On January 28th, leaders of Brazil and Argentina caused waves in economic circles during a summit in Buenos Aires after they announced plans to develop a currency union. The union, called the sur, would create a new unit of account for denominating bilateral trade and financial flows between Brazil and Argentina and serve as an alternative to the U.S. dollar.
The discussions come on the heels of economic recovery for the two nations after COVID-19 devastated both countries and stripped away years of societal development. A joint statement issued by the governments emphasized the intended goals of the currency which are to “overcome the barriers to our exchanges, simplify and modernize the rules and encourage the use of local currencies”.
The announcement was met with skepticism from the international finance community, pointing toward the stark differences in economies that would make it difficult to control under one currency. Harvard University professor Jeffry Frieden commented in an interview with Marketplace that a joint currency union “eliminates or dramatically reduces each country’s flexibility in their monetary policy”. The importance of flexible monetary policy was evidenced by its usefulness in mitigating the effects of the COVID-19 pandemic on overall growth and avoiding the total collapse of domestic economies. The Center for Strategic and International Studies (CSIS), found that the current economic circumstances are not well aligned with the difference in inflation rate being almost 95%. The move would add to an increasingly tense regional dynamic with Brazil as the dominant player in South America.
To gain perspective, we can look to the European Union’s economic integration system which links states together in an economic system governed by euros. When comparing the sur to the eurozone, it is important to note that the process of integration for the sur may be significantly more challenging due to the current economic and political disparities between Brazil and Argentina. The eurozone was established among countries with relatively similar levels of development, stable economies, and comparative political systems. In contrast, Brazil and Argentina face significant differences in economic and political stability, which could create difficulties in coordinating monetary policies.
The eurozone also benefited from a long period of economic and political cooperation before the creation of the euro. On the other hand, Brazil and Argentina are approaching a potential union with a history of tense economic and political relations, which may make it more difficult to build domestic coalitions to support such policies.
This is not the first time such an attempt has been made to smooth over the economic integrations. “First came the “gaucho”, a currency meant to replace Brazil’s cruzado and Argentina’s austral until the concept was abandoned amid economic turmoil in 1988.” The attempts for the “gaucho” were hurt by instability in both domestic and regional political structures that governed economic policy. Leaders of both countries are optimistic that this union will be different due to President Silva’s history of leading regional cooperation. Specifically, Silva is remembered for leading the expansion of environmental and societal rights of the Amazon forest and its native populations during his first presidency.
In the international sphere, the announcement was met with apprehension because the agreement decreases the supply and importance of US dollars. This continued to spur fears of increased proxy-investment wars that the US engaged in against China to maintain a foothold in countries around the world. As dominant players in South America, both Brazil and Argentina have become key markets for these countries as the economy becomes increasingly globalized.
In conclusion, the proposed currency union between Brazil and Argentina has the potential to create significant economic benefits and simplify bilateral trade. However, the integration of the sur may be significantly more challenging than the establishment of the eurozone due to current economic and political disparities, a lack of prior cooperation, and ongoing recovery from the pandemic. It remains to be seen if these challenges can be overcome, but the proposal should be monitored closely as it could have significant implications for the global economic landscape.
Photo by Palácio do Planalto licensed under the Creative Commons Attribution 2.0 Generic license.