Brazil and Argentina will begin putting together a single currency

Date:

Brazil and Argentina will begin putting together a single currency

  • news by AUN News correspondent
  • Sunday, January 22, 2023
  • AUN News – ISSN: 2949-8090

Summary:

  • In a move that might eventually result in the formation of the second-largest currency bloc in the world, Brazil and Argentina will this week declare that they are beginning preliminary work on a shared currency.

  • It would initially function with the Argentine peso and the Brazilian real.

  • According to the FT, a currency union that included all Latin America would account for 5% of the world’s GDP.

  • The summit will cover ways to develop regional value chains to take advantage of regional opportunities, according to Alfredo Serrano, a Spanish economist who oversees the Celag regional political think-tank in Buenos Aires.

  • He also predicted that progress on a currency union would be made.

In a move that might eventually result in the formation of the second-largest currency bloc in the world, Brazil and Argentina will this week declare that they are beginning preliminary work on a shared currency.

At a summit this week in Buenos Aires, the two largest economies in South America will examine the proposal and encourage other Latin American countries to participate.

According to officials speaking to the Financial Times, the initial focus would be on how a new currency, which Brazil considers dubbing the “sur” (south), may increase regional trade and lessen dependency on the US dollar. It would initially function with the Argentine peso and the Brazilian real.

According to Sergio Massa, Argentina’s finance minister, “there will be… a decision to start analysing the criteria needed for a common currency, which involves everything from fiscal difficulties to the size of the economy and the responsibilities of central banks.”

He continued, “It would be a study of mechanisms for trade integration. I don’t want to raise false hopes because it’s just the beginning of a long journey for Latin America.

The idea would be made available to additional countries in Latin America after starting as a bilateral effort. The Argentine minister stated, “It is Argentina and Brazil inviting the rest of the area.

According to the FT, a currency union that included all Latin America would account for 5% of the world’s GDP. When expressed in dollars, the euro, the most significant currency union in the world, accounts for almost 14% of the world’s total GDP.

Other currency groups include the East Caribbean dollar and the CFA franc, used by some African nations and pegged to the euro. These represent a far smaller portion of the world’s economic production.

The project’s completion will probably take several years; Massa pointed out that it took Europe 35 years to develop the euro.

The veteran leftist’s first overseas journey since taking office on January 1 will begin on Sunday night with a trip to Argentina, where an official statement is anticipated.

In recent years, Brazil and Argentina have considered creating a single currency, but conversations stalled due to Brazil’s central bank’s resistance, according to a source familiar with the matter. There is more political support now that leftist leaders run both two nations.

A representative for the Brazilian finance ministry stated that he was unaware of any working groups on a shared currency. Before taking his current position, he mentioned that finance minister Fernando Haddad had co-authored an article from last year that suggested a digital common currency for South America.

Brazil and Argentina’s trade is booming; it reached $26.4 billion in the first 11 months of the year, up over 21% from the same time in 2021. The Mercosur regional economic group, which includes Paraguay and Uruguay, is driven by the two countries.

Argentina, where annual inflation is approaching 100% as the central bank produces money to support spending, would benefit most from a new single currency. According to figures from the central bank, the amount of money in circulation doubled during President Alberto Fernández’s first three years in office. The highest denomination peso bill is now worth less than $3 on the frequently used parallel exchange rate.

Brazil will be concerned about coupling its economy with its notoriously unstable neighbour, which is the largest economy in Latin America. Since its default in 2020, Argentina has been entirely cut off from the world’s financial markets, and it still owes the IMF more than $40 billion for a rescue it received in 2018.

Lula will remain in Argentina for the Community of Latin American and Caribbean States (CELAC) summit on Tuesday, which will bring together the new generation of left-leaning leaders in the region for the first time since a wave of elections last year reversed a rightwing trend.

According to officials, Gustavo Petro, the president of Colombia, Gabriel Boric, the president of Chile, and other more contentious leaders like Miguel Daz-Canel of Cuba and Nicolás Maduro of Venezuela are likely to participate. President of Mexico Andrés Manuel López Obrador is not expected to attend because he often avoids travelling abroad. On Sunday, protests against Maduro’s presence are anticipated in Buenos Aires. The summit will also make agreements on deeper regional integration, the defence of democracy, and the battle against climate change, according to Santiago Cafiero, Argentina’s foreign minister.

At a time when the globe needed Latin America’s food, minerals, and oil, he said, the region required to discuss the type of economic development it wanted.

Is the area going to provide this in a way that transforms its economy [solely] into a producer of raw materials or will it offer it in a way that fosters social justice [by adding value]? He asked.

The summit will cover ways to develop regional value chains to take advantage of regional opportunities, according to Alfredo Serrano, a Spanish economist who oversees the Celag regional political think-tank in Buenos Aires. He also predicted that progress on a currency union would be made.

He declared that “the monetary and foreign exchange processes are essential.” Given the region’s robust economies, today’s options exist to create tools that can replace reliance on the dollar. That will be a massive step in the right direction.

Political scientist and former minister Manuel Canelas claimed that CELAC, established in 2010 to assist governments in Latin America and the Caribbean in coordinating policy without the US or Canada, was the only organisation of this type to have endured over the past ten years while others failed.

However, the socialist presidents of Latin America are currently dealing with more challenging global economic conditions, challenging domestic politics with numerous coalition governments, and a decline in public support for regional integration.

Because of this, he warned, “all the efforts toward integration will undoubtedly be more careful. They must also explicitly focus on providing outcomes and demonstrating their use.”

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