BUENOS AIRES, Argentina (CN) — Brazil and Argentina are laying the groundwork for a common currency to strengthen regional trade and lessen the dependency on the U.S. dollar. But the road to implementation faces multiple hurdles.
The proposed currency, the sur (Spanish for south), would be used to facilitate bilateral trade and function in parallel to the Brazilian real and Argentine peso — rather than replace the two countries’ currencies.
“We intend to overcome barriers to our exchanges, simplify and modernize the rules and encourage the use of local currencies,” Brazil President Luiz Inácio Lula da Silva and Argentina President Alberto Fernández said in a joint statement.
The two leftist leaders outlined their intention to “move forward in discussions about a common South American currency that can be used for both financial and commercial flows, reducing operating costs and reducing our external vulnerability.”
The U.S. dollar is the default currency for global trade as well as foreign exchange reserves. In the Americas, 96% of all trade is in U.S. dollars, the highest of any region, according to the U.S. Federal Reserve.
With the dollar’s dominance over global trade, different regional institutions have developed plans to overcome its dependence on the U.S. currency. “There have been initiatives promoted by different countries in recent years to replace the dollar in their commercial transactions, something that’s been promoted mainly by countries with sanctions imposed by the U.S., such as Russia, Iran, and China, although countries such as India have also been involved,” said Esteban Mercatante, an Argentine economist.
Latin America has already attempted to create an alternative trade currency. The SUCRE was a medium of exchange for members of the left-wing ALBA organization. It was intended to increase regional integration, with the first bilateral trade deal between Venezuela and Ecuador made in 2010, but soon fell out of use following the crisis in Venezuela.
For Brazil and Argentina, this new approach to an old idea faces many obstacles. “For this common currency to be more than a working hypothesis, inflation in Argentina would have to be reduced to levels close to one digit, something that is unlikely to happen in less than five years,” said Mercatante. “It would also require coordination of interest rates and some agreement on policies regarding inflows and outflows. All of this would be difficult to achieve.”
Mercatante also added that the sur would be unthinkable as long as Argentina is home to multiple exchange rates mostly focused on the dollar.
“It’s unclear that anything beyond talks will take place,” said Matías Vernengo, a professor of economics at Bucknell University. “Not only because the conditions are very different, for example, Argentina doesn’t have dollar reserves and hence the peso would depreciate considerably more than the Brazilian real with respect to the sur, but also Argentina has presidential elections this year.”
Argentina’s incumbent center-left president is suffering from a 75% disapproval rating, with the right-wing Juntos por el Cambio party currently ahead in opinion polls leading up to the election this October. If Argentina moves to the right, agreement on a common currency looks even more unlikely.
“In my view, the point of this was political,” Vernengo added, “to suggest that the integration between two countries, one with a threatened economy and the other with a threatened democracy, stand together.”
There is a strong appetite across Latin America for closer connections and deeper integration. A survey from the Inter-American Development Bank found that 71% of Latin Americans support regional integration and 56% have a positive view of regional trade agreements.
Despite that, political will for regional integration has ebbed and flowed over the decades. In the 1980s, as democracy returned to Argentina and Brazil after brutal military dictatorships, the elected presidents Raúl Alfonsín and José Sarney began the process of creating a common market and a common currency, the gaucho, named after the iconic skilled horsemen and folk hero of both Argentina and southern Brazil. It was the precursor to the Mercosur economic bloc in South America, which was established in 1991, but the idea of a common currency failed to progress.
During the commodities boom of the early 2000s, left-wing governments of the pink tide introduced the SUCRE as a way of facilitating trade without the need of the U.S. dollar — but soon fell out of favor.
More recently, right-wing governments have lost power to a resurgent left across Latin America, from Mexico and Colombia down to Chile, Argentina and Brazil. The expectation is that the political realignment will benefit interregional trade, which stood at 13% in 2021, down from its peak of 21% in 2008.
But economists believe that the implementation of a common currency, such as the sur, is unlikely. “What is more feasible is that the talks will result in some form of financing by Brazil of trade imbalances, and the search for mechanisms to settle deficits without resorting to the dollar,” said Mercatante, “something similar to what Argentina does with China.”
Even in the event of the sur becoming a mechanism of trade between Argentina and Brazil, Mercatante says that it would have a very limited impact on the dependence on the U.S. dollar for both countries. “For Brazil, because trade with Argentina has been accumulating surpluses for a long time, that is, it adds to its accumulation of reserves. For Argentina, yes it would relieve part of the foreign currency required for trade, but the truth is that the trade deficit with Brazil is smaller than that with other countries such as China.”
The financial sector also presents a barrier to the goals of a common currency. “Dollar dependency is registered above all in the financial area,” added Mercatante, “with the weight of capital and interest payments on the debt as well as in areas of the balance of payments such as profit remittances from multinationals back to the countries where they’re based. In all this, the common currency will not have any impact on the balance of payments.”
Vernengo believes that the most important way for the region to integrate would be productive. “The most relevant news from Lula’s recent trip to Buenos Aires wasn’t the common currency but the announcement that Brazil’s national development bank will lend money to neighboring countries.” This could lead to “spending on infrastructure, with highways and trains connecting the Atlantic and the Pacific, and a more rational location of industry with access to larger markets.”
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