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South America’s Make-Believe Money Is Either Dangerous or Irrelevant

When the presidents of Brazil and Argentina announced at a regional summit in Buenos Aires that they would start planning for a common currency, you could almost hear the chortling from lower Manhattan to the Washington headquarters of the International Monetary Fund. 

“It’s not far from El Salvador adopting Bitcoin,” said Kenneth Rogoff, who became chief economist at the IMF just in time to witness the macro-devaluation of the Argentine peso in 2001. Olivier Blanchard, who held the post a few years later, went simply for “insane.”

Brazil’s Finance Minister Fernando Haddad quickly tried to dial back expectations, explaining that the “sur” (south, get it?), as the new currency would be named, would be only a common means of payment for trade and financial transactions, not a replacement for the Argentine peso and the Brazilian real; a unit of value to free the South American nations’ transactions from the hegemony of the dollar. 

Still, beyond the eagerness in Brasilia and Buenos Aires to manifest their left-leaning governments’ ideological fraternity in opposition to the overbearing rich neoliberal countries of the north, it’s hard to make sense of another wishful attempt to glue together economies which, after multiple shots at integration, still remain stubbornly apart. 

Consider all that has happened since the regional trading bloc of Mercosur was launched almost 32 years ago. 

Brazil and Argentina put an end to hyperinflation. But the strong currencies they used as an anti-inflationary tool ultimately crashed around the turn of the century. Their economies soared on the back of a commodity boom in the 2000s, then sank once it was over. 

What hasn’t happened is Mercosur. The common market with a shared external tariff originally envisaged by Argentina, Brazil, Uruguay and Paraguay in 1991 never materialized. Neither did its dream of economic policy coordination. Its members don’t even trade that much with each other. In 2021 only 11% of exports from Mercosur countries went to others in the bloc. 

It’s unclear how the new nebulous unit of value will improve on that. “In what world would this facilitate trade,” asked Rogoff. “I do not see what problem this solves,” Blanchard observed, following Haddad’s clarification. “Seems complicated and useless.” 

It “won’t reach the level of monetary unification seen with the euro,” Haddad told reporters in Buenos Aires. But a paper the minister co-authored last year promoted a “process of monetary union in the region,” where members (the plan is to offer the sur to other countries in the neighborhood) could adopt the currency for domestic use too. 

That sounds like a walk toward currency unification.

Argentina, where inflation is running at around 100% per year, might even gain from hitching its currency to that of a more stable neighbor where inflation is running at around 5.8%. But for Brazil, where the central bank has been pretty successful in containing prices even in an environment of high inflation, it would be madness.

“In the past Argentina has tried every creative monetary policy trick known to man and invented a few more,” Rogoff said. “None worked.”

A working common currency requires a common monetary policy, which in turn calls for coordinated fiscal policy. But how can anybody coordinate fiscal policy with Argentina, where chronic out-of-control spending by the states and the federal government is largely financed by printing money?

And once you look at it carefully, the common currency is even a poor idea for Argentina. 

The euro’s experience offers a cautionary tale: Even a careful project with a reasonable historic geopolitical rationale and many decades in the making was on the verge of being blown up when weaker economies with fragile fiscal accounts, like Greece and Italy, almost went under in the aftermath of the global financial crisis.  

With no control over their exchange or interest rates, unable to convince Germany to send money and help them out of the hole, they were forced into massive contractions that toppled governments.

The lesson is clear: Tying together disparate economies with rigid common rules that bar them from following independent policies on spending or interest rates will fail when their economic fortunes — let alone their political preferences and constraints — diverge. 

Given the pitfalls, the sur’s proponents must answer a basic question: To what end? Their answers, so far, aren’t great. The prospect of regional integration doesn’t even need a coin of the realm. USMCA partners buy 23% of US exports without such a tool. Eighty-four percent of Mexico’s exports go to its North American partners. 

Haddad’s paper from last year offers some reasoning to justify the idea: part of a defensive strategy for a world of economic warfare. 

There is a power to having a currency used in global trade and finance. That power can devastate lesser countries in the global pecking order. Europe and the US used theirs to punish Russia for invading Ukraine, for instance, kicking it off SWIFT, the messaging system used by financial institutions globally to convey instructions to carry out tens of millions of transactions each day . 

Countries across Latin America were rendered insolvent when the Federal Reserve raised interest rates to quell US inflation in 1979, slowing the world economy and raising the cost of servicing their dollar-denominated debts.

How can a country maintain its sovereignty if it doesn’t control the currency it borrows and trades in and risks ending under the control of an IMF stabilization plan?

Haddad’s beef is not unreasonable. The prospect of landing on the tail-end of the Fed’s dog can be terrifying. It’s even plausible that trade between Brazil and Argentina (and they would invite other Latin American countries to join) would be smoother using a common currency. 

What is beyond reality is the idea that the sur would free Brazil, Argentina and any fellow travelers in Latin America from the yoke of the main currency for global trade and investment. Latin America accounts for just 5% of global trade. Its foreign finance will be made up largely of dollars for a very long time.

Who knows, presidents Luiz Inacio Lula da Silva and Alberto Fernandez may love each other like brothers. But Brazil and Argentina ceding power over their economies to one another? Dream on. Three decades after the fanfare for Mercosur, we’re still waiting for economic policy coordination to happen.

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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Eduardo Porter is a Bloomberg Opinion columnist covering Latin America, US economic policy and immigration. He is the author of “American Poison: How Racial Hostility Destroyed Our Promise” and “The Price of Everything: Finding Method in the Madness of What Things Cost.”

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