Ensuring regional monetary harmonization

The normal flow of cross-border investment within a given grouping depends on a certain level of monetary and fiscal harmonization. The total lack of convergence in such areas as the liberalization of interest rates, central government deficit and, particularly, foreign exchange policy (exchange rate management, regional convertibility), usually accompanied by such symptoms as divergent inflation rates, may result in either one-sided capital flows which may represent an unbearable burden on all partners or, owing to the uncertainty of the zone and the incompatibility of countries, no crossborder trading whatsoever. Countries with diverging monetary performance (particularly the inflation rate) find it difficult even to manage day-to-day routine financial operations.

Flourishing regional capital markets may depend also on a minimum convergence in fiscal policies. The coordination of fiscal policies may aim at, inter alia, establishing maximum limits to fiscal deficits, the prohibition of their financing with central banks' credits, the establishment of maximum limits to the public debt/GDP ratio. When divergences in these fields are excessive, market participants coming from different countries of the region cannot enjoy equal opportunities. In addition, it is important to harmonize the fiscal and incentives policies given their incidence on the movements of goods, services, capital and factors within a region. This requires a comprehensive process of concertation. The compromise elaborated in this process may eventually imply a commitment to intraregional consultations before adopting national fiscal measures.

A minimum level of harmonization does not imply uniformity. The latter is not only impractical but also undesirable. One of the driving forces of cross-border securities movements within any area may be exactly the divergent patterns of savings, equity supply and demand, fiscal deficits.