Economy

Brazil and Argentina to begin preparations for a common currency

Brazil and Argentina will announce this week that they are starting preparatory work on a common currency, in a move that could eventually create the world’s second-largest currency bloc.

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

The first focus will be on how a new currency, which Brazil proposes to call “sur” (south), could boost regional trade and reduce dependence on the US dollar, officials told the Financial Times. It would 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 includes everything from fiscal policy issues to the size of the economy and the role of central banks,” Argentina’s Economy Minister Sergio Massa told the Financial Times.

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

Initially a bilateral project, the initiative would be offered to other nations in Latin America. “It is Argentina and Brazil that invite the rest of the region,” said the Argentine minister.

A currency union that covered all of Latin America would represent around 5 percent of global GDP, the FT estimates. The world’s largest currency union, the euro, comprises around 14 percent of global GDP measured in dollars.

Other currency blocs include The CFA franc which is used by some African countries and is linked to the euro and the East Caribbean dollar. However, these comprise a much smaller part of global economic output.

The project will probably take many years to realize; Massa noted that it took Europe 35 years to create the euro.

An official announcement is expected during Brazilian President Luiz Inácio Lula da Silva’s visit to Argentina starting Sunday night, the veteran leftist’s first foreign trip since taking power on Jan. 1.

Brazil and Argentina have been discussing a common currency for the past few years, but the talks took a backseat to Brazil’s central bank’s opposition to the idea, an official close to the discussions said. Now that the two countries are both governed by left-wing leaders, there is greater political support.

A spokesman for Brazil’s finance ministry said he had no information about a working group on a single currency. He noted that Finance Minister Fernando Haddad had co-authored an article last year, before taking his current job, and proposed a South American digital common currency.

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

The attractions of a new single currency are most obvious for Argentina, where annual inflation approaches 100 percent as the central bank prints money to finance spending. During President Alberto Fernández’s first three years in office, the amount of money in public circulation has quadrupled, according to central bank data, and the largest denomination peso note is worth less than $3 at the widely used parallel exchange rate.

However, there will be concern in Brazil over the idea of ​​linking Latin America’s largest economy to that of its perennially volatile neighbour. Argentina has been largely cut off from international debt markets since its 2020 default and still owes more than $40bn. to the IMF from a rescue package in 2018.

Lula will remain in Argentina for a summit on Tuesday of the 33-nation Community of Latin American and Caribbean States (CELAC), which will bring together the region’s new crop of left-wing leaders for the first time since a wave of elections last year reversed a right-wing trend.

Colombian President Gustavo Petro was likely to attend, officials said, along with Chile’s Gabriel Boric and other more controversial figures such as Venezuela’s revolutionary socialist President Nicolás Maduro and Cuban leader Miguel Díaz-Canel. Mexican President Andrés Manuel López Obrador generally declines to travel abroad and is not scheduled to attend. Protests against Maduro’s attendance are expected in Buenos Aires on Sunday.

Argentina’s Foreign Minister Santiago Cafiero said the summit would also pledge greater regional integration, the defense of democracy and the fight against climate change.

Above all, he told the Financial Times, the region needed to discuss what kind of economic development it wanted at a time when the world was hungry for Latin America’s food, oil and minerals.

“Is the region going to deliver this in a way that turns its economy around [solely] into a commodity producer or will it deliver it in a way that creates social justice [by adding value]?,” he said.

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

“The monetary and foreign exchange mechanisms are crucial,” he said. “There are opportunities today in Latin America, given its strong economies, to find instruments that replace dependence on the dollar. It will be a very important step forward.”

Manuel Canelas, a political scientist and former Bolivian government minister, said CELAC, founded in 2010 to help Latin American and Caribbean governments coordinate policy without the United States or Canada, was the only such pan-regional integration body that had survived past decade when others fell by the wayside.

But Latin America’s leftist presidents now face more difficult global economic conditions, more difficult domestic politics with many coalition governments and less enthusiasm from citizens for regional integration.

“Because of this, any steps towards integration will certainly be more cautious . . . and will need to focus squarely on delivering results and showing why they are useful,” he warned.

Additional reporting by Bryan Harris in São Paulo

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