19 July 1998. Economic and financial relations between Latin America and the Caribbean, the region’s second trade partner after the United States, will suffer a "gradual" impact after the entry into force of the Euro, the new European currency, according to a study published today by SELA.

Currently, the international monetary system is dominated by the U.S. dollar, but as of 1 January 1999, the euro will become the world’s second currency, which will put in place "two big players" with enough power "to change the rules of the game", according to the document "The impact of the euro on Latin America and the Caribbean".

On that date, and for the first time in the monetary history of the world, 11 countries of the 15 members of the European Union will abandon their nation currencies and adopt a common currency, the euro, which constitutes a decision of "great political and economic significance" not only for Europe but also for the rest of the international community.

SELA, anticipating the problems and advantages involved in the introduction of the euro, convened a forum in October last year (see "Forum on the Impact of the euro on economic relations between the European Union and Latin America and the Caribbean") in which a group of experts analyzed the effects that the single European currency will have on its economic and trade relations with our region.

In the case of Latin America and the Caribbean, the "impact of the euro will be gradual, since the new currency will affect the composition of the international reserves and on several trade and financial operations as it becomes consolidated in the international monetary system" according to the document, which compiles the papers presented at the forum.

Europe is the second most important trading partner of Latin America and the Caribbean, with exports of about 30 billion dollars and imports in the order of 40 billion dollars a year. As regards investments, the European ones represent almost 23 percent of total foreign investments in the region.

In a synthesis of the impact of the euro on the world monetary and financial system, the document underlines, among other aspects, the following:

• The euro’s implications for the servicing of the Latin American and Caribbean countries’ external debt will depend on the debt structure of each country. If the debt is subject to the Libor rate there will be a short-term impact, since Britain will not adopt the euro for now. But if the debt is subject to the Pibor (Paris interbank) rate, it will be subject to a new marker which in turn is linked to the exchange of the French franc vis-a-vis the euro.

• In the short and medium term, the prices of raw materials will continue to be in dollars. On the other hand, as regards bond issues, the use of the euro will be extended in shorter periods as of 1999.

• The euro will widen access to international private capital markets for the developing countries, facilitating the possibility of issuing "eurobonds" to substitute dollar obligations.

• In the medium term, in the case of a significant re-evaluation of the euro with respect to the currencies belonging to it, there could be implications of a certain scope for the exchange terms of the European Union’s trade partners, in that European exports will be dearer.

• As the euro becomes consolidated, it will be more difficult for the United States to maintain its present current account deficit level and to continue being the world leader in the international financial markets.

• The introduction of the euro in the international monetary system will not necessarily mean greater stability in exchange fluctuations or in the general behaviour of capital flows in other regions. Therefore the developing countries should remain vigilant in the handling of their monetary policies and reserves, since changes in the volatility of the system are not expected.

The costs of the financial transactions that currently arise from the existence of various rates of exchange between the European countries will drop considerably, facilitating trade operations with the European Union and between the countries that form it.

http://www.sela.org
sela@sela.org
   SELA,  Permanent Secretariat
Torre Europa, Fourth floor, Urb. Campo Alegre, Av Francisco de Miranda,
Caracas 1060- Venezuela
Tlf: (58) (212) 955.71.11 Fax: (58) (212) 951.52.92