Democracy Lab

Latin America's Paraguayan Hangover

Some Latin American leaders have peculiar ideas about what constitutes an assault on democratic principles.

It's been two and a half weeks since Paraguay's parliament removed President Fernando Lugo from office in an astounding high-speed impeachment procedure. But the shock waves from the event are still reverberating through the capitals of Latin America -- and the reactions offer some jarring insights into some of the region's double standards about democracy.

As many have noted, Lugo's removal wasn't pretty. Yet it was hardly the "parliamentary coup" that some in the region have been claiming. The road to impeachment is mapped out by the Paraguayan constitution, and lawmakers stuck to the letter of the law. No tanks or troops took to the streets. Within hours after his removal Citizen Lugo was sounding off to his boosters and the press. (The photo above shows Lugo supporters demonstrating in the streets of Asunción after his removal.) Nor did the Organization of American States (OAS) expel Paraguay from its ranks. "The democratic order has remained intact in Paraguay in spite of the swift impeachment trial," said Thor Halvorssen, president of the Human Rights Foundation, an outspoken U.S.-based civic group. "Although politics and emotion run high," he added in a written statement, "we urge the OAS and others to consider the facts and the law."

That is exactly what didn't happen. If the legitimacy of Lugo's ouster remains murky, there was no mistaking what happened next as Paraguay's neighbors swiftly punished the new government and remade a continental trade alliance, shredding international treaties and two decades of diplomatic best practices in the process. In Mendoza, Argentina, regional leaders convened an emergency summit of Mercosur, the South American customs union, ostensibly to defuse the crisis in Paraguay. Instead of olive branches, they brought kerosene.

Although Brazil, Argentina, and Uruguay stopped short of imposing sanctions on the new government in Asunción, they wasted no time in suspending Paraguay from the fold on the argument that the "coup" against Lugo violated Mercosur's democratic charter, as outlined in the so-called Ushuaia Protocol. That was the first misstep. By the union's rules (article 37 of the Ouro Preto Protocol and Article 20 of the Treaty of Asunción), all four founding members are entitled to their say in binding matters, including the alleged offending nation. However, when Paraguay's Ignacio Mendoza Unzain arrived in Mendoza to argue the new government's case, he was turned away. More than a humiliation, the snub was a clear breach of Mercosur's charter. "Paraguay's case was not even heard in Mendoza," says Brazilian diplomat and foreign policy scholar Paulo Roberto de Almeida. "This was clearly illegal."

The second blunder was even worse. Long eager to be inducted as a full member to Mercosur, Venezuela had secured the blessings of Brazil, Argentina, and Uruguay -- but not of Paraguay. Although Lugo had lobbied hard on behalf of his ally Hugo Chávez, the opposition-controlled Paraguayan legislature demurred. At issue was Chávez's habit of trampling on democracy at home and meddling abroad in the name of spreading a messianic vision of twenty-first-century socialism. And since all decisions in Mercosur must be unanimous, Venezuela remained out in the cold. But by ousting Paraguay -- until the next presidential elections in April 2013 -- the pro-Chávez faction of Mercosur opened a back door to the Bolivarian showman.

The irony was not lost on the region. In his 12 years in power, Chávez has become a master at gaming democracy. Again and again he has tested his popularity in national referendums and elections, and then parlayed his victory at the ballot box into a blank check to bully critics, stack the courts and gerrymander, counting on his mouthpieces in congress to grant him extraordinary powers.

And yet in 2010, when he redrew voting districts to throw legislative elections to chavista candidates, Latin America's heads of states looked the other way -- or worse. "If anything, Venezuela has an excess of democracy," then-President Luiz Inácio Lula da Silva once said, famously defending Chavez's rule." It's been no different in Bolivia, Ecuador, and Nicaragua, where Chávez's Bolivarian acolytes have had their way with the press, the legislature, and critics to thundering silence in the hemisphere. Likewise, not one sitting Latin president invoked the Ushuaia Protocol or the Democratic Charter of the OAS when Argentine president Cristina Fernández de Kirchner purged the National Statistics Institute and threatened to prosecute media that dared report the real numbers on inflation.

