Argentina and Brazil consider creating a common currency

Argentina and Brazil are in early talks to introduce a common currency, as they seek to curb their dependence on the U.S. dollar in international trade. The idea of a common currency between Latin America's two largest economies was first discussed in 2019 but was met with pushback from the Brazilian central bank at the time. Talks were re-initiated in recent months, with both countries formally discussing their plan at the 7th Summit of the Community of Latin and Carribean states (CELAC) held in Buenos Aires, Argentina.

Speaking at the summit on Tuesday the 24th of January, Brazil's President Luiz Inacio Lula da silva and Argentina's president Alberto Fernandez made clear that the common currency would not replace the currencies of the two countries, but it would instead serve as unit of account in trade between them; meaning that the Brazilian real and Argentine peso would continue to exist.

According to President Lula da silva, the common currency, which Brazil suggests calling the "Sur" (South), would initially be shared between Argentina and Brazil for trade and transactions between the two countries and later be adopted by other members of the Mercosur trade bloc.

Source: dreamstime

Why create a common currency?

The main motivation behind a common currency between the two countries is trade facilitation and greater economic cooperation by reducing their reliance on the U.S. dollar. In recent months, Argentina has had to deal with a greenback (U.S. dollar) shortage which has forced the emergence of black markets for the currency in the country. With the introduction of the Sur as the unit of account in trade and transactions, Argentina seeks to reduce its dependence on the U.S. dollar, thereby providing a way around its foreign exchange crisis.

By reducing their dependence on the U.S. dollar, Brazil and Argentina would also be able to reduce their vulnerability to external shocks and fluctuations in the U.S. dollar, thus reducing exchange uncertainty and facilitating the exchange of good and services.

Is The Idea Feasible?

The sharing of a common currency is more likely to work among similar economies, as it requires significant policy cohesion. Given the differences between the two south American economies, many have ruled the idea of a common currency between them near impossible. Former U.S. secretary Larry Summers, for example, labelled the idea "highly problematic" given the stark differences between the two countries. Chile's former central bank president Jose de Gregorio believes that Brazil would risk its sound monetary policy by linking its currency to Argentina.

How different are Brazil and Argentina?

Brazil has an independent central bank and a floating exchange rate system whereby the rates are determined by demand and supply. In the case of Argentina, monetary guardians print money at the order of the government to balance the budget deficit.

Economically, Brazil sits in a better position than Argentina. The latter is currently experiencing an economic turmoil, with inflation reaching 95% in 2022, a 30-year record and the highest in the world. This is in sharp contrast to Brazil's 5.8% inflation. In addition, poverty remains a major problem in the country, with nearly four out of ten Argentines living in poverty, and the value of the Argentine peso has been on a persistent decline for over a decade now.

Brazil has more than $300 billion in foreign exchange reserves, making it a creditor to the world financial system. On the other hand, Argentina's foreign exchange reserves are almost empty, and the country owes more than $40 billion to the international monetary fund.

Only Time Will Tell

Even if the two countries were similar, it would take many years before the idea could be realized. The experience of the Euro area, for example, shows how long of a process it can be to have a group of countries share a common currency. Having said that, only time will tell whether Brazil and Argentina are really in a position to adopt such measure.

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About the Author

Neron Sifflore

Neron is an economics undergraduate at the university of Nottingham Malaysia Campus. He is very passionate about the subject and aspires to become the best version of himself. By joining the NES research team, Neron seeks to develop on a personal level and from an academic standpoint.

References

Brazil and Argentina to start preparations for a common currency. Available at Brazil and Argentina to start preparations for a common currency | Financial Times (ft.com)

Brazil and Argentina Discuss Creation of Common Currency. Available at Brazil and Argentina Discuss Creation of Common Currency (wsj.com)

Argentina's inflation rate at 95%, highest since 1991. Available at Argentina's inflation rate at 95%, highest since 1991 | Reuters

Argentines turn to black market dollars as crisis worsens. Argentines turn to black market dollars as crisis worsens | Financial Times (ft.com)

One Argentine peso stock image (dreamtime). Available at brazil and argentina share a common currency - Bing