well forgotten old
The idea of a common Latin American currency has existed for a long time: they tried to implement it back in the 80s of the XX century. The previous president of Brazil, Jair Bolsonaro, also thought about this. However, steps towards the implementation of the plan have been taken only now, in 2023. Against the background of the global trend to abandon the dollar, the leaders of the Latin American region – Brazil and Argentina – officially announced the start of preliminary negotiations on the creation of a common currency, which should unite the South American market.
Presidents Luis Lula da Silva and Alberto Fernandez insist that the new currency "will reduce transaction costs and the external vulnerability of countries." There are no plans to withdraw the Brazilian real and the Argentine peso from circulation: national currencies will remain, and the new unit will be used for external settlements between states. The common coin will be called "Sur" ("South").
So far, the project is being discussed only between the two countries, but all neighbors in Latin America will be offered to join it. The unification of the region under a single currency will create one of the largest unions in the world – it will account for about 5% of the global economy. It will become the second after the eurozone, which accounts for 14% of global GDP.
Many countries are trying to get rid of the dollar by trading in their own currencies. For example, the same Brazil and China agreed to pay in reals and yuan; the imposed sanctions forced Russia to trade with India in rupees, and now India is offering the same to Bangladesh and Malaysia; Saudi Arabia has said it is open to offers to trade in currencies other than the dollar. However, none of these options provide for the introduction of a common currency, which is being discussed in Latin America.
Dedollarization in Latin America
The leaders of the countries do not hide the fact that the key reason for creating their own unit of account is to get rid of dollar dependence, which puts the region in a vulnerable position and is costly in trade. “If it depended on me, we would always trade in the national currency so that we do not have to depend on the dollar,” said Brazilian President Luiz Lula da Silva.
The US dollar is the default currency for Latin America: in the Americas, 96% of all transactions are made in dollars, more than anywhere else in the world. Argentina is Brazil's third-largest partner, and Brazil is Argentina's largest, with trade between the countries reaching $28 billion last year, up 20.6% from the same period in 2021. Within the MERCOSUR trade bloc (which unites Brazil, Argentina, Paraguay and Uruguay), Argentina and Brazil play a leading role, but economic relations face many difficulties.
For Latin America, the US dollar is the default currency
In every transaction between countries, the dollar acts as a price reference: that is, the value of the goods must first be converted from Brazilian reals to dollars, and then from dollars to pesos. This is, firstly, an additional step for the participants in the transaction, and, secondly, it leads to greater volatility: if the dollar fluctuates strongly against the real or peso, then the price of the goods may turn out to be unexpectedly high or low.
The calculation of the price of the new currency is still being discussed, and one of the options may be a mechanism by which it will be tied to some asset: gold or other currencies. It is assumed that the cost of a single unit of account will be set on the basis of a standardized basket of currencies, which will give an idea of the price level in the participating countries. The real, however, is likely to carry more weight in the equation because it is more liquid than the peso.
Based on this concept, it would be more correct to compare “sur” not with the euro, but with another unit of account that was used in European countries in 1979-1999 – ECU ( european currency unit ). The cost of the ECU was also determined by the basket of currencies of the states that were part of the European monetary system. The largest weight then belonged to the German mark, French franc and pound sterling, also the Italian lira, Belgian franc, Dutch guilder, Irish pound, Danish krone, shortly before the creation of the eurozone – Greek drachma, Luxembourgish franc, Spanish peseta and Portuguese escudero. ECU was used exclusively in non-cash transactions.
In the case of the “sur”, it is not yet clear whether the currency will acquire a physical embodiment or will also be put into circulation only in non-cash transactions. For Argentina, the creation of a single currency will also solve another problem – the shortage of dollars needed for trade. This is partly why the currency talks began, Brazilian Finance Minister Fernando Haddad explained . According to him, the government is considering several options for solving the problem of foreign currency.
The shortage of dollars forced the Central Bank of Argentina to tighten control over importers. Now, in order to buy something from the same Brazil, Argentinean consumers buy dollars from the regulator, and he will sell them only if the need for imports is proven. Previously, importers took advantage of the fact that the official rate was almost two times lower than the market rate and tried to extract as much currency from the central bank as possible. Now companies have to match their needs with the requirements of the regulator, and it has become more difficult to get foreign currency to buy goods from abroad. The transition to a common unit should also solve this problem.
