Brazil and Argentina talked about creating a common currency to shake off the hegemony of the dollar
At the recent 7th summit of the Community of Latin American and Caribbean States, two regional powers, Brazil and Argentina, proposed the creation of a common South American currency.
Argentina and Brazil are exploring the launch of a common currency that could lead to the world's second largest currency area.
Brazil and Argentina will announce at a summit in Buenos Aires that they are starting preparations for a "common currency" and will invite other countries in Latin America to join, the Financial Times reported yesterday. The move could create the world's second-largest currency area after the euro.
Officials were quoted as saying the summit would focus on how a common currency, dubbed SUR (south) by Brazil, could boost regional trade in future to reduce the region's reliance on the US dollar.
Argentine President Cristina Fernandez and Brazilian President Luiz Inacio Lula da Silva confirmed Wednesday that the two countries are considering launching a common currency, Xinhua reported.
Argentine Economy Minister Sergio Massa told the Financial Times that the meeting would discuss the parameters needed to create a common currency, including fiscal issues, the size of the economy, the role of the central bank and many other aspects.
He added: "It will be a study of trade integration mechanisms. I don't want to raise any false expectations. This is the first step in a long road that Latin America must take."
The plan is a bilateral project. Massa said Argentina and Brazil would invite other countries in the region to join them. But Massa also said the plan could take many years to realize.
Venezuelan President Nicolas Maduro said Wednesday that his country supports a proposal by Brazil and Argentina to create a common currency for South America.
The plight of Latin American countries
Economists pointed out that the United States has been exploiting the hegemony of the dollar to harvest the world through the operation of the Federal Reserve for a long time, and Latin America has also suffered a lot.
In the late 1970s and early 1980s, the Fed abruptly raised rates after a years-long rate-cutting cycle. The appreciation of the dollar led to a large amount of money flowing back to the United States, and Latin American countries, because they had borrowed a lot of dollar debt, faced enormous pressure to repay the debt, so many countries fell into the debt trap.
The move by Brazil and Argentina to propose a common currency reflects a desire by countries in the region to reduce their dependence on the dollar.
The latest proposal comes as Argentina struggles with more than three decades of high inflation. On January 6, 2023, Argentina's central bank predicted that inflation would reach 98.4% in 2023.
With economic downturn, hyperinflation, debt problems and social unrest, Argentina is once again caught in a "storm". Since the beginning of 2022, the cumulative depreciation of the Argentine peso has exceeded 40%, which further increases the imported inflationary pressure and capital outflow risk of Argentina, and also reduces the government's solvency.
The government has imposed frequent import restrictions since late 2021 in an effort to shore up the central bank's foreign exchange reserves, which fell to less than $29 billion as of August last year.
Moreover, while the Brazilian real's cumulative depreciation against the dollar so far in 2022 is only 6.5% -- a relatively resilient emerging market -- Brazil, like Argentina, has spent a lot of its reserves on imports, and its reserves have fallen by $29.4 billion.
The integration process of CELAC is worth looking forward to
Argentine economist Hernan Lecher told reporters that Brazil and Argentina together account for more than 50 percent of the South American economy.
Coming together now for a common currency, despite its operational complexities, is good news for both countries' economies: in Brazil's case, it will increase Brazilian exports and lead to further growth;
For Argentina, it would alleviate the current shortage of dollar reserves and reduce the trade risks arising from reliance on the dollar.
Mr Lecher also said the introduction of a common currency would require better communication and bridging differences between Argentina and Brazil over macroeconomic policies, the role of central banks and productivity levels.
Carlos Mardel, a Brazilian economics professor, pointed out that the introduction of a common currency in Brazil, Argentina and other South American countries will be one of the strategies to promote regional integration in Latin America.
Although the idea of a common currency in South America has been criticised by many liberal economists, it "has strong arguments and deserves further discussion".
Mardell also said that because Latin America's economies are "extremely uneven," slower developing economies are likely to take a more effective path to integration into world markets once they adopt the common currency, as Portugal and Greece have shown since joining the euro.
Jose Karamuru, a former ambassador to China and a member of the international advisory council of the Brazilian Centre for International Relations, said the idea of a common currency was a "good idea" but introducing a common currency to replace the Brazilian real and the Argentine peso would require more co-ordinated action and time from both countries.
For the time being, he said, it is desirable that Brazil and Argentina may be discussing the introduction of a monetary unit (similar to the European Monetary Unit (ECU), the unit of measurement used by European Community members before the euro was formed) to facilitate trade between the two countries and reduce their reliance on the dollar to settle trade.