Lula is in Argentina for the VII Summit of the Community of Latin American and Caribbean States and, before the event, he was received bilaterally by Argentine President Alberto Fernández. One theme that dominated the news was the adoption of a common currency between the two countries, a proposal that has merits, demerits and, above all, obstacles.
The proposal is for a common currency “for South American circulation”, whose intention is “in the long term”, “with a view to boosting trade and regional productive integration and increasing resilience to international shocks.”. This is in article 20 of the joint declaration of the two presidents. That is, it would not be an immediate project and the focus is on regional trade between South American countries.
A first clarification is in order. A common currency is not the same as a single currency. Many people, out of ignorance or bad faith, compared the proposal to a kind of South American euro. The euro is the single currency that several countries have adopted, after a two-decade process that began in 1979 and culminated in the circulation of the Euro in 2002.
A common currency is a currency used by two or more countries alongside their own currencies, and it does not even need to be circulating. It can be a currency that serves only as a parameter of exchange and values, to facilitate trade. Appealing to the reader’s memory, as was the Real Unit of Value, an index that existed for a few months together with the Cruzeiro Real, the currency in circulation.
Another comparison is with the Special Drawing Rights, the SDR, of the International Monetary Fund, which, although it is not a currency, calculates interest rates and exchange rates for converting the currencies that are part of the IMF basket. In short, it is not about adopting a single currency with Argentina, nor about abandoning the real or giving up monetary sovereignty, although the confusion is the result of the lack of precision of the term.
post-2008 world
Fernando Haddad, Minister of Finance, even said in Buenos Aires that the creation of a single currency between the two countries is not feasible. The proposal for a common currency to facilitate and encourage trade between Brazil and Argentina is part of an increasingly strong trend in the post-2008 world, that of developing trade with national currencies other than the dollar and the euro.
This allows developing countries to focus their reserves in these currencies for other commitments, in addition to avoiding interference from large economic centers. In recent years, some major economies have expanded their trade in national currencies. For example, India and Russia agreed to trade in rubles and rupees following Russia’s post-invasion sanctions on Ukraine.
The point is that, as the given examples show, the adoption of a common currency is almost redundant, it is not a necessity. The Central Bank of Brazil already has the Local Currency Payment System, SML, which was even mentioned in the same joint presidential statement by Lula and Fernández, asking for its expansion as an instrument “to increase and facilitate trade without obstacles”.
Common currency deepens this mechanism, but it’s not a necessity, it’s a choice to create a new unit of account. Like any choice, it has benefits and risks. Some of the benefits for Brazil are the fact that Argentina is one of the main destinations for Brazilian exports and, mainly, exports of manufactures and products with higher added value.
Deepening this relationship would be extremely beneficial for the Brazilian economy. The future also contains possibilities, such as the purchase of natural gas exploited in Argentina, reducing dependence on Bolivian gas. Large economies even manage to export inflation in moments of greater crisis, which would not necessarily be the case, but it is always an interesting international phenomenon.
Scratchs
On the other hand, the risks are many. One of the reasons for the increased use of national currencies by Argentina is due to the scarcity of dollars in Argentina, a currency that would probably serve as an arbitrage parameter in the use of domestic currencies. The country is involved in the biggest agreement in the history of the IMF, its inflation far exceeds that of Brazil at the moment.
It is not even possible to accurately determine the value of the Argentine peso, as the country has multiple conversion rates with the dollar. Mainly, as our readers already know, it is an election year in Argentina. This is the biggest obstacle. A compromise like the one proposed requires years of negotiations and needs to be seen as State policy, without being hijacked by the ballot box.
If the proposal for a single currency is taken forward, it will be with the elected government, which will not necessarily be Fernández’s. Until then, and during this process, it is more interesting to coordinate and deepen existing mechanisms, with the resolution of issues such as the possible agreement between Uruguay and China and the shelved agreement between Mercosur and the European Union.
Unfortunately, the reality of our Latin American region is that of not valuing regional integration issues. Either for ideological reasons, such as the suspicion of an “Ursal”, for historical mistrust between rival countries or for electoral reasons. In March 2019, we talked here in our space about how the Bolsonaro government’s posture was harmful in this sense, of perpetuating the Latin American alphabet soup dance.
Instead of consolidating and adapting what already exists, we always seek to create something new, a panacea for the moment. A common currency between Brazil and Argentina could be beneficial, perhaps paving the way for a future South American single currency. This reality, however, is far away, and needs to be worked on. With constancy and perpetuity. Until then, using the real and the same weight.
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