surprisingly small product group. Fear of imported beef and poultry is mobilizing farmers' associations and paralyzing the political capacity of an entire continent – ​​even though economists calculate that the actual market shifts would be marginal.

In this analysis, we examine the anatomy of a dispute that is about far more than tariffs and quotas. It is a struggle for Europe's role in a new world order: Will the EU succeed in asserting its strategic interests, or will it surrender the field without a fight to China's growing influence? While Berlin is pushing for swift ratification, Paris is using its political clout for a blocking strategy that has the potential to permanently paralyze European trade policy. Read here why the Mercosur agreement has become a matter of survival for European competitiveness and who the real winners and losers of this geopolitical high-stakes game are.

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Last exit South America: Why a failure of the agreement would be a geopolitical disaster

The European Union stands at an economic policy crossroads that could hardly be more symbolic. A trade agreement, finally within reach after a quarter-century of negotiations, threatens to collapse over a surprisingly small group of agricultural products. While the strategic and economic arguments for the agreement between the European Union and the South American Mercosur countries are overwhelming, the political debate focuses on product categories that appear marginal in their macroeconomic significance, but whose symbolic power is enormous.

The agreement would create the world's largest free trade zone, encompassing a common market of over 715 million people and enabling European companies to save around four billion euros annually in tariffs. Approximately 91 percent of all tariffs between the two economic areas would be gradually eliminated. For the German mechanical engineering sector, which currently faces import tariffs of up to 20 percent, for the automotive industry, tariffs of up to 35 percent, and for the chemical industry, duties of up to 18 percent, this would represent a fundamental improvement in their competitive position.

At the same time, the entire project is in danger of failing because France, Italy, Poland, and several other member states have positioned themselves against the agreement. The political dynamics are not determined by the overall economic effects, but rather by the fears of a small, yet politically highly mobilizable group of farmers who fear a competitive disadvantage compared to South American producers.

The product policy anatomy of a conflict

The political sensitivity of the agreement centers on a precisely defined group of agricultural products. Beef is at the forefront, including both fresh and frozen meat, as well as high-quality cuts. This product category is mobilizing massive resistance, particularly in France, Ireland, Austria, Italy, and Poland. The agreement stipulates that Mercosur countries may export 99,000 tons of beef annually to the European Union at a reduced tariff rate of 7.5 percent, an amount that corresponds to approximately 1.6 percent of total European beef production.

However, economists are significantly downplaying the actual impact of these quotas. Irish agricultural economist Alan Matthews has argued that the anticipated increases in fresh beef imports are massively overestimated. In 2024, the European Union already imported approximately 105,000 tons of beef from the Mercosur countries, of which around 60,000 tons were imported under existing historical tariff quotas and a further 45,000 tons at full tariff rates. The new Mercosur quota of 54,550 tons of fresh meat would initially replace the 45,000 tons that were previously imported at full tariff rates. The actual additional import volume would therefore amount to only about 10,000 tons, not the feared 54,550 tons.

The majority of the additional imports would be in the frozen beef segment, a significantly lower-quality product primarily used by Italy and Spain for the production of processed meat products. Frozen meat does not compete in the same market as fresh, premium cuts. Matthews estimates that Mercosur imports could reduce European producer prices for beef by a maximum of around two percent, which, compared to typical market price fluctuations, poses no threat to Europe's high-priced meat segment.

Poultry meat is the second product category with high political sensitivity. The agreement grants a duty-free import quota of 180,000 tons per year, which corresponds to approximately 1.4 percent of European demand for poultry meat. Here, too, the feared differences in standards regarding animal welfare, antibiotic use, and hygiene are considered key arguments for rejection.

Sugar and ethanol are particularly sensitive issues for France and other large sugar beet and bioethanol producers. The European Union grants an import quota of 650,000 tons of bioethanol, of which 450,000 tons are duty-free for the chemical industry and the remaining quantity is subject to reduced tariffs for other uses, including biofuels. For sugar, tariffs will be reduced to zero over five years within the existing WTO quota.

Other sensitive products include rice, which is particularly relevant for southern EU member states such as Italy, Spain, and Portugal, as well as eggs and egg products, for which a tariff quota of 3,000 tonnes of egg equivalent is set, increasing in 500-ton increments over five years. Honey, garlic, and citrus fruits complete the list of politically sensitive agricultural products, even though their volumes are comparatively small.

