term. let me now give a brief overview of how we perceive developments in latin america. the overall outlook continues to improve, although uncertainties as to the strength and resilience of the growth recovery remain. the region ’ s output is bottoming out as south america ’ s recession is being partially offset by a better situation in mexico and central america. the region ’ s recovery has been helped by higher than expected growth in brazil in the first two quarters of 1999, while inflation remained subdued. most observers expect inflation to be some 10 % in 1999, the lowest level in 50 years. factors which may affect the region ’ s growth over the next year are external financing conditions, the extent of the expected slowdown in the us economy, and uncertainties about the pace of brazil ’ s recovery. moreover, a number of countries have fragile banking systems, which may affect economic growth in the medium term. recovery in latin america may, however, benefit from stronger growth in europe given the size of bilateral trade and financial relations. the eu in particular accounts for about 20 % of latin american exports ( 2 % of the region ’ s gdp ), and about 25 % of mercosur exports. moreover, europe has been a traditional exporter of capital to latin america. europe accounts for some 40 % of the net foreign direct investment in the region, some eur20. 8 billion or usd20 billion. numerous european corporations and banks now have a significant share of investments in latin america. over the last decade latin america has made a great deal of progress toward sound economic policies, and the region ’ s growth potential is vast in terms of human and natural resources. latin america is still carrying out the challenging work of building up its economic institutions in order to foster financial stability and sustained non - inflationary economic growth. the policy developments to date are encouraging. several countries in the region have adopted sound budgetary policies, redirected public investment towards health and education, privatised a large number of public sector companies, changed their laws to give foreign investors the same treatment as national ones, opened up their economies, and adopted more disciplined monetary polices, thereby curbing inflation. moreover, a number of countries have granted a more independent status to their central banks and have strengthened their banking systems. all these factors lead us to believe that we are witnessing an enduring and genuine structural change in the region. the containment of the brazilian financial crisis early this year offers evidence that economic reforms have been beneficial to the

in constantly changing circumstances. today i would like to discuss with you our recent experience of decision - making in an uncertain world. i will outline how the crisis developed and then describe how we at the european central bank ( ecb ) responded – the kinds of information we draw on, the tools we use and the principles on which we base our decisions. i will close with some brief reflections on dealing with uncertainty. ii. uncertainty and the crisis the origins of the crisis lay in changes in the economic and financial environment over the past two decades. during that time, there was a marked decline in the volatility of such aggregate economic indicators as total household consumption and total business bis central bankers ’ speeches production. this led to a widespread perception that we were living in very benign economic conditions. at the same time, some developed countries underwent a process of financial deregulation and innovation aimed at improving efficiency. new financial products were developed with the promise of enabling financial institutions to manage the risks in their lending activities more effectively. as a result, larger segments of the population obtained mortgage financing, and credit generally was more easily available. but the promised benefits of financial risk management turned out to be illusory. risk did not disappear, indeed in many cases it was magnified. and the process of deregulation led to a huge increase in private indebtedness and an accumulation of financial imbalances. at the global level, a number of developed economies were able to finance increased household consumption by borrowing from fast - growing emerging economies that had an abundance of savings. these sustained global imbalances contributed to lower interest rates, which further encouraged the process of credit creation in countries that were receiving capital inflows. it was clear to many careful observers that this process eventually should come to a halt. with the considerable benefit of hindsight, warning signals of the subsequent financial distress in the data for 2006 – 07 are clearly evident. in the name of my colleague central bankers, i gave myself a clear warning in january 2007 on the likelihood of a major market correction due to a significant under - assessment and under - pricing of risks in the financial markets. but the specifics of how a crisis might be triggered and the course of its subsequent propagation proved hard to predict in real time. ultimately, the crisis was ignited in august 2007 by unprecedented tensions in the interbank market, in which financial institutions lend to and borrow from one another. following the bankruptcy of lehman brothers in september 2008, the financial market tensions