Joint currency plan of Brazil and Argentina raises economic concerns

Former IMF chief economist Olivier Blanchard needed just three words to respond to the news that Brazil and Argentina would begin preparatory work to create a common currency. “This is crazy,” he tweeted.

While economists have questioned the feasibility of the idea, political analysts have been less dismissive, pointing out that the desires of the largely left-wing presidents of South America to promote regional integration and challenge the US dollar dominance.

For the first time in more than seven years, Brazil and Argentina are politically aligned under leftist leaders, with Luiz Inácio Lula da Silva and Alberto Fernández keen to present a united front.

Brazil’s president told reporters in Buenos Aires earlier this week that “God willing” finance ministers and the heads of the two central banks would have the “intelligence, competence and good sense” to start the job. which could eventually produce a common currency.

His Argentine counterpart said that although he did not know “how a common currency with Brazil and the region would work”, the two nations would have a “much deeper strategic link” that would last “for decades”.

The two leaders made it clear that an eventual common currency would, at first, be limited to use in commerce and would work alongside, rather than replace, the Brazilian real and Argentine peso.

This is not the first time the idea has been raised. People close to the former right-wing administration in Brazil confirmed that former finance minister Paulo Guedes had championed the idea several times on the grounds that the currency would help impose fiscal discipline and that there would be fewer global currencies in the future, so it would be beneficial. if the region established its own. Guedes even suggested a name, the “royal weight,” and predicted a 15 year timeline for a project of this type in Latin America. former head of the Argentine central bank Frederick Sturzeneggerwho served from 2015 to 2018 under the conservative administration of Mauricio Macri, supported the establishment of a central bank among members of the Mercosur trading bloc.

The Latin American left has long wanted to reduce the region’s historic dependence on the United States and sees a common currency as a smart way to claim greater economic sovereignty while pursuing a long-held dream of a closer political union. narrow. In a nod to those tensions with his rival north of the equator, Brazil’s current finance minister Fernando Haddad co-authored a paper last year suggesting a common currency called “sur,” or south.

Underpinning political support is the desire to stabilize Argentina’s battered economy. The country has been on the brink of insolvency for years, its central bank reserves are dwindling, strict exchange controls have fueled a rampant black market for the dollar and confidence in the peso has collapsed. “Argentina needs an external anchor to restore credibility,” said economist Rodrigo Wagner, an expert on the adoption of new currencies.

Financial chaos has weighed on trade between the two economies. At approximately $30 billion in 2022, flows between Brazil and Argentina are lower than the $40 billion level recorded a decade ago. That’s partly because Argentina is chronically short of US dollars, the common currency of world export markets, to buy Brazilian exports.

“Certainly, trade is facilitated by a common currency, and there are benefits to eliminating currency risks,” said Nannette Hechler-Fayd’herbe, global head of economics and research at Credit Suisse. However, she highlighted that currency unions also pose challenges for member states, as the history of the EU’s single currency project demonstrates.

Pierpaolo Barbieri, founder of Argentine fintech Ualá, said it was too easy to be cynical about the plans. “Brazil wants a bigger market for its exports and lower trade barriers,” he added. A common unit of exchange would be an “end vehicle” for achieving both.

Digital currencies, such as Tether and Bitcoin, already offered alternatives. “Anything that opens up our extremely closed market is a step in the right direction,” Barbieri said.

Everton Guimarães Negresiolo, president of the Argentine-Brazilian Chamber of Commerce, Industry and Services, said that “a bilateral trade tool” in a currency “other than the dollar” would be beneficial for the companies they represent, although he recognized that a chain of imbalances between the two countries posed “very important challenges”.

“It is very positive news to know that we are working towards greater regional integration,” said Gustavo Grobocopatel, who heads one of Argentina’s largest agricultural groups, Los Grobo, adding that the announcement was a way to get member states to “they will begin to do their homework” on the imbalances.

Wagner said the lack of an alternative to dollars meant that South American nations, including his native Chile, were losing valuable trade relationships.

But others argue that the scale of the disparity between the two countries makes the project not a start.

Buenos Aires has been cut off from international debt markets since a default in 2020 and has strict exchange controls. Meanwhile, the real is fully convertible and better control over public spending means the country has full access to international markets. Annual inflation in Argentina reached 94.8 percent in December, compared with a much more manageable 5.79 percent in Brazil.

Marcos Casarin, chief economist at Oxford Economics, said: “Argentina has more inflation in a single month than Brazil [has] in one year.”

“My perception is that this common currency will not be feasible. And if it is feasible, it will create more and more turbulence in our economy,” said Walter Schalka, president of São Paulo-based Suzano, one of the world’s largest pulp and paper companies. “Argentina and Brazil face different economic moments. They are in a completely different situation. This is something that is not going to create any value for Brazil.”

Additional reporting by Jonathan Wheatley

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