Many economists dismissed talk of a common currency in South America. Here’s why

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Spencer Feingold, Digital Editor, World Economic Forum

• Argentina and Brazil recently floated the idea of creating a new currency for trade.
• The idea was met with skeptism from many economists.
• The currency, officials said, could help boost trade and reduce reliance on the US dollar.

Last month, the leaders of Argentina and Brazil announced plans to discuss the introduction of a new common currency for trading in South America—a move that could advance economic integration in the region and the potential creation of the world’s second-largest currency bloc.

In a jointly penned article published in Perfil, an Argentine newspaper, Argentine President Alberto Fernández and Brazilian President Luiz Inacio “Lula” da Silva stated they have “decided to advance discussions on a common South American currency that can be used for both financial and trade flows, reducing operating costs and our external vulnerability.”

The announcement, however, was met with skepticism by economists, with many arguing that the economies and currencies of Argentina and Brazil are far too disparate for such integration.

“The two economies share almost none of the requirements for a currency bloc to work, making the ‘sur’ not only irrelevant but also unfeasible,” Oxford Economics, a global economics advisory firm, stated in a research briefing that refers to the floated name for the potential common currency, the “sur.”

Meanwhile, Olivier Blanchard, the former chief economist of the International Monetary Fund, tweeted in response to news of the talks, “This is insane.” Harvard professor and former US Treasury Secretary Larry Summers also took to Twitter to question the idea.

During a summit between Fernández and Lula in Buenos Aires in January, the two governments noted that the potential common currency would not replace the current national currencies (like the euro did in the Eurozone), but would serve as a third unit for trading. The currency’s creation, officials said, could help boost regional trade and reduce reliance on the US dollar.

Still, experts note that such economic and monetary integration between Brazil and Argentina — the two largest economies in South America — would be challenging.

Economists also point to unsuccessful efforts in the past. In the 1980s, for instance, the two countries discussed the creation of a trade currency called the “gaucho.” The currency, however, failed to materialise. Former Brazilian President Jair Bolsonaro also floated the idea in 2019.

What it takes to launch a successful common currency

Countries that successfully introduce common currencies need similar levels of inflation and interest rates as well as comparable levels of debt.

Tellimer, a leading emerging markets research firm, noted in a brief on the potential “sur” currency that the economies of Brazil and Argentina are far from aligned on key metrics. Indeed, in 2022, inflation in Argentina soared to over 90% while in Brazil it was roughly 6%. The levels of foreign exchange reserves also diverge dramatically between the two countries.

“Argentina has more inflation in a single month than Brazil has in one year, demanding very different monetary and fiscal policy stances each,” Marcos Casarin, chief Latin America economist at Oxford Economics, and Felipe Camargo, a senior Oxford Economics economist, noted the firm’s brief.

There is also concern over the potential impact a third currency could have on the national currencies — and whether businesses would have confidence in a third currency that is tied to the national currencies. The Argentine peso, in particular, has been under stress in recent years and has performed relatively poorly compared to other currencies in Latin America.

Moreover, trade between the countries needs to be substantial for a common currency to be useful, experts maintain. Trade between Brazil and Argentina makes up only 6% of their GDP, according to Oxford Economics.

Brazilian and Argentine officials note that the creation of a new trading currency remains in the nascent stage of early talks. Yet leaders maintain that the currency could one day be a useful trading tool for countries within MERCOSUR, the South American trading bloc.

“Why don’t we try to create a common currency among the Mercosur countries?” Lula stated during a press conference in Buenos Aires. “I think eventually this will happen.”