sovereignty. this could be achieved by giving european institutions greater competence to effectively compel euro area member states – in a graduated manner if and when the situation deteriorates – to take the necessary fiscal policy decisions. this would correspond to a further sharing of national sovereignty. but for both weaker and stronger countries, it is in fact an opportunity to regain substantive sovereignty as opposed to formal sovereignty. for the weaker countries, measures that put the soundness of their fiscal policies beyond doubt will allow them to be fully sovereign, in the sense that they can use fiscal policy in its vital economic stabilisation role and take free decisions about taxes or types of expenditure without fear of excessive discipline from financial markets. for the latter, sharing sovereignty at the european level will allow them to effectively protect their domestic economies from spillovers from the rest of the euro area. moreover, they will no longer be placed into situations where they are de facto forced into taking decisions to avert imminent catastrophe. the sharing of sovereignty is also the pre - condition for any risk - sharing mechanisms at the euro area level. the recent report by the four presidents mentioned the gradually development of a fiscal capacity for the emu – that is, a common budget for the euro area distinct from the eu budget. it identified two possible functions of such fiscal capacity : first, facilitating the adjustment to country - specific shocks ; and, second, providing financial incentives for structural reforms. reflections on this are at a very early stage and the pros and cons need to be carefully weighed but it is a very important component of a fiscal union. there is a long debate going back to the werner report in 1971 or to the preparation of the maastricht treaty on the degree of fiscal integration that is necessary to sustain a monetary union. in my view the key question on taking detailed decisions remains that of efficiency, being necessary to assess whether there are economic benefits in excess of costs in moving some expenditure to the euro area level. economic union the third pillar, economic union, is necessary to ensure the conditions for prosperity within a monetary union and thereby prevent countries from becoming a burden on others. without the possibility for exchange rate adjustment, countries have to remain sufficiently flexible to adjust through other channels as underlined by the theory of optimal currency areas. this is particularly important in the euro area – as opposed to, say, the united states – because fiscal transfers go only through the eu budget to compensate regions that lose competitiveness and become permanently depressed. the bedrock of economic union

enrique v iglesias : economic trends in latin america – the context of a globalized economy statement of mr enrique v iglesias, president of the inter - american development bank, at the meeting of the bank for international settlements, in mexico city, mexico, on 13 november 2000. * * * dear governors and friends : i am honored that bis invited me to speak to this distinguished audience of central bank governors from so many countries. that our host, the bank of mexico, is celebrating its 75th anniversary makes this a particularly special occasion. as you may expect, my topic today is latin america. i would like to use this opportunity to convey the views of the inter - american development bank on the state of economic affairs in the region and also to share with you some of our concerns about the future. i hope that some of these concerns may be of interest to the bis as they relate to its important work of strengthening financial systems. i shall divide my remarks in three parts. first, i shall briefly talk about the deep reforms that our region undertook in the past decade, which have radically transformed for the better the economic landscape of latin america. however, despite the strong policies and institutions that were put in place, as you know, our economies were overwhelmed by the external shocks suffered in recent years. second, i shall tell you how our region has experienced recent international financial turmoil and how it is currently recovering from a growth slowdown. the key question now is whether changes have been made to prevent the same experience from happening again and, after this painful episode comes to an end, whether growth and stability will prevail. i certainly hope so, but, finally, i shall close with some of my concerns about our continuing vulnerability to a sometimes hostile external environment, which i think are of interest to the bis and others involved in reforming the international financial architecture. 1. the reforms undertaken by the region in the last decade the reforms were deep : in the last decade, latin america embarked on a broad range of macroeconomic stabilization efforts and structural reforms that radically changed the economic environment. macroeconomic stabilization has been the result of a very important effort to correct our traditional fiscal imbalances throughout the region. fiscal deficits larger than 3 % of gdp were common in the eighties and are now exceptional : the average fiscal deficit in the last ten years has been just 1. 4 % of gdp. fiscal consolidation has been supplemented with sound monetary policies, which has resulted in much lower levels of inflation in most