The Impact of the Euro on Latin America

Abstract

The key finding of this report is that the euro is not likely to cause any single major change in Latin America and the Caribbean (LAC). There will, however, be a lot of small effects--in different directions--in the short and long run. In the main, the impact of the euro on Latin America is expected to be of secondary importance, since no structural trade change is expected. Because the LAC countries are very heterogeneous, the European and Economic and Monetary Union (EMU) and the euro are therefore likely to impact countries differently. Countries and regions with strong links--culturally and geographically--to the United States (such as Mexico and Central America) are likely to be less affected than countries with weaker links. The report's main findings are the following: 1) The European Union should increase imports from the LAC region. 2) Because LAC countries are highly dollarized, a major immediate change is not expected with the euro's launching, rather the main impact is likely to come through financial linkages. 3) Increased financial deepening in Europe could lead to a small increase in exports for LAC. 4) The immediate impact on debt value and debt service is expected to be small. 5) LAC countries may become more attractive as destinations for European investors seeking diversified portfolios. 6) LAC and Mercosur cannot be seen as optimal currency areas at this time.