During his first trip outside of Brazil since taking office on January 1, Brazilian President Luiz Inacio Lula da Silva met with his Argentine counterpart Alberto Fernandez on January 23 in Buenos Aires to float the idea of a common currency for both countries, which could become the second-largest global currency bloc behind the Euro.
The currency will be used for both financial and trade flows, which will result in a reduction in both operational expenses and sensitivity to external factors. In addition, the concept of a single currency would ultimately make it easier for other players or emerging countries to follow such an endeavor by paving the road for them to do so.
The purpose of the “Sur” or “South” currency would be to act as a financial counterweight currency to the dominance of the USD in terms of commerce in the area. This is the notion that lies behind the “Sur” or “South” money. During this period, it will also make commercial links with South America easier for the rest of the globe to maintain. In addition, since these economies are the major actors in the area, this currency will not circulate inside the borders of Brazil or Argentina; rather, it will be used as a common denominator in the financial transactions that take place between various countries. By using this strategy, Argentina and Brazil can identify a common ground on which to build upon in order to develop their commercial and financial connections.
The Significance of Taking This Strategy in Light of Recent Events
In the late 1980s, Argentina and Brazil discussed the idea of a shared currency that would be called the “gaucho.” This plan did not come to fruition, and the idea of a common currency was also floated during the previous administrations of Mauricio Macri in Argentina and Jair Bolsonaro in Brazil. However, as of late, the circumstances have shifted, and people all over the globe are contending with tremendous economic challenges. In addition, it is anticipated that the pace of economic growth in South America would drop precipitously from 6.6% in 2021 to 2.6% in 2022 and then collapse to 1.1% in 2023. The unemployment rate in the region reached 7.9 percent and returned to levels seen before the pandemic; however, the outlook for the labor market in the region, which is also being impacted by the impact of the conflict in Ukraine, may be complicated by greater informality and working poverty.
Additionally, an aggressive tightening of monetary policy in developed countries in an effort to bring inflation under control might portend difficulty for Brazil and Argentina, mostly as a result of the consequences of increased borrowing costs and a more costly US currency. The latter might, in fact, make the inflationary difficulties much more severe. Against such a backdrop, the two governments have come across to initiate the idea. The paper will discuss the messages conveyed by the idea for the rest of the world.
The Benefits of Having a Single Currency as a Model for The Rest of the World
Helps to Make Business Transactions Easier in the Region
When doing business across international borders, using a similar currency avoids the need to engage in currency conversion, which makes the process much more straightforward and expedient. In 2022, Brazil was the most important market for Argentine exports, accounting for 14.3 percent of total revenue and $12.7 billion. Brazil accounts for over 20 percent of Argentina’s total imports, with a value of little more than $16 billion in 2017.
On the other side, during the year 2022, Brazil purchased goods worth 13.61 billion US dollars from Argentina. After the introduction of the common currency, there will be an extraordinary improvement in the state of trade relations, and at the same time, this will contribute to the growth of the regional trade bloc known as Mercosur, which consists of the countries of Argentina, Brazil, Paraguay, and Uruguay.
Cuts Down on the Expenses of Transactions and Transportations: Rise in Trade and Investment
Businesses and people in both nations might save money on transaction fees and currency exchange rates if they used a single currency instead of their respective currencies. Additionally, the procedure will be simplified, and there will be no need to pay fees associated with currency conversion or spend the additional time that is required to convert currencies.
Additionally, with a similar currency, it will be much simpler to compare prices between Brazil and Argentina, which will make it much less difficult to identify the various modes of transportation that provide the best value for money. In addition to this, it will facilitate commerce and transactions, making them simpler and more effective. This, in turn, will lead to a rise in trade and investment, which will, in the long term, contribute to a reduction in the costs of transportation. Because of this, there is the potential for more competition in the transportation industry, as businesses will be able to provide rates that are more competitive within a broader market.
Fosters Economic Integration
A single currency may assist encourage economic integration and cooperation between nations, which can ultimately lead to increasing levels of economic activity overall, including increased levels of trade and investment. Additionally, the Sur (border) between Brazil and Argentina will, in the long run, encourage economic integration by lowering obstacles to trade and facilitating the free movement of products, services, and money between nations. It contributes to the expansion of commerce and investment, which ultimately results in increased economic cooperation and dependency among the other nations of South America.
Improves the reliability of pricing: Reduced Price Volatility and More Price Stability
Both nations will reap the benefits of price stability as a result of the establishment of a single currency, which will restrict the power of individual nations to manufacture money and devalue their currencies. Instead of being responsible for the monetary stability of each individual country, the central bank of a currency union is accountable for the stability of the whole union as a whole. This may eventually result in reduced inflation and a level of total prices that is more stable. The nation’s central bank is able to adopt monetary policies that are aimed to promote stability. These policies may include the regulation of the money supply and the setting of interest rates, both of which can assist in reducing the pressures of inflation. Surcharges, in addition, will assist to prevent currency swings, which will also contribute to reduced price volatility and more price stability.
Raises the Efficiency of the Central Bank’s Monetary Policy
Because of the use of a common currency, the central bank of the currency union is able to follow a single monetary policy that is suited to the requirements of the whole area. This eliminates the need for the bank to make separate policy adjustments for each individual nation. In addition, as a result of this, monetary policy will be better coordinated and implemented, since it will be possible for the central bank to pursue policies that are beneficial to both nations. In order to accomplish their objectives, which include maintaining price stability and fostering economic development, the central banks of Argentina and Brazil have access to a greater variety of financial instruments and a more extensive market.
If there is just one currency in use, there will be more price transparency, which will in turn drive higher levels of market competition. In addition to this, the introduction of a single currency will lead to the development of a single market and will make millions of potential consumers more accessible.
The combination of these two reasons will likely result in an increase in the chance that Brazil and Argentina will get an increasing amount of investment from the rest of the world. Last but not least, the introduction of a single currency would instantly bring about a reduction in the higher exchange rates of currencies that currently exist not only between Argentina and Brazil but also with other countries in the region. These higher rates of exchange currently exist not only between Argentina and Brazil but also with other countries in the area.
Being the strongest medium of exchange and most formidable military in the world is directly related to the dominance of the US dollar. Any attempt to replace it might lead to geopolitical unrest and US government retaliation. Additionally, any country’s economic instability will disrupt the supply chain and have an impact on others. Exchange rates may also cause problems over the road because trading with other nations would entail trading in multiple currencies, which affects how stable an economy is. However, the action itself is a courageous statement of defiance against the status quo, which is primarily dominated by a few currencies to the detrimental interests of large number of population in the developing world. Perhaps, this is the beginning of a movement to end the politics of oligopolies in currency exchange rates.
Syed Raiyan Amir is a Research Associate at The Center for Bangladesh and Global Affairs (CBGA)