Unique regional currency: pros and cons of a proposal that appears again from Brazil

one more time the idea of ​​implementing a single regional currency arises from Brazil. Almost two years after the version was installed that the governments of Jair Bolsonaro and Mauricio Macri were studying the possibility of moving towards a common currency between the two countries -it was even mentioned that it would be called Peso-Real-, the proposal flies over again, although with a peculiarity: this time, its promoter is nothing less than Luiz Incio “Lula” da Silva.

The former president of Brazil and who leads the polls ahead of the presidential elections to be held in October exposed on Saturday the need to create a common currency for Latin America. “We don’t have to depend on the dollar,”.

The idea of ​​a single Latin American currency was even addressed by two economists close to Lula in a recent article published in the Folha de S. Paulo newspaper. There, Gabriel Galpolo, former president of Banco Fator and who has collaborated with Lula’s government program, and Fernando Haddad, former mayor of So Paulo and today the PT’s candidate for state governor, defended the single currency, in a model similar to that of the European bloc with the euro, as a way to increase regional integration and strengthen the monetary independence of the region.

But the possibility of moving towards a common currency does not seem to be echoed in these latitudes. Although it even transpired that it would be called “South” and that, according to the text by Galpolo and Haddad, “it would be issued by a South American central bank” after an initial capitalization carried out by the member countries, within the economic team of the Argentine Government downplay the issue. “It is a more political than technical definition,” the Central Bank apologizes. “There is nothing, there is no opinion on that initiative,” they complement from the Ministry of Economy.

The reason for this can perhaps be found in the fact that, as economists agree, it is that The possibility seems very remote today, taking into account the multiple economic imbalances that should be corrected before moving towards a common regional currency.. In off the recordanalysts disqualify the possibility and even point out that it is a proposal that could not be applied for at least a decade.

For Joaqun Pastor, an economist at the consulting firm P&L advisors, the project “could be very efficient for the economies that make up the common currency area” but he warned that for this it is necessary to meet certain conditions that today are far from being met.

Among them, he stated that the member economies should have a similar structure, be exposed to the same drivers macro and suffer the same shocks. To make it work well, I added, there should be mobility of productive factors, especially labor. Also flexibility of prices and salaries and fiscal discipline.

“If everything worked happily and those conditions were met, Argentina will benefit a lot. You sacrifice monetary policy but you increase trade and regional integration generates better institutions,” he considered.

Despite this, Pastor recorded: “In Europe it took many years to converge legislation and exchange schemes before launching the euro“.

A similar diagnosis was made by Adrin Yarde Buller, chief economist at Facimex Valores. “It’s an interesting idea to deepen regional integration and our economy would clearly benefit from a currency that can function better as a unit of account, especially considering that inflation will be greater than 60% this year,” he analyzed. Despite this, he stressed: “It is about of measures very difficult to reverse, so this Perhaps this is not the best time to negotiate something like this and we will have to wait until we have a position of greater relative strength.“.

Francisco Ballester, director of MindY-economics, recalled that a single currency in the region would have benefits -especially in some countries- but also negative issues. “For Argentina, the main benefit is that it would import the credibility it lacks from the rest of the region. It would be a quick way to lower inflation“, analyze.

However, and in tune with his colleagues, he noted: “In the medium term, the question is whether the countries of the region meet the typical conditions needed to share the currency.: free mobility of employment between the different regions and a supranational fiscal authority that can compensate for the differences between shocks that affect different countries”.

And in this regard, he expressed: “These last two factors do not exist. There is no superior fiscal entity and, for cultural and distance reasons – the distances are much greater here than in Europe, for example – I think it is difficult to see a great increase in labor mobility”.

Finally, Pastor added that if this proposal is carried out, “the problem is that a crisis comes later and if the countries are not fully integrated, the common currency limits you a lot.” And remember: “This was part of the discussion in the European Union during the crisis. The Greeks said if we could devalue we would be better off.”

A story that repeats itself

Already in a paper written in 1999 Eduardo Levy-Yeyati and Federico Sturzenegger, who would later have their respective experiences at the Central Bank, had wondered, in light of the European experience, if a common regional currency was a good model for Mercosur.

In this work, the economists found that at that time the preconditions for a monetary area were not present in Mercosur from the point of view of the traditional theory of the optimal currency area (OCA). Besides, The text concluded that, from the point of view of credibility, and unlike the European model, the lack of an anchor country in the region stood out.thus suggesting the desirability of a monetary union that would include the US.