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A common currency for the Mercosur

Summary:
Actual proposal by Haddad and Galípolo at Folha de São PauloLula's visit to Argentina, during the  Community of Latin American and Caribbean States (CELAC) meeting, brought about a brief discussion of the possibility of a common currency. I have discussed here (as well as many guest bloggers) both currency unions, in particular the euro, and it's consequences. Note that the FT piece linked suggested that the common currency was the first step in a long process. I doubt it, in part because, if the end goal is a real currency union, it would be a terrible idea. The actual proposal by the current finance minister, Fernando Haddad, and one of his collaborators, Gabriel Galípolo, falls short of a common currency area. It is still a bad idea.The idea is to reduce the use of the dollar for

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 Actual proposal by Haddad and Galípolo at Folha de São Paulo

Lula's visit to Argentina, during the  Community of Latin American and Caribbean States (CELAC) meeting, brought about a brief discussion of the possibility of a common currency. I have discussed here (as well as many guest bloggers) both currency unions, in particular the euro, and it's consequences. Note that the FT piece linked suggested that the common currency was the first step in a long process. I doubt it, in part because, if the end goal is a real currency union, it would be a terrible idea. The actual proposal by the current finance minister, Fernando Haddad, and one of his collaborators, Gabriel Galípolo, falls short of a common currency area. It is still a bad idea.

The idea is to reduce the use of the dollar for bilateral transactions, and Haddad and Galípolo, in their piece for Folha de São Paulo last year, suggested that this would stimulate integration and trade. It is unclear that even that is correct. And there are other experiences with that kind of instrument in the region (e.g. the SUCRE in Ecuador, not the old currency, but the compensation mechanism).

The question about the proposal, which includes the creation of a digital currency and a central bank of the south, is what purpose does it serve. Haddad and Galípolo had suggested that it would further integration. That seems unlikely. Most of the integration has been done with Mercosur, and the most important way to integrate the countries in the region would be productively. The common currency won’t solve the Argentine external problems associated to the lack of dollar reserves either. And it won’t solve the Brazilian issue of how to deal with the political problem of the self-imposed fiscal ceiling limit, which make no sense, and constrains the ability of the government to promote growth and reduce inequality.

It is also unclear that anything beyond some general discussions would take place, and not just because the conditions are very different, and Argentina does not have dollar reserves, and hence the peso would depreciate considerably more with respect to the sur (the tentative currency) than the real would (note that the peso has depreciated way more than the real with respect to the dollar, and that to some extent explains the inflation differentials).

More importantly, Argentina has presidential elections this year, and it has to avoid a default on external obligations, something that is not the case in Brazil, obviously. In my view, the point of this announcement was purely political, and to suggest that the integration between the two countries, one with a threatened economy, the other with a threatened democracy, is a priority. Both left of center presidents stand together. Of course, the right place for this is UNASUR, not the Mercosur, and talks should be explicitly political. There is no circumstance in which a movement in the direction of a common currency makes any sense.

Matias Vernengo
Econ Prof at @BucknellU Co-editor of ROKE & Co-Editor in Chief of the New Palgrave Dictionary of Economics

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