The implications for regional politics and prosperity are dire. True, trade has soared among the Mercosur nations, from $4.5 billion to over $47 billion, from 1991 to 2011. But prosperity has failed to bring union, and lately the bold customs union has succumbed to internal squabbling and beggar-thy-neighbor protectionism. The ham-handed reaction to the political crisis in Paraguay may only hasten the decline. By throwing Paraguay under the bus and extending a welcome mat to Venezuela, Mercosur has made a hash of its own rules on democracy and free trade. "Who in this tale deserves the name of coup-makers?" asked the Estado de Sao Paulo newspaper in a lead editorial.

A small comfort may be the measured reaction from the Latin street. Paraguayans, though perplexed, did not storm the barricades after Lugo's fall, a prospect that could have brought conflict and possibly a bloodbath. And even as the media and opinion makers condemned the hasty impeachment, they were equally indignant over the rush to banish Paraguay and to extend Mercosur's approval to Chávez's dubious democracy. "We do not have a Democratic Charter, just a syndicate of presidents," wrote the Ecuadorian jurist and former diplomat Mauricio Gándara Gallegos in a recent column.

As unstable and fraught as it may be, constitutional democracy is still the gold standard for the America's and its breach a shouting offense. But unless the region's leaders apply the rules and safeguards to all nations, whether run by conservatives or compañeros, the new era of Latin democracy will look a lot like the old one of conspiracies and coups d'état.

NORBERTO DUARTE/AFP/GettyImages

Argument

Made in the Shade

How cloudy Germany became the world's solar superpower, and then lost everything.

DALLGOW-DÖBERITZ, Germany — On a former military airfield in the eastern German state of Brandenburg, 88,600 crystalline photovoltaic panels stand in a proud salute. The skies that were filled with zeppelins a century ago are now empty, save for a thick patchwork of dark clouds.

For Saferay, the Berlin-based firm that operates the Dallgow-Döberitz solar park, the sea of deep blue silicon represents easy money. The park runs itself; not a soul is evident there on most days. The only regular personnel are the lawn mowers, who periodically trim the grass so it does not block the panels. All that's needed is the sun -- however little of it shines in this particularly unsunny corner of an unsunny country.

"It was easy to set up," Sandra Meissner, the Saferay project manager responsible for erecting the plant in less than two months last year, tells me as she maneuvers her Audi into the solar park, "because all the modules are the same."

But for Q-Cells, the German company that built those modules, that's precisely the problem. The company was the world's largest producer of solar cells as recently as 2008, but struggled when the specialized technology became a mass-produced commodity. Cheap solar panels from China began flooding the market -- Q-Cells, no longer able to compete, filed for bankruptcy in April in what the conservative Heritage Foundation was quick to call Germany's "Solyndra moment."

On the surface, the similarities between the German firm and its American counterpart that had failed seven months earlier were striking. Both had benefited from generous public subsidies: In the case of Solyndra, $535 million in federal loan guarantees; in the case of Q-Cells, a German law that required electricity consumers to subsidize producers of solar energy to the tune of $10 billion a year. Both were regarded as models for the future of renewable energy, only to fall victim to falling solar cell prices and competition from China. And both quickly became punching bags for conservatives, who enjoyed a told-you-so moment at the expense of government-backed solar energy.

But the similarities mask a fundamental difference: The federal money spent on Solyndra sparked a public outcry because the U.S. solar market couldn't get off the ground. The funds supporting Q-Cells came under fire because the German solar manufacturing industry had grown too quickly, only to collapse when the subsidies on which it had grown reliant needed to be cut.

Most visitors to cloudy Germany would never guess that the country is the world leader in solar energy, with nearly as much photovoltaic capacity as the rest of the world combined. The country isn't exactly bathed in the sun's rays. A side-by-side solar resource map put out by the U.S. government-owned National Renewable Energy Laboratory, with red indicating brilliant sun and purple denoting thick cloud cover, shows the United States dressed in healthy hues of yellow and orange while Germany is almost entirely frostbitten blue-violet. Aside from Alaska and part of western Washington state, just about every inch of the United States gets more energy from the sun than the sliver of southern Germany that gets the most.

