Brazil and Argentina are starting preparations for a common currency

Brazil and Argentina will announce this week that they are beginning 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 this week at a summit in Buenos Aires and will invite other Latin American countries to join.

The first focus will be on how a new currency, which Brazil proposes to call the “sur” (south), can boost regional trade and reduce reliance on the US dollar, officials told the Financial Times. It would initially parallel the Brazilian real and the Argentine peso.

“There will be . . . a decision to start studying the parameters needed for a single currency, which will include everything from fiscal issues to the size of the economy and the role of central banks,” the Argentine minister told of economics Sergio Massa to the Financial Times.

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

Initially a bilateral project, the initiative was to be offered to other countries in Latin America. “It is Argentina and Brazil that invite the rest of the region,” said the Argentine minister.

A currency union covering all of Latin America would represent about 5 percent of global GDP, according to estimates by the FT. The world’s largest currency union, the euro, represents about 14 percent of global GDP measured in dollars.

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

The project will likely take many years to complete; 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 beginning Sunday night, the leftist veteran’s first overseas trip since taking power on Jan. 1.

Brazil and Argentina have talked about a common currency in recent years, but talks broke down over Brazil’s central bank opposition to the idea, an official close to the talks said. Now that the two countries are both controlled by left-wing leaders, there is more political support.

A spokesman for Brazil’s finance ministry said he had no information about a single currency working group. He noted that Treasury Secretary Fernando Haddad co-authored an article proposing a South American digital common currency last year before taking up 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 percent from the same period in 2021. The two nations are the driving force behind the Mercosur regional trade bloc, which includes Paraguay and Argentina. Uruguay.

The appeal of a new common currency is most apparent in Argentina, where annual inflation is approaching 100 percent as the central bank prints money to fund spending. During President Alberto Fernández’s first three years in office, the amount of money in public circulation quadrupled, according to central bank data, and the largest denomination peso bill is worth less than $3 at the widely used parallel exchange rate.

However, there will be concern in Brazil over the idea of ​​linking Latin America’s largest economy to that of its eternally volatile neighbor. Argentina has been largely cut off from international debt markets since its 2020 bankruptcy and still owes more than $40 billion to the IMF following a 2018 bailout.

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

Colombian President Gustavo Petro was likely to attend, officials said, along with Chilean 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 shuns overseas travel and will not participate. Protests against Maduro’s presence are expected in Buenos Aires on Sunday.

Argentina’s Foreign Minister Santiago Cafiero said the summit would also include commitments on greater regional integration, defending democracy and fighting climate change.

Above all, he told the Financial Times, the region needed to discuss what kind of economic development it wanted at a time when the world was starving for Latin America’s food, oil and minerals.

“Is the region going to deliver this in a way that will keep the economy going? [solely] to a raw material producer or is he going to deliver it in a way that creates social justice [by adding value]?,” he said.

Alfredo Serrano, a Spanish economist who heads the regional political think-tank Celag in Buenos Aires, said the summit would discuss how to strengthen regional value chains to take advantage of regional opportunities, and how to move forward on a currency union.

“Monetary and exchange rate mechanisms are crucial,” he said. “There are opportunities in Latin America today, given its strong economies, to find instruments that replace dependence on the dollar. That will be a very important step forward.”

Manuel Canelas, a political scientist and former Bolivian government minister, said CELAC, created in 2010 to help Latin American and Caribbean governments coordinate their policies without the US or Canada, was the only such pan-regional integration body to have been established in recent years. decade while others fell by the wayside.

However, Latin America’s left-wing presidents now face tougher global economic conditions, tougher domestic politics with many coalition governments and less citizen enthusiasm for regional integration.

“As a result, all steps towards integration will certainly be more careful. . . and will need to be directly focused on delivering results and showing why they are useful,” he warned.

Additional reporting by Bryan Harris in São Paulo

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