Brazil and Argentina start preparations for a common currency

What do we know so far?

As reported by the Financial Times, Brazil and Argentina will announce this week that they are beginning preparatory work to agree on a common currency between the two nations. This move could create the world's second-largest currency bloc - after the European Union - if a common agreement is reached.

In these first negotiations between the two countries, the nations have focused on creating a new currency, which Brazil suggests calling ‘Sur’ (‘south’, in Spanish).

These two major South American economies will discuss the plan at a summit in Buenos Aires this week and invite other Latin American nations to join. Brazilian President Luiz Inácio Lula da Silva has already landed in Argentina, inaugurating his first mandatory trip. An official announcement is expected during this visit to the country chaired by Alberto Fernández.

Argentina's Economy Minister Sergio Massa told Financial Times that "there will be a decision to start studying the parameters needed for a common currency, which includes everything from fiscal issues to the size of the economy to the role of central banks."

"It would be a study of trade integration mechanisms," he added. "I don't want to create false expectations. It is the first step of a long road that Latin America must travel."

The idea is to boost regional trade and reduce dependence on the US dollar. At first, it would run in parallel with the Brazilian real and the Argentine peso.

Will other countries join the new currency?

Although the project will be established between Argentina and Brazil, the initiative would be offered to other Latin American nations. "It's Argentina and Brazil inviting the rest of the region," Argentine Minister Massa said.

A monetary union covering all of Latin America would account for about 5% of world GDP, estimates by the FT. In comparison, the world's largest monetary union, the euro, encompasses about 14% of global GDP when measured in dollar terms. The project is likely to take many years to materialise; Massa noted that it took the European Union 35 years to create the euro.

What are the benefits of a common currency?

The attractions of a new common currency are most obvious for Argentina, where annual inflation approaches 100% as the central bank prints money to finance spending.

During President Alberto Fernández's first three years in office, the amount of money in public circulation has quadrupled, according to central bank data, and the largest-denomination peso note is worth less than $3 at the widely used parallel exchange rate.

 

Lula's maiden voyage

On January 22, Lula landed in Argentina for his maiden international trip since taking office as Brazil's president, following the tradition of first visiting the region's largest trading partner. 

Lula's trip to neighbouring Argentina also marks Brazil's return to the Community of Latin American and Caribbean States (CELAC), which Brazil left in 2019 on the orders of Bolsonaro, who refused to participate in the regional group due to the presence of Cuba and Venezuela.  (Source: Lanacion.com)

According to the Financial Times, during this visit, both presidents emphasised the need for a good relationship between Argentina and Brazil to strengthen regional integration. The leaders also emphasised strengthening the Mercosur trade bloc, which includes Argentina, Brazil, Paraguay and Uruguay.

"Together with our partners, we want Mercosur to constitute a platform for our effective integration into the world, through the joint negotiation of balanced trade agreements that respond to our strategic development objectives," said both presidents.

Elon Musk publicly supported the initiative

Last Sunday, the owner of Tesla and Twitter, Elon Musk, celebrated the possibility of creating a common currency between the two countries, making his opinion known via tweet.

"Probably a good idea," Musk said via Twitter in a thread of messages from the Whole Mars Catalog account.

 

Is there a history of similar agreements between Argentina and Brazil?

As brought to light by the Argentine media Perfil.com, it is worth mentioning that in 2019 Argentina and Brazil tried to create a common currency that sought to replace the current one of both countries and was going to be called the "real peso". 

On that occasion, the bilateral agreement was managed by then-presidents Mauricio Macri (Argentina), and Jair Bolsonaro (Brazil). Both leaders began meetings on the matter through their respective Economy Ministers, Nicolás Dujovne and Paulo Guedes.

However, the Central Bank of Brazil decided to calm the situation, and everything remained an idea.

"The Central Bank of Brazil has no projects or studies underway for a monetary union with Argentina. There are only, as is natural in the relationship between partners, dialogues on macroeconomic stability, as well as debates on risk and vulnerability reduction and institutional strengthening," the entity said.

The trade relationship between Argentina and Brazil

According to the Argentine Chamber of Commerce and Services,  in 2022 Argentina ranked third among the largest suppliers in Brazil, behind China and Hong Kong and Macau ($6.447 billion),  the United States ($5.080 billion). In turn, among the main buyers of Brazil, Argentina ranked third, behind China, Hong Kong and Macao ($7.982 billion) and the United States ($3.571 billion).

In 2022 (with data close to eleven months), bilateral trade between Argentina and Brazil exceeded the total traded during 2021 and is estimated to have ended with the highest value in the last ten years (higher than $28,223 million in 2014).

In the first eleven months of 2022, bilateral trade reached $26,419 million, 20.7% above the value achieved in the same period of 2021, driven mainly by the increase in the cost of energy imported by Argentina from Brazil. 

In turn, Brazil's share of total Argentine trade reached, in these eleven months of 2022, 16.7% compared to 17.1% in the same period of 2021.

Trade between the two countries accumulated in the first eleven months of 2022 a negative balance for Argentina for $2.271 billion because exports grew 13.2% in 2022 compared to the eleven months of 2021, while imports from Brazil increased by 34.1% in the same period.

It is important to note that Brazil is Argentina's main trading partner, a relationship that historically showed deficit balances because imports from that country are usually strategic for our productive fabric.

Important factors for the Brazilian Economy

Brazil has a free-market economy and is classified as a fast-growing economy. The largest component of Brazil's GDP is the services sector, which accounts for 67% of it. Agriculture is also important, accounting for 5.5% of GDP. (Statista.com)

Brazil ranks thirteenth in the world in terms of its nominal GDP (Source: datosmacro.com). It has a diversified economy, being a key producer of industrialized products and raw materials. Some of the most important manufactured goods produced in Brazil include auto parts and automobiles, equipment and machinery, cement, textiles, aeroplanes, computers, petrochemicals, consumer durables, and steel.

The Latin country also produces numerous important commodities such as iron ore, oil, soybeans, corn, cotton, sugar, cocoa, forest products and livestock.