Safeguards between political promise and economic effectiveness

To prevent the agreement from failing due to resistance from agricultural countries, extensive safeguards were integrated into the treaty text. These safeguard clauses form the core element of the political compromise efforts and are intended to address the concerns of the skeptical member states.

The limited-quantity special tariff quotas form the first line of defense. For beef, 99,000 tons can be imported annually at a reduced tariff rate, divided into 44,550 tons of frozen and 54,450 tons of fresh beef. Any quantity exceeding these quotas is subject to the regular, significantly higher tariff rates.

The so-called alert clauses constitute the second safeguard. An investigation is initiated if import volumes increase by more than eight percent per year, or if the prices of imports from Mercosur are at least ten percent lower than the prices of equivalent or competing EU products, and at the same time either there is an increase in annual imports under preferential tariff conditions of more than ten percent or a decrease in the import prices of these products of ten percent. This eight percent threshold represents a compromise between the European Parliament's demand of five percent and the European Commission's proposal of ten percent.

Crucially, these thresholds do not have to apply to the entire European Union. It is sufficient if the changes in quantity and price occur in a group of member states or even just in a single member state. Should the investigation conclude that there is serious damage or even just the risk of damage, the EU can temporarily suspend tariff preferences for the products concerned.

Particularly close market and price monitoring is planned for the list of sensitive products, which includes beef, poultry, rice, honey, eggs, garlic, ethanol, sugar, citrus fruits, various dairy products, maize and maize products, pork, biodiesel, and spirits. The European Commission closely monitors prices, import volumes, and market shares of these products, with established routines and reports at least every six months.

The deadlines for protective measures have been shortened. Investigations are to be completed more quickly, and immediate action is to be possible within a few weeks if a serious risk of damage is identified. If farmers are at risk, tariff preferences can be temporarily revoked. In practical terms, this means that tariffs on the affected products can be increased again or quotas capped until the market stabilizes and there is no longer a harmful increase in imports.

The mirror clause dilemma and the limits of regulatory convergence

Perhaps the most politically controversial demand concerns the so-called mirror clauses. France and other critics demand that imported goods must meet the same standards as European products, particularly regarding pesticide and antibiotic bans, as well as animal welfare. The European Parliament has explicitly called for a mirror clause for production standards, stipulating that safeguards can also apply if imports benefiting from tariff preferences do not comply with the environmental, animal welfare, health, or food safety standards applicable in the EU.

However, the practical implementation of this requirement encounters fundamental difficulties. Production conditions in the Mercosur countries differ significantly from EU regulations along all agricultural production chains. In Brazil, for example, several active ingredients are approved as growth promoters in animal production, including bacitracin, flavomycin, and monensin, which are banned in the European Union. Some of the pesticides approved in Mercosur are not permitted in the EU, even though the EU produces and exports such products.

In Brazil alone, over 500 pesticides are permitted, 150 of which are banned in the EU. The registration, sale, and use of pesticides in Brazil are steadily increasing. Glyphosate, which was only approved in the EU until December 2022 and whose complete phase-out is under discussion, is widely used in the Mercosur countries, primarily in soybean cultivation.

The question of whether these mirror clauses are actually enforceable and whether they can be triggered quickly and consistently enough remains crucial for the credibility of the protective mechanisms. The EU Commission emphasizes that, in principle, the same standards and safety requirements apply to imported food as to domestically produced food. However, these standards primarily relate to the final product, not the production conditions.

The newly negotiated sustainability chapter and the supplementary 2024 annex are intended to address these concerns. They underscore the importance of the Paris Climate Agreement and commit both sides to respecting the ILO core labor standards. Biodiversity protection is to be achieved by promoting sustainable agricultural practices, and measures are to be taken to prevent further deforestation of the rainforest.

Critics, however, see a fundamental weakness in the fact that these sustainability standards are not subject to the agreement's general dispute settlement procedure. Furthermore, environmental and human rights organizations believe the annex contains a loophole that could undermine the EU Deforestation Regulation. The newly created compensation mechanism grants Mercosur countries the right to challenge European sustainability laws and provides them with a right to compensation if EU laws, such as the Deforestation Regulation, restrict their trading advantages.

The downside of industrial policy: Where the real winners are.

While the political debate is dominated by agricultural anxieties, the substantial economic benefits of the agreement clearly lie in the industrial and service sectors. The contrast between the distribution of political attention and the distribution of economic importance could hardly be greater.

