Brazil and Argentina to start preparations for a common currency

Brazil and Argentina will this week announce that they are starting preparatory work for a common currency, in a move that could eventually create 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 will invite other Latin American countries to join.

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

“There will be . . . the 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 of the central bank,” Argentina’s economy minister Sergio Massa told the Financial Times.

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

Initially a bilateral project, the initiative will be offered to other countries in Latin America. “Argentina and Brazil invite the whole region,” said the Argentine minister.

A currency union covering all of Latin America would represent about 5 percent of global GDP, the FT estimates. The world’s largest currency union, the euro, accounts for about 14 percent of global GDP when measured in dollar terms.

Other currency blocs include the CFA franc used by several African countries and pegged to the euro, and the East Caribbean dollar. However, this accounts for a small proportion of global economic output.

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This project may take years to come to fruition; 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 that begins on Sunday night, the veteran leftist’s first foreign trip since taking power on January 1.

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

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

Trade is booming between Brazil and Argentina, reaching $26.4bn in the first 11 months of last year, up almost 21 per cent on the same period in 2021. The two countries are the driving force behind the regional trade bloc Mercosur, which includes Paraguay and Uruguay.

The appeal of the new common currency is most evident 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 bills are worth less than $3 at the widely used parallel exchange rate.

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However, there is concern in Brazil about the idea of ​​merging Latin America’s largest economy with its ever-volatile neighbor. Argentina has been largely cut off from international debt markets since defaulting in 2020 and still owes more than $40 billion to the IMF from the 2018 bailout.

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

Colombian President Gustavo Petro is 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 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 would also make commitments on 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 the kind of economic development it wants at a time when the world is hungry for Latin American food, oil and minerals.

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“Will the region supply this in a way that transforms its economy [solely] be a producer of raw materials or will it supply them in a way that creates social justice [by adding value]?,” he said.

Alfredo Serrano, a Spanish economist who runs regional political 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 making progress on a currency union.

“The monetary and foreign exchange mechanisms are important,” he said. “There is a possibility today in Latin America, given its strong economy, to find an instrument that replaces the dependence on the dollar. That would be a very important step forward.”

Manuel Canelas, a political scientist and former Bolivian government minister, said that CELAC, founded in 2010 to help Latin American and Caribbean governments coordinate policies without the US or Canada, is the only pan-regional integration body that has survived over the past decade when others fell by the wayside.

However, Latin America’s left-leaning presidents now face tougher global economic conditions, more complicated domestic politics with multiple coalition governments, and less enthusiasm from the people for regional integration.

“Because of this, all steps towards integration will definitely be more cautious. . . and need to focus directly on delivering results and showing why they are useful”, he reminded.

Additional reporting by Bryan Harris in São Paulo


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