Skip to main content

The euro and Latin America

With Europe's new monetary unit a done deal, a question for Latin America is what impact the euro will have on the region.
Don't look for any major economic effects, at least in the short term, says Charles O. Sethness, manager of the IDB's Finance Department. He believes the immediate effect will probably be slight and limited mainly to a greater ease in conducting foreign exchange transactions. With the euro, a given country will no longer have to engage in many foreign exchange and hedging operations as has been the case when making transactions in the multiple pre-euro currencies.

But in the future, some Latin American and Caribbean countries and financial institutions may find financial transactions in the euro market as attractive and easily accessible as the dollar or the yen markets, according to Sethness.

The euro market could become larger and more liquid than today's individual European currency markets, complete with higher yielding and lower rated instruments," Sethness says.

At the same time, European exports could become more competitive in world markets because of lower foreign exchange fees and transaction costs. Also, more exports from Latin America could eventually be priced in euros rather than dollars, he added.

Europe is the region's second most important trading partner, with annual exports of about $30 billion and imports on the order of $40 billion. European investments in Latin America represent nearly 23 percent of total foreign investments in the region.

In a recent study on the euro's impact, the Latin American Economic System (SELA) found that the new currency will not necessarily bring greater financial stability to the world's financial markets. "It is important for developing countries to remain alert in their management of monetary policy and reserves," SELA said.

Shortly after its adoption on Jan. 1, 1999, the euro will represent 30 to 35 percent of all the outstanding world loans and will replace the German mark as the second most widely used currency in world trade, after the dollar, according to SELA.

With regard to the interest rates on external debt, the introduction of the euro will not affect countries with interest rates tied to dollar Libor (the London Interbank Offered Rate for U.S. dollars, a world benchmark lending rate), SELA says. However, countries with debts tied to Pibor (Paris Interbank Rate) or Deutsche Mark Libor will receive a new benchmark for interest payments that will be linked to a French franc/euro or Deutsche mark/euro quotation.

European capital markets will grow significantly with the introduction of the euro and achieve greater importance in financing the growth of enterprises, having a similar role as capital markets in the United States, says SELA. "The euro bond and European stock markets will rival those of the United States, reducing the costs of capital and increasing the efficiency of placements."

Following the euro's introduction next year, the IDB and the French government will hold a high-level conference on the international impact of the new currency on March 16 in Paris during the IDB's annual meeting.

Meanwhile, at a July summit of the leaders of the Mercosur countries held in Argentina, that country's president issued a call for a common currency among the four member nations. President Carlos Menem predicted that accomplishing monetary union will take Mercosur much less time than the half century it has taken the Europeans.

Jump back to top