The reduction of very high Mercosur external tariffs on machinery, motor vehicles, automotive parts, chemicals, and medical technology forms the core of the economic benefits for the European Union. The Mercosur countries currently levy some of the highest external tariffs worldwide: 35 percent on cars, 14 to 20 percent on machinery, and up to 18 percent on chemicals. With the trade agreement, the Mercosur countries are expected to liberalize around 90 percent of EU industrial imports.

For the German mechanical engineering sector, which is currently burdened with import tariffs of up to 20 percent, this represents a significant relief. These tariffs are among the highest in the world. The German Engineering Association (VDMA) emphasizes that these additional costs make it difficult for companies to offer projects competitively on an international scale. The new agreement aims to make approximately 91 percent of all EU exports duty-free.

The automotive industry stands to benefit particularly from the tariff reductions. Currently, German car manufacturers pay a 35 percent tariff on every exported vehicle. This tariff is set to decrease gradually under the Mercosur agreement. The president of the German Association of the Automotive Industry (VDA) argues that the agreement offers a major opportunity for car manufacturers and suppliers. In 2023, Germany exported only 20,700 passenger cars to Argentina and Brazil, and she sees significant potential for increasing these exports. The advantage over China is considerable: Chinese car manufacturers would then have to pay ten percent more in tariffs in South America than their European competitors.

The European Commission estimates that the agreement could increase annual EU exports to South America by up to 39 percent, equivalent to €49 billion. Overall, European companies could see annual savings of approximately €4 billion. According to the German Chamber of Industry and Commerce, more than 8,500 German companies already export to the Mercosur countries; three-quarters of them are small and medium-sized enterprises (SMEs).

Structural change through market access: Public procurement and services

One of the least noticed, but potentially most impactful, aspects of the agreement concerns access to public procurement. For the first time, EU companies could gain access to public tenders in the Mercosur countries under the same conditions as local companies. This marks the first significant opening of the Mercosur countries' markets for public procurement to companies from the EU.

A central principle of the agreement on public procurement is non-discrimination. Suppliers from the contracting states must be treated equally to domestic suppliers. The use of electronic means is particularly emphasized to facilitate and streamline access to public tenders. The public procurement market in the Mercosur countries has thus far been largely closed. Currently, Mercosur governments can discriminate against European companies without restriction in public procurement contracts for goods and services. The agreement would open the Mercosur procurement market, particularly at the federal level, to European suppliers.

In the services sector, Mercosur service exports to the EU amounted to €13.6 billion in 2023, while the EU exported services worth €29.8 billion. Simplified market access for services significantly increases the competitiveness of European companies.

Reducing technical barriers to trade is another important component. Differing technical standards significantly complicate trade. Many machines have previously required dual certification, according to EU standards and the regulations of the Mercosur countries, which regularly led to delays, additional costs, and uncertainty in project planning. The aim is to facilitate increased mutual recognition of technical standards. Simplifying product certification procedures could significantly reduce costs.

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Employment effects and macroeconomic projections: a reality check

The overall macroeconomic effects of the agreement are assessed very differently in various studies, but a pattern is emerging: the effects are positive but moderate, and the methodological uncertainties are considerable.

A study commissioned by the Federal Ministry of Labour and Social Affairs estimates an increase of approximately 60,000 employed persons in Germany. Other calculations predict around 100,000 additional jobs in the EU. The implementation of the free trade agreement is expected to create over 440,000 new jobs in Europe.

Currently, around 240,000 jobs in Germany are linked to exports to Mercosur. According to calculations by the European Commission, exports to Brazil alone secure 855,000 jobs in the EU. 60,500 European companies maintain business relationships with the region.

The GDP effects reveal a remarkable discrepancy between different scenarios and time horizons. One study predicts that the EU's gross domestic product would expand by €10.9 billion in the conservative scenario and by €15 billion in the ambitious scenario by 2032 once the agreement enters into force. In the Mercosur region, a GDP increase of €7.4 billion in the conservative scenario and €11.4 billion in the ambitious scenario is projected.

In the long term, after full implementation, Germany would have an almost 0.3 percent higher price-adjusted GDP after the measure comes into force. For the EU, the long-term figures are slightly more than 0.6 percent. Based on the 2024 GDP, this would amount to an absolute sum of slightly more than 29 billion euros for Germany.

