How Feasible Is Brazil and Argentina’s Proposal for a Common Trading Currency?

Authorities in both countries have ratified their intention to advance with the plan, but experts warn of the challenges they could face in the short term

Brazil's President Luiz Inácio Lula da Silva and Argentine President Alberto Fernández headed the meeting between the two countries.
January 24, 2023 | 01:51 PM

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Buenos Aires — Since Sunday, the announcement of the beginning of studies toward creating a common currency for financial and commercial flows between Brazil and Argentina has provoked a variety of reactions.

Argentine Economy Mnister Sergio Massa’s statement on Sunday was ratified Monday with the presence of Brazilian President Luiz Inácio Lula da Silva in Buenos Aires; and with the meeting between the ministers of economy of both countries, Massa and Brazil’s Fernando Haddad.

However, the reactions to the proposal could be summarized in one word: skepticism.

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Although experts consulted by Bloomberg Línea agree that the proposal may be a positive one, they point out that for it to move forward, many steps must be taken and that, first of all, Argentina will have to correct its macroeconomy.

Lula’s endorsement of the common currency

In the framework of the bilateral meeting held on Monday between the presidents of Argentina and Brazil, Lula stated that “what we want to work on now is that our finance ministers, each one with their economic teams, can make us a proposal for foreign trade to be carried out in a common currency, which will be built with much debate and many meetings. That is what is going to happen”.

If you ask me, there would always be trade with other countries in both nations’ currencies, to not depend on the US dollar

Lula da Silva

For his part, Argentina’s President Alberto Fernández said: “We do not know how a common currency between Argentina and Brazil or in the region could work, but we do know that economies work depending on foreign currencies, and we do know how harmful that is. I welcome this vocation of the Brazilian government”.

Luiz Inacio Lula da Silva will take part in the ECLAC summit in Buenos Aires. Photographer: Anita Pouchard Serra/Bloombergdfd

Meeting between Haddad and Massa

After the bilateral meeting between Lula and Fernández, Sergio Massa received his Brazilian counterpart, Fernando Haddad, as well as Argentine business leaders, during an encounter in which Massa ratified the intention of “taking the first step on a long road that we must travel toward the goal of a common currency for both countries and with an invitation to other countries in the region”.

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The economy ministers of Brazil and Argentina.dfd

It doesn’t mean renouncing the currencies of each country, but rather finding a trade instrument that is a common denominator that reflects the power of the region’s GDP.

Sergio Massa, Argentina's economy minister

The experts’ view

According to Juan Carranza, an Argentine geopolitical analyst, this project “is not feasible in the short term”, for which he lists three reasons. The first has to do with Brazil’s interests, and which are linked to recovering the bilateral trade volume with Argentina. In that sense, Carranza points to the agreement between the central banks of both nations in which both importers and exporters invoice in their local currency.

“This system is little used and what Brazil wants is for it to be used more,” Carranza said.

Technical issues and the lack of complementary natuure of the two economies are also a factor that will impact the progress of the measure, he added.

“We produce the same things that Brazil produces, we depend a lot on Brazil and the strength of the currency are other issues that make it difficult to achieve in the short term.”

The third factor is political, he said. “Ceding sovereignty costs the governments, and a lot. Macroeconomic coordination is already difficult, let alone a common currency,” he said.

For Martín Tetaz, an Argentine economist and a congress member of the Evolución Radical party, said: “It is a good idea as a point of arrival, but as a starting point it seems to me that we have to fix our exchange rate with that of Brazil, and that could make the common exchange rate more stable”.

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According to Tetaz, “if the government is thinking only of a currency for foreign trade, I do not think it will solve Argentina’s inflation problem”.

And regarding the possibility of this project moving forward, he said it would require regulations that “would take years”.

“It may take five or six years to move toward a common currency, and Argentina has an urgent problem with inflation right now,” he said.

For his part, Gustavo Pérego, director of consulting firm ABECEB, said “it is not feasible in the short term, given the experience of Mercosur, where supranational regulations are almost impossible, and it would be more difficult to create a supranational regulation on a currency”.

The analyst added that there could be the logic for greater trade facilitation with the use of its own currency, however, he added that there are difficulties, and that “in the long run there has to be a macroeconomic convergence between the two countries in order to be able to even have such a scheme”.