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Argentina and Brazil discuss a common currency project

Argentina’s President Alberto Fernandez (R) and Brazil’s President Luiz Inacio Lula da Silva (L) greet each other after signing a series of agreements during a news conference in Buenos Aires.

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Argentina and Brazil, South America’s two largest economies, are in preliminary talks to create a common currency, as part of a coordinated bid to reduce dependence on the US dollar.

But some analysts are highly skeptical, calling the proposal “pie in the sky” due to the gaps between the two economies and the rapidly changing political winds in the region.

“Our finance ministers, each with their own economic team, can make us a proposal for foreign trade and transactions between the two countries that are done in a common currency,” Brazilian President Luiz Inacio Lula da Silva said on Monday during a meeting. of a press conference in Buenos. Aires, Argentina, according to Reuters.

Speaking on his first international visit since taking office, Lula said the currency would initially be designed for trade and transactions between Brazil and Argentina. It could then be adopted by other members of Mercosur, South America’s main trading bloc.

Brazilian Finance Minister Fernando Haddad said adopting a common currency was not intended to replace the Brazilian real and the Argentine peso. He would have added that the currency does not yet have a name or maturity, nor would countries seek euro-style monetary unification.

Jimena Blanco, head of Americas at Risk consultancy Verisk Maplecroft, described the talks as a “flamboyant” announcement designed “to draw attention to an otherwise inconsequential regional summit”.

“Three decades after its creation, MERCOSUR has yet to achieve its primary goal of trade integration for its four founding members,” Blanco told CNBC via email. “Developing and implementing a common South American currency is therefore a pie in the sky.”

“Neither Argentina nor Brazil have the economic or political conditions to embark on such fundamental change, which would take decades to roll out effectively,” Blanco said.

“We expect the ‘Sur’ to share the same fate as the Peso Andino, which never came into existence, or as Sucre, the digital payment currency used by Venezuela and ideologically aligned countries that never saw the light of day. ‘has only symbolic value and has failed to account for the importance of the US dollar in regional trade,’ she added.

Exploratory interviews

Argentinian President Alberto Fernandez said that while it was not yet clear how the single currency might work in the region, he and Lula agreed that relying on foreign currencies for trade was harmful.

“It’s hard to believe that Argentina and Brazil would actually move in this direction given the gaps between the two economies at the current stage,” Mario Marconini, chief executive of consulting firm Teneo, told CNBC per E-mail.

Marconini pointed out that it took decades for European countries to reach a point where member countries felt ready to move forward with a common currency, and this process followed a sustained period of coordination and a relatively high level macroeconomic policy alignment.

Brazilian Finance Minister Fernando Haddad (2nd from left) and Argentinian Economy Minister Sergio Massa (2nd from right) sign a joint agreement.

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He added that Lula was “diplomatic” not to contradict Argentine Economy Minister Sergio Massa, who had spoken publicly about the two countries working towards a common currency.

“However, Lula failed to engage in anything other than initial exploratory talks on bilateral monetary issues,” Marconini said.

“Lula’s willingness to play the game in such a way reflects much more his government’s desire to restore good relations with Argentina [and Latin America] than anything concrete on how to move forward on an issue that doesn’t make economic sense right now.”

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