The German Economic Institute, however, arrives at considerably more modest estimates. It predicts that the overall economic effects for the EU will be very small. According to this assessment, the EU's GDP could increase by a mere 0.06 percentage points by 2040 thanks to the agreement, despite the potential creation of the world's largest free trade zone. Brazil could see the largest increase in GDP, at around 0.46 percent.

Various simulations of the growth effects of a free trade agreement between the EU and the Mercosur countries calculate long-term GDP increases that, in most studies, amount to 0.1 percent or less for both the EU and its member states. These estimates illustrate that EU free trade agreements with individual countries or a small number of countries have only limited growth effects. Furthermore, noticeable GDP effects are only possible if non-tariff trade barriers are also reduced.

The positive development of GDP is primarily attributable to net exports, i.e., increased exports. Higher levels of private consumption compared to the reference scenario also contribute to the increased GDP. While the studies predict a slight rise in consumer prices in the EU, they simultaneously anticipate a slight increase in real wages both in the EU and in most Mercosur countries.

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Raw materials diplomacy and strategic supply chain resilience

Beyond the traditional trade effects, the agreement gains an additional strategic dimension through access to critical raw materials. The Mercosur countries possess important raw materials and agricultural commodities that Europe needs for its energy and resource transition, decarbonization, electromobility, and chemical industry, and which it intends to use to diversify away from China.

The Mercosur countries are important suppliers of raw materials to the EU. Argentina has significant lithium deposits, while Brazil possesses hafnium, magnesium, niobium, silicon metal, and rare earth elements such as gadolinium. The agreement will facilitate EU investment in the development of local industries for processing these critical raw materials.

The context of this raw materials diplomacy is the increasing concentration of power in critical raw materials. Ninety-five percent of the world's lithium is extracted from just five countries. Furthermore, the processing of most critical raw materials is heavily concentrated in China. For rare earth elements, nearly half of imports come from China, followed by 28 percent from Russia. Raw lithium currently comes to the EU primarily from Chile, while processed lithium comes from China.

In 2021, the EU adopted its Economic Security Strategy, which aims to promote innovative technologies, combat unfair trade practices, and diversify procurement and sales markets. The Mercosur agreement is a key component of this strategy. It would secure access to critical raw materials for the EU without relying on a single country or region.

Long-term supply relationships can reduce the EU's strategic vulnerability to single-source suppliers. This is particularly important in the context of China's rare earth monopoly and the US blockade policy on semiconductors. China recently restricted its rare earth exports and imposed conditions.

Normative leverage and multilateral signaling effect

The agreement includes chapters on sustainability, environmental and climate protection, labor standards, and public procurement, enabling the EU to strengthen its regulatory leverage in South America. It sends a signal for rules-based multilateralism at a time of global protectionist waves and strengthens the EU's negotiating position vis-à-vis the US, China, and other blocs.

The new free trade zone, encompassing more than 700 million inhabitants, would be the world's largest of its kind, according to the European Commission, and is also intended to send a signal against the protectionist tariff policies of US President Donald Trump. Economists estimate it would cover almost 20 percent of the global economy and more than 31 percent of global goods exports.

For the EU, it is now crucial that the German government advocates for the swift entry into force of the agreement at the EU level. A delay, or even a failure, would jeopardize the EU's razor-thin trade policy advantage in this region, as the competition is not standing still. Furthermore, rapid implementation could send a strong signal for free trade negotiations with India and Indonesia. These are other important agreements that the German economy urgently needs to diversify and strengthen its supply chains.

Geopolitical power shifts: China's quiet rise in South America

The strategic dimension of the agreement only becomes fully understandable when one considers the fundamental geopolitical power shift in South America over the last two decades. China has transformed itself from a marginal player into the region's dominant economic partner, with profound consequences for Europe's position.

Around 2017, China overtook the EU as the region's second most important trading partner after the United States. Exports and imports between China and the Latin America and Caribbean region rose from US$12.5 billion in 2000 to almost US$450 billion in 2021. Mercosur's trade volume with China is now around 58 percent higher than its trade with the EU. Europe's share of Latin American exports has declined slightly since 2001 to 11 percent.

South American countries have an export surplus of approximately $37 billion with China, while they have a deficit of just over $12 billion with the EU. Around 69 percent of Mercosur's soybean exports and 64 percent of its iron ore exports go to China. For Latin America's largest economies, including Brazil, Mexico, Argentina, and Colombia, China is now one of their most important trading partners.

