A New Financial Architecture For South American Countries

Abstract

Several South American countries experienced financial crises during the 1990s and each responded differently.  Thus Brazil floated the real following its 1997 crisis, Argentina started the decade with a currency board arrangement, but was forced to give it up some ten years later at more or less the same time that Ecuador adopted the dollar as its official currency.  Chile, on the other hand, has been an island of financial stability in a subcontinent in turmoil.  This article provides an alternative model for South American countries that could lead to more stability in the region and more independence from any of the major economies, especially the United States. This model borrows heavily from the experience of the European Union in general and European Monetary Union in particular. It recommends that the countries in South America first join a reformed Mercosur before forming a South American Monetary Union.  In addition to creating a new common central bank or currency board, some other regional institutions will probably need to be created in order to coordinate economic policies, to negotiate with other countries, and to settle disputes that might arise among members.