Brazil and Argentina will announce this week that they are beginning preparatory work for a common currency, 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 calls “sur” (south), could boost regional trade and reduce dependence on the US dollar, officials told the Financial Times. It would initially run parallel to the Brazilian real and Argentine peso.
“There will be . . . a decision to start examining the parameters needed for a common currency, covering everything from tax issues to the size of the economy and the role of central banks,” Argentina’s economy minister, Sergio Massa, told the Financial Times .
“It would be a study on trade integration mechanisms,” he added. “I don’t want to create false expectations. . . it is the first step on a long road that Latin America has to travel.”
Originally a bilateral project, the initiative was intended to be offered to other nations in Latin America. “It is Argentina and Brazil that invite the rest of the region,” said the Argentine minister.
A monetary union encompassing all of Latin America would account for about 5 percent of global GDP, the FT estimates. The world’s largest currency union, the euro, accounts for 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 part of global economic output.
It will probably take many years for the project to come to fruition; Massa pointed out 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, which begins Sunday night, the veteran left’s first trip abroad since he took power on Jan. 1.
Brazil and Argentina have been discussing a common currency for the past few years, but the talks stalled due to opposition from Brazil’s central bank to the idea, said an official close to the discussions. Now that both countries are governed by left-wing leaders, there is greater political support.
A spokesman for Brazil’s finance ministry said it had no information about a working group on a common currency. He pointed out that last year, before taking up his current job, Treasury Secretary Fernando Haddad co-authored an article proposing a South American common digital currency.
Trade between Brazil and Argentina is thriving, 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 trading bloc, which includes Paraguay and Argentina, and Uruguay.
The benefits of a new common currency are most evident for Argentina, where annual inflation approaches 100 percent as the central bank prints money to fund spending. During President Alberto Fernández’s first three years in office, the money supply in public circulation has quadrupled, according to central bank data, and the largest denomination peso bill is worth less than $3 at the widely used parallel exchange rate.
In Brazil, however, there will be concerns about tying Latin America’s largest economy to that of its ever-volatile neighbor. Argentina has been largely cut off from international debt markets since its 2020 default and still owes the IMF more than $40 billion from a 2018 bailout.
Lula will remain in Argentina on Tuesday for a summit of the 33-state Community of Latin American and Caribbean States (CELAC) that will bring together the region’s new generation of left-wing leaders for the first time since a reverse election wave last year.
Colombia’s 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 trips abroad and will not take part. Protests against Maduro’s participation are expected in Buenos Aires on Sunday.
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Argentina’s Foreign Minister Santiago Cafiero said the summit will also make pledges on greater regional integration, defending democracy and fighting climate change.
Above all, he told the Financial Times, the region needs to discuss what kind of economic development it wants at a time when the world is starving for food, oil and minerals from Latin America.
“Will the region deliver this in a way that will boost its economy? [solely] convert it into a commodity producer or provide 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 will discuss how regional value chains could be strengthened to seize regional opportunities and make progress towards monetary union.
“The currency and exchange 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. This will be a very important step forward.”
Manuel Canelas, a political scientist and former minister in the Bolivian government, said that CELAC, which was founded in 2010 to help Latin American and Caribbean governments coordinate their policies without the US or Canada, is the only such pan-regional integration body to survive did last decade while others fell by the wayside.
However, Latin America’s left-wing presidents are now confronted with more difficult global economic conditions, more complicated domestic politics with many coalition governments and less popular enthusiasm for regional integration.
“For this reason, all integration steps will certainly be more cautious. . . and must focus squarely on delivering results and showing why they are useful,” he cautioned.
Additional reporting by Bryan Harris in São Paulo