A common currency: dreaming costs nothing | Article

"Put the cart before the horse." This could summarize what the majority of the continent's economists consulted these days think about the initiative for a common currency proposed by the presidents of Brazil and Argentina, Luis Inácio Lula da Silva and Alberto Fernández. It is not something radical like a Latin American-style euro, but a currency designed only for commercial exchanges that would not replace the real and the peso, but would reduce dependence on the dollar.

Still, the proposal was born weak. In a press conference within the framework of Celac, which was held in Buenos Aires, Lula and Fernández invited other continental leaders to join the project that bears the tentative name “South”. Nobody said “I want to”, except the Venezuelan president, Nicolás Maduro.

The approach, framed in a utopian Latin American integration, has been cherished theoretically, although realism prevails today. For example, for Renzo Jiménez, a Peruvian analyst, "if we start from the experience observed with the creation and implementation of the euro, we could clearly answer that, in addition to being feasible, a common Latin American currency would be recommendable, although reaching the right conditions would require effort." , perseverance and time”.

But at the present time the mere idea of ​​having a common currency in a region known for its disparate debt and inflation problems scares finance ministers and central banks. “At the moment we are comfortable having our own monetary and fiscal policy,” Mario Marcel, Chile's finance minister, said in a very diplomatic way. That country is only showing signs of inflationary stabilization after the pandemic.

Less careful was José de Gregorio, former president of the Chilean Central Bank, who maintained: "It is the most absurd idea I have ever heard." Along the same lines, the Nobel Prize in Economics Paul Krugman described the initiative as "a terrible idea."

The proposal has even been mocked by some of the most influential economic media in the world. The Economist headlined “Argentina and Brazil propose a bizarre common currency”, to add the following sentence in the article: “It would unite the largest economy in South America (Brazil) with one of the sickest (Argentina)”. Bloomberg, for his part, headlined "Economists laugh at a common currency in South America."

But what's wrong with an idea that points to greater regional integration, precisely one of the goals so sought after in Latin American history?

Florencia Gutiérrez, an economist at the Center for Political Economy of Argentina, points out that, in order to materialize this idea, which she sees with more optimism, a series of steps must first be taken to reduce asymmetries on the continent. Asymmetries that are even present in the Brazil-Argentina relationship. "What is currently being discussed is an advance in economic integration that has to do with the possibility that trade between Argentina and Brazil be through a common currency, without losing sovereign currencies, which implies a much more complex process" , Explain.

For the analyst, this commercial currency between Brazil and Argentina would make it possible not to use dollars in the exchange between the two (something that would benefit an Argentine economy that always lacks dollars). Brazil is its main trading partner and accounts for 20% of imports from the southern neighbor. "The growth of Brazil has an impact on the growth of Argentina," stresses Gutiérrez.

What is known about the "South", the possible South American common currency

President Alberto Fernández and his counterpart Lula da Silva confirmed that there are negotiations for the implementation of a regional currency for commercial exchange.https://t.co/OIGGRZcTEr

✒️ @martinezluciap

— Checked (@Checked) January 29, 2023

So, what would be the necessary steps for a common currency, beyond the one proposed by Lula and Fernández?

The economist Renzo Jiménez maintains that the first thing that should be taken into account "is that a regional currency would require the formulation of a monetary policy independent of the fiscal policy that is implemented in the countries involved." Jiménez explains that the objective of this monetary policy should be focused on price stability in the entire region, "that is, a low and stable rate of price inflation at the regional level." Something that seems very far away right now.

Between 2012 and 2022 Brazilian inflation moved between 2% and 12% per year. In the Argentine case, it was much more pronounced: “In the absence of reliable figures, it is estimated that the inflation rate in Argentina not only did not decrease, as offered, but rather accelerated. In fact, the annual inflation rate for 2022 would have closed almost at around 100% per year,” says Jiménez.

After the announcement of the 'south' proposal, most economists recalled that, in order to adopt the euro, the European Union walked a very long road that required a series of previous agreements. “It took three to four decades of perseverance. Today the path is no longer unknown, so if there really was political will, it could be covered in much less time,” says Jiménez.

Claudio Pares, an economist at the University of Concepción, in Chile, explains that since trust is a fundamental value for the strength of a common currency, "the risk of default of states should be close to zero, financial systems should be in good regulated and highly solvent, and have no risk of capture by political sectors”. Issues that in Latin America do not abound.

“Our region is far from having the necessary political institutions and economic stability to think about a project as beautiful as that of a single currency and market,” added Pares.

Even in Europe, despite its years of work, there have been problems in the last decade. “It showed its worst facet after the subprime crisis (the financial crisis of 2007): an erratic monetary policy, followed by Brexit and radical movements that want to end it (the European Union) in almost all member countries, despite the long work that it was done with several generations of citizens”, recalls Pares.

But not even these risks, which the Europeans have not yet completely left behind, detract from the potential benefits of a common currency as an instrument of true Latin American integration. The conditions do not yet exist, but as the Chinese proverb says, the longest path begins with the first step.

* Cristian Ascencio. Member of the Editorial Board of CONNECTAS and the #CONNECTASHub. He was an editor at the newspaper El Mercurio de Antofagasta. He was part of the first class of the Intensive Editors Training Program organized by CONNECTAS. He participated in well-known transnational collaborative reports, such as "The Women Cannon Fodder of Drug Trafficking", "The New Latino Exodus" and "The Last Nazi Prisoners in Latin America."