Brazil and Argentina discuss common currency. What are the gains and losses

The idea of ​​creating a common currency for commercial and financial transactions between Brazil and Argentina is one of the main topics of President Luiz Inácio Lula da Silva’s (PT) trip to the neighboring country. The proposal is not new and has been heavily criticized by opponents, mainly due to the financial crisis that the country governed by Alberto Fernández is going through and which could contaminate the Brazilian economy.

The discussion revolves around the creation of a facilitating mechanism for trade between countries, but without replacing the currencies in circulation, as was suggested during the government of Jair Bolsonaro (PL). The suggestion is that the common unit of exchange be named “sur” (south, in Spanish).

On Monday (23), in a press conference, the Minister of Finance, Fernando Haddad, and his Argentine counterpart, Sergio Massa, reinforced that the proposal for a common currency differs from the concept of a single currency, as is the case with the euro, used in 20 countries of the European Union.

“We had a series of mechanisms that stopped working. Now, we are creating a way to meet the demands, a common means of payment between the two countries, which does not depend on the exchange rate situation of each country”, said the Brazilian minister.

Although the initiative is still in the study phase, last year Haddad signed an article in the newspaper “Folha de S.Paulo” in which he presented a proposal for the creation of a South American currency. The text was written together with the current executive secretary of the Ministry of Finance, economist Gabriel Galípolo.

“The beginning of a process of monetary integration in the region is capable of introducing a new dynamic to the consolidation of the economic bloc, by offering countries the advantages of access and shared management of a currency with greater liquidity, valid for relations with economies that, together , represent greater weight in the global market”, says an excerpt from the text.

According to the authors, the Brazilian experience with the Real Unit of Value (URV), which served as a reference in the transition from the Cruzeiro Real to the Real, could support a paradigm for the creation of sur.

The currency would be issued by a South American central bank, with an initial capitalization made by member countries, proportional to their respective participation in regional trade. “The capitalization would be done with the countries’ international reserves and/or with a tax on the countries’ exports outside the region”, wrote Haddad and Galípolo.

Also according to the article, each member country would be credited with an initial endowment of sur and exchange rates between national currencies and the sur would fluctuate. There would also be an adjustment mechanism between surplus and deficit countries, and the resources from this instrument would be used to capitalize a clearing house, dedicated to reducing asymmetries between economies.

Bolsonaro and Guedes have already defended the creation of a single currency for Brazil and Argentina

Although criticized by opponents of the Lula government, including federal deputy Eduardo Bolsonaro (PL-SP), the idea of ​​a single currency for Brazil and Argentina was defended in the previous government by former president Jair Bolsonaro (PL) and the former minister of Economics, Paulo Guedes.

Still in 2019, on a trip to Buenos Aires, the two discussed the subject with their peers in Argentina, Maurício Macri and Nicolas Dujovne. The theme was also discussed with Argentine businessmen and, in the meetings, even a name for the possible currency was suggested: “peso real”. In Brazil, Bolsonaro also stated that the idea of ​​creating a single currency could be extended to all countries in South America.

“As happened with the euro back then, the real peso could happen here. It could happen. It’s a first step,” Bolsonaro said at the time. “This is something that could happen within 20 years,” Guedes said.

The former minister again defended the initiative in August 2021, during a meeting at the Senate Foreign Relations Committee. “We could have a complete integration and, in this sense, Brazil would assume a function like that of Germany in Europe”, he said. Still on the occasion, he stated that the new currency could be one of the “five or six relevant currencies in the world”.

In May 2022, at the World Economic Forum in Davos, Switzerland, the former minister mentioned the proposal once again when talking about greater trade integration in Latin America. “I think we’ll probably see the real weight,” he declared.

This Monday (23), Haddad made it clear that the idea of ​​the current government is not about a currency to replace the peso and the real. “My predecessor defended a single currency, that’s not what we’re talking about. It’s not about Paulo Guedes’s idea, it’s about moving forward with the planned instruments that did not work satisfactorily”, he said, at an event in Buenos Aires.