Between 2005 and 2016, Chinese banks issued more than $140 billion in loans in Latin America, more than the World Bank and the Inter-American Development Bank combined. Chinese investments totaled $142 billion between 2000 and 2020. Chinese investment in Brazil increased by 34 percent in 2024.

China's Belt and Road Initiative is viewed by US geostrategists as a counterweight to China's power. The US national security strategy of December 2017 clearly identifies American interests as being at risk: China is attempting to draw the region into its sphere of influence through state-directed investments and loans. China is thus no longer seen merely as an economic competitor, but also as a geopolitical adversary seeking to expand its influence in Latin America through economic means and to make Latin American governments dependent on it.

The strategic competition between the US and China in Latin America certainly expands Europe's options. The EU could offer itself as a strategic ally, providing Latin American countries with an alternative. These countries do not want to exchange their historical dependence on the US for a new one on China, nor do they want to become doubly dependent on both. The Mercosur agreement offers an opportunity in this regard.

Despite increased competition from China, Europe remains competitive. While the EU has lost its position as Latin America's second most important trading partner to China, it has only fallen to third place overall and even remains the second most important trading partner in some sub-regions. Argentina, Brazil, Colombia, and Mexico, in particular, are not yet part of China's Belt and Road Initiative and remain important partners of the EU in Latin America.

European companies remain the most important investors in the region. European direct investment amounted to €384 billion in 2023. The EU is the largest investor in Mercosur. It is therefore expected that Chinese companies will compete even more fiercely with their European counterparts in these key sectors in the future.

The saying goes: Whoever negotiates with Europe gets a lecture. Whoever negotiates with China gets a port. How much truth there is in this adage is currently evident in Peru. There, one can witness, almost in real time, Europe losing geoeconomic ground while China gains it. In the competition for access to vital resources from Latin America, China has created a fait accompli with the port of Chancay.

The political arithmetic of failure: France's blocking strategy

The political decision on the agreement rests with the Council of the European Union, where a qualified majority is required. This means that at least 15 of the 27 EU member states must agree, representing at least 65 percent of the EU population.

Currently, besides France, Austria, Italy, Poland, and Ireland are particularly critical of or opposed to the agreement. The German government decided last week to vote in favor of the Mercosur agreement. The German government and German industry are pushing for swift ratification.

France's position is particularly complex. President Macron has repeatedly changed his stance. During the 2022 election campaign, he promised to approve the agreement only under the strictest conditions. At the World Climate Conference in Belém, he then spoke positively about the agreement. Each time, protests from farmers followed. Shortly before the expected vote, France is demanding further improvements and calling for a postponement.

France's Minister of Economy and Finance specified France's demands: In its current form, the agreement is unacceptable. France is setting three conditions: First, a strong and effective safeguard clause is needed. Second, the standards that apply to production in the EU must also apply to production in the partner countries. Third, import controls are necessary. As long as we have no assurances on these three points, France will not accept the agreement.

Brazilian President Luiz Inácio Lula da Silva increased the pressure, threatening not to sign the agreement during his term if it failed now. EU Commission President Ursula von der Leyen was scheduled to officially sign the agreement next Saturday on the sidelines of a Mercosur summit in the Brazilian city of Foz do Iguaçu.

French President Macron warned against agreeing to the deal against his country's will, stating that it would be strongly opposed. Italian Prime Minister Meloni also expressed reservations, saying it would be premature to sign an agreement in the coming days.

The current protest by French farmers has little to do with the agreement itself, but is directed against the rule that all cattle in a herd must be slaughtered if one of them is infected with the highly contagious lumpy-skin disease. For many days now, thousands of farmers have been blocking major transport routes across the country. But Mercosur is further fueling the farmers' frustration. Many demonstrators say they want to rebel against agricultural policy in general, feeling unheard.

The powerful farmers' associations want to block the agreement. They don't believe that the so-called mirror clauses promised by Macron will actually be enforced. More radical and increasingly successful groups like the Coordination Rurale reject not only this agreement, but ultimately free trade altogether. They demand national agricultural policies, separate laws, and protective tariffs.

The paradox of French economic interests

The irony of the French position becomes clear when one considers the actual economic interests. With its anti-Mercosur policy, the government in Paris is acting against its own economic interests. France is the largest agricultural producer in Europe. French farms produced agricultural products worth €88.2 billion in 2022. At the same time, France is also a major exporter of processed foods, wine, chocolate, and spirits, which would benefit from tariff reductions.

