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Is the Euro-zone on the Mend? Latin American examples to analyze the Euro question

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  • Cavallo, Eduardo A.
  • Fernández-Arias, Eduardo
  • Powell, Andrew

Abstract

Several European countries face challenges reminiscent of those faced by the emerging economies of Latin America. The economic booms in some peripheral Euro-zone countries financed by large capital inflows; the credit and asset price booms and then the busts including Sudden Stops in capital flows; the strong interaction between sovereign debt and domestic banking systems; the role of foreign banks and contagion; and all in the context of a fixed exchange rate, are familiar plotlines for Latin American audiences. For those Euro-zone countries that built up large Euro-denominated external liabilities, Latin America’s experience is particularly relevant and worrisome. Still, Europe may be in a better position to navigate a path out of the crisis given cooperative mechanisms that were absent in Latin America, particularly the availability of massive liquidity support. Nonetheless, while such support buys time, it does not guarantee success. This paper argues that reflecting on Latin America’s experience provides useful lessons for Europe to improve the chances for a successful resolution.

Suggested Citation

  • Cavallo, Eduardo A. & Fernández-Arias, Eduardo & Powell, Andrew, 2014. "Is the Euro-zone on the Mend? Latin American examples to analyze the Euro question," Journal of Banking & Finance, Elsevier, vol. 47(C), pages 243-257.
  • Handle: RePEc:eee:jbfina:v:47:y:2014:i:c:p:243-257
    DOI: 10.1016/j.jbankfin.2014.07.010
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    1. Alessio Terzi, 2019. "The Euro Crisis and Economic Growth: A Novel Counterfactual Approach," CESifo Working Paper Series 7746, CESifo.
    2. Terzi, Alessio, 2020. "Macroeconomic adjustment in the euro area," European Economic Review, Elsevier, vol. 128(C).

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    More about this item

    Keywords

    Latin America; Euro; Debt overhang; Banking crisis; Sudden stops; Real devaluations; Fiscal devaluation;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • G01 - Financial Economics - - General - - - Financial Crises

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