Is EMU a Blueprint for Mercosur

Abstract

In this paper, we explore the advantages and disadvantages of a monetary union between Mercosur countries in light of the recent European experience. We address the issue both from the perspective of the traditional optimal currency area (OCA) theory as well as from the approach that emphasizes the credibility gains that a monetary union can provide for inflation prone economies. We find that, at the current stage, the standard OCA preconditions for a currency area are not present in Mercosur. On the other hand, from a credibility standpoint, the European model highlights the lack of an anchor country in the region, therefore suggesting the convenience of a monetary union that includes the U.S. We also examine the case of full dollarization, which we believe is the alternative to a Pan-American currency union that most closely resembles the European model.

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