At least in the Brazilian case, there is very little empirical evidence of that. Under managed exchange rates Brazil suffered recurrent balance of payments difficulties in the 1950s and 1960s, the 1980s debt crisis, which contributed to a dramatic deterioration in macroeconomic performance in the following years, and the slowdown and crisis of the 1990s, before its final collapse in January 1999. Letting the market set the exchange rate does not mean remaining inactive when markets become dysfunctional. Thus, the Central Bank has used its reserves, during the current period of global financial turmoil, to ensure that Brazilian exporters and importers retain access to trade finance, to help Brazilian corporates rollover their debts and to provide liquidity to the spot market. Throughout this difficult period our focus has been on contributing to improve the way markets function, not to replace them. This approach is, and will remain, the cornerstone of our action in the foreign exchange market. There is no doubt that the world is currently experiencing an extremely difficult time. But it is also true that Brazil is among the countries that are better prepared to cope with the effects of the global financial crisis – a fact pointed out by several organizations in many occasions, such as the last issue of the OECD composite leading indicators, a survey encompassing 35 countries. 1 Brazilian fundamentals not only enable us to face the current environment in better conditions than most countries, but also in a much better shape than in the past.
Indeed, by urging governments to aim at a fiscal position “close to balance or in surplus” in the medium term, the pact enables them to let fiscal deficits increase during recessions without exceeding the 3% reference value. In short, it allows them to create a fiscal buffer during normal economic periods that can be drawn on to counter economic divergences or asymmetric shocks. To summarise that overall issue, the “Optimal Currency Area” theory has frequently been called upon by economists who criticized EMU and expressed concerns about giving up the exchange-rate policy instrument as a response to asymmetric shocks - in particular to asymmetric shocks within a monetary union. I would like to point out, first, that one of the most remarkable effect of the European integration has been the increasing symmetry of shocks. Second, Professor Mundell himself, in support of EMU, made an interesting clarification at the beginning of 1998: in the event of a shift in demand from one member country to another, creating unemployment in the first and inflationary pressure in the second, flexible exchange rates would not be able to solve the problem. I quote: “If the argument for devaluation were valid, it could be applied to every state or sub-region in any country, with a proliferation of new currencies, so they could be devalued!”.