Talk of a “common currency” to be shared by Brazil and Argentina sparked confusion — and strong reactions — over the weekend.
The stir was created after a joint guest column by Brazilian President Lula Inacio da Silva and Argentine President Alberto Fernandez was published in Argentina’s Perfil newspaper on Saturday, ahead of the Brazilian leader’s Sunday arrival in Buenos Aires. In the column, the pair said they “decided to advance discussions on a common South American currency that can be used for both financial and commercial flows, reducing operational costs and our external vulnerability.”
The column, and remarks by Argentina’s economy minister to the Financial Times, sparked speculation of a move toward a full-scale currency union, comparable to the euro, the currency shared by 20 European nations.
See: Proposed Brazil-Argentina common currency is met with doubts from experts
The actual proposal is far more modest, observers said, but could go a long way to alleviating trade-related pains in the region.
So what is on the table?
Brazilian Finance Ministher Fernando Haddad told reporters that initial discussions focused on how to aid Argentina in buying Brazilian exports without drawing down its meager dollar reserves, Reuters reported, rather than creating a shared currency that would circulate in both countries.
So rather than a shared currency comparable to the euro, what is being discussed is the creation of a unit of account that would help facilitate trade, said Monica de Bolle, a senior fellow at the Peterson Institute for International Economics, in a phone interview.
Trade between Brazil and Argentina is largely denominated in U.S. dollars. The problem is that Argentina doesn’t have much in the way of dollar reserves, so it has put in place a number of capital constraints, which has had a big impact on Brazilian exporters, de Bolle explained.
The best comparison would be special drawing rights, or SDRs, the supplementary foreign-exchange reserve assets created and maintained by the International Monetary Fund, she said. The value of an SDR is based on a basket of international currencies.
The value of any unit of account created by Brazil and Argentina could similarly be based on a basket of currencies, potentially including the Argentine peso USDARS,
“This is a long-term effort…I would say they have at least a year’s worth of work on this, assuming they can keep the focus,” de Bolle said.
While the prospective tie-up is far less ambitious than a euro-style currency union, skeptics still argued it would be a bad idea for both countries.
While politicians argue it would allow users to trade more freely in their currency, “bilateral trade between Brazil and Argentina is becoming less and less relevant, with trade between the two countries accounting for just 6% of their GDP,” said Marcos Casarin, chief Latam economist at Oxford Economics, in a Monday note.
Casarin questioned why individual exporters would accept the unit as an alternative means of payment.
“Even for Argentina, the weaker link between the two, we struggle to see why exporters — who currently benefit from the dollar’s stability to store the value of their profits — would accept trading in a currency tied to the Argentinian peso or the Brazilian real which cannot be used to pay for the vast majority of their imports which are sourced from outside the Mercosur” trade bloc, made up of Brazil, Argentina, Uruguay and Paraguay, the economist wrote.