Farmers' dissatisfaction extends to many areas. In addition to general frustration with increasing political regulation, stricter environmental requirements, and unfair production conditions, the lumpy-skin disease is now a further issue. This situation, coupled with the Mercosur agreement, significantly exacerbates this frustration.

If it were only the farmers who were rebelling, there wouldn't be too much cause for concern in France. But the government is also presenting itself in a poor light. Free trade in food is not very popular in Europe's leading agricultural country, where domestic products are highly valued at the dinner table. Moreover, the small group of cattle and poultry farmers is mobilizing particularly strongly and pushing the agricultural associations before them.

To make matters worse, virtually the entire French political elite is allowing itself to be manipulated by the farmers. Even within the president's liberal camp, there is strong opposition to the Mercosur agreement. Domestically, the French government's obstructionist stance could prevent the farmers' protests from being further fueled. This must be seen in the context of the rising right-wing populists and the agricultural association Coordination Rurale. Nevertheless, giving in to the tractors is neither courageous nor in the best interests of the country.

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Structural decision-making paralysis and European governance deficits

Sustainability as a pretext? Deforestation, climate risks and the double standards of EU trade policy

France's blockade is symptomatic of a deeper European governance problem. France is operating from a position that is increasingly out of touch with modern European economic realities. The French Prime Minister stated that its demands have not been met. France refuses to accept the agreement in its current form and is demanding additional guarantees for its farmers.

The French farmers' lobby and short-term domestic political sensitivities in Paris or Vienna are completely disproportionate to Europe's long-term strategic interests. This realization is a painful but necessary lesson for European leaders: when short-term considerations of national lobby groups block European action, they inevitably lead to long-term strategic defeats.

It is therefore not surprising that Chancellor Friedrich Merz championed the agreement at the start of the summit: the only possible decision is for Europe to approve it. The real question is how farmers are managing to block such a geopolitically significant agreement. After all, despite their willingness to protest, agriculture accounts for only one to two percent of value creation in countries like France and Italy.

The EU is certainly taking farmers' concerns into account. The agreement with the Mercosur countries includes safeguard clauses that allow the European Commission to limit imports of sensitive products such as beef and poultry if their imports increase sharply. This regulation comes into force as soon as the increase exceeds eight percent. The Council of Ministers and the European Parliament reached an agreement on this in time for the EU summit late Wednesday evening.

An expert remains unmoved by the agricultural sector's accusation that South American producers benefit from laxer environmental regulations. While there are differences in wages and land prices, the EU generally applies the same standards and safety requirements to imported food as to domestic production. From a consumer protection perspective, therefore, there is no increased risk.

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The cost of failure: What Europe has to lose

For Europe's future, the failure of the Mercosur agreement would be a disaster. It would demonstrate the EU's inability to implement its own strategies. It would show that individual countries, under domestic political pressure, can sabotage Europe's overall interests. This would severely damage the trust of not only South America, but also other potential trading partners, Asia, and the Middle East, in European reliability.

Should the EU actually fail to sign the Mercosur agreement, this would have significant consequences for Europe's positioning. The agreement is indeed the EU's foreseeable last chance to establish a geopolitical position of strength in a region where European influence is increasingly waning.

This process would continue in a self-reinforcing manner. The less present the EU is in South America, the less significant it becomes as a negotiating partner. The less European companies benefit from local investment opportunities and access to raw materials. The more South American countries become mere appendages of the Chinese raw material supply chain or the US geopolitical sphere of influence.

The European strategy for economic security is to be implemented through diversification of trading partners. However, if individual European states prevent the EU from concluding agreements with important regions through obstructionist policies, this strategy becomes an illusion.

Without an agreement, Europe would have even less influence on environmental policy in the Mercosur countries. Moreover, the region would be completely left to China as its most important trading partner. Critics argue that a trade deal that accelerates deforestation and the climate crisis cannot, in itself, create new stability. But the alternative—no agreement at all and thus no leverage whatsoever—appears even more problematic.

Compensation funds and the economics of political appeasement

To overcome resistance from agricultural countries, a compensation fund is also being discussed to mitigate risks to European agriculture. FPÖ MEP Haider speaks of a multi-billion euro compensation fund for farmers, intended as a pacifier for Macron.

