“It is not far from the fact that El Salvador has adopted bitcoin”, said Kenneth Rogoffwho became chief economist at the IMF just in time to witness the macro devaluation of the Argentine peso in 2001. Olivier Blanchard, who took office a few years later, simply called it a “wild”.
The Brazilian Finance Minister, fernando haddadquickly tried to lower expectations by explaining that the “south”, as the new currency would be called, would only be a common means of payment for commercial and financial transactions, not a substitute for the Argentine peso and the Brazilian real; a unit of value to free the transactions of the South American nations from the hegemony of the dollar.
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However, beyond the desire in Brasilia and Buenos Aires to manifest the ideological fraternity of their leftist governments in opposition to the dominant rich neoliberal countries of the north, it is difficult to make sense of another illusory attempt to unite economies that, after multiple attempts of integration, remain immensely distanced.
Consider all that has happened since the Mercosur regional trading bloc was created almost 32 years ago.
Brazil Y Argentina They ended hyperinflation. But the hard currencies they used as an anti-inflation tool finally collapsed at the turn of the century. Their economies soared on the back of the commodity boom in the 2000s and then tanked once the boom ended.
What has not happened is the very essence of mercosur. The common market with shared external tariff originally conceived by Argentina, Brazil, Uruguay and Paraguay in 1991 never materialized. Nor is his dream of coordinating economic policies. Its members don’t even trade much with each other. In 2021, only 11% of exports from Mercosur countries went to other nations in the bloc.
It’s unclear how the new value unit would improve that. “In what world would this make trade easier?”I ask rogoff. I don’t see what problem this solves”, observed Blanchard, after clarifying Haddad. “It seems complicated and useless.”
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“It will not reach the level of monetary unification seen with the euro”Haddad told reporters in Buenos Aires. But a document the minister co-authored last year promoted a “monetary union process in the region”, where members (the plan is to offer the south to other neighboring countries) could also adopt the currency for domestic use.
That sounds like a path to monetary unification.
Argentina, where inflation hovers around 100% a year, could even gain by pegging 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 containing prices even in a high inflation environment, that would be crazy.
“In the past, Argentina has tried every creative monetary policy trick known to man and invented a few more.Rogoff said. “None worked.”
A functioning common currency requires a common monetary policy, which in turn requires a coordinated fiscal policy. But how can anyone coordinate fiscal policy with Argentina, where chronic runaway spending by states and the federal government is largely financed by printing money? And once you look at the situation more closely, the common currency is even a bad idea for Argentina.
The experience of the euro offers a warning: even a careful project with reasonable historical geopolitical logic and many decades of preparation came close to blowing up when weaker economies with fragile fiscal accounts, such as Greece and Italy, nearly collapsed as a result 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: linking disparate economies with rigid common rules that prohibit them from following independent policies on spending or interest rates will fail when their economic fortunes, not to mention their political preferences and constraints, diverge.
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Given the traps, the southern defenders must answer a basic question: To what end? Their responses, so far, have not been great. The prospect of regional integration does not even need a currency. T-MEC 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 article from last year offers some rationale for the idea: part of a defensive strategy for a world of economic warfare.
Having a currency used in world trade and finance gives power. That power can devastate countries lower in the world pecking order. Europe and the United States used theirs to punish Russia for invading Ukraine, for example by banning it from the SWIFT messaging system, which is used by financial institutions globally to transmit instructions for carrying out tens of millions of transactions every day. .
Latin American countries 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-denominated debts.
How can a country maintain its sovereignty if it does not control the currency of its credits and with which it carries out commercial transactions, and so it could end up under the control of an IMF stabilization plan?
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Haddad’s concern is not unreasonable. The prospect of being at the mercy of Fed decisions 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 more fluid using a common currency.
What is beyond reality is the idea that the south 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 represents only 5% of world trade. Its foreign funding will be largely made up of dollars for a long time.
Who knows, the presidents Luiz Inácio Lula da Silva and Alberto Fernández may love each other like brothers. But for Brazil and Argentina to cede power over their economies to each other? Not even in dreams. Three decades after the Mercosur fanfare, we are still waiting for economic policy coordination to take place.
By Edward Porter
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