With the goal of greater economic integration, Argentina and Brazil are renewing discussions on the formation of a common currency. The idea has the potential to expand to other Latin American countries, in a move that could create the world's second largest currency bloc. However, the plan, which has been discussed before, could face numerous political and economic obstacles, reports Radio Free Europe, writing of world media.
Ahead of the meeting in Buenos Aires, the presidents of the two countries, Luis Inacio Lula da Silva and Alberto Fernandes, wrote a joint article stating that a common currency could help strengthen economic integration, according to Reuters.
"We intend to overcome barriers in our exchange, simplify and modernize the rules and promote the use of local currencies. We have also decided to advance the discussion of a common South American currency that can be used for financial and commercial transactions, reducing operational costs and our external vulnerability," he said. in a text published on the Argentine site Perfil.
The idea of a common currency, according to Reuters, was initially raised in an article written last year by Fernando Haddad and Gabriel Galipolo, now Brazil's finance minister and his executive secretary, and mentioned by Lula during the election campaign. Politicians from both countries discussed the idea back in 2019, but then they encountered resistance from the Brazilian central bank.
Lula's trip to neighboring Argentina also marks Brazil's return to the Community of Latin American and Caribbean States (CELAC), which Brazil left in 2019 at the behest of previous president Jair Bolsonaro, who refused to participate in the regional group due to the presence of Cuba and Venezuela. The leaders also announced the strengthening of the Mercosur trade bloc, which includes Argentina, Brazil, Paraguay and Uruguay.
News of the possible announcement of the start of discussions on a common currency was first reported by the Financial Times on January 21, noting that the presidents of Brazil and Argentina intend to invite other Latin American countries to join them in a move that could eventually create the second-largest currency bloc.
The initial focus will be on the possibility that the new currency, which Brazil proposes to call the sur, will boost regional trade and reduce reliance on the US dollar, officials told the London paper, adding that the sur would first be circulated alongside the Brazilian real and Argentine peso.
A currency union that would cover all of Latin America would represent about five percent of global GDP, estimates the Financial Times and adds that currently the world's largest currency union, the euro, covers about 14 percent of global GDP measured in dollars.
While there is concern in Brazil about the idea of linking with its neighbor's unstable economy, the idea of a new common currency is likely to be more attractive to Argentina, where, the paper points out, annual inflation has soared to nearly 100 percent while the central bank prints large amounts of money to finance spending.
Although a group of new left-wing Latin American leaders meet at a major summit of the 33-member CELAC community on Tuesday, hoping for deals on regional integration, the Financial Times concluded, they are also facing tougher global economic conditions, more complex domestic politics with many coalition governments and less enthusiasm of citizens for that integration.
Reviving discussions about creating a common currency between Brazil and Argentina has revived a plan that has been discussed before, but which could face numerous economic and political obstacles as many emerging markets seek alternatives to the strong US dollar, Bloomberg writes.
The latest proposal for a common currency comes as Argentina struggles with the highest inflation in more than three decades and ahead of presidential elections later this year.
On the other hand, Brazil's economy will see anemic growth this year, with Lula's new administration announcing a significant increase in public spending to fulfill his campaign promises last year.
South America's two largest economies have for decades considered options for coordinating their currencies, often to counter the influence of the dollar in the region, Bloomberg said, noting that persistent macroeconomic imbalances in both countries, along with persistent political obstacles to the idea, have had little effect.
In 1987, the leaders of the two countries announced the creation of a common accounting unit, called the gaucho, to measure trade between the countries. The idea failed amid a series of disagreements, the portal points out, noting that countries now have similar challenges.
Bonus video:
