Coping with Financial Crises: Latin American Answers to European Questions

30 Pages Posted: 17 Feb 2013

See all articles by Eduardo A. Cavallo

Eduardo A. Cavallo

Inter-American Development Bank (IDB) - Research Department

Eduardo Fernandez-Arias

Inter-American Development Bank (IDB)

Date Written: October 2012

Abstract

Europe faces challenges reminiscent of Latin American financial crises. The failure of recent liquidity support to normalize the situation in Europe suggests the need to refocus the policy debate on fundamentals: structural reform for growth and, where needed, restructuring to resolve banking crises and the debt overhang. Latin America's experience yields relevant policy lessons for Europe on those fronts except concerning the use of sharp real devaluations to spearhead recovery: euro-zone countries following suit by reintroducing devalued national currencies would invite catastrophe. Despite this constraint, Europe stands a better chance of navigating the path out of the crisis because it has cooperative mechanisms unavailable in Latin America. European cooperation can provide support for orderly crisis resolution as well as growth and competitiveness within the currency union fold, to the benefit of all members. However, the path is uncharted, and successful regional cooperation will require innovation and political will.

JEL Classification: E61, F33, F34, F36, F53, G01

Suggested Citation

Cavallo, Eduardo A. and Fernandez-Arias, Eduardo, Coping with Financial Crises: Latin American Answers to European Questions (October 2012). IDB Working Paper No. IDB-PB-176, Available at SSRN: https://ssrn.com/abstract=2219774 or http://dx.doi.org/10.2139/ssrn.2219774

Eduardo A. Cavallo (Contact Author)

Inter-American Development Bank (IDB) - Research Department ( email )

1300 New York Ave., NW
Washington, DC 20577
United States

Eduardo Fernandez-Arias

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue, NW
Research Department
Washington, DC 20577
United States
202-623-3783 (Phone)
202-623-2481 (Fax)

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