Yet Germany installed 7,500 megawatts of solar panels last year, compared with 1,855 in the United States -- a country with nearly four times Germany's population and 28 times its landmass.

But even as solar energy production continues to boom, Germany's manufacturers of solar technology are collapsing at an alarming rate. In the four months preceding Q-Cells' bankruptcy, another leading German solar cell firm, Solon, filed for bankruptcy, as did two major solar thermal firms in the country. Two weeks after the Q-Cells bankruptcy, the Arizona-based module producer First Solar announced that it was shutting down its operations in Germany.

How did this decidedly unsunny country come to dominate the world solar energy market, only to see its solar manufacturing crash to the ground? The roots of the industry's ascent -- and its eventual demise -- lie in an unlikely conversation 22 years ago.

* * *

1990 was a year of head-spinning change in Germany. The previous November, the Berlin Wall had come down, sending thousands of East Germans across the crumbling Iron Curtain into the West. One by one, the barriers to reunification fell, leading to the official establishment of a single Germany on Oct. 3, 1990.

But Matthias Engelsberger had something else on his mind that year. The 21-year veteran of the German parliament, the Bundestag, was retiring at the end of the term, and he had one year left to make his mark. He decided to stake his legacy on an industry that was still in its infancy: renewable energy.

So Engelsberger, a member of the conservative Christian Social Union, made an unusual move: He reached across the aisle to a young colleague of the upstart Green party, Wolfgang Daniels.

"I was the energy policy speaker for the Green party at the time," recalls Daniels; Engelsberger died in 2005. "And at some point we were talking, and we said, 'Yeah, we have to try something to cross party lines.'"

The result of their collaboration, which raised eyebrows in both of their ideologically distant parties, was a simple one-page law, the 1990 Electricity Feed-In Law. It provided modest incentives for the development of renewable energy by requiring energy companies to buy small-scale renewable electricity, at a fixed above-market price, from households and businesses that produced it.

The bill initially didn't receive much attention. "This all took place at a time when German reunification was on the agenda, so we were working in the shadows," says Daniels. "At the hearings, people said, 'Yeah, OK, we'll let that pass. It won't have any serious impact on the overall energy supply.' They saw it as a gimmick. It wasn't like everyone knew that this was the beginning of a completely new development."

At the time, Daniels and Engelsberger had their sights set on wind and hydropower. Solar power, which provided less than 0.001 percent of Germany's electricity in 1990, was an afterthought and didn't begin to take off until the feed-in tariff law was revised in 2000 and again in 2004 to boost the subsidies for renewable energy, particularly for solar.

The results were spectacular. Annual solar installations in Germany jumped 20-fold from 2000 to 2005 and another eightfold from 2005 to 2010, catapulting Germany into its unlikely role as the world leader in solar power. Only it worked a bit too well. With German demand for solar modules exploding, production boomed and prices began to plummet. A solar panel in Germany now costs just half of what it did three years ago -- good news for Germans looking to generate electricity from their roofs, but devastating for companies trying to turn a profit by producing and selling panels.

Germany is famous for its prowess in manufacturing specialized technology. The country's redoubtable Mittelstand -- small and medium-sized firms that produce things such as high-quality machine parts -- has kept German manufacturing growing and has helped bring the national unemployment rate to its lowest level in more than 20 years, even while the rest of Europe sinks deeper into economic crisis. But solar cells are no longer specialized technology -- they're now easily churned out on a massive scale. And when it comes to this kind of manufacturing, there's no one better than the Chinese.

"You can't beat China at its own game, which is primarily high-volume manufacturing of largely commoditized products," says Shayle Kann, managing director of the solar unit at the energy market analysis firm GTM Research. "Solar has pretty much gotten to that point."

