The “South” could achieve the near impossible: the economic integration of a region whose countries do not even have a common free trade area. Economists are skeptical.
Argentina and Brazil want to create a single currency called “South” for all of Latin America, which has become a project with much support and many detractors.
If they succeed, it could create the largest monetary union in the world after the European Union. Latin America represents 5% of the world gross domestic product, the EU 13%.
It is not surprising that the project dominated the headlines of the European economic media last weekend.
In South America, on the other hand, the announcements hardly caused a stir.
Since the first integration projects fifty years ago, the idea of a common currency has repeatedly fed the fantasies of politicians, but nothing but material for academic papers has emerged from these attempts.
What do you think of the single currency for Latin America in Chile?
The former economy minister and member of the Principal Financial Group board of directors in Chile, referred to this situation, Hugo Lavados Montes.
“Consolidation requires economic conditions, which has been extensively analyzed in the wake of the Euro. There is also a different way to have common currency, which is to adhere to the currency of another country. Cases of Ecuador and Panama with the US$ dollar”, analyzed the former national authority.
The former minister also emphasized that what was said by Mario Marcel, given that “With a common currency, the monetary policy of each country ceases to make sense.”
“And the fiscal policy (revenues and expenses of the treasury) has a very limited framework,” he added. “With large inflation differentials and a fiscal deficit, it is hard to see how to move in that direction,” he added.
“In addition, a conviction of the population, companies, investors is required, that there will be no going back. Without this social expectation about politics, the single currency is born a failure, because economic behavior very quickly leads to making it unfeasible ”, he concluded.
Two completely different neighbors
The Brazilian-Argentine economist Fabio Giambiagi criticizes the renewed debate as a “waste of time”.
According to Giambiagi, the lack of state planning of the economies by governments, as well as the different economic situations, currently prevent the development of a serious monetary project.
In fact, both countries could hardly be more different in their monetary and fiscal policies: Brazil has a flexible exchange rate and an independent central bank.
Argentina’s currency guardians, by contrast, print money at the president’s behest to balance the budget deficit.
As a result, inflation in Argentina is currently 95% per year.
In Brazil, it was slightly below 6% in 2022.
Brazil has more than 300,000 million dollars in foreign exchange reserves, which makes it a creditor of the world financial system.
Argentina owes more than 40,000 million to the International Monetary Fund (FMI), from whose drip it hangs. Otherwise, the country would have been insolvent long ago.
Start the house on the roof
Argentina’s foreign exchange coffers are almost empty. With rigid capital controls, the government prevents Argentines from buying dollars.
There are about two dozen different exchange rates for the greenback. On the black market, the dollar is worth twice the official exchange rate.
Nor is there a common market between the two countries, not even a free trade zone.
In Mercosur, the economic community formed by Argentina, Brazil, Uruguay and Paraguay, imports of many products are subject to high tariffs.
Numerous exemptions to the Common External Tariff also apply. Add a common currency to this fragile “economic community” is to start building the house from the roof.
There is only one reason why the president of Brazil, Lula, revives the project of a single currency for Latin America.
This is a political argument, not an economic one: After his re-election, Lula wants to promote integration in Latin America.
Brazil brings together more than half of the economic power and population of the continent. He wants to use the unity of the region to increase the geopolitical weight of Latin America, as he already achieved during his first two terms.
Buenos Aires, happy to cling to anything
It is assumed that the common currency will act as an accelerator of the regional integration process in South America, something that has already been announced by the Minister of Finance, fernando haddadin April 2022.
The Argentine government, for its part, is happy about any burning nail it can grasp in the serious crisis.
A union with Brazil, much bigger, could stop the isolation of Argentina. The elections are in October, so any positive news is welcome in Buenos Aires.
Certainly, greater economic integration in South America would be highly desirable, but instead of politically promoting infrastructure projects and free trade agreements, the South Americans limit themselves to taking the third step before the first.