The importance of confidence in macroeconomic stabilisation efforts

The intensification of the fiscal and financial problems in advanced economies, mainly in Europe, has deteriorated the prospects for global economic activity. In order to break the adverse feedback loop between the low economic growth, the fiscal crisis and the financial fragility, restoring confidence among economic agents is key. To this end it is crucial to adopt credible and comprehensive measures to consolidate fiscal accounts, to recapitalise troubled financial institutions and to repair private agents’ financial positions. The recent agreements reached by European authorities move in this direction, but additional measures might be needed, which may require a greater participation of the International Monetary Fund. Latin America is a region that for decades suffered from recurring financial crisis that brought about hovering economic, political and social costs. The region learned its lesson and this time around has been able to sail through this period of world financial turbulence relatively unscratched. I claim that there are useful lessons that Europe could learn from Latin America´s experience in dealing with crises and setting the ground to avoid recurrences.