China has seen its market share of solar cell manufacturing explode in recent years, climbing from 26 percent in 2007 to 62 percent last year, according to GTM Research. It is home to eight of the top 10 solar cell manufacturers in the world, according to market research firm Solarbuzz. (The one U.S. company on the list, First Solar, recently announced a restructuring that will see 30 percent of its global workforce laid off, including the 1,200 workers at its plant in the German city of Frankfurt an der Oder.) Meanwhile, Germany's market share, once the highest in the world, is at 5 percent and falling. Just four years ago, Q-Cells was the world's leading solar cell manufacturer.

Klaus-Dieter Maubach, who sits on the six-member board of management that runs Germany's largest electric utility, E.on, predicts that there won't be any German solar panel manufacturers left in five years.

"They have to contend with competitors in Asia and a global oversupply of production capacity," says Maubach.

If German solar manufacturers are to avoid the fate Maubach forecasts, they'll have to beat the competition on either price or quality. But with the former growing ever more difficult and the latter something of a wash, given the commoditization of solar cells, it's an uphill climb.

"If the European manufacturers can't be cheaper, then they have to be better," says Michael Kauch, a member of parliament and the environmental policy spokesman for the Free Democratic Party, which has been critical of subsidies for solar energy. "And at the moment, they don't appear to be."

* * *

This was supposed to be renewable energy's golden moment. Last year, in the wake of Japan's Fukushima nuclear disaster, Germany shut down half its nuclear reactors overnight and committed to phasing out the other half within a decade. The move was cheered by renewable energy advocates as a bold step to clear the path for wind and solar power.

Those dreams, however, were quickly dashed. Instead, the country's solar industry is experiencing its most tumultuous period since it first got off the ground. David Wedepohl of the German solar industry group BSW-Solar estimates that 10,000 full-time-equivalent jobs have been lost in Germany in solar installation, trade, and production this year, as of May. The collapse of the German solar firms has led to much finger-pointing. One obvious target is Beijing: The Chinese government, industry sources say, has flooded its domestic solar manufacturers with capital and propped them up even as they lose money, in a transparent ploy to corner the market.

The U.S. Commerce Department ruled in March that the Chinese government was illegally subsidizing the country's solar manufacturers and slapped modest tariffs on Chinese solar cells and panels entering the United States. Then, in May, the Commerce Department found that Chinese manufacturers were "dumping" solar products on the U.S. market by selling them at prices below the cost of production, and it imposed steeper tariffs of more than 30 percent on Chinese solar imports.

Some German solar manufacturers have called for similar measures in their country, or at least bonuses for consumers who purchase German-made panels. Norbert Röttgen, who served as Germany's environment minister until May, has accused China of "a pricing policy aimed at displacing German companies."

It doesn't help matters that Germany has directly subsidized Chinese solar manufacturing. According to a report in the German magazine Der Spiegel, the German government has sent over $100 million in renewable energy subsidies to China as part of its climate program.

But at the root of the crisis in German solar manufacturing is a seemingly inevitable chain of events that began with the conversation between Daniels and Engelsberger in 1990. The feed-in tariff law, which propelled Germany to the top of the world in solar energy, was ultimately a victim of its own success. As more and more Germans installed solar panels on their rooftops, consistently beating the government's expectations, subsidizing solar energy became increasingly expensive.

The tariff had a built-in mechanism to reduce the payout to renewable electricity producers gradually over time, as the increased volume caused a reduction in price. But the price of solar installations was dropping much faster than the tariff was being reduced, making solar power an even more attractive investment. As the price of solar modules plummeted, solar manufacturers became ever more reliant on subsidy-fueled market growth, leaving them vulnerable should the pace of new installations slow.

With subsidy costs skyrocketing, nearly everyone agreed that the government had to step in and cut the feed-in tariff more drastically. But the government's announcement in this February that it would make a near-immediate cut of up to 30 percent -- the cuts were reduced slightly in June after protests from state governments -- simply turned out the light on some solar manufacturers. Trapped between the Scylla of falling prices and the Charybdis of ruthless competition from China, they began to file for bankruptcy in droves.

