Brazil and Argentina announced this week that they will begin preparatory work for a common currency that could eventually create the world’s second largest currency bloc.
South America’s two largest economies will discuss the plan at a summit in Buenos Aires this week, inviting other Latin American countries to join.
The initial focus will be on how the new currency, which Brazil is proposing to call “Sur” (Southern), could boost regional trade and reduce reliance on the US dollar, officials said. told the Financial Times. Initially, it will run in parallel with the Brazilian real and the Argentinean peso.
“There will be… Argentina’s Economy Minister Sergio Massa has told the Financial Times the decision to launch an investigation into the necessary parameters of a common currency, from fiscal issues to the size of the economy to the role of the central bank.
“It will be a study of the mechanisms of trade integration,” he added. “I don’t want to create false expectations…it’s the first step in the long road Latin America has to go.”
Initially a bilateral project, the initiative will be extended to other countries in Latin America. “It is Argentina and Brazil that are inviting other regions,” the Argentine minister said.
The FT estimates that a currency union covering all of Latin America would be worth about 5% of global GDP. The world’s largest monetary union, the euro, accounts for about 14% of global GDP in dollar terms.
Other currency blocks include the CFA franc, which is used in some African countries and pegged to the euro, and the East Caribbean dollar. But they cover a much smaller portion of global economic output.
It can take years for a project to come to fruition. Massa pointed out that it took him 35 years for Europe to make the euro.
An official announcement is expected during Brazilian President Luis Inacio Lula da Silva’s visit to Argentina beginning Sunday evening.
Brazil and Argentina have been discussing a common currency for the past few years, but talks fell apart when the central bank of Brazil opposed the proposal, said people close to the talks. Both countries have greater political support now that they are ruled by leftist leaders.
A spokesman for Brazil’s finance ministry said it had no information about a working group on a common currency. He noted that Finance Minister Fernando Haddad co-wrote an article proposing a digital common currency for South America last year before assuming his current job.
Trade between Brazil and Argentina is booming, reaching $26.4 billion in the first 11 months of last year, up nearly 21% from the same period in 2021. Her two countries are Paraguay and Uruguay.
The appeal of a new common currency is most evident in Argentina, where the central bank is printing money to fund spending and annual inflation is approaching 100%. Central bank data show that in President Alberto Fernandez’s first three years in office, the amount of banknotes in public circulation quadrupled as much as his, and the highest denomination peso note was in widespread use. Worth less than $3 at the quoted parallel exchange rate.
But in Brazil, concerns will be raised about the idea of dragging Latin America’s largest economy into the economy of its ever-volatile neighbor. Argentina has been largely cut off from international bond markets since its default in 2020, leaving her more than $40 billion in debt to the IMF in a 2018 bailout.
Lula will be in Argentina on Tuesday for a summit of the Community of Latin American and Caribbean States (CELAC) of 33 countries. right-wing tendencies.
Colombian President Gustavo Petro is likely to attend, according to officials, along with more controversial figures such as Chile’s Gabriel Boric and Venezuela’s revolutionary socialist president Nicolas Maduro and Cuban leader Miguel Diaz Canel. Mexican President Andrés Manuel López Obrador, who generally avoids international travel, has no plans to attend. Protests against Maduro’s attendance are expected in Buenos Aires on Sunday.
Argentina’s Foreign Minister Santiago Cafiero said the summit would also pledge to increase regional integration, defend democracy and fight climate change.
Above all, he told the Financial Times, we need to discuss what kind of economic development we want at a time when the world is hungry for food, oil and minerals in Latin America.
“Is this region going to supply this in a way that will turn its economy around? [solely] Or are you going to supply raw materials in a way that creates social justice? [by adding value]? ,” He said.
Alfredo Serrano, a Spanish economist who runs the Selag regional political think tank in Buenos Aires, said the summit would discuss ways to strengthen regional value chains and take advantage of regional opportunities, as well as progress on monetary union.
“Currency and foreign exchange mechanisms are very important,” he said. “Given its strong economy, Latin America today has the potential to find alternatives to its dependence on the dollar. That would be a very important step forward.”
Political scientist and former Bolivian government minister Manuel Canelas said CELAC, founded in 2010, was set up to help governments in Latin America and the Caribbean coordinate their policies without the United States or Canada. A pan-regional integration agency like that, the past decade when others have lost their way.
But Latin America’s left-wing presidents now face a more difficult global economic situation, complex domestic politics with many coalition governments, and declining public enthusiasm for regional integration.
“This will ensure that every step towards integration is cautious . bottom.
Additional reporting by Brian Harris from São Paulo