The idea of ​​such a fund raises fundamental questions. If the projected damage to European agriculture is indeed as minor as many economists claim, why is a multi-billion-euro compensation fund necessary? Conversely, if the damage is actually substantial, a compensation fund would only mask the structural problems, not solve them.

The logic of compensation reveals the political dilemma: the EU is effectively paying to ensure that an economically beneficial agreement doesn't fail due to the opposition of a small industry group. This sets a worrying precedent for future negotiations.

Asymmetric effects: The Mercosur perspective

While the debate in Europe is dominated by agricultural anxieties, the outlook for the Mercosur countries is significantly different. Mercosur member Argentina is projected to experience an estimated growth rate of around -1.3 percent in 2024, following growth of approximately five percent in 2022. The other Mercosur countries recorded positive growth rates in 2023: Paraguay's economy is expected to increase by around 4.7 percent, Uruguay's GDP by about 0.4 percent, and Brazil's economy is estimated to grow by around 2.9 percent.

Argentina has been in recession since 2018. The annual inflation rate in 2023 was around 133.5 percent, and it is projected to reach around 230 percent in 2024. After the right-wing populist, self-proclaimed anarcho-capitalist Javier Milei won the presidential elections in Argentina in November 2023, he implemented extreme austerity measures. These are likely to further increase poverty and inequality in the country.

With a gross domestic product of US$2.4 trillion, Mercosur is the world's fifth-largest economic region. Brazil is the bloc's economic powerhouse, generating 75 percent of the combined GDP. Furthermore, 86 percent of all foreign direct investment is concentrated in this country of 211 million inhabitants.

Since 2016, Brazil has been undergoing a shift in economic policy: The previously largely isolated country is opening up, and the new direction has become particularly evident since the change of government in 2018. While Brazil's economy is expected to experience more robust growth of 2 percent in 2020, the outlook for neighboring Argentina has deteriorated significantly.

For the Mercosur countries, the agreement primarily means access to the European market for their agricultural products and raw materials, but also presents challenges for their still-developing industries. Critics argue that the reduction of tariffs could lead to deindustrialization, as European industrial products put pressure on South American manufacturers. They further contend that the agreement entrenches a transportation system focused on combustion engines and private vehicles and represents a backward-looking mobility and trade policy.

Sustainability rhetoric and deforestation reality

Perhaps the most sensitive issue in the public debate concerns the environmental and climate impacts of the agreement, particularly deforestation in the Amazon rainforest. The initial political agreement met with massive resistance within the EU, as the sharply rising deforestation rates in the Amazon rainforest, in particular, sparked fierce protests.

In 2023, the EU presented a proposal for a supplementary instrument to address sustainability issues. The aim was, in particular, to ensure compliance with the Paris Climate Agreement and to curb deforestation. Brazil committed to halting deforestation by 2030.

The EU Deforestation Regulation prohibits the import of goods into the EU that are linked to deforestation. The South American community of states felt patronized and disadvantaged by this. Environmental and human rights organizations criticize the fact that the newly created compensation mechanism is enshrined in the central arbitration procedure and grants states the right to compensation if EU laws such as the Deforestation Regulation should restrict their trade advantages.

The new annex stipulates that information on the legality and sustainability of Mercosur products, provided by the competent authorities, must be recognized as reliable by EU authorities. Furthermore, if ratified, the EU-Mercosur agreement will play a role in the EU's classification of countries regarding the risk that traded products may be linked to deforestation.

The reduction of tariffs and the increase of export quotas from Mercosur countries for agricultural products such as beef, which are heavily influenced by illegal deforestation, threaten further deforestation of the Amazon rainforest, which again experienced an alarming number of forest fires last year. The Cerrado savanna is also under threat.

The problem is that passages concerning climate protection and human rights in the agreement cannot be enforced. The sustainability standards are not subject to the agreement's general dispute settlement procedure. Critics argue that this trade agreement thus cements an unsustainable economic system, produces more emissions, and therefore exacerbates climate change.

The institutional time bomb: Ratification and splitting

Another complexity concerns the institutional modalities of ratification. The agreement will only fully enter into force once the European Council, the European Parliament, and all parliaments of the 27 EU member states have given their consent. This process could take years and fail at any time if even one national parliament refuses to approve it.

If the agreement were split, only a qualified majority in the EU Council would be required for the trade component, and no approval from national parliaments would be necessary. The Bavarian Farmers' Association rejects such a procedural change. The question of splitting the agreement is highly politically sensitive, as it conflicts with the EU's democratic legitimacy and its ability to act.

