March 20, 2023

Brazil and Argentina are considering creating a common currency to boost regional trade and reduce their dependence on the US dollar. If the project remains blocked for the time being at the negotiation stage, it could, in the future, become the second largest monetary union in the world.

A future strategic alliance. At the end of a summit of the Community of Latin American and Caribbean States (Celac), the presidents of Brazil and Argentina announced a new rapprochement of their positions on the creation of a common currency , whose objective would be to revitalize regional trade and reduce their dependence on the US dollar, revealed the Financial Times.

With this in mind, this potential union should initially revolve around the two largest economies in the region, Brazil and Argentina, before gradually integrating other countries, starting with those of Mercosur (Uruguay and Paraguay). The new currency could be called “sur” (“south” in French) and should initially work in parallel with the Brazilian real and the Argentinian peso. Ultimately, it could represent around 5% of global GDP.

“Two brother peoples meet again. A relationship that should never have been interrupted and that the history of Latin American fraternity revives., said Alberto Fernández and Lula da Silva in a document published following their bilateral meeting organized last Sunday.

Very different economies

However, this huge project should not see the light of day immediately. If the idea had already germinated in the past within the authorities of the two countries, all the talks had failed, in particular because of the systematic opposition of the central bank of Brazil and a lack of political support.

And for good reason, if Brazil and Argentina are the two largest economies in the region, and together account for nearly 26.1% of South American GDP, the gap between the two neighbors is very significant. Until the 1970s, Brazil was an economic “dwarf” with a lower GDP than Argentina. But this is no longer the case today. In 2021, the Brazilian GDP weighed 1.609 billion dollars, or 3.3 times its Argentinian equivalent.

Moreover, due to its international structure and development, the Brazilian economy is much more independent than its Argentinian neighbour. Indeed, if Argentina is highly integrated into the Brazilian economy (20.4% of imports and 14% of exports), the reverse is not true. Exports from Brazil to Argentina represent only 9.5% of foreign trade, less than to the European Union (10%), the United States (11%), but especially China ( 32%).

Such a scheme would therefore cause many imbalances between these two economies, like those observed between certain signatory countries of the euro, on an even greater scale. Inflation is, for example, not at all the same in the two countries. About 5.2% for Brazil in 2022, compared to almost 94.8% in Argentina.

Unequal partners

Indeed, while Argentines might naturally be attracted by the prospect of a stable currency and access to global capital markets (which is not currently the case with the peso which has lost 98% of its value against the dollar in the space of 15 years), Brazilians, whose currency is relatively stable (although not very valuable, around 19 cents of the dollar) could be reluctant to give up the real .

From a strictly commercial point of view, such a deal could also hit the Argentinian economy hard, in particular due to the freezing of exchange rates, a sine qua non condition of the project to guarantee its viability. Moreover, the effect of this monetary stabilization could be costly for Argentina, which would have to adapt to the new needs of the Brazilian market, and adapt its industrial production to obtain a comparative advantage, which it has not had for several decades. .

For all these reasons, Argentina is not an ideal partner for Brazil, and Brazil could take a predominant place that would not suit Argentina.

Get out of dollar dependence

However, recent elections of left-wing leaders in both countries have brought their positions closer together, and given greater political support to the project. In fact, both countries, including Brazil, could benefit from the success of such an initiative. On the one hand because the two countries are facing considerable economic difficultiesand on the other hand, because the strengthening of an alliance of the Mercosur countries would make it possible to renegotiate trade agreements with other regions, including the European Union, which are currently at a standstill.

But the main objective openly put forward by the two presidents is above all the reduction of the dollar-dependence of South American trade. Currently, the dollar is prominent in the region. In Ecuador, as in El Salvador and Panama, it is even the only legal tender. In Argentina or Venezuela, it is a substitute currency for the local currency, in which citizens have little confidence. More generally, it is largely the currency used for the foreign debt of these emerging countries, but also that of commercial relations.

In concrete terms, this dependence considerably weakens the economies of these countries, which are therefore dependent on American monetary policy. For example, when the Fed tightens its policy, as is the case now, central banks must raise their rates more quickly to maintain the value of their currency against the dollar and prevent monetary or financial crises. Breaking out of this dependence is therefore an absolute priority issue for these countries, and the “sur” could partly replace the dollar in commercial and financial transactions.

Keeping China and the United States at bay

Moreover, this project could represent a strategic geopolitical opportunity for Latin America and more particularly for Brazil, at a time when world capitalism is organized in large areas of influence centered on China and the United States. Like what the European Union is trying to create, this new economic zone embodied by the “over” could place the region in an equidistant and relatively independent position from the two great powers, while benefiting from the advantages of each.

In other words, the objective would be, on the one hand, to gradually get out of dependence on the dollar and the United States, while maintaining a distance Beijing’s growing influence on trade relations in the region. The creation of the “on” could embody this vision, and on the other hand strengthen the bilateral relations between Brazil and Argentina, which would tend to bring the two economies closer together.

To do this, the two central banks of Brasilia and Buenos Aires must meet in mid-February to launch the first discussions on this subject. Above all, they must reach an agreement on a guarantee system for bilateral trade, and therefore to “accelerate the process of supplying and exporting Brazilian companies to Argentina, and the supply of Argentine companies to Brazilian companies”.

A complex but not impossible project

Finally, if the Brazilian and Argentinian leaders will very probably have to overcome many obstacles to carry out a project of such magnitude, it remains nonetheless viable in the long term, and is already raising great hopes in the region. Well aware of these potential difficulties, the governments of the two countries nevertheless prefer to exercise great caution.

“I don’t want to create false hopes, this is the first step on a long road that Latin America must take,” Argentine Economy Minister Sergio Massa told the Financial Times.

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