24 January 2023

Brazil & Argentina’s Common Currency Plans

Education

Brazil and Argentina have announced they will begin preparation for a shared common currency called the “sur”, meaning “south”, this week that could see the creation of the world’s second-largest currency bloc. This article will explore what this could mean for South America’s two biggest economies, the historical context and whether it will incentivise other Latin American countries to participate in the shared project.

 

Summit in Buenos Aires this week to discuss the creation of Sur

 

Announcing the shared ambition between South America’s largest economies, Brazil’s President Luiz Inácio Lula da Silva and his Argentinian counterpart Alberto Fernández said in a joint article for Argentina’s newspaper Perfil that their goals in this mission include boosting regional trade and financial flows, reducing their reliance on the US dollar, and evaluating fiscal issues relating to the size of their respective economies and the future role of their central banks. Officials also clarified to the Financial Times that, at first launch, the currency would run in parallel with the Brazilian real and Argentine peso.

 

The idea for a new common South American currency was originally raised last year in an article authored by Fernando Haddad, who has since been promoted to Finance Minister for Brazil. Nonetheless, advancing discussions on the shared currency is by no means a signal its introduction will be imminent and may take many years to come to fruition.

 

Areas of particular concern for Brazil may include:

 

·         Argentina’s annual inflation approaching 100 per cent

·         Argentina’s default in 2020

·         $40bn owed to the IMF for Argentina’s 2018 bailout

 

Argentina’s Economy Minister Sergio Massa noted that he does not want to create any false expectations that discussions will be easy, stating “processes can be very elastic” and highlighted that it took 35 years for the Euro to come into practice.

 

The historical context of a shared South American currency

 

The idea of a common currency for South America is by no means a new idea, as it has been discussed for many years as a way to increase economic integration and stability in the region. However, many challenges have hindered its creation, including that the economies of the different countries in the region are quite diverse with many having a particular history of inflation.

 

Additionally, there are political challenges to creating a common currency, as each country would need to give up some degree of control over its own monetary policy. In practice, it would generally require countries to share similar levels of debt, inflation, and economic growth, which is not the case in South America today. Critics of the idea often cite the creation of the shared Sucre regional electronic currency in 2008 and its eventual failure as a case point example of the challenges involved.

 

Latin American countries invited to participate

 

While the Sur currency will begin as a bilateral project, both presidents have underlined that the initiative will later be extended to invite other South American nations. In addition to highlighting the reduced trading conditions this would bring forth, Brazil’s Finance Minister has previously cited the European Union’s soft power as an example of the strengths of regional economic integration. Specifically, he cited the Eurozone sanctions against the Russian Federation for its war in Ukraine and argued that this level of regional power is necessary for an increasingly changing international geopolitical environment.

 

If these efforts are sustained and a new Sur currency did in fact integrate the economies of South America, the Financial Times has estimated this would represent 5 per cent of global GDP. In comparison, the world’s largest currency union, the Euro, represents approximately 14 per cent of global GDP when measured in US Dollar terms.

 

Key Takeaways

 

The announcement of Brazil and Argentina's shared ambition for a common currency is a significant development that could have substantial implications for the region and the world. While there are many challenges that must be overcome before the currency can be introduced, the renewed interest in this initiative is significant and should be closely monitored. The potential benefits of such a currency include increased economic integration and stability, as well as reduced reliance on the US dollar for South American nations. However, there are also many challenges that must be overcome, including addressing the diverse economies and political realities of the countries involved.

 

 

 

Disclaimer: Any information presented is for general education and informational purposes hence, not intended to be and does not constitute investment or trading advice or recommendation. No opinion given in the material constitutes a recommendation by M4Markets that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

It does not take into account your personal circumstances or objectives. Any information relating to past performance of an investment does not necessarily guarantee future performance.

Trinota Markets (Global) Limited does not give warranty as to the accuracy and completeness of this information.

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