Presidents of Argentina and Brazil Renew Discussions on Common Currency

Argentina and Brazil are planning to create the world’s second-largest currency union, with the primary goal of increasing bilateral trade by using a shared unit of account. This has been revealed through recent discussions.

Argentina and Brazil announced plans to create a common currency, the sur, ahead of the CELAC summit in Buenos Aires. This move would establish the world’s second-largest currency union after the 20-nation eurozone in Europe.

The presidents of both countries published an opinion piece stating that they were renewing discussions of the matter. Despite Latin America’s 5% GDP and the EU’s 13%, the announcement had little impact in South America. Politicians in both countries have considered a common currency for 50 years, but previous attempts have not led to progress.

The Challenges of Monetary and Fiscal Policies in Brazil and Argentina

Economists find it easier to accept a common unit of trade rather than the concept of a currency union. Despite the significant differences in monetary and fiscal policies, Brazil has a floating exchange rate and an independent central bank, while Argentina’s monetary authorities print money at the president’s request to offset budget deficits. This has led to Argentina’s annual inflation rate reaching 95% in 2022, compared to Brazil’s rate of just under 6%. Brazil holds over $300 billion in foreign exchange reserves, making it a global creditor, while Argentina owes more than $40 billion to the International Monetary Fund, without which the country would have become insolvent.

Challenges to Joint Currency between Argentina and Brazil

The government of Argentina has implemented strict capital controls which prevent its citizens from purchasing dollars, leaving the country’s foreign exchange reserves nearly depleted. The official exchange rate for the dollar is vastly different from the black market rate, with the latter being twice as valuable. Additionally, there is no common market or free trade agreement between Argentina and Brazil. Despite tariffs and exemptions on imports within the Southern Common Market, Brazilian President Luiz Inacio Lula da Silva is pushing for a common currency. However, this decision is driven by political motives to increase Latin America’s geopolitical influence rather than economic considerations.

Brazil and Argentina’s Economic Integration Efforts Met with Skepticism

The Brazilian Finance Minister, Fernando Haddad, previously stated that the common currency should catalyze regional integration in South America. However, with the current economic crisis in Argentina, the government is eager to grasp any opportunity to alleviate their isolation, even if it means linking with larger Brazil. As elections approach in October, the positive news is highly sought after in Buenos Aires. Although greater economic integration in South America is desirable, South Americans are proceeding with caution and focusing on addressing basic issues before moving on to more advanced projects and agreements. Economist Mohamed A. El-Erian is also doubtful about the success of this endeavor, stating that neither country has the necessary conditions to make it work and attract others.