Brazil and Argentina will announce this week that they are beginning preparatory work on a common currency, in a move that could eventually create the world’s second-largest currency bloc.

South America’s two largest economies will discuss the plan at a summit in Buenos Aires this week and invite other Latin American nations to join.

The initial focus will be on how a new currency, which Brazil suggests calling the “sur” (south), could boost regional trade and reduce reliance on the US dollar, officials told the Financial Times. At first it would run parallel with the Brazilian real and the Argentine peso.

“There will be … a decision to start looking at the necessary parameters for a common currency, which includes everything from fiscal issues to the size of the economy and the role of central banks,” said Argentina’s Economy Minister Sergio Massa, to the Financial Times.

“It would be a study of trade integration mechanisms,” he added. “I don’t want to create false expectations. . . It is the first step of a long road that Latin America must travel”.

Initially a bilateral project, the initiative would be offered to other Latin American nations. “They are Argentina and Brazil inviting the rest of the region,” said the Argentine minister.

A monetary union covering all of Latin America would represent around 5 percent of global GDP, estimates the FT. The world’s largest monetary union, the euro, encompasses about 14 percent of global GDP when measured in dollar terms.

Other coin blocks include the CFA franc which is used by some African countries and is pegged to the Euro and the East Caribbean dollar. However, these comprise a much smaller portion of global economic output.

The project is likely to take many years to come to fruition; Massa pointed out that it took Europe 35 years to create the euro.

An official announcement is expected during Brazilian President Luiz Inácio Lula da Silva’s visit to Argentina that begins Sunday night, the veteran leftist’s first trip abroad since he took power on January 1.

Brazil and Argentina have discussed a common currency in recent years, but the talks were based on Brazil’s central bank’s opposition to the idea, said an official close to the discussions. Now that the two countries are governed by left-wing leaders, there is greater political support.

A spokesman for Brazil’s finance ministry said it had no information about a working group on a common currency. He pointed out that Finance Minister Fernando Haddad had co-author of an article last year, before assuming his current position, proposing a common South American digital currency.

Trade is flourishing between Brazil and Argentina, reaching $26.4 billion in the first 11 months of last year, nearly 21 percent more than in the same period in 2021. The two nations are the driving force behind the Mercosur regional trading bloc, which includes Paraguay and Uruguay.

The attractions of a new common currency are most obvious for Argentina, where annual inflation approaches 100 percent as the central bank prints money to finance spending. During the first three years of President Alberto Fernández’s rule, the amount of money in public circulation has quadrupled, according to central bank data, and the highest denomination peso bill is worth less than $3 at the widely used parallel exchange rate.

However, there will be concern in Brazil about the idea of ​​uniting Latin America’s largest economy with that of its ever volatile neighbor. Argentina has been largely insulated from international debt markets since its 2020 default and still owes more than $40bn to the IMF from a 2018 bailout.

Lula will remain in Argentina for a summit on Tuesday of the 33-nation Community of Latin American and Caribbean States (CELAC), which will bring together the region’s new crop of left-wing leaders for the first time since a wave of elections last year reversed a right wing.

Colombian President Gustavo Petro is likely to attend, authorities said, along with Chilean Gabriel Boric and other more controversial figures including Venezuela’s Socialist Revolutionary President Nicolás Maduro and Cuban leader Miguel Díaz-Canel. Mexico’s President Andrés Manuel López Obrador generally avoids traveling abroad and is not scheduled to participate. Protests against Maduro’s attendance are expected in Buenos Aires on Sunday.

Argentine Foreign Minister Santiago Cafiero said that commitments will also be made at the summit on greater regional integration, the defense of democracy and the fight against climate change.

Above all, he told the Financial Times, the region needed to discuss what kind of economic development it wanted at a time when the world was starving for Latin American food, oil and minerals.

“Is the region going to supply this in a way that turns its economy [solely] in a raw material producer or will supply it in a way that creates social justice [by adding value]?,” he said.

Alfredo Serrano, a Spanish economist who heads the Celag regional political think tank in Buenos Aires, said the summit would discuss how to strengthen regional value chains to seize regional opportunities, as well as advance a currency union.

“Monetary and exchange mechanisms are crucial,” he said. “There are possibilities today in Latin America, given its strong economies, to find instruments that replace the dependence on the dollar. It will be a very important step forward.”

Manuel Canelas, a political scientist and former Bolivian government minister, said CELAC, founded in 2010 to help Latin American and Caribbean governments coordinate policies without the US or Canada, was the only surviving pan-regional integration body. During the last years. last decade while others fell by the wayside.

However, Latin America’s leftist presidents now face tougher global economic conditions, more complicated domestic politics with many coalition governments, and less citizen enthusiasm for regional integration.

“Therefore, all steps towards integration will surely be more cautious. . . and it will have to be squarely focused on delivering results and showing why they are useful,” he warned.

Additional reporting by Bryan Harris in Sao Paulo

By sbavh

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