Brazil and Argentina begin preparations for a single currency

This week, Brazil and Argentina will announce the start of preparatory work on a common currency, in a move that could eventually lead to the creation of the world’s second-largest currency bloc.

South America’s two largest economies will discuss the plan at a summit in Buenos Aires this week and invite other Latin American countries to join.

The initial focus will be on how a new currency, which Brazil proposes to call “sur” (the south), could boost regional trade and reduce dependence on the US dollar, officials told the Financial Times. It will initially run parallel to the Brazilian real and the Argentine peso.

“There will be a … decision to start studying the necessary parameters for a common currency, which include everything from fiscal issues to the size of the economy and the role of central banks,” Argentine Economy Minister Sergio Massa told the Financial Times.

“It will be a study of trade integration mechanisms,” he added. “I don’t want to create any false expectations… It is the first step on a long road that Latin America has to travel.”

Initially a bilateral project, the initiative will be introduced to other Latin American countries. “It is Argentina and Brazil that claim the rest of the region,” said the Argentine minister.

The Financial Times estimates that a currency union covering the entirety of Latin America would account for about 5 percent of global GDP. The euro, the world’s largest monetary union, makes up about 14 percent of global GDP when measured in dollars.

Other currency blocks include the CFA franc, which is used by some African countries and pegged to the euro, and the East Caribbean dollar. But these include a much smaller slice of global economic output.

The project is likely to take many years to come to fruition; Massa noted that it took 35 years to create the euro.

An official announcement is expected during Brazilian President Luiz Inacio Lula da Silva’s visit to Argentina that begins Sunday night, the veteran left’s first overseas trip since taking power on Jan. 1.

Brazil and Argentina have discussed a common currency for the past few years, but the talks have stalled because Brazil’s central bank opposes the idea, said an official close to the discussions. Now that both countries are ruled by left-wing leaders, there is even more political support.

A spokesman for Brazil’s Finance Ministry said he had no information on a working group on the single currency. He noted that Finance Minister Fernando Haddad co-wrote an article last year, before taking up his current job, proposing a common digital currency in South America.

Trade between Brazil and Argentina is booming, reaching $26.4 billion in the first 11 months of last year, up nearly 21 percent from the same period in 2021. The two countries are the driving force behind Mercosur’s regional trade bloc, which includes Paraguay and Uruguay.

The attractions of the new single currency are most evident for Argentina, with annual inflation nearing 100 percent as the central bank prints money to fund spending. During President Alberto Fernandez’s first three years in office, the amount of public money in circulation quadrupled, according to central bank data, and the largest peso bill came to be worth less than $3 on the widely used parallel exchange rate.

Still, there will be unease in Brazil about the idea of ​​linking Latin America’s largest economy to that of its perpetually volatile neighbor. Argentina has been largely cut off from international debt markets since its default in 2020 and still owes more than $40 billion to the International Monetary Fund from its 2018 bailout.

Lula will stay in Argentina for a summit of the 33-country Latin American and Caribbean Association (CELAC), which will bring together the region’s new group of left-wing leaders for the first time since last year’s wave of elections led to a reversal of the right.

Colombian President Gustavo Petro is likely to attend, along with Chile’s Gabriel Boric and other more controversial figures such as Venezuela’s Revolutionary Socialist President Nicolas Maduro and Cuban leader Miguel Diaz-Canel, officials said. Mexican President Andres Manuel López Obrador generally avoids traveling abroad and is not scheduled to participate. Protests against Maduro’s presence are expected in Buenos Aires on Sunday.

Argentine Foreign Minister Santiago Cafiero said the summit will also commit to greater regional integration, the defense of democracy and the fight against climate change.

Above all, he told the Financial Times, the region needs to discuss what kind of economic development it wants at a time when the world is hungry for Latin American food, oil and minerals.

Will the region provide this in a way that turns its economy around [solely] to a raw material product or will it provide it in a way that creates social justice [by adding value]?,” He said.

Alfredo Serrano, a Spanish economist who runs the regional political think tank Celag in Buenos Aires, said the summit will discuss how to strengthen regional value chains to take advantage of regional opportunities, as well as make progress on a currency union.

“Monetary and foreign exchange mechanisms are crucial,” he said. “There are possibilities today in Latin America, given their strong economies, to find alternative tools to dependence on the dollar. This will be a very important step forward.”

Manuel Canelas, a political scientist and former Bolivian government minister, said the Community of Latin American and Caribbean States, which was founded in 2010 to help Latin American and Caribbean governments coordinate policy without the United States or Canada, was the only regional integration body that survived. Over the past decade others have also fallen by the wayside.

However, left-wing presidents in Latin America now face more difficult global economic conditions, more complex domestic politics with many coalition governments, and less citizen enthusiasm for regional integration.

Because of this, all steps towards integration will definitely be more careful. . . The focus will have to be squarely on achieving results and showing why they are beneficial,” he warned.

Additional reporting by Brian Harris in Sao Paulo

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