Argentina suffers from dollar shortage
That is why, according to the representative of the Brazilian Ministry of Finance Gabriel Gapolio, along with the regional unit of account, loans are being discussed to support exports to Argentina. The Brazilian government plans to offer guarantees to its banks to help finance deals, while Argentina will provide collateral in the form of "hard assets" such as grain, gas or oil.
The idea with a single coin also has an ideological background – the idea is beneficial to Argentine President Alberto Fernandez: strengthening ties with Brazil could save his political career. According to polls, Fernandez is one of the most unpopular leaders in Latin America. His country is in economic stagnation, and the population is waiting for quick solutions to accumulated problems. The next election will be held in October, and beautiful statements about deepening economic ties with Brazil and the fight against dependence on the dollar could become the basis of Fernandez's election campaign.
The single currency should also feed the political ego of President Luiz Lula da Silva. He dreams of making Brazil an economic powerhouse and a regional political dominator. Restoring ties in the region and strengthening its leading position is becoming a priority for Brazil, especially against the backdrop of the collapse of the only regional bloc – MERCOSUR, whose members (Brazil, Argentina, Paraguay and Uruguay) for years cannot even agree on the introduction of a free trade zone, not to mention about expanding other ties.
The lack of progress in MERCOSUR led Uruguay to start its own negotiations with other countries – China and Turkey. At the end of 2022, Uruguay even applied to join the Trans-Pacific Space, a trade union that now includes 11 countries, including Australia and Japan. At the time, Argentine Foreign Minister Santiago Cafiero said Uruguay had to choose whether to remain in MERCOSUR – according to the rules of the customs union, no country has the right to enter into preferential agreements with third parties.
The main problem is the frenzied Argentinean inflation
Economists and central bankers are skeptical not only about the idea of a common unit of account between all Latin American countries, but also about the possibility of realizing a monetary union between Argentina and Brazil. The countries have strong trade ties and are major exporters of commodities, but this is not enough to create a full-fledged bloc.
The key problem is rampant inflation in Argentina. In 2022, it reached 100%, and in 2023 it can accelerate to 110%. The local Central Bank turned on the printing press to finance government spending and quadrupled the money supply in the first three years of President Alberto Fernandez's rule, as the state cannot borrow on global markets due to frequent defaults.
A three-decade-high inflation rate has coincided with rising poverty, economic stagnation and declining reserves, all exacerbating the financial crisis in a country that still owes the International Monetary Fund more than $40 billion in bailouts from 2018. A single currency between the two countries is impossible without reducing inflation in Argentina to at least 10%, and this may take at least five years. The country will also have to get rid of its black currency market, where the dollar's real value is sometimes twice the official rate.
In Brazil, inflation is dozens of times lower: the price increase is 5.8%. Such a large difference excludes a joint monetary policy, because the introduction of a single currency in most cases implies a single key rate. Conducting a common monetary policy will be difficult and purely technical: the central bank of Argentina, unlike the Brazilian regulator, is not independent, and the government actively interferes in its work.
For comparison, despite Germany's leadership in the EU, the economies of the countries of the European Union are in comparative balance relative to each other. However, the EU is unique in this sense: East Asia is dominated by China, the Persian Gulf is dominated by Saudi Arabia (which prevented the creation of a single currency in the region), and Latin America is dominated by Brazil. Argentina's economy is only 30% of Brazil's GDP.
"It's like opening a joint bank account with an unemployed bum"
Moreover, there is no unity regarding the monetary union even in Brazil itself – local political forces and business were dissatisfied with the president's desire to create a common currency with economically unstable Argentina – a country where default has become a national tradition. "It's incredible that Lula is even considering creating a single currency between Brazil and Argentina – it's like opening a joint bank account with an unemployed slacker who owes everyone money," Fabio Ostermann, a business-friendly New Party MP, wrote.
Default has become a national tradition in Argentina
Chile's former central bank governor José de Gregorio said the country is risking its monetary policy in favor of strengthening ties with Argentina, which has yet to recover from a string of defaults. Argentines, on the other hand, keep billions of dollars in foreign bank accounts – this is another evidence of the growing demand for the American currency and the lack of confidence in the peso.
Experts from Oxford Economics emphasize that the two economies do not meet the requirements for the operation of the currency bloc at all, which makes the initiative to create a "sura" unworkable. In addition to the level of inflation, the trust of enterprises in the new currency raises questions, especially if it is somehow pegged to the extremely volatile peso.
