Alberto Fernandez meets Lula Da Silva in Buenos Aires
-Analysis-
BUENOS AIRES — Proposals for a single currency for Mercosur, the South American trading zone, re-emerged during Brazil's President Luiz Inácio Lula da Silva visit last month to the Argentine capital. Speaking alongside host President Alberto Fernández, he clarified that this was a long-term project to facilitate regional trade without using U.S. dollars, not a short-term plan to replace national monies with a "Southern" currency.
This was the fourth public proposal of sorts for a regional currency. The presidents of Brazil and Argentina first mentioned it in 1987 as a tool to ease bi-national trade. Argentina's former president Carlos Menem discussed it again at a trade summit in Montevideo, Uruguay in 1997.
The subject was raised again in 1999 as part of more ambitious, EU-style convergence plans proposed by Argentina. The Argentine and Brazilian economy ministries reportedly discussed a common currency again in 2019, but in private.
The history of proposals shows that Brazil has been the cautious, if not outright skeptical, side regarding a shared currency. The doubts also come from international economists, including American Paul Krugman, who called it a "terrible idea," which disregards the theory of Optimal Currency Areas (OCAs). Olivier Blanchard, former chief economist with the International Monetary Fund (IMF), considers the proposal simply insane.
Instead, some top business leaders are less hostile: Tech billionaire Elon Musk believes it may be a good idea, while Pierpaolo Barbieri, an Argentine regional entrepreneur and founder of fintech firm Ualá, sees it positively within an integrated single market of a still hypothetical future. Other political observers consider it essential to any regional integration project, and specifically to wean regional trade off the U.S. dollar.
So is a single currency advisable in our case or simply the culmination of a distant political vision of integration? Is it feasible, or just a distraction from more urgent priorities?
Inflationary pasts
The OCA theory, which was proposed by Robert Mundell in 1961, sees a single currency as well-suited to areas closely tied through transnational trade flows and the movement of productive factors like capital and labor. For an individual country, its cost-benefit ratio depends on the level of economic integration with its partners.
Brazil and Argentina have yet to fully overcome a measure of "disreputability"
From this perspective, Mercosur is not an OCA because it is not integrated yet through close trading links or capital and labor flows. The volume of trade inside Mercosur remains small, and has even declined to the level of 11-12% (of its members' total trade volume). Argentine and Brazilian exports to Mercosur countries in 2021 were just 17.9 and 6% of their respective total exports. The movement of workers has yet to be fully liberalized, and with capital, while there has been liberalization of direct investment rules, exchange restrictions remain in force in Argentina, which discourages capital inflows.
Extenuating factors like similar economic structures are also absent. This is show by, for example, low industrial trade levels. Likewise, there is limited capacity for transferring fiscal resources to less solid economies, in the manner of the European Union's solidarity funds.
Lastly, the EU's "credibility theory" and benefits of the German Bundesbank's reputation aren't entirely relevant to Mercosur. The Brazilian central bank is considerably more reputable than Argentina's, but hardly the Bundesbank. In fact, Brazil and Argentina have yet to fully overcome a measure of "disreputability" resulting from the long history of inflation in both countries. Brazil's stabilization since 1994 has been successful, but is still young, while high inflation remains a risk in Argentina.
Visionary, or a distraction?
A much higher level of economic integration would be needed in the Mercosur zone to merit a common currency. Before considering it, Mercosur countries need to agree on issues of macro-economic and fiscal coordination and harmonization, and ultimately need deeper economic interdependence.
Is a currency feasible in the medium term? If governments want Mercosur to gain traction, their first steps should include lifting import barriers inside Mercosur and consolidating, with stable external tariffs, the market's regulated integration in global trade, as well as taking economic harmonization measures. These require agreements, soon, on specifics. Brazil and Argentina must in turn also clarify what kind of integration they want: a customs union and eventually a single market and currency, or a free-trade zone.
Before a customs union is laid out and fine-tuned, and measures taken to coordinate regional macro-economies, talk of a shared currency is abstract, if not distracting — unless in the coming months, Lula da Silva, president of the region's economic heavyweight, makes a political decision to boost Mercosur integration.
*Nofal is an economist, a former Argentine legislator, and was a deputy-industry minister in the 1980s.
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