1. What are Brazil and Argentina talking about?
Lula and Argentine President Alberto Fernandez announced their intention to discuss a “common South American currency” in an open letter published in an Argentine newspaper last weekend. The unit would be “used for financial and trade trading to reduce operating costs and reduce our external vulnerability” to the dollar, they wrote. The announcement came amid a summit meeting of the Community of Latin American and Caribbean States. There, the finance ministers of both countries made it clear that they are thinking of a “common currency” that would not replace their own national currencies. Other trading partners such as Uruguay and Paraguay would like to join.
2. How would that work?
A working group with officials from Brazil and Argentina is expected to start talks about a joint entity that can handle trade transactions without relying on the dollar. It is part of a broader plan to facilitate trade between Brazilian exporters and Argentine importers, who are struggling to access US dollars due to capital controls. A fund will operate under the Brazilian Treasury to provide guarantees for these transactions together with public and private banks.
3. How does a unit of account work in retail?
No details on specific plans have been released, but here’s a general picture: Currently, a trade transaction between the two countries requires the US dollar as a price reference. This means that in order to pay for Argentinian goods exported from Brazil, the importer must first convert the price from Brazilian reais to dollars, and then the seller converts those dollars to pesos. Not only does this add an extra step, but it can also lead to greater volatility if the dollar fluctuates against either currency. Instead, the value of a common unit of account could be determined using a standardized “basket of currencies” intended to give an idea of price levels in the participating countries. That would make calculating the price in the importing country’s currency a one-step process rather than a two-step process and would reduce volatility by pegging the exchange rate to a range of prices – in addition to not requiring the dollars to broker the operation. The common unit would be similar in concept to the ECU, the accounting currency used as the monetary unit of European countries from 1979 to 1999 before the introduction of the euro.
4. Why wasn’t it done sooner?
Brazil and Argentina have been considering options for coordinating their currencies for decades, but persistent macroeconomic imbalances and political volatility in both countries made it impossible to advance the idea. In 1987, the two countries announced the “gaucho,” a common unit of account to measure trade between nations. It failed amidst hyperinflation and increasing currency devaluation. More recently, Bolsonaro also proposed a single currency, but was met with skepticism: his political differences with Fernandez meant they never held a formal meeting during their tenure. There is no short list of challenges now. Argentina’s annual inflation has approached 100% amid a rapid depreciation of the peso, while Brazil’s consumer price inflation hit nearly 5.9%, with interest rates at a six-year high.
5. What would be the benefit?
Officials from both governments believe a joint trade entity would boost regional trade. Still, most economists have downplayed the idea as “untimely” and “far from likely.” Chile’s former central bank governor Jose de Gregorio said Brazil is risking its solid monetary policy by strengthening ties with Argentina while still trying to regain credibility in its public accounts.
6. Why is Lula following this?
It’s one of many ways he’s trying to restore Brazil’s role on the international scene. One of his first acts after being elected president was to attend the COP27 talks in Egypt and offer to host the United Nations climate talks in 2025. As a candidate, he had managed to secure high-profile meetings with European officials. Now, just over a month after taking office, he promises to boost regional trade by regaining a seat in CELAC, a group of 33 Latin American nations formed to replace US influence in the region . Bolsonaro left the community after ideological differences with Cuba and Venezuela. Still, it won’t be an easy task as one of the region’s oldest trading blocs, Mercosur, is put to the test.
7. What else is happening to trade in South America?
The Southern Common Market, called Mercosur in Spanish, is one of the oldest trading blocs in the region with Argentina, Brazil, Uruguay and Paraguay as founding members. Others like Chile and Bolivia are linked to the bloc while Venezuela remains suspended. Established in the 1990s, it has served as a means of promoting regional trade, although not without conflict, as members have often imposed tariffs on imports during times of economic crisis. Uruguay, one of its smallest partners, unilaterally opened trade negotiations with China last year and applied to join the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership. It’s a move out of frustration at Mercosur’s slow pace of opening up its economies and pushing forward trade deals, after decades of negotiations with the European Union. President Luis Lacalle Pou has promised to stay in Mercosur but said the bloc needs modernization and still faces internal trade barriers.
8. Can Brazil regain its regional standing?
After years of isolation during the Bolsonaro administration, the international community seems eager to welcome Brazil back. But Lula must overcome political and economic tensions to reunite the region. Cuba, Venezuela and Nicaragua remain hot issues for the region as refugees cross borders to escape the economic crisis while left-wing leaders remain reluctant to condemn their regimes. Leaders are also now at odds over how to deal with Peru’s growing political instability. On the economic front, consumer price inflation is only now easing as the region’s main central banks continue to maintain double-digit interest rates, and growth is expected to slow this year. In addition, Lula’s plans to increase regional trade must overcome China’s influence in the region, which has grown through major infrastructure projects.
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