Monday 2 October 2023

What have been the main obstacles for Latin America to have a single currency?

A monetary union covering all of Latin America would represent around 5% of world GDP.

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30 September 2023 - At The Banks - Source: BCCR

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Q REPORTS (BBC News Mundo) “In commerce in Latin America there is already a single currency. It’s called a (US) dollar.”

This mixture of irony and skepticism exuded by the words of Juan Batteleme, professor of international relations at the University of Buenos Aires, about the announcement by Brazil and Argentina of articulating a common currency, is the same that is spread among many analysts.

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The former chief economist of the IMF, Olivier Blanchard, responded to the news with four words: “This is crazy”, while the prestigious magazine The Economist called the project “bizarre”.

“It would unite the largest economy in South America with one of the sickest,” the weekly said in reference to Argentina, a country that has been trying these months to avoid at all costs what would be its tenth sovereign debt default since its independence in 1816.

And it is that after the announcement, many believed that the main economies of South America intended to create something like the euro that would replace both the Argentine peso and the Brazilian real.

The suggestion of inviting other Latin American nations to join later would have the potential to create the world’s second-largest currency bloc, after the European Union.

A monetary union covering all of Latin America would represent around 5% of the world GDP. To compare the euro, it encompasses around 14% of world GDP when measured in dollar terms.

But this aspiration, agree the economists, lacks foundation already in its origin.

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“It would not make any sense for a country like Brazil, which has inflation of 5.8% and 330,000 million dollars of international reserves, to link its monetary destiny to a country that incurs serial defaults like Argentina, with inflation of 95%. % per year and less than 10,000 million dollars of net international reserves,” argues Thierry Larose, senior manager of the Vontobel firm.


However, it is not the first time that Brazil and Argentina have sat down to talk about a common currency. Talks have failed in the past, mainly due to opposition from Brazil’s central bank.

But the historical precedent that could come closest to the idea of “South”, which is how Argentina and Brazil have baptized their currency, is the Sucre, an acronym in Spanish that means “Unified System of Regional Compensation”.

It was initially proposed by Cuba to facilitate cross-border trade between the “Bolivarian” countries (Bolivia, Cuba, Nicaragua and Venezuela).

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“This initiative sought to free these countries from the yoke of the dollar, not only because the Bolivarian regimes are anti-Americanist by nature, but also because most of these countries have low international reserves and limited access to dollar financing for their imports,” recalls Llarose.

Political affinity

The objectives of this and the regional projects that followed with equal success are almost always the same: to avoid the dollar, boost trade and force greater levels of fiscal discipline.

And almost all of them are born when the political affinity of the countries goes in the same direction. That is, when the governments are left or right.

“Unfortunately for them, the initiative was a complete failure with only a few completed transactions and all very small ones,” he adds.

For the economist, the reason for that failure is that a project like that “inevitably ends up being a way for countries with low reserves and a trade deficit to obtain cheap loans from those with high reserves and a trade surplus.”

That is why the latter usually have very few incentives to adhere to such a system, “beyond perhaps ideological satisfaction.”

Fading projects

What history tells us about Latin America’s attempts to have a common currency is that all the attempts died on the shore and almost all followed the same pattern: successes in their initial stage to move to a phase in which the idea was it blurs until it is lost.

Mercosur and Unasur also tried.

There are political, economic and social obstacles, but above all of them flies one of the most weight: integration.

“In Latin America, not all of us perceive the net value of integration. We want different things. Mexico is integrated with the United States, Uruguay is fighting for free trade agreements, just like Chile, just like Ecuador,” says Professor Batteleme.

“And then we have Argentina, which does not want any kind of free trade agreement. Not having the means to pay, we cannot import. The look now is that we have to live with what is ours”.

“In the end, there are more differences that Latin Americans have in relation to how to integrate than the agreements,” he explains in an interview with BBC Mundo.

Different positions in front of the world

“In other words, we believe in integration, but when we have to transform that into policies that imply, on the one hand, giving up our sovereignty, coordinating, harmonizing, etc., differences in the political system, ideological differences, differences in the economic structures, the differences in the positions that the countries have in relation to the United States, China, Europe, and that threatens any Latin American integration project.

“How do you integrate with the Cuban regime, which is not even democratic? Why can’t we agree on a definition of Human Rights?” the expert wonders.

So, to the differences in the size of the economies and their different relative strengths, which at first sight would be the first obstacle in the region, we must add the ideological problems, excess sovereignty and differences in the approval processes of each country.

Excess of sovereignty

“European success is based on intergovernmentalism added to a process of supranationality. In Latin America there is no intergovernmentalism or it is very limited as in the case of Mercosur or the case of the Pacific Alliance. And to this is added an excess of sovereignism that makes it very difficult to coordinate policies,“ says Batteleme.

Another obstacle is social.

“The poverty indicators, the social indicators… there is no common starting point. This generates a perception that integration does not benefit all of us equally and also generates problems of articulating policies,” says Batteleme, who believes that a common currency in Latin America would not change anything, because “ultimately, economic and industrial policy, and politics itself, continues to be nationally based.”

“In commerce in Latin America there is already a single currency. It’s called (US) dollar. The Argentine Republic’s fantasy of being able to have an alternative currency is due to the fact that it does not have dollars. That is the reality,” he says.

The key to the region

So why did Lula support Alberto Fernandez in this “adventure” of the South?

The reasons, according to Batteleme, are framed in the context of the departure of Jair Bolsonaro as head of Brazil and the arrival of the leftist leader Luis Inácio Lula da Silva to the presidency.

“Lula made a politically correct statement by giving Alberto Fernández what he needed in terms of gaining confidence in the markets,” he says.

“And the message that Lula sends is this idea that a Latin America that is not united, but aligned behind the leadership of Brazil gives him enough status to speak on an equal footing with the United States, with Putin, with Xi Jinping, and that Brazil regain that stature. It presents itself as the key state of the region,” he thinks.

Perhaps the idea of a common currency is too ambitious, but there is an intention to show the world that Brazil has a spirit of regional cooperation.

Read the original article (in Spanish) at BBC Mundo.

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