On the 22nd of January 2023, Brazilian and Argentinian presidents da Silva and Fernández announced their intention to establish a common currency, provisionally named the ‘Sur’. To say that this plan has been met with scepticism would be an understatement.
What’s the plan?
The two left-wing leaders unveiled their plan to lay the groundwork for a common currency at a
summit held in Buenos Aires, though little was disclosed as to how the preparations would
actually unfold. In their initial statements, the pair cited a desire to boost regional trade in Latin
America and to reduce reliance on the US dollar as the principal reasons for their plan. They
stated that whilst at first this common currency would only be between Brazil and Argentina,
membership would eventually be offered to all Latin American nations. There is certainly no
denying that this is an ambitious scheme; if successful, a common currency in which all of Latin
America participates could make up 5 percent of global GDP, and has the potential to be the
second-largest currency union after the Eurozone (Financial Times, 2023). It is worth noting
that this common unit would not be intended to replace existing national currencies, the
Argentine peso and Brazilian real, but rather be used specifically to facilitate trade transactions
between the two nations.
However, opinions on the creation of such a common currency are overwhelmingly
unconvinced, and the idea of tying Latin America’s largest economy to one of its most volatile
does not seem like a recipe for success. Olivier Blanchard, former chief economist of the IMF,
summed up his views in a three-word tweet: “this is insane”.
What’s in it for Argentina and Brazil?
For Argentina, the benefits of a common unit with Brazil are obvious. Argentina’s annual
inflation is approaching 100 percent, as the central bank continues to print money to fund the
country’s reckless spending. Capital controls are increasingly tight, and the country is
desperately trying to avoid its tenth debt fault since independence in 1816 (The Economist,
2023). A common currency would provide welcome alternative currency reserves, since
Argentina finds itself continually selling US dollar reserves to prop up the peso. Crucially, the
scheme would boost regional trade with Argentina’s biggest and most valued trading partner.
For Brazil, the advantages are less apparent upon first glance, and the nation would certainly be
putting its monetary policy on the line by strengthening ties with an economy as volatile as
Argentina. President da Silva, who came into office at the turn of this year, intends to re-establish Brazil’s role in the international and political sphere. In doing so, he hopes to give himself a
reputational boost by promoting Brazil’s integration in Latin America after his predecessor
Bolsonaro isolated the nation and fell out with his counterparts across the region.
Brazil and Argentina have both been suffering from dampened export demand in recent years;
exports from Brazil to Argentina in 2020 were less than half of what they were in 2017 (OEC,
2023), and the nations have been struggling to reach trade agreements with Europe, China and
the US. The countries’ officials believe a common currency could help to reignite trade within
the Mercosur bloc, of which Brazil and Argentina are the main drivers, thereby compensating
for a lack of export demand outside the continent.
What’s more, trade between the two economies currently relies on the US dollar as a price
reference; exports from Brazil first have to be translated from Brazilian real into dollars, and
then from dollars into Argentine pesos. A common unit would eliminate this extra step, and
could also reduce price volatility when the dollar fluctuates against the two currencies. Both
nations have an interest in reducing reliance on the US dollar, as its growing strength has also
made imports more expensive and increased the cost of servicing dollar-denominated debt (of
which Argentina has a lot). The proposed name ‘Sur’ may itself be a subtle allusion to the
tensions between these South American nations and the US and their desire to escape its
stronghold (Financial Times, 2023).
Feasible or destined for failure?
Whether or not da Silva and Fernández’s reasons for devising such a scheme are sound or not,
there is no denying that many obstacles stand in the way of success.
Undoubtedly the most fundamental problem the two nations face is that they have hugely
divergent economies and their business cycles are completely out of sync. Argentina’s main
export is agricultural commodities, whilst Brazil’s is industrial goods, and these are affected by
very different global economic conditions (The Economist, 2023). This is no small issue; Robert
Mundell, a Canadian economist, posited that economic similarities were the most important
determinant of how well countries would fit together in a currency union. If the common unit of
account were to eventually develop into a currency union and replace national currencies, the
countries would have to relinquish economic sovereignty and be governed by a central monetary
policy. A single, centralised interest rate simply would not work for the economies of Argentina
and Brazil, who would need to adopt entirely different monetary policy in the face of economic
shocks.
What’s more, trade integration, the ultimate aim of the common currency, is stifled by barriers
to the movement of human and physical capital, due to South America’s poor infrastructure and
Argentina’s tight capital controls. The Mercosur trade bloc, which also includes Uruguay and
Paraguay, has also been struggling due to China’s growing influence in the continent and
political tensions within and between nations, and this further threatens integration.
It should also be noted that this is not the first time that Argentina and Brazil have had the idea
for a common currency; in 1987, the idea of the ‘gaucho’ was floated, but failed amid
hyperinflation and currency depreciation problems (The Washington Post, 2023). The two
countries have for many decades faced problems of macroeconomic imbalances and political
instability, and there does not seem to be any obvious reason why these issues would not get in
the way again this time around. All this fuels the popular scepticism that the timing of this latest
common currency scheme is poor, and that Argentina and Brazil should focus on fixing their
more pervasive problems first.
However, whilst the economic logic behind Fernández and da Silva’s plan is shaky at best, from
a political standpoint the case is somewhat stronger. For the first time in seven years, the two
nations are both being run by left-wing leaders with aligned views, and their strong desires to
integrate should not be too quickly dismissed. It may also serve to acknowledge the long-term
timescale of the common currency project; it will take decades to establish a common unit, and
even longer if it is to ever become a full-blown monetary union (the Eurozone took 35 years to
form, for example). This may give the nations time to overcome the current economic and
political obstacles they face, and thereby augment the feasibility of the project.
All in all, Argentina and Brazil’s common currency plan seems overly ambitious and
insufficiently thought out, and economic analysts have every reason to be sceptical. Whilst a
common currency can certainly bring many benefits under the right conditions, these two
nations are victims of a number of unique characteristics and inherent problems that undermine
the feasibility of such a union in their case. The project suffers from poor timing, and seems to
be driven more by political motives than sound economic reasoning; the divergence between the
two economies represents a fundamental obstacle that cannot be easily overcome, and the very
idea of a common currency seems to place Argentina’s problems in the hands of Brazil. It will
certainly be interesting to watch how this project plays out.
Article by International Developments Columnist Lara Gigov
Edited by Bailey Rawden
Bibliography
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