Seminar of the Eurosystem and Latin American central banks to be held in Madrid on 23 and 24 May 2002

In a joint initiative of the Banco de Espana and the European Central Bank, a high-level seminar of the Eurosystem and Latin American central banks was held today at the offices of the Banco de Espana in Madrid. This has been the first high-level seminar involving the Eurosystem and Latin American central banks. A preparatory workshop involving experts was held at the ECB in Frankfurt on 21 and 22 March 2002.

Participants in the seminar include high-level representatives of Latin American central banks (The Banco Central de la Republica Argentina, the Banco Central de Bolivia, the Banco Central do Brasil, the Banco Central de Chile, the Banco Central del Ecuador, the Banco Central del Paraguay, the Banco Central de Reserva del Peru, the Banco Central del Uruguay, the Banco Central de Venezuela, the Banco de Mexico and the Banco de la Republica, Colombia) the ECB and national central banks of the Eurosystem. Representatives of regional fora have also participated in the seminar, including the Inter- American Development Bank, the European Commission and the Centre for Latin American Monetary Studies.

The aim of the seminar was to strengthen policy dialogue between the Eurosystem and Latin American central banks and to share views on issues of common interest. The discussions focused on the following three topics: regional integration in Latin America and Europe, monetary and exchange rate policies and financial sector issues.

Regional integration

Some trends in regional integration in Latin America were discerned. First, contrary to the EU, Latin America does not exhibit a single pattern of regional integration. Instead, there are at least two models: a North-South pattern with close ties with the US, as reflected primarily in NAFTA, and a South-South pattern, whose main component is currently MERCOSUR. Second, in the aftermath of financial crises in several countries in the region, earlier momentum of further regional integration in Latin America seems to have slowed in recent years. Third, on a more structural level, it was observed that the low level of trade and financial integration and the low level of synchronisation of national business cycles are providing, in Latin America, weaker incentives for more institutional integration compared to Europe.

The European integration process was considered to be of interest for Latin America but not readily replicable in Latin America because of a number of distinct features, namely (i) it was primarily motivated at the start by political considerations; (ii) it took place in a natural area for economic integration; (iii) it relied on a strong institutional and legal underpinnings, including the transfer of sovereignty in some policy areas to the supranational level.

With regard to the future of regional integration in Latin America, it was underlined that further evolution of such cooperation would be conditioned upon more stable national macro-economic and financial performance as well as strengthened policy and institutional domestic frameworks. Participation in multilateral trade arrangements is instrumental in fostering domestic institution-building processes, through the adoption of internationally accepted rules and practices. Further economic liberalisation in Latin America can be expected to increase regional interdependencies and thereby promote the conditions for closer integration, even going beyond trade arrangements. Finally, it was considered that as a major experience in regional integration, the EU shows that multilateral regional surveillance can interact positively with domestic progress made in stability-oriented macro-economic policies and best practices for other relevant policies.

Monetary and Exchange Rate Policies

In this session, participants considered developments in exchange rate regimes in Latin America and discussed possible policy lessons, bearing in mind the experience of the EU. During the course of the 1990s, many Latin American countries made substantial progress in stabilising their economies. As a monetary anchor for this process most countries chose a fixed or intermediate exchange rate regime. Disruption to international capital flows which had surged in the 1990s led to the adoption by most countries of floating exchange rate regimes together with inflation targeting - a move facilitated in general by the achievement of a low inflationary environment - or, in a few cases, dollarisation. It was recognised that, in contrast to EU countries, Latin American countries, even when faced with similar problems, did not consider reducing intra-regional exchange rate volatility, in large part because regional instability worked against that aim.

When considering issues of policy relevance for future developments, it was noted that experience of floating rate regimes, in a number of cases accompanied by explicit inflation targeting, has, though short- lived, been largely positive so far. Three policy challenges were identified in this regard. First, in order to ensure stable macro-economic conditions, monetary policy needs to be buttressed by sound fiscal and structural policies. Second, stability-oriented monetary policy requires institutional support in the form of an independent, transparent and accountable central bank. Third, given that exchange rates in emerging economies might be subject to volatility and misalignment, exchange rate developments and expectations still need to be taken into account.

Finally, the EU experience suggests that there are advantages to pursuing common objectives in a number of areas, irrespective of the degree of exchange rate co-operation that a region such as Latin America may seek. In particular, the commitment to and implementation of sound fiscal, structural, financial system and institutional reforms may be improved through a variety of channels, including the definition of commonly agreed objectives, the adoption of best practices, peer pressure to implement difficult policies, monitoring mechanisms that facilitate timely policy adjustments, and a regional institutional umbrella that prevents backsliding on progress made.

The financial sector

In spite of several financial crises, Latin American countries have made major progress in developing their domestic financial systems, particularly over the last decade. The size of these systems has doubled in several countries and their efficiency in intermediating funds has increased significantly. Latin American banking systems have been liberalised and largely privatised and are now more open to foreign competition. Domestic capital markets, particularly bond markets, have expanded rapidly and institutionally managed funds have boomed in some countries, mainly as a result of the reform of pension systems. Public institutions, particularly central banks, have played a crucial role in the development of financial systems by pursuing price and financial stability. This process bodes well for increasing domestic private savings, which the region needs in order to reduce its dependence on foreign capital.

Increasing the stability and soundness of their domestic financial system represents a key objective for Latin American countries. Macroeconomic stability is also key in this regard, since they both go together in the long run. Sound regulation and supervision needs to be maintained as well as a stable legal and institutional environment. The use of domestic currency financial instruments should be strengthened in order to reduce vulnerabilities. Finally, pension reform and other sources of institutional investment need to be fostered, so as to create sufficient demand in order for domestic capital markets to grow.

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In conclusion, the Madrid Seminar illustrated that there are many issues of common interest warranting the pursuit of an active policy dialogue. It was agreed to explore ways to enhance cooperation between the central banks of both regions and relevant regional fora, including through the organization of similar meetings in the future.

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