For the trade policy aspects, provisional application could be decided upon, while the broader parts of the Association Agreement would undergo the national ratification process. This would at least make the economic benefits achievable in the short term, but carries the risk that the political commitments on sustainability and human rights would remain permanently non-binding.

Germany between industrial pragmatism and consideration for agricultural policy

Germany's position in the Mercosur conflict is remarkably clear. The Federal Cabinet has already approved the signing of the agreement. German business associations are urging a swift signing. The German Chamber of Industry and Commerce called on the Federal Government to work decisively towards concluding the agreement.

This clear-cut situation stems from the specific structure of the German economy. As a leading export nation in the mechanical engineering, automotive, and chemical sectors, Germany is particularly affected by high import tariffs in third countries. Approximately 12,500 German companies export to the four South American countries, of which around 70 percent are small and medium-sized enterprises.

The reduction of trade barriers would particularly benefit mechanical engineering companies, car manufacturers, and the food industry. According to the EU statistics agency, total EU exports to the Mercosur countries amounted to €56.3 billion in 2022, while goods and services worth €64.3 billion came from there to the EU.

Currently, around 405,000 German industrial jobs are directly dependent on end-user consumption in China. Given the increasingly protectionist tendencies of major economies like China and the USA, closer cooperation with the Global South, including the Mercosur countries, is considered necessary.

Germany and France have realigned their economic policies, particularly through their active commitment to developing a European industrial strategy and implementing derisking policies. However, while Germany sees the Mercosur agreement as an instrument of this diversification strategy, France is blocking precisely this strategy for domestic political reasons.

The contrast between the German and French positions also reflects differing economic developments. While the French economy is expected to have grown by one percent in 2023, German GDP contracted and is projected to increase only minimally in 2024. These diverging trends can be attributed to various factors, with the French presidential system allowing President Emmanuel Macron to set clear priorities and implement new measures quickly.

Despite these differences, the French and German economies have far more in common than is generally acknowledged. While France has outperformed Germany economically over the past four years, it is still catching up with Germany, which experienced a remarkable economic boom in the 2010s. In particular, Germany has one of the lowest unemployment rates in Europe, and its companies have maintained their high global market shares.

The legacy of a missed opportunity

The Mercosur agreement exemplifies the structural dilemmas of European economic policy in the 21st century. A treaty that appears overwhelmingly advantageous according to rational economic criteria threatens to fail due to the political mobilization power of small interest groups. The discrepancy between economic soundness and political feasibility could hardly be greater.

The economic facts are clear: The agreement would bring European companies approximately four billion euros in tariff savings annually, grant them access to a market of over 700 million people, diversify strategically important raw material relationships, and send a geopolitical signal against China's growing influence in South America. The anticipated disadvantages for European agriculture amount to only a few percentage points for individual products and could be mitigated through safeguard clauses and compensation mechanisms.

However, the political reality is different. France uses its veto power in the Council to block an agreement that goes against its own long-term economic interests but appears politically expedient in the short term. The European governance structure is proving incapable of asserting pan-European interests against particular national resistance.

The real paradox lies in the fact that, by failing to reach an agreement, the EU has exacerbated precisely the strategic vulnerability it sought to reduce through the agreement. Without Mercosur, Europe remains trapped in its dependence on China for critical raw materials, continues to lose ground in South America, and sends a devastating signal to other potential trading partners: negotiations with the EU can fail, even if they are technically complete, because domestic political interests outweigh pan-European strategies.

For the German economy, failure would mean billions of euros in untapped export opportunities, while Chinese competitors further expand their position in South America. For European geopolitics, it would mean the continent missing its last realistic chance to play a significant role in a strategically important region.

The decision on the Mercosur agreement will therefore be far more than a trade policy decision. It will show whether Europe is capable of thinking and acting with a long-term perspective, or whether short-term domestic political calculations will permanently paralyze its strategic ability to act. Ultimately, it is about whether the European Union can still be taken seriously as a global actor, or whether it will be reduced to a pawn of particular interests, incapable of implementing its own strategies.

History will judge this decision harshly, regardless of the outcome. If the agreement is reached despite all opposition, it will serve as proof that Europe remains capable of action even under the most adverse conditions. If it fails, it will go down in history as a warning sign of the final decline of European influence in a multipolar world order.

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