"They can't just suddenly cut the funding by 30 percent," says Stefan Säuberlich, CEO of Solon before its bankruptcy in December 2011 and now managing director of the Solon Energy unit under the umbrella of the United Arab Emirates-based company Microsol, with which it subsequently merged. "No company in the world can bring down its costs proportionately in such a short time."

Some German politicians, meanwhile, suggest solar firms simply became too content to live on the government dole. "Why are they bankrupt?" asks Michael Fuchs, a member of parliament in Chancellor Angela Merkel's Christian Democratic Union and a prominent critic of the solar subsidies. "They've received high subsidies for decades, but they haven't pursued any innovations. This is always the problem when subsidies give companies a kind of inertia. They don't ask themselves, 'What will we do when the subsidies are gone?'"

Fuchs thinks it was a mistake for Germany to subsidize solar power in the first place. "Germany isn't exactly the sunniest country in Europe," he says, noting that it receives about as much sunshine as Alaska. "And Alaska wouldn't start planting pineapples."

But others blame the influence of the country's four big energy companies -- three German firms and the Swedish giant Vattenfall -- for the damage done to solar companies. Because solar energy tends to be small-scale and localized, it doesn't fit well into these companies' business plans, so they mobilize their substantial political clout against it, lobbying for lower subsidies for renewable power and painting the effects of a switch to renewables in dire economic terms. (Industry groups representing utilities in the United States have likewise resisted attempts to pass a renewable energy standard.)

* * *

But there may be hope yet for Germany's solar power industry, or at least the segments of it that anticipated the bumpy road ahead for solar manufacturers.

Amid the wreckage of Q-Cells' business model, Michael Merz has emerged the winner. He is the managing director of Saferay, Germany's biggest operator of solar farms, including the one in Dallgow-Döberitz.

Merz and most of his Saferay colleagues worked at Q-Cells, which three years ago was Germany's leader in ground-mounted solar installations. But strategic differences and a desire to separate the balance sheets led the company's ground-mounted division to split off in late 2009. The drop in price of Q-Cells' solar panels was a boon for operators like Saferay: As module prices tanked, it became even cheaper to expand its solar parks.

"To most people, or at least to us, it was clear that in the long run, the value would not lie in production of solar modules and solar cells anymore, but in the systems business," says Merz, referring to the installation and operation of solar panel arrays, as we sit in Saferay's headquarters on the 25th floor of the iconic Allianz building, which would have offered sweeping views over East Berlin if not for the thick gray fog.

Q-Cells' management declined to be interviewed for this article, citing the stress of the insolvency. But Merz spoke openly about how the collapse in solar cell prices, which sank Q-Cells, has been Saferay's gain.

"At the moment, you have massive overcapacity leading to smaller demand, which is perfect for us," Merz says. "So since the beginning of or mid-2011, the market has had a very favorable turn toward us." The company's earnings, he says, more than doubled from 2010 to 2011.

To qualify for feed-in tariffs, ground-mounted installations must be on reclaimed land, so they tend to be in the former East Germany, which is full of former Soviet military spaces and other abandoned developments. Saferay's largest solar farm, in the town of Senftenberg, is located on a former open-pit coal mine; Dallgow-Döberitz occupies a former airfield.

Germany's solar equipment manufacturing is concentrated in three states of the former East that have been collectively dubbed the "Solar Valley," which is a bit like calling southern India "Frigid Plains" because some air-conditioners are produced there. Here, after German reunification, the manufacturing industry lay in shambles and unemployment was rampant. The large numbers of experienced technology workers in search of jobs -- and the generous subsidies for manufacturing investments -- led solar producers to flock to the area.

Hubert Aulich, the 68-year-old executive director of PV Crystalox Solar in Germany, was one of the eager arrivals on the scene. He remains a hopeful voice in a region that has been hard-hit by Q-Cells' bankruptcy and the industry's struggles.

