The case against the idea is daunting. A full union, with a joint central bank, would surely crumble
Save time by listening to our audio articles as you multitaskThe idea has a history. First came the “gaucho”, a currency meant to replace Brazil’s cruzado and Argentina’s austral until the concept was abandoned amid economic turmoil in 1988. On its heels was a proposal by members of Mercosur, a trade alliance, to adopt a common currency, and, an experiment led by Venezuela, which had ambitions to reduce the continent’s reliance on the dollar.
That, at least, is the case for the idea. The case against is daunting. A full union, with a joint central bank, would surely crumble. Economists judge how well countries fit in a currency union using criteria devised by Robert Mundell, a Canadian economist, that measure economic similarities. Normally, central bankers tailor interest rates to individual economies; in a union, one rate has to do for them all. Policy rates in Argentina and Brazil are an astonishing 61 percentage points apart.
Another condition specified by Mundell is that people and money should move smoothly across borders, acting as a means of adjustment when a shock hits one country but not the other. Whereas in Europe farm workers hop between jobs and countries, South America’s poor infrastructure makes travel a hassle, and Argentina’s capital controls make getting paid across borders nearly impossible.
Brazil is already getting cold feet. Officials have stressed the new currency would be an addition to the two national ones, rather than a replacement, and that it is a long-term project. Other countries are not racing to join. Lula and Mr Fernández offered South American leaders the chance to do so at a press conference on January 25th: no one has so far taken them up.
This watered-down union would still place Argentina’s problems at Brazil’s door. There would need to be a monetary policymaker, either a currency board or full-blown central bank, to watch exchange rates. The, to which Argentina owes $72bn, would be less willing to prop up the peso if Argentina had another legal tender. To top it all off, Lula would have to ignore his independent central bank, which has come out in opposition to the idea.
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