Brazil And Argentina In Talks Over New LatAm Common Currency

February 1, 2023
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The Presidents of Brazil and Argentina have announced plans to build a common currency for Latin America to enhance cross-border trade and curtail dependency on the dollar.

The Presidents of Brazil and Argentina have announced plans to build a common currency for Latin America to enhance cross-border trade and curtail dependency on the dollar.

The announcement came as part of Brazil’s recently-elected President Luiz Inácio Lula da Silva’s visit to Buenos Aires where Lula and his Argentine counterpart, Alberto Fernández, discussed wide-ranging topics that affect the political, social and economical scene of the region.

During the visit, the economic ministers of the two countries signed a declaration to reinforce their strategic alliance, strengthen democracy and deepen political and economic integration among countries in Mercosur, the regional common market whose members also include Paraguay and Uruguay.

As part of this plan, Brazil and Argentina, which are both led by left-leaning Presidents, will initiate technical studies to deepen the financial integration of the countries in the region and mitigate their dependency on foreign currency.

This initiative includes in the long term the creation of a South American currency “with a view to promoting trade and regional integration of goods and increasing resilience to international shocks”.

“We have decided to enhance the discussions on a common South American currency that can be used for both financial and trade transactions, reducing operating costs and reducing our external vulnerability,” the Argentine government said.

The new currency will be first launched in Brazil and Argentina and expanded to other countries in the future.

A ‘shared’ but not ‘single’ currency

The common currency, which Brazilians like to call the “Sur” after the Spanish word “South”, has come up several times during Lula’s election campaign.

The initiative was inspired by the euro but will be different in the sense that it will be a shared currency, as opposed to a single currency, according to Argentine economy minister Sergio Massa.

It means that the common currency would not replace either the Argentine peso or the Brazilian real, instead it will exist in addition to these currencies.

A shared currency could bring several benefits to the region, Dennis Shirshikov, head of growth at Awning.com and former professor of economics at the City University of New York, told VIXIO.

For instance, it is intended to solve the issue of currency fluctuations and exchange rate uncertainties, promoting trade and financial stability in the region, Shirshikov said.

The Sur may also enhance payments by increasing competition, making payments more efficient and lowering transaction costs for businesses and consumers.

On the other hand, the common currency may pose a number of challenges, according to Shirshikov. It creates the risk of inflationary pressures, as well as the need for a unified monetary policy and for significant investments in the payments infrastructure.

The success of a common currency, in that sense, “would depend on the ability of the governments of Brazil and Argentina to work together effectively and address these challenges”, he stressed.

The prospects of the Sur

Although the idea to facilitate cross-border payments and trade through a common currency is attractive, experts agree there is a long way to go before it happens.

“It is not very realistic and would be very challenging,” David Schwartz president and CEO of the Financial and International Business Association (FIBA), told VIXIO.

Inflation, the value of a country’s reserves and balance of payments issues would affect the relative value of the currency and require constant adjusting in the value relative to each country’s currency, Schwartz explained.

Brazil and Argentina have different economic structures and levels of inflation, and it would be a challenging task to align their monetary policies for the common good, Shirshikov also noted.

According to the International Monetary Fund, Argentina had an annual inflation rate of 95 percent at the end of 2022, ranking the second highest in the region, following Venezuela’s 210 percent. By contrast, Brazil had a comparatively moderate 6 percent inflation.

Additionally, a shared currency may only make sense between economies that are “each other's major trading partners and are similar enough that they won't face large asymmetrical shocks”, Paul Krugman, Nobel laureate, pointed out.

Although Brazil, as a member of Mercosur, is Argentina’s main trade partner, with 15 percent of Argentine exports going to Brazil and 19 percent of its imports coming from there, Argentine exports and imports to and from Brazil represent only 4 and 5 percent of Brazil’s total export and import.

However, according to Shirshikov, if successful, the joint currency “could serve as a model for other countries in the region and lead to a stronger, more integrated Latin American economy”.

In a press conference following the announcement, the economic minister acknowledged that it will be a long process, emphasising that they do not want to “create false expectations”.

“We are going to look at the asymmetries in terms of gross product, we are going to look at the minimum requirements. Argentina, for example, has to follow a path of more fiscal order and more accumulation of reserves in order to be a partner that brings synergy and virtuosity in the creation of a common currency,” Massa said.

Recurring theme of common Latin American currency

The idea of a common South American currency is not new and has been raised by various politicians in various countries in the past.

It was first proposed by former Venezuelan socialist President Hugo Chávez in 2007 to counter the dominance of the US dollar and enhance regional trade.

Building on his vision, in 2010, Bolivia, Venezuela and eight Caribbean countries launched a common currency called Sucre.

The Sucre, however, did not take off and, according to Ecuadorian legislators, it was used as a money laundering tool and facilitator of bogus exports. Adoption of that currency reached its height in 2012, with 2,077 transactions worth $910m, and has been shrinking each year since then.

Later in 2018, Venezuelan President Nicolás Maduro proposed to replace Sucre with a Venezuelan cryptocurrency to facilitate trade between member nations. The idea, however, has not gained ground.

Maduro also expressed support for Brazil and Argentina’s Sur initiative.

“Venezuela is prepared to support the initiative to create a Latin American and Caribbean currency. Our path is independence, union and liberation of the continent” the President tweeted.

In 2022, Fernando Haddad, who currently serves as Brazil’s economy minister, published an article in local newspaper Folha de Sao Paulo where he laid out his vision for a common currency.

Under Haddad’s plans, each participating country would have the discretion to decide whether they adopt Sur altogether or keep their currency. The new currency would be issued by a South American central bank and exchange rates between national currencies and the Sur would fluctuate.

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