Aulich came to the city of Erfurt in 1997 to start a company that produces the silicon wafers used to make solar panels. (The company, PV Silicon, merged with the British firm Crystalox in 2002.) In his plant, located in a city sector dominated by solar firms, Aulich expresses confidence that the German solar industry isn't doomed to be one big Solyndra.

"I know the company; I've looked at their product," Aulich says of Solyndra. "There should have been people who told Obama, 'High risk. Don't do this.'" Solyndra, like Q-Cells, was on the wrong side of history. It staked its fortune on solar panels that didn't use silicon, just before the price of silicon plummeted and rendered its business uncompetitive.

But Aulich thinks his own firm can disprove the notion that solar equipment can't be produced in wealthy countries like the United States and Germany.

"Where are the advantages of manufacturing in China?" Aulich asks. "It is not management skills, I would say. It is not that the people are particularly skillful.… But there are low labor costs. So if you have a product which consumes a lot of labor, then you have to ask yourself, either you go where the low[-cost] labor is or you do automation."

Aulich is banking on the latter. Inside his plant, silicon wafers glide through quality-control machines before being separated into good and bad piles -- all without the assistance of humans.

There is a widespread belief in Germany that the country can't compete with China on costs and must aim for superior quality. But in an industry in which solar wafers and panels are becoming commodities, Aulich thinks Germans have it backward: Through specialization and automation, they can cut out labor costs and beat China at its own price game.

That may not be good news for Germany's employment rate -- but it may just allow the country to beat China at its own game. Wedepohl of BSW-Solar agrees, arguing that Germany is uniquely positioned to capitalize on the trend toward automation.

"Labor costs are not a large factor because of automation," he says. "And you know who's good at automation? The Germans!"

German technology may still rule the day, but the country itself isn't likely to be home to the world's solar parks of the future. Germany is once again a victim of its own success -- it has not only succeeded in bringing down solar costs domestically, but around the world. Now that Germany has put in the initial investment to make solar energy cost-competitive, it's suddenly viable in countries that might not have been able to make the investments themselves.

Merz says that in "unbankable markets" like Greece, feed-in tariffs wouldn't have worked because people wouldn't have trusted the government to honor its price guarantees. But now that Germany has pushed solar technology over the hump, "it will come at much lower costs for the other countries," he believes. Saferay itself is looking to get in on the action, with plans for solar farms in sunnier California, Chile, and India. (The California and India projects are still in the early planning stages, but the Chile installation, set to be completed in August, will use Chinese panels.)

"Five years from now, Germany's not likely to be the largest solar market in the world anymore," says Kann of GTM Research.

But even if German solar cell manufacturers are unable to survive and new solar installations gravitate toward sunnier climes, Germany can continue to profit from its decision to go all-in on solar power when no one else would. Germany's strength, after all, is advanced technology, and though Chinese firms may be making most of the solar cells, German companies like Jonas & Redmann are building many of the machines used by the Chinese to manufacture the cells.

"It will be the German companies that will bring the technological advantage to other countries," said Merz. "That's what Germany always benefited from: from exporting this know-how, this technology, to other countries. So just because the installations now move to other countries doesn't mean the German companies won't make money anymore."

If nothing else, Germany has shown the world that a little political will goes further than a lot of sun. Even in gray Germany, with the right incentives in place, the roof of an average single-family home with a typical solar installation generates about as much electricity as the household consumes. On a recent atypically sunny Saturday in May, the country hit a new solar milestone by producing a world-record 22 gigawatts of solar power at midday, the equivalent of 20 nuclear reactors and enough to cover nearly half of the country's electricity needs at the time. Wedepohl expects German solar energy production to keep growing, despite the current troubles, and provide 10 percent of the country's electricity by 2020.

In five or 10 years, there may not be a German solar manufacturing industry to speak of, and the country may be blanketed in Chinese panels. But Chinese panels still produce electricity, and they wouldn't grace rooftops around the world had it not been for the road paved by Germany's bold solar ambitions. The process that Engelsberger and Daniels set in motion has ushered in an era of solar power in Germany beyond their imaginations. At the end of the day, this dark cloud has a silver lining.

EPA/JAN WOITAS