This week, the second-largest currency bloc of the world started to take shape in South America. The world’s most prominent economic minds are puzzled.
In a joint op–ed published by Perfil, Argentina’s Presidents confirmed their plans to create a “sur” common currency. Luiz Inacio Lula de Silva , Brazil’s new President, arrived in Buenos Aires Monday to meet with Alberto Fernandez (Argentinean counterpart) and discuss ways to strengthen trade ties.
In their op-ed they stated that they had decided to push for discussions on a South American common currency that could be used for both commercial and financial flows. They also said that a common currency would protect both countries from external forces and vulnerabilities. Brazil’s President Lula stated Monday that the common currency would reduce the region’s dependence on the U.S. dollar and facilitate trade.
According to Sergio Massa , Argentina’s economy minister, implementation will take time. He compared the rollout of the project to the 35 years that it took European countries for the euro to be introduced, which is the largest currency bloc in the world. Based on early reactions, many prominent economists doubt that a Latin American currency will ever be implemented. Others argue that the idea is misguided.
“I’m shocked by the idea of a joint currency for Brazil & Argentina,” ex-U.S. Treasury Secretary Larry Summers said on Tuesday. He also stated that the plan was “highly problematic”, given the economic differences between Brazil and Argentina, lack of political alignment, shared run-ins against populist political movements and issues with fixed exchange rate.
Summers admitted that he was not a specialist in Latin American economics. He invited other experts to provide their comments, but even South American authorities and developmental economists have been scratching there heads about the move.
“This is insane,” Olivier Blanchard (a French economist) wrote Sunday on Twitter. Jose De Gregorio (a Chilean economist, former minister for economy, and governor of the central bank of the country), called the idea a “total loss of time”.
De Gregorio stated that the announcement of a single currency was “the most absurd thing I have ever heard” and not very credible. The plan was unfavorably compared to the euro, which began with a “very deep economy union” between countries. He warned Brazil against integrating its currency into Argentina, which could lead to a disruption in its monetary policy.
Inflation in Argentina has been among the most volatile in recent years. Inflation in Argentina reached 100% in November. The country’s revolving doors of ministers has caused Argentina’s economic climate to change from an interventionist government to a pro-business, free market environment multiple times throughout the years.
Inflation has caused a cost-of-living crisis in a country where citizens are still recovering from the economic shock. This led to large antigovernment protests last.
The stability of Argentina’s trade relationship with Brazil has been $26.4 Billion in the first eleven months of the last year, according to the Financial Times. This is 21% more than the previous year.
According to Fernando Haddad , Brazil’s Finance Minister, facilitating trade is likely to be more important than establishing a new currency in the short-term, he told reporters at Monday’s Buenos Aires summit.
“We have to figure out how we will do it,” he stated, noting that the target level of monetary unification wouldn’t reach the level of the euro.
Economists can also get on board if trade and economic reforms are the final outcome of the common currency concept.
Brazil and Argentina do not have the “initial circumstances to make this succeed” and attract other countries, said Mohamed El-Erian (president of Queen’s College at Cambridge) and chief economic advisor at Alleanz. posted Sunday on Twitter. He said that the talks at the current summit could open the door to more substantial economic changes.
He wrote, “The best that this initiative can hope to is that talk creates some policy cover for much-needed economy reforms.”
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