The announcement this week that Brazil and Argentina were working on a common currency proposal to revitalize bilateral trade and reduce dependence on the US dollar raised expectations about the possible emergence of a currency bloc with the potential to become the second largest in the world. after the Euro Zone.
“We have decided to advance the discussions on a common South American currency that can be used for both financial and commercial flows, reducing operating costs and our external vulnerability,” announced the presidents of Brazil and ArgentinaLuiz Inácio Lula da Silva and Alberto Fernández, respectively, in a joint article on Sunday.
International interest in the proposal for a common currency, which is not new and had already been mentioned by Lula da Silva in his previous mandates, increased in part due to a report from the influential British newspaper Financial Times Y to the favorable reaction of South African tycoon Elon Musk.
The Financial Times reported that the initiative would be one of the central points in Lula da Silva’s visit to Buenos Aires, his first trip abroad since he assumed the Brazilian presidency for the third time.
“There will be a decision to start studying the necessary parameters for a common currency, which includes everything from fiscal issues to the size of the economy and the role that central banks will play,” the head of the Argentine economy, Sergio, told the British outlet. Massa.
The commotion centered mainly on the potential of the “south”, as the currency would initially be called, to become a kind of “South American euro” if the rest of the countries in the region accepted the invitation to use it. If so, this monetary union could represent 5% of world GDP.
Experts are not convinced
Are we then close to the creation of a new monetary block? Analysts and experts do not see it as likely, at least not in the short term.
According to Pavel Vidal, professor of Economics at the Universidad Pontificia Javeriana in Cali, Colombia, “the conditions for a monetary union in Latin America are not present, and even less between Brazil and Argentina.”
“I understand the interest and importance of wanting to gain autonomy in relation to the US dollar, but a convergence of the countries is required, some solid and independent institutions for the management of economic policies and indicators of sustainable macroeconomic balances and public debt before to start thinking about sharing a common currency,” Vidal explained to the voice of america.
For the economist, Argentina -above all- “does not meet these criteria.” The Argentine nation is in the midst of a crisis due to the fall in dollar reserves and experienced inflation close to 100% in 2022.
Other experts have pointed to the disparity in the economies of the two countries. The Colombian analyst and economist Julio César Herrera expressed his opinion in a Article published in The Economist that, to make this single currency a reality, both governments “would have to print banknotes” something very difficult to do at the moment.
“The Argentine economy, with its large deficit and its large debt, does not have the capacity to be an ally. Brazil has a much stronger economy and productive system. Economically it does not make sense to take two such disparate economies and equalize them,” Herrera warned. .
For Vidal, at present the “best monetary arrangement would be to think of some way to promote trade and indebtedness using the own currencies as the unit of account with some type of indexation to regional inflation. That is, to think of exchange arrangements and indexation to the inflation as a way to use the dollar less, and not so much in sharing a common currency, which is a much more ambitious objective and not very feasible under current conditions,” he stated.
looking for solutions
Given the expectation of a possible announcement after the meeting on Monday between Lula da Silva and Fernández in Buenos Aires – prior to the summit of the Community of Latin American and Caribbean States (Celac) – officials from both governments rushed to specify that, for now What they were looking for is immediate solutions to strengthen the economies of both countries.
“Trade is very bad and the problem is precisely the foreign currency, right? So we are trying to find a solution, something in common that can make trade grow,” Brazil’s finance minister told reporters on Monday. Fernando Haddad, upon his arrival in the Argentine capital.
Haddad specified that they first focus on how to help Argentina acquire Brazilian exports without affecting its scarce dollar reserves, instead of launching a common currency with wide circulation in both countries.
The Brazilian minister spoke of a “common trade unit” but dismissed the idea of a unified currency.
His Argentine counterpart had already detailed Financial Times that this currency would circulate in parallel to the real and the peso. “It is the first step on a long road that Latin America must travel,” Massa said, adding cautiously that he did not want to “create false expectations.”
The “South American euro” still takes
In Buenos Aires, Lula da Silva and Alberto Fernández, both of leftist tendencies, assured that important decisions had not yet been taken on the implications of a common currency proposal that would replace the existing ones.
What is known is that both parties are discussing an agreement to intensify bilateral trade which, according to Minister Sergio Massa, has fallen by about 40% in the last 10 years.
The strategy consists, Reuters reports, of an agreement under which Brazilian banks would give credits to Argentine importers, backed by a Brazilian government fund to guarantee the loans.
Argentina would have to provide guarantees for the commercial financing of Brazil with international liquidity.
“They could be Chinese titles, they could be contracts for the purchase of gas, wheat. Something with international liquidity that guarantees that, in the event of non-payment by the Argentine importer, Brazil can access to compensate for this non-payment,” specified a cited source. by Reuters.
For the moment, the operations will be carried out in reais, the same source detailed.
The Argentine Minister of Economy pointed out that they are advancing “in a reciprocal export financing program whose objective, in the case of Brazil, is to increase the volume and simplify the life of Brazilian companies when exporting to Argentina , and in the case of Argentina, increase the rate of supply in the Argentine value chains”.
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