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Mercosur splits dampen EU outlook for trade deal as window narrows

Mercosur trade bloc summit in Bento Goncalves

By Anthony Boadle and Philip Blenkinsop

BRASILIA/BRUSSELS (Reuters) -Splits within South American trade bloc Mercosur have dampened hopes in the European Union of a trade deal, which could fall apart if it does not get done by the end of the year, diplomats and members of the European Parliament told Reuters.

Two of Mercosur's four countries have yet to reply to an addendum in which Brussels included environmental safeguards to address reservations by many EU member states, diplomats said.

EU negotiators have been waiting for a reply since March. Many had hoped for a swift conclusion to the trade deal under President Luiz Inacio Lula da Silva, who overhauled Brazil's environmental policies to protect the Amazon rainforest since taking office this year. But that hope has since fizzled.

"It has deflated like a balloon," said Austrian MEP Thomas Waitz, a critic of the agreement, who recently visited Brazil.He said Lula's comments on the Russian invasion of Ukraine, blaming both sides for the war, have contributed to Europeans' disenchantment.

"That caused much disappointment and reduced the excitement and the hopes for a quick finalization of the trade agreement with Mercosur," Waitz said in an interview.

A spokesperson for Brazil's foreign ministry said a Mercosur meeting this week "will serve to clarify the latest details of the common position" and European negotiators would travel to Brasilia next week for a round of "negotiations on the texts."

As president pro tempore of Mercosur since July, Lula has pushed back against more open government procurement in both blocs, as provided for in the trade deal negotiated under his predecessor after nearly two decades of discussions.

Even Lula has recognized publicly that patience is wearing thin with the talks over the accord, which has been on hold since 2019 due to European environmental concerns.

"We must reach an agreement in the next few months. Either agree or stop discussing the agreement, because after 22 years no one believes in it anymore," Lula told reporters on Monday in New Delhi following the G20 summit.

European diplomats, however, said Mercosur has yet to send a consolidated counterproposal. As of Monday, officials in Uruguay and Paraguay said no written reply had been sent to the EU.

"If anything was sent, it was Brazil's position, not Mercosur's," a Uruguayan foreign ministry source said.

Bernd Lange, chair of the international trade committee of the European Parliament, which must clear any deal, said the EU had hoped for a speedier resolution, while recognizing Lula's domestic challenges. The EU received no response to date on its demands for commitments on climate and deforestation.

Differences between Brazil and Uruguay on their response to the EU, plus a change of government in Paraguay, have delayed a joint Mercosur reply on the so-called side letter, diplomats said. They said there would not be another negotiating round until the EU receives a joint Mercosur response.

The delays dashed hopes of finishing the trade deal in July during a summit between EU and Latin America in Brussels. After meeting with Lula, European Commission President Ursula von der Leyen spoke of finishing the accord by the end of 2023.

Even that timeline is now in doubt, according to Uruguay's ambassador to Brazil Guillermo Valles Galmés, whose country has expressed interest in going ahead without Mercosur to sign a bilateral trade agreement with China.

"The window of opportunity is closing and if the agreement is not signed by the end of this year, it is unlikely that it will ever happen," said Valles, who was envoy to the EU when negotiations got going in 1996 and later led talks as Uruguay's deputy foreign minister.

The front-runner in Argentina's October elections, Javier Milei, is a libertarian climate skeptic who has pledged to pull out of Mercosur, which he calls a "defective customs union."

EU interest could also wane after Spain, the most vocal EU advocate of the Mercosur deal, concludes its six-month presidency of the European Union at the end of the year.

A European Parliament election in June 2024 is also expected to cloud the agenda next year.

"If the agreement is not signed by the end of this year, the Commission will not move ahead pushing for it. They will do their best to keep it out of the election campaign," said MEP Waitz. "I don't think it will happen. This is a hot potato."

(Reporting by Anthony Boadle in Brasilia, Philip Blenkinsop in Brussels, Lucinda Elliot in Montevideo and Daniela Desantis in AsuncionEditing by Brad Haynes, Richard Chang and Chizu Nomiyama)