The executive secretary of the Ministry of Finance, Gabriel Galípolo, made similar statements. “It is precisely because of the low convertibility of the peso, and because we understand that it is difficult to accept the peso in international trade today, that another form of unit of account and means of payment is being considered,” said the economist in an interview with GloboNews. .

Common unit of exchange would protect dollar reserves

André Perfect, who was chief economist at Necton, sees the creation of a common unit of exchange as opportune for Brazil to lead the economic organization of South America.

“The idea is to create a clearinghouse between the bloc’s partners. We sell in reais and buy in pesos. The surplus of one finances the deficit of the other”, ” published the economist on a social network. “Let’s assume that Brazil always has a surplus against Argentina. They will have to borrow this ‘money’ from the clearinghouse, which will charge interest on this amount,” he explained.

Fábio Bittes Terra, economics professor at the Federal University of ABC, also defends the initiative. “Member countries would exchange in that currency and protect their international dollar reserves a little, by not spending it for exchanges between them”, he wrote.

As it is not pegged to the dollar, trade between the two countries would not be harmed if one of them had depleted its foreign exchange reserves, according to Perfeito. “Ultimately, if the real becomes the strongest currency in the bloc, Argentines will have a debt in reais. […] Currency is credit, that is, debt. If the countries of the bloc owe in reais (even if the interest rates are low in that clearing house), there will be a decisive influence of Brazil on the countries of the bloc.”

Still according to him, if hypothetically Argentina was unable to honor the debt, Brazil could be paid directly in merchandise, with the Argentine government paying the producer in pesos. “That’s exactly what the Chinese were doing with Argentines: they would lend in yuan, and if they couldn’t pay, the Chinese would take merchandise.”

“The advantage of this strategy is that it allows you to continue producing even without having access to the reference currency (today the dollar)”, explains the economist.

Argentina’s economic situation would make integration unfeasible

Many analysts, on the other hand, are wary of the idea. “The creation of a common currency between Brazil and Argentina in the current situation is a fiction”, says economist Robson Gonçalves, a professor at the Getulio Vargas Foundation (FGV). “A good part of Brazil’s economic relations with the rest of the world and Argentina’s with the rest of the world is accounted for in dollars, so it is natural that the dollar is a reference.”

For him, the fact that the countries are in very different economic situations makes monetary integration, even if merely accounting, unfeasible. “It’s like tying up two people who follow different steps”, he compares.

Gonçalves considers that discussing the proposal at this moment is like putting “the cart before the horse”. “A discussion aimed at reinvigorating Mercosur would be much more realistic”, he argues. “Mercosur should have common external tariffs and, however, it is full of exceptions. A person moving from Brazil to Argentina still has some bureaucracy, trade flows are still restricted”, he exemplifies.

“We are a long way from Europe, which took almost 40 years to create a common currency, until all economies were more or less walking in step,” he says.

The opinion is the same as that of Cláudio de Moraes, professor of macroeconomics and finance at the Institute of Graduate Studies and Research in Administration (Coppead) at the Federal University of Rio de Janeiro (UFRJ). “Monetary integration is very interesting, but it requires fiscal and monetary discipline and very high equivalence between countries. It is the end of a process, not the beginning.”

Given the current context, the economist believes that the initiative would benefit Argentina more than Brazil. “When you make a deal like this, the intention is not to have to, by Swift [sistema de transações financeiras internacional]make the transaction via dollar and then in the local currency”, he explains.

“For Argentina, which is experiencing a crisis with the peso, seeking trade contours that can escape the dollar makes perfect sense”, says Moraes. “Brazil would perhaps have the advantage of lowering transaction costs, but it is still a very preliminary thing, a very complex structure and a trading partner that, although traditionally important, is suffering a very serious economic moment precisely in its own currency.”

Moraes considers that the proposal should not succeed. “Honestly I don’t believe this will happen, nor will it go beyond good intentions.”