Argentina, Brazil put common currency plan on ice – DW – 01/24/2023

Ahead of a summit of the Community of Latin American and Caribbean States (CELAC) in the Argentinian capital of Buenos Aires on Tuesday, word had spread that Argentina and Brazil wanted to create a common currency, reportedly called the sur, after the presidents of both countries published an opinion piece saying they were renewing discussions of the matter. Such a move would create the world’s largest currency union after the 20-nation eurozone in Europe.

Latin America accounts for 5% of the world’s gross domestic product, the EU for 13%. Little wonder, then, that the project dominated business headlines in Europe over the weekend. In South America, meanwhile, the announcement barely caused a stir.

Since the first integration projects began 50 years ago, politicians in both countries have dreamed of a common currency. But thus far, attempts have produced little more than material for academic papers.

Instead of one currency, a common trade unit

Brazilian-Argentina economist Fabio Giambiagi criticized the renewed discussion as a “waste of time.” The governments’ failure to better plan their economies, along with their differing economic situations, prevents the development of a serious currency project for the time being, he told DW.

Apparently, he wasn’t the only one to think so. At the Tuesday summit, it became clear that there are no plans for a monetary union at this time; rather, the two countries want to press ahead with talks on the development of a common unit of account meant to facilitate trade. This was announced by the two heads of state, Lula da Silva and Alberto Fernández, in Buenos Aires. Under these plans, the currencies of both countries—the real in Brazil and the Argentine peso—would continue to exist; the new value unit, yet to be precisely defined, would serve to make trade between the two countries more efficient and reduce dependence on the US dollar.

starkly different neighbors

A common unit of trade is perhaps easier for economists to swallow than the idea of ​​a currency union had been. In terms of monetary and fiscal policies, the states could hardly be more different. Brazil has a floating exchange rate and an independent central bank. The monetary guardians in Argentina, on the other hand, print money at the order of the president to balance the budget deficit. As a result, Argentina’s annual inflation rate hit 95% in 2022. In Brazil, it was just under 6%.

Brazil has more than $300 billion (€276 billion) in foreign exchange reserves, making it a creditor to the world financial system. Argentina, on the other hand, owes more than $40 billion to the International Monetary Fund, on whose drip it hangs. Without the IMF, the country would have long since become insolvent.

Argentina grapples with soaring inflation

To view this video please enable JavaScript, and consider upgrading to a web browser that supports HTML5 video

Putting the cart before the horse

Argentina’s foreign exchange coffers are almost empty, and the government’s rigid capital controls prevent Argentinas from buying dollars. There are about two dozen different exchange rates for the greenback there. On the black market, the dollar is worth twice as much as at the official rate.

There’s also no common market between the two countries, not even a free trade zone. In the Southern Common Market — a regional free trade bloc commonly known by its Spanish abbreviation Mercosur — imports of many products are subject to high tariffs. Several exemptions also apply to the common external tariff. Putting a common currency on top of this fragile “economic community” is like putting the cart before the horse.

There is only one reason why Brazilian President Luiz Inacio Lula da Silva is reviving the project of a common currency, and it’s based on a political argument, not an economic one. After his recent reelection, Lula wants to push ahead with integration in Latin America. He wants to use unity in the region to increase Latin America’s geopolitical weight, similar to what he did during his first two terms in office.

Brazil accounts for more than half of Latin America’s economic power and populationImage: Nelson Almeida/AFP

Buenos Aires grasps at any straw

The common currency is supposed to act as an accelerator for the process of regional integration in South America. Brazilian Finance Minister Fernando Haddad already said as much last April. But with an economic crisis on its hands, the Argentine government is happy for any straw it can grasp at. A link with much-larger Brazil could solve Argentina’s isolation.

Argentina’s elections are in October, so any positive news is in demand in Buenos Aires. Greater economic integration in South America is certainly desirable, but instead of pushing infrastructure projects and free trade agreements, the South Americans are taking step three before step one.

Economist Mohamed A. El-Erian is also skeptical. “Neither country has the initial conditions to make this succeed and attract others,” he wrote on Twitter.

This article was originally published in German and updated to reflect recent developments.

Leave a Comment

Your email address will not be published. Required fields are marked *