Brazil and Argentina to start preparations for a common currency

Brazil and Argentina will announce this week that they are starting preparatory work for a common currency, in a move 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 and invite other Latin American nations to join.

The initial focus will be on how a new currency, which Brazil suggests calling “sur” (the south), could boost regional trade and reduce dependence on the US dollar, officials told the Financial Times. It would be the first run in parallel with the real Brazilian and Argentine peso.

“There will be . . . a decision to start studying the necessary parameters for a common currency, which includes everything from fiscal issues to the size of the economy and the role of the central bank,” Argentina’s economy minister Sergio Massa told Financial The Times.

“It would be a study of mechanisms for trade integration,” he added. “I don’t want to create any false expectations. . . it is the first step in a long road that Latin America must travel.”

Initially a bilateral project, the initiative should be offered to other nations in Latin America. “Argentina and Brazil invite the rest of the region,” the Argentine Minister said.

A currency union covering all of Latin America would account for about 5 percent of global GDP, the FT estimates. The world’s largest currency union, the euro, encompasses about 14 percent of global GDP when measured in dollar terms.

Other currency blocs include the CFA Franc used by some African countries and pegged to the euro, and the East Caribbean dollar. However, these encompass a smaller slice of global economic output.

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The project is likely to take many years to achieve; Massa noted that it took Europe 35 years to create the euro.

An official announcement is expected during Brazilian President Luiz Inácio Lula da Silva’s visit to Argentina that begins Sunday night, the veteran leftist’s first foreign trip since taking power on January 1.

Brazil and Argentina have discussed a common currency in the past few years but talks have foundered on the opposition of Brazil’s central bank to the idea, an official close to the discussions said. Now that the two countries are both governed by leftist leaders, there is more political support.

A spokeswoman for the Brazilian finance ministry said it did not have information about a working group on a common currency. He noted that finance minister Fernando Haddad co-authored an article last year, before taking his current job, proposing a common digital currency in South America.

Trade is booming between Brazil and Argentina, reaching $26.4 billion in the first 11 months of last year, an increase of nearly 21 percent over the same period in 2021. The two nations are the driving force behind the regional trade bloc Mercosur, which has including Paraguay and Uruguay.

The attractions of a new common currency are most obvious for Argentina, where annual inflation is approaching 100 percent as the central bank prints money to finance spending. During President Alberto Fernández’s first three years in office, the amount of money in public circulation quadrupled, according to central bank data, with the highest denomination peso bill worth less than $3 on the widely used parallel exchange rate.

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However, there will be concerns in Brazil about the idea of ​​hitching Latin America’s largest economy to that of its ever-volatile neighbors. Argentina has cut largely from international debt markets since its 2020 default and still owes more than $40 billion to the International Monetary Fund in a 2018 bailout.

Lula will remain in Argentina for a summit on Tuesday of the 33-nation Community of Latin American and Caribbean States (CELAC), which will bring together the region’s new crop of leftist leaders for the first time since an election wave last year reversed a rightward trend. .

Colombian President Gustavo Petro is likely to attend, officials said, along with Chile’s Gabriel Boric and other more controversial figures such as Venezuela’s revolutionary socialist president Nicolás Maduro and Cuban leader Miguel Díaz-Canel. Mexico’s president, Andrés Manuel López Obrador, generally avoids overseas travel and is not scheduled to attend. Protests against Maduro’s presence are expected in Buenos Aires on Sunday.

Argentina’s Foreign Minister Santiago Cafiero said the summit will also make commitments on greater regional integration, the defense of democracy and the fight against climate change.

In addition, he told the Financial Times, the region needed to discuss what kind of economic development it wanted at a time when the world was hungry for food, oil and Latin American minerals.

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“Will the region provide this in a way that turns its economy around [solely] of a raw material producer or will he provide it in a way that creates social justice [by adding value]?,” he said.

Alfredo Serrano, a Spanish economist who heads the regional policy think tank Celag in Buenos Aires, said the summit will discuss how to strengthen regional value chains to take advantage of regional opportunities, as well as making progress on a currency union.

“Monetary and foreign exchange mechanisms are very important,” he said. “There are possibilities today in Latin America, due to its strong economy, to find instruments that replace the dependence on the dollar. This will be a very important step forward.”

Manuel Canelas, a politician and former Bolivian government minister, said CELAC, which was founded in 2010 to help Latin American and Caribbean governments coordinate policies without the United States or Canada, is the only surviving pan-regional integration body. . the past decade as others have fallen by the wayside.

However, Latin America’s leftist presidents now face tougher global economic conditions, tougher domestic politics with many coalition governments, and less enthusiasm from citizens for regional integration.

“Because of this, all the steps towards integration will certainly be more cautious. . . and will have to focus directly on giving results and showing why they are useful,” he warned.

Additional reporting by Bryan Harris in São Paulo


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