The Mexican Investment : Peso’s plummet puts U.S. relationship to test

The government of Mexican President Ernesto Zedillo has been rocked by the economic events of the last few days. While some part of the turbulence is no doubt of the weeks-old government’s own making, it is absolutely vital that Mexico’s neighbors do all in their power to help the new government through this storm.

So far both Ottawa and Washington have reacted very well indeed. The United States extended a $6-billion line of credit and Canada chipped in with $1 billion. Clearly Mexico’s partners in the North American Free Trade Agreement (NAFTA) recognize that the continent’s political and economic stability depends on a Mexico that is politically and economically stable.

The need for partnership exists not only in the economic realm; bilateral and, in some areas, trilateral efforts are vital whether the issue is legal immigration, illegal immigration, border control, drug trafficking, temporary labor or whatever. No North American nation is an island; Mexico City, Ottawa and Washington must work as a close-knit team.

Alas, the Zedillo government has had a terrible week. Not long after highly respected Finance Minister Jaime Serra Puche had reassured international investors that Mexico had no intention of devaluing the peso against other world currencies, Mexico devalued the peso. Not only that, it let the peso free-fall in currency markets. Mexico’s currency is now trading at about 30% less value.

The Zedillo government can be criticized for its tactics, and it should learn early on that the confidence of foreign governments will reflect in part the degree to which it keeps its word.

However, the root of the problem transcends Mexico. Currency volatility can be described as the Great Satan of the present world economic system. As last Sunday’s Times editorial argued, without global monetary reform the world currency exchange system will remain vulnerable to wild swings, risky hedging and ruthless speculation. This is what happened this week. But it should not happen. It’s bad stuff.

Some major foreign investors are furious with Minister Puche for saying one thing and doing another; some, like Ross Perot, even see a dark conspiracy to devalue American investments, cheapen Mexican goods for U.S. purchasers while making U.S. goods in Mexico more expensive and effectively lowering Mexican wages, thus adding to migratory pressure northward.

But we think the Mexican government deserves the benefit of the doubt. The United States needs to look at its partnership with Mexico as a long-term deal, and at the current downturn as a temporary cost of doing business. We must remain close, understanding and helpful. Recriminatory finger-pointing will solve nothing, and can erode the enormous progress.