Argentina and Brazil Risk: A “Eurocentric” Tale

This paper suggests that the practical operation of the European Exchange Rate Mechanism (ERM) provides important lessons for authorities in developing countries struggling to implement sustainable exchange rate regimes to support economic convergence. These lessons are beginning to spread beyond the European continent, reaching in particular Argentina and Brazil. The difficulty in adapting a code of conduct like that of the ERM in Latin America is certain to be greater given the absence of financial reputation in either one of the two main members of Mercosul and the novelty of peer pressure among them. The “Eurocentric” tale this paper tells about Argentinian and Brazilian risk posits that the decoupling visible since 2001 could be sustained by enhanced regional surveillance in the Mercosul if financial reputation in its two main members were sufficient. While this tale is for the long term, it provides an anchor for the difficult choices Argentina and Brazil face in trying to earn credibility abroad.