Latin America's integration processes in the light of the EU's experience with EMU

European Commission Directorate-General For Economic And Financial Affairs

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EUROPEANECONOMYEUROPEAN COMMISSIONDIRECTORATE-GENERAL FOR ECONOMICAND FINANCIAL AFFAIRSECONOMIC PAPERShttp://europa.eu.int/comm/economy_financeN° 173 - July 2002Latin America’s integration processes inthe light of the EU’s experience with EMUbyHeliodoro Temprano Arroyo,Directorate General for Economicand Financial AffairsEconomic Papers are written by the Staff of the Directorate-General forEconomic and Financial Affairs, or by experts working in association withthem. The "Papers" are intended to increase awareness of the technical workbeing done by the staff and to seek comments and suggestions for furtheranalyses. Views expressed represent exclusively the positions of the author anddo not necessarily correspond to those of the European Commission.Comments and enquiries should be addressed to the:European CommissionDirectorate-General for Economic and Financial AffairsPublicationsBU1 - -1/180B - 1049 Brussels, BelgiumECFIN/316/02-EN This paper only exists in English.©European Communities, 2002Latin America’s Integration Processes in theLight of the EU’s Experience with EMU (*) (**)byHeliodoro Temprano ArroyoAbstractThe paper assesses the advisability of subregional monetary integration in Latin Americaby looking at the EU s experience with EMU and by applying the theory of optimumcurrency areas (OCA) and other criteria proposed by the more recent literature.

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• Publié par: EUROPEAN-COMMISSION-DIRECTORATE-GENERAL-FOR-ECONOMIC-AND-FINANCIAL-AFFAIRS
• Nombre de lectures: 13
• Langue: English

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EUROPEAN ECONOMY EUROPEAN COMMISSION DIRECTORATE-GENERAL FOR ECONOMIC AND FINANCIAL AFFAIRS ECONOMIC PAPERS

http://europa.eu.int/comm my_ /econo finance

N° 173 - July 2002

Latin America’s integration processes in the light of the EU’s experience with EMU by Heliodoro Temprano Arroyo, Directorate General for Economic and Financial Affairs

Economic Paperasr e written by the Staff of the Directorate-General for Economic and Financial Affairs, or by experts working in association with them. The "Papers" are intended to increase awareness of the technical work being done by the staff and to seek comments and suggestions for further analyses. Views expressed represent exclusively the positions of the author and do not necessarily correspond to those of the European Commission. Comments and enquiries should be addressed to the:

European Commission Directorate-General for Economic and Financial Affairs Publications BU1 - -1/180 B - 1049 Brussels, Belgium

ECFIN/316/02-EN

© European Communities, 2002

This paper only exists in English.

Latin America’s Integration Processes in the Light of the EU’s Experience with EMU (*) (**) by Heliodoro Temprano Arroyo

Abstract The paper assesses the advisability of subregional monetary integration in Latin America by looking at the EUs experience with EMU and by applying the theory of optimum currency areas (OCA) and other criteria proposed by the more recent literature. The analysis based on the OCA criteria suggests that, with the possible exception of NAFTA, none of the subregions examined should engage into monetary integration. They are subject to frequent asymmetric shocks and, with the exception of NAFTA, their degree of trade and financial integration and macroeconomic convergence remains insufficient and they lack a large and stable member country from which to import monetary credibility. These subregions should in particular refrain from adopting exchange rate stabilisation schemes before achieving deeper integration and convergence. The traditional OCA theory does not take into account, however, some relevant aspects such as the degree of de facto dollarisation, the existence of serious credibility problems in some countries and the possible endogeneity of its criteria. After extending the analysis to these factors, the picture changes somewhat, particularly regarding the advisability of dollar-based monetary integration in Central America. The paper also discusses the extent to which the EUs fiscal policy architecture could be recreated in Latin America. It concludes that, although the EUs fiscal rules may provide a useful reference, they would have to be adapted to the specific features of the Latin American economies, such as the weaker operation of automatic fiscal stabilisers and the high sensitivity of fiscal deficits to changes in international commodity prices.

JEL classificatio:n F31, F33, F36 Keyword:smonetary integration, optimum currency areas, Latin America, dollarisation, exchange rates, fiscal policy coordination

(*) A previous version of this paper was presented at the Workshop on Latin America organised by the European Central Bank and the Bank of Spain in Frankfurt on 21-22 March 2002. (**) The author wishes to thank for their comments or support: Peter Bekx, Alexander Italianer and Klaus Regling, from DG ECFIN; Jorge Barboza, from the Central American Monetary Council; Vivek Arora, Gian Maria Milesi-Ferretti and Luca Ricci, from the IMF; Eduardo Levy Yeyati, from the Banco Central de la República Argentina; Pablo Fonseca Pereira dos Santos, from the Brazilian Ministry of Finance; and Miguel Villa, from the UNs ECLAC.

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