“The only alternative currency that people in South America want to carry in their pocket is the US dollar,” says Arturo Porzekansky, economist at the Woodrow Wilson International Center. He also notes that all attempts by the countries of South America to build an economic union have not yet been successful, and MERCOSUR is a frankly weak economic union, so he does not see real prospects for creating a single currency.
A common currency risks repeating the fate of the South American economic union. Initially, the countries came together to expand international trade and encourage each other's economic development. However, one of the main drawbacks of the association was the glaring inequality between the countries: in economic terms, Argentina and Brazil have much more weight than Paraguay and Uruguay. In addition, the development of the bloc is hampered by shocks in the participating countries, whether it be the devaluation of the Brazilian currency in 1999 or the regular financial crises in Argentina.
The US dollar is the only alternative currency that people in South America want to carry in their pocket.
Partners within the bloc are constantly arguing for trade: Brazil, for example, supports a free trade agreement with China, while Argentina opposes it. MERCOSUR's success in expanding international trade is also dubious: a deal with the EU, which was negotiated for twenty years, hung in the air due to environmental disagreements, and no agreements were reached with the States.
There are also more optimistic analysts who do not exclude the possibility for Argentina and Brazil to create a common currency – at least within the framework of a trading unit of account, and not a full-fledged currency, like the euro. “Today, Latin America, given its strong economy, can find tools that will free it from dollar dependence. This will be a very important step forward,” said Alfredo Serrano, head of the regional think tank Celag.
The Chavez case lives on. Who else in Latin America tried to make a single currency
The idea of a single Latin American currency is not new – back in the 1980s, the presidents of Brazil and Argentina wanted to create a common market and a common currency – "gauchos", which got its name in honor of the social group characteristic of both countries. Then it was assumed that the value of the currency would be determined by the Central banks of both countries, and provided by the reserve fund of the states.
However, the idea remained only on paper: after the signing of the agreement, none of the countries made efforts to put the unit into circulation. The economic crises in Argentina and the high volatility of national currencies prevented – problems that are still relevant.
The fate of the currency, which was introduced into circulation by the alliance of Venezuela and Cuba in the early 2000s, turned out a little better. Like "sur", the coin was intended to replace the dollar in interstate settlements. “Enough with the dictatorship of the dollar, long live the sucre,” then-President of Venezuela Hugo Chavez said when he signed the bill creating the currency. The sucre exchange rate was floating and depended on the valuation of a basket of currencies of the member countries of the union. The first deal with the new currency took place between Venezuela and Ecuador only in 2010.
Later, other countries joined the alliance, but with the onset of the crisis in Venezuela, the currency quickly fell into disuse. Unleashing the potential failed, among other things, because Dominica, Saint Vincent and the Grenadines, Antigua and Barbuda refused to use sucre. Neighbors in the region were already part of the Eastern Caribbean dollar currency union, the value of which is pegged, symbolically, to the US dollar. At the peak of its active use in 2012, the number of transactions in the sucre reached 2646, and the volume was just over a billion dollars. And from 2012 to 2016, it steadily declined, until in 2016 Ecuador remained the only country conducting transactions in this currency.
History also knows successful, in addition to the euro, currency unions that still exist – this is the French Pacific franc and the same East Caribbean dollar. However, in these cases we are talking about states with small economies that are equivalent relative to each other. The small volume of trade and economic proximity allow countries to successfully manage a common currency. The share of these currency unions in global GDP is several times less than the place that the countries of Latin America can take.
China also wants to abandon the dollar with a new unit of account: government researchers have proposed creating a pan-Asian digital currency, pegging it to a basket of 13 national currencies, including the yuan, yen and the South Korean won. This is as close as possible to the mechanism that Argentina and Brazil are currently discussing. However, so far, the matter has not gone further than researching the issue, and the governments of Asian countries have not shown any interest – even taking into account China's successful experience in creating national cryptocurrencies: the volume of transactions with the digital yuan, put into circulation in 2020, almost exceeded $14 in 2022 billion
Brazil and Argentina have repeatedly returned to the discussion of a common currency in recent years, but earlier negotiations remained unsuccessful. The idea of a joint settlement unit was opposed by the Central Bank of Brazil, and President Jair Bolsonaro strongly disagreed with his Argentine counterpart. However, now that both countries are under the leadership of ideologically close presidents, the initiative has much more political support. However, even with the most successful combination of circumstances, one should definitely not expect quick results from Latin American countries. “I don't want to create false expectations. This is the first step on a long road that Latin America has to go through,” said Argentine Economy Minister Sergio Massa, recalling that it took Europe 35 years to create the euro.