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Coping with Financial Crises: Latin American Answers to European Questions

Eduardo Cavallo () and Eduardo Fernandez-Arias

No 4804, Research Department Publications from Inter-American Development Bank, Research Department

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-codes: E61 F33 F34 F36 F53 G01 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-cba, nep-eec and nep-lam
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