Brazil and Argentina have announced their intention to introduce a common currency. It could be called «South». There is no question that the initiative has political «attraction» and it may even make some economic sense if some conditions are met. In a world of degraded globalization, with Latin America increasingly interested in gaining autonomy from an increasingly introverted US and an increasingly assertive China, it is instructive to think that monetary sovereignty is achievable.
Indeed, the euro has undoubtedly served to protect European countries from the latest shock The United States has a sometimes erratic monetary policy, although the euro is still a long way from being able to compete with the dollar for the throne of the world’s reserve currency. On an economic level, Brazil and Argentina have close trade ties and fairly synchronized macroeconomic cycles (both are big exporters of raw materials, have similar production structures, and Brazil is stronger). However, inflation in Argentina is high, while inflation in Brazil is under control, which is the main problem with shared monetary policy. Finally, the Mercosur substratum created three decades ago provided the institutional basis for the project, but said substratum was more effective on paper than in reality.
(…) If the common currency proposal between Argentina and Brazil were to use a synthetic unit of account for bilateral commercial and financial transactions, its impact in practice would be limited(…)
Either way, if the project is finally released, it’s going to be a tough road. Monetary and exchange rate policies are lost when currencies are shared. As the eurozone has learned over the past decade, this can be painful, so it must be clear that there is a political project behind it, one that most citizens do not hesitate to support. In the case of South America, where strong nationalism exists, this is not at all clear. Even if the two countries keep the real and the peso in the first phase, what if Argentina has to devalue? How will this affect the credibility of the consolidated unit of account you want to introduce for trade between the two countries? The Europeans also introduced the ECU (European Accounting Unit) in the 1980s, but in practice the backbone of the European Monetary System remains the Deutsche Mark.
As we explained on another occasion, when currency unions became more popular after the financial crisis that started in the US in 2008, the reality was that creating the euro was always an act special Currently, it is not possible to replicate it in East Asia or the Arabian Gulf, nor in South America or Latin America, because the balance of power is very different. The foundation of the European Monetary Union is the Franco-German engine, which consists of two relatively balanced and complementary forces. The French economy accounts for 70% of Germany’s GDP by size, but France is a military power and holds a permanent seat on the UN Security Council.
This balance does not exist in other regions. China is too domineering in East Asia, Saudi Arabia is too domineering in the Arabian Gulf, and Brazil is too domineering in South America. Argentina’s economy accounts for only 30% of Brazil’s economy, and it does not provide France with a military check against Germany, let alone its deep-seated economic problems. In addition, Brazil’s economic and monetary strength cannot be compared with Germany’s. In the absence of a supportive fiscal and political union, the euro and the European Central Bank are built on the credibility of the Deutsche Mark and the Bundesbank. The Central Bank of Brazil and the real lack that credibility. Finally, creating a stable common currency requires the creation of a relatively independent supranational monetary authority, which is not easy to achieve when the balance of power is so asymmetrical.
Finally, there is the geopolitical dimension. In a world where great power competition is increasingly evident, it seems logical to assume that Washington would not welcome a reduction in the use of the dollar in South America, its backyard. This can have serious consequences. Recent crises, including the financial crisis in 2008 and the COVID-19 crisis in 2020, have once again shown that the Federal Reserve (FED) remains the world’s central banker. Even the Eurozone, which issues a second global currency, had to activate a liquidity line (change line) with the Fed to secure the dollars necessary to stabilize its financial system. The Fed has only five central banks with permanent liquidity lines: the Central Bank of Canada, the United Kingdom, Japan, Switzerland and the European Central Bank, which extended temporary lines for nine others during the crisis, including Banco do Brasil (Argentina, from the Central Bank of China). received a similar liquidity line, but of dubious utility). It will be worth seeing if this continues to happen with the introduction of «South», especially if the political rhetoric of the initiative is to reduce the use of the dollar in the region. In short, if Argentina and Brazil’s common currency proposal is to use a synthetic unit of account in bilateral commercial and financial transactions, its impact in practice will be limited, despite the coordination and cooperation between the central banks on the exchange of exchange rates (Something always difficult) Regional trade can be expanded by giving regions more stability (remember South America is one of the least trade intensive regions between neighbors).Conversely, if you want a monetary union, you need an independent supranational monetary authority on the one hand and a lot of political will to continue the integration on the other, because as the history of the euro has shown, there is no minimum Fiscal union can buffer monetary union, currency union cannot be maintained shock Asymmetrical conditions that may affect different parts of the union.
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Image: Family portrait at the 7th CELAC Heads of State and Government Summit in Buenos Aires, Argentina (1/24/2023). Photo: Ricardo Stuckert/PR. Palazzo Planalto (CC BY 2.0).
Authors: Miguel Otero Iglesias, Federico Steinberg.
The entry «South American Currency Union?: An Unenforceable Ideal» was first published in USA News Web.