South America’s two biggest economies, Brazil and Argentina, have recently been in talks to create the world’s second-largest currency union after the eurozone. A summit held in Buenos Aires in January revealed the bilateral project to fellow Latin American countries, and it is expected to pave the way for other states to join the discussion at a later stage. The Sur, reportedly the proposed name of the new currency, might potentially jumpstart a new era for trade and politics between the two neighbors, as well as secure more stability in their long-troubled markets. Nevertheless, experts around the world have envisaged a rather complex path to the materialization of such a far-reaching agreement.
The relationship between Argentina and Brazil first tightened in 1991, when they formed an economic bubble with Paraguay and Uruguay under the name of South Common Market (MERCOSUR). However, different political climates caused the neighboring allies to experience extended periods of mutual incomprehension. Among other examples, the 2019 election of right-wing Jair Bolsonaro as president of Brazil created animosity with the liberal leader Alberto Fernández in Argentina. Yet, in October, 2022, Brazil reelected its previous president Luiz Inácio Lula da Silva, realigning the country with Buenos Aires’ interests. “I am back to make good agreements with Argentina, (…), to help both countries grow economically,” said Lula according to El País during his first state visit to the Argentinian capital. Hence, the recent decision to contemplate a new currency has come off as a symbolic moment of the restored alliance between the governments.
De-dollarization
The two left-leaning leaders stated their intention to advance discussions regarding a shared currency for both financial and commercial flows, with the purpose of decreasing operating costs and minimizing external vulnerability, as reiterated by The Courthouse News Service. The South American neighbors have been notoriously dependent on the U.S. dollar to compensate for the low value of their native currencies – in the Americas alone, 96 percent of trade is carried out in U.S. dollars, according to the U.S. Federal Reserve. As an act against the dollar’s dominion over international commerce, there have been multiple attempts to bypass the currency, a process known as de-dollarization. While most have been promoted by sanctioned countries including China, Russia and Iran, Latin America has also had a precedent with the virtual currency SUCRE used between Ecuador and Venezuela. Regrettably, the latter’s economic crisis prevented the currency from advancing and gaining wide-spread use.
The search for currency unions marks a new multipolar, deglobalized world where the dollar may not hold as much influence anymore. Tectonic plates of finance are shifting in a variety of directions, one being the hypothetical birth of the Sur, producing effects that are already visible – for instance, the share of U.S. dollar reserves held by central banks fell to the lowest level in 25 years, as indicated by the International Monetary Fund (IMF). From a socioeconomic perspective, the erosion of U.S.-oriented markets has been strengthening the position of politically neutral states and incentivized others to maintain an anti-American attitude, most notably China. Similar to the affirmed role of the euro, the Chinese yuan has in fact gained an increasing role in the global economy by approaching the latent African market.
Why Again?
Considering that previous efforts were not fruitful, what motivated Lula and Fernández to revive an old idea? As the central bank incessantly prints money to repay debts, Argentina is frighteningly close to reaching 100 percent annual inflation, which justifies its interest in tying the knot with Brazil. Additionally, Argentina is almost entirely isolated from other alliances due to its virtually unpayable debt and its capital markets almost being closed, as the publication UFM Market Trends commented in a related article. Also, both countries have shown great interest in reducing trade barriers and subsequently increasing profits. Lastly, the desire to pursue this dream stems from the intention of building a true common market and intensifying the bond between the two MERCOSUR members.
A Problematic Outlook
Despite the enthusiasm for the proposal, many experts have attested to negative prospects for the future of the new currency. The Granite Tower (GT) decided to dive into the matter by interviewing Professor Jaehak Lee, president of the Institute of Hispanic Studies (Spanish Language and Literature). Professor Lee deemed the project a “propagandistic move” to
counterbalance the effects of an extremely narrow market, which practically only relies on raw material exports. Additionally, he emphasized the role of the hyperinflation in Argentina’s economy, which has fallen victim of the country’s obstinacy to pursue a pricey populist policy. Lastly, he affirmed that, although the chances are scarce, the local government should reconsider its public expenses and limit them as much as possible. By and large, both states should consider reaching a more equal position before evaluating onward measures.
The main argument in favor of Argentina and Brazil’s step toward the Sur is the preexisting European model. However, the most crucial aspect of economic cooperation is mutual responsibility. Europe has faced countless political conflicts due to the fiscal irresponsibility of some governments, and economists fear the same problem could have devastating effects in Latin America. Financially stable and responsible countries are not abundant on the continent, which begs the question – would a South American currency be the embodiment of a European union made of exclusively southern states? The Sur highly resembles the euro, both in its usage and in the subsequent interdependence of different industrial fields. Thus, all roads to further advancements seem to lead back to the same original issue – Argentina’s disastrous inflation.
All in all, the feasibility of such a high-scale project is doubtful to many commentators, as its risks may extend the concerns of isolated markets to a whole continent. Besides, even if the idea managed to see light, the value of the currency would be limited to that of the weakest member of the union. Ultimately, it is safe to conclude that the ambition of this maneuver should be reflective of a wider political endeavor, which was addressed by Brazilian President Lula da Silva as a “renewed version of 21st century socialism.”