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 begin planning for a common currency, you could almost hear the commotion from lower Manhattan at the headquarters of the International Monetary Fund in Washington.

“It’s not far from El Salvador adopting Bitcoin,” said Kenneth Rogoff, who became chief economist at the IMF as he watched the macroeconomic devaluation of the Argentine peso in 2001. Olivier Blanchard, who held the post for a few years later, it just went for “crazy”.

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

However, beyond the willingness in Brasilia and Buenos Aires to display the ideological fraternity of their left-wing governments in opposition to the rich neoliberal countries of the North, it is hard to make sense of another pious attempt to weld together economies that, after multiple shots at integration, they still remain stubbornly apart.

Consider everything that has happened since the Mercosur regional trading bloc began almost 32 years ago.

Brazil and Argentina ended hyperinflation. But the strong currencies they used as an anti-inflationary tool finally collapsed around the turn of the century. Their economies soared due to the commodity boom of the 2000s and then sank once it ended.

What hasn’t happened is Mercosur. The common market with a common external tariff originally envisioned by Argentina, Brazil, Uruguay and Paraguay in 1991 never materialized. Nor her dream of economic policy coordination. Its members don’t even trade with each other that much. In 2021 only 11% of exports from Mercosur countries were directed to other bloc countries.

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It’s not clear how the new nebular unit of value will improve on this. “In what world would that facilitate trade,” Rogoff asked. “I don’t see what problem that solves,” Blanchard remarked, after Haddad clarified. “It seems complicated and useless.”

“It will not reach the level of monetary unification seen with the euro,” Haddad told reporters in Buenos Aires. But a document drawn up by the minister last year promoted a “monetary union process in the region”, where members (the plan is to offer the sur to other countries in the neighbourhood) could also adopt the currency for domestic use.

This sounds like a walk towards currency unification.

Argentina, where inflation hovers around 100% a year, could even gain from shifting its currency to that of a more stable neighbor where inflation hovers around 5.8%. But for Brazil, where the central bank has been quite successful in holding down prices even in a high-inflation environment, that 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 of them worked.”

A functioning common currency requires a common monetary policy, which in turn requires a coordinated fiscal policy. But how does one reconcile fiscal policy with Argentina, where chronic state and federal spending sprees are largely financed by money printing?

And once you look closely, the common currency is even a bad idea for Argentina.

The experience of the euro offers a cautionary tale: even a careful project with sound historical geopolitical logic and many decades in the making was on the verge of imploding when weaker economies with fragile fiscal accounts, such as Greece and Italy, nearly collapsed. after the global financial crisis.

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

The lesson is clear: Binding disparate economies with rigid common rules that prevent them from pursuing independent spending or interest rate policies will fail when their economic fortunes—let alone their political preferences and constraints—diverge.

Given the pitfalls, sur proponents must answer one key question: To what end? Their answers, so far, have not been great. The prospect of regional integration does not even need a kingdom currency. USMCA partners purchase 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 rationale to justify the idea: part of a defense strategy for a world of economic warfare.

A currency can be used in global trade and finance. This power can destroy smaller countries in the world pecking order. Europe and the U.S. used theirs to punish Russia for invading Ukraine, for example, by launching SWIFT, the messaging system used by financial institutions worldwide to transfer instructions for making tens of millions of transactions each day.

Countries across Latin America became 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 debts.

How can a country maintain its sovereignty if it does not control the currency it borrows and trades and risks ending up under the control of an IMF stabilization plan?

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Haddad’s beef is not unreasonable. The prospect of landing on the Fed’s dog’s tail can be terrifying. It is 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 goes beyond reality is the idea that the sur would free Brazil, Argentina and every fellow traveler in Latin America from the yoke of the master currency for global trade and investment. Latin America accounts for just 5% of world trade. Its foreign funding will consist largely of dollars for a very long time.

Who knows, Presidents Luiz Inacio Lula da Silva and Alberto Fernandez might love each other like brothers. But are Brazil and Argentina ceding power over their economies to each other? Dream. Three decades after the fanfare for Mercosur, we are still waiting for economic policy coordination.

More from Bloomberg Opinion:

• Social media companies fail once again in Brazil: Parmy Olson

• The Rise of the Left Was the Real Story of 2022: Pankaj Mishra

• Peru’s turmoil must not be the future of Latin America: Eduardo Porter

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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