By Robin Emmott and Alonso Soto
BRUSSELS/BRASILIA (Reuters) - While much of Brazil is focused on hosting next year's soccer World Cup and the Olympic Games in 2016, an event of far longer-lasting economic significance is bubbling below the surface.
If all goes to plan, Brazil will sign its first major free-trade agreement next year, 15 years after talks were first launched with Europe on an ambitious deal. Such pacts can bring sustainable wealth while sporting events tend to engender only short-term and sometimes money-losing prestige.
But success or failure for Brazil relies on dealing with an unpredictable partner, Argentina.
The European Union and the South American trade bloc Mercosur have set themselves a deadline of December 31 to swap offers for opening markets in a pact that would encompass 750 million people and $130 billion in annual trade.
A final accord could be struck early next year. But negotiators also know that over more than a decade, talks have collapsed and been relaunched only to stall again, while in between, Argentina suffered the world's largest debt default.
"We still hope we can agree a deal," said Adrianus Koetsenruijter, a senior EU official who deals with Mercosur, which comprises Brazil, Argentina, Paraguay, Venezuela and Uruguay.
For the European bloc, the deal would let it tap into Latin America's promising economies and boost its global trade role.
But the question is whether Argentina, one of the most protectionist members of the Group of 20 countries, will join in opening its economy to greater EU imports, or go the way of Venezuela's leftist government, which is out of the talks.
Brazil, one of the world's largest and most dynamic emerging economies, is ready to do a deal. It is backed by Uruguay and Paraguay, but they are relatively small players.
It wants Argentina on board, although it would most likely go ahead with a rump Mercosur if necessary.
"Brazil knows that it needs to sign up to the sophisticated trade deals that are emerging," said Jean-Pierre Audy, a member of the European Parliament who led a delegation of lawmakers to Brazil in October. "It doesn't want to be isolated."
Europe, meanwhile, is also frustrated by Argentina's policies to protect local industry. Relations have been soured by a row over biodiesel exports and Argentina's nationalization of energy company YPF from Spain's Repsol last year.
EU and South American diplomats see the year-end deadline as Argentina's last chance to stick with the pack, or release Brazil to pursue its own agenda as the world's seventh largest economy in a rapidly evolving international trade system.
But Brazilian President Dilma Rousseff appears unwilling to force her fellow leftist ally, Argentina's Cristina Fernandez, to make a decision. "There is no decision to break Mercosur. It is a strategic project," said Brazil's new ambassador to the European Union, Vera Barrouin Machado.
Privately, however, a faction of the Brazilian government backed by Brazilian business wants to leave Argentina behind.
Mercosur, once seen as South America's answer to European integration, is a forum for Brazil's diplomatic role as Latin America's largest economy and most populous nation, while Argentina is an important market for Brazilian companies.
Brazil, which exports goods from cars to coffee, is the fifth largest foreign investor in Europe and wants access to EU markets for its agricultural exports, especially beef.
Its development and foreign ministers were set to go to Brussels last month to deliver the Brazilian proposal to liberalize almost 90 percent of trade with Europe.
But the trip was scrapped at the last minute, according to a person close to the talks. Argentina countered by leading a delegation to Brasilia to draw up a single proposal to present to the Europeans on behalf of all of Mercosur.
Brazilian and Argentinian trade officials met again on Tuesday in Buenos Aires. "Brasilia and Buenos Aires want to send a signal to Europe that Mercosur is united," said a South American diplomat close to the talks.
Brazil's neighborly policy carries risks, however.
If a Mercosur-EU free-trade deal fails, Brazil could be one of the few Latin American countries without a free-trade agreement with both the United States and the European Union, unlike for example, Mexico, Peru, Chile and Colombia.
Meanwhile, the European Union is in ambitious trade talks with almost 80 countries, including the United States. For its part, Washington is negotiating a free-trade bloc that would stretch from Vietnam to Chile to Japan, or about 40 percent of the global economy, the Trans-Pacific Partnership (TPP).
(Additional reporting by Guido Nejamkis and Anthony Boadle, writing by Robin Emmott, editing by Jeremy Gaunt)