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Brazil and Argentina to begin preparations for a common currency

Brazil and Argentina will announce this week that they are beginning preparatory work on a common currency, which could eventually create the world’s second-largest currency bloc.

South America’s two largest economies will discuss the plan at a summit in Buenos Aires this week and invite other Latin American countries to join.

The initial focus will be on how a new currency, which Brazil suggests calling the “sur” (south), could boost regional trade and reduce dependence on the U.S. dollar, officials said. at the Financial Times. It would initially operate in parallel with the Brazilian real and the Argentine peso.

“There will be . . . a decision to start studying the necessary parameters for a common currency, which includes everything from fiscal issues to the size of the economy and the role of central banks,” the Argentine Minister of Finance said. ‘Economics Sergio Massa at the Financial Times.

“It would be a study of trade integration mechanisms,” he added. “I don’t want to create false hopes. . . it is the first step on a long road that Latin America must take.

Initially a bilateral project, the initiative would be offered to other Latin American nations. “It is Argentina and Brazil that are inviting the rest of the region,” said the Argentine minister.

A monetary union that would cover all of Latin America would represent around 5% of global GDP, estimates the FT. The world’s largest monetary union, the euro, accounts for around 14% of global GDP when measured in dollars.

Other currency blocks include the cfa franc which is used by some African countries and pegged to the Euro and Eastern Caribbean dollar. However, these encompass a much smaller slice of global economic output.

The project will likely take many years to materialize; Massa noted that it took Europe 35 years to create the euro.

An official announcement is expected during Brazilian President Luiz Inácio Lula da Silva’s visit to Argentina which begins on Sunday evening, the veteran left-winger’s first trip abroad since taking power on January 1.

Brazil and Argentina have discussed a common currency for the past few years, but talks broke down over Brazil’s central bank opposition to the idea, an official familiar with the talks said. Now that both countries are ruled by leftist leaders, there is greater political support.

A spokesman for Brazil’s finance ministry said it had no information on a common currency task force. He noted that Finance Minister Fernando Haddad had co-author of an article last year, before taking his current position, proposing a common South American digital currency.

Trade is booming between Brazil and Argentina, reaching $26.4 billion in the first 11 months of last year, up nearly 21% from the same period in 2021. The two nations are the engine of the regional trade bloc of Mercosur, which includes Paraguay and Uruguay.

The attractions of a new common currency are most evident in Argentina, where annual inflation is approaching 100% as the central bank prints money to fund spending. In 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 peso note is worth less than $3 at the exchange rate. widely used parallel.

However, there will be concerns in Brazil about hitching Latin America’s largest economy to that of its still unstable neighbour. Argentina has been largely cut off from international debt markets since defaulting in 2020 and still owes the IMF more than $40 billion following a 2018 bailout.

Lula will remain in Argentina for a Tuesday summit of the Community of Latin American and Caribbean States (CELAC), which will bring together the region’s new generation of left-wing leaders for the first time since a wave of elections left the last year reversed a right-wing trend.

Colombian President Gustavo Petro was likely to attend, officials said, along with Chilean Gabriel Boric and other more controversial figures such as Venezuela’s Socialist Revolutionary President Nicolás Maduro and Cuban leader Miguel Díaz-Canel. Mexican President Andrés Manuel López Obrador generally avoids foreign trips and is not expected to participate. Demonstrations against Maduro’s presence are expected in Buenos Aires on Sunday.

Argentine Foreign Minister Santiago Cafiero said the summit would also make commitments on greater regional integration, the defense of democracy and the fight against climate change.

Above all, he told the Financial Times, the region needed to discuss what kind of economic development it wanted at a time when the world was hungry for food, oil and minerals from Latin America.

“Is the region going to provide this in a way that transforms its economy [solely] in a commodity producer or will he source it in a way that creates social justice [by adding value]?,” he said.

Alfredo Serrano, a Spanish economist who heads the regional policy think tank Celag in Buenos Aires, said the summit would discuss how to strengthen regional value chains to take advantage of regional opportunities, as well as progress towards a monetary union. .

“Monetary and exchange rate mechanisms are crucial,” he said. “There are today in Latin America, given its strong economies, opportunities to find instruments that replace dependence on the dollar. This will be a very important step forward. »

Manuel Canelas, a political scientist and former minister in the Bolivian government, said CELAC, founded in 2010 to help governments in Latin America and the Caribbean coordinate their policies without the United States or Canada, was the only body to pan-regional integration of this type to have survived over the past decades while others have fallen by the wayside.

However, left-leaning presidents in Latin America now face tougher global economic conditions, more delicate domestic politics with numerous coalition governments, and less public enthusiasm for regional integration.

“As a result, all steps towards integration will certainly be more cautious. . . and will need to focus directly on delivering results and showing why they are useful,” he warned.

Additional reporting by Bryan Harris in São Paulo

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