A common currency for Argentina and Brazil: what the experts say

They highlight the chance to reduce dollar dependency, but warn it requires an alignment of Brazil and Argentina’s currency cycles and policies.

Brazilian president Luiz Inácio Lula da Silva made his first official visit to Argentina with the goal of signing a series of bilateral integration agreements and participating in the CELAC summit. In this context, one of the issues that gained the greatest relevance was the confirmation that the two countries would work on a project to establish a common currency focused on trade, which would coexist with local currencies (in other words, it would not be a Euro-style single currency). 

After his bilateral meeting with Alberto Fernández, Lula said that both countries’ economic teams would work on the project. This news sparked interest both locally and abroad, since at the meeting both countries invited the whole region to join the monetary bloc. Analysts point out that the proposal entails the significant challenge of aligning the monetary policies of both countries, which requires a deep and extensive process of economic integration.

Marcelo Elizondo, president of Argentina’s International Chamber of Commerce, stated that “the currency that is being planned aims, in its first stage, to cover commercial trades between actors from both countries without the need to go through the dollar.

“Achieving it will not be easy, since it will require a series of technicalities that fix the differences between both countries. On the one hand, they need to set the price of the currency and its competent authority. In Brazil, this is handled by the market, while in Argentina the official price is a long way from the market numbers. On the other hand, the challenge is what will happen with the trade restrictions Argentina applies, such as the Central Bank’s authorizations to access foreign currency. Also, I think an agreement between central banks will be necessary for it to work”.

Matías Bolis Wilson, chief economist at the Argentine Chamber of Commerce and Services, said that given the importance of both countries in Mercosur and the strong commercial link between them, the initiative makes economic sense, although the conditions are not yet in place. 

“The challenge arises in relation to the theory of optimal monetary areas, for which certain conditions must be met: the first one is that the economic cycle of both countries be similar, because a common monetary and exchange policy is going to be applied,” he said. “Likewise, there is a need to move forward with a common market, unlike Mercosur, which currently is a customs union. The common currency is the end point of an entire integration process.”

Competitiveness

In 2022, Argentina’s effective exchange rate lost competitiveness in relation to other currencies, falling by 10 percentage points in an index compiled by the Central Bank. 

Regarding the impact of a common currency with Brazil, Bolis Wilson pointed out: “Historically, Argentina tends to resort to exchange rates in order to gain competitiveness, due to its structural problems. Faced with a supranational entity that would manage a common currency, they would require more structural work to be more competitive. 

“This is why the project could be very good for the country in the medium and long term, since it would not resort to cyclical devaluations, as observed in the history of the REER (also known in a Argentina as ‘Multilateral Real Exchange Rate Index, or TCRM’) where there were strong exchange rate jumps that were later mitigated by the inflationary process.

“The fact that Brazil and Argentina exit the convertibility in different years is a point worth analyzing, and highlights that a coordination of both economic cycles is essential to avoid bids in monetary policy and rate controls in both countries’ expansionary or recessive moments.”

One of the goals of the project is to reduce dollar dependency in bilateral trade, and therefore ease the pressure on Central Bank reserves. Elizondo stressed that “the project can facilitate bilateral trade and reduce currency exchange stress,” but he cautioned, “it will depend on how it works. If the currency is quoted in the market and Argentines can access it as a value safe haven, perhaps there will be a new distortion with the official exchange rate that will once again reflect exchange rate tensions.”


Author: Carolina Paparatto / Originally published in Ambito.com / Translated by Agustín Mango

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