What is the common currency that Brazil and Argentina trade and why this would not be the end of the real

The possibility of creating a common currency for Brazil and Argentina for commercial transactions became one of the main topics of President Luiz Inácio Lula da Silva’s (PT) visit to the neighboring country — his first international trip since taking office at the beginning of the month.

“We decided to move forward in discussions on a common South American currency, which can be used both for financial and commercial flows, reducing operating costs and our external vulnerability”, says a joint letter released before the meeting between Lula and the Argentine president, Alberto Fernandez.

In a speech during the meeting, Lula reinforced the idea. “Why not try to create a common currency as has been tried between the Bric countries? I think that, over time, this will happen. And I think it needs to happen.”

Details on what will be discussed — including a Brazilian proposal to name the currency “sur” (south) — were published by the British newspaper Financial Times, which interviewed the Argentine Minister of Economy, Sergio Massa.

Many people upon hearing the news understood that Brazil and Argentina could create something like the euro — a single currency between South America’s two largest economies that would replace both the Argentine peso and the Brazilian real.

However, the Minister of Finance, Fernando Haddad, denied the news when he landed in Buenos Aires on Sunday.

The common currency that the two countries are studying to create in the future would only serve to facilitate commercial transactions without the need to resort to the dollar. It would be very different from the euro — which is a single currency that has replaced national currencies in 20 of the 27 countries in the European Union.

In fact, the proposal under study between Brazil and Argentina looks more like a virtual currency — which would not replace national currencies.

‘common’ currency

The US dollar is now fundamental to most financial and commercial operations in the world. The currency was adopted as the global store of value in 1944, within the Bretton Woods Agreement.

This means that many central banks around the world hold part of their governments’ wealth in dollars. The quotation of national currencies against the dollar is fundamental to determine the economic power of each country.

Over the years, there have been efforts to abandon the dollar as the world’s main currency. China promotes bilateral treaties with several countries so that commercial exchanges are carried out in yuan and in the country’s national currency.

In April of last year, Haddad had published, together with economist Gabriel Galípolo, an article in Sheet in which he proposed a common currency not only for Brazil and Argentina but for all of South America.

Haddad and Galípolo argue that the creation of the currency could help countries protect their sovereignty from possible sanctions imposed by foreign powers, especially the US, which is at the “top of the world hierarchy”, for having the privilege of being able to issue international currency.

“The US and Europe used the power of their currencies to impose severe sanctions against Russia, confiscating international reserves and excluding it from the international payments system (Swift),” they write.

“The use of the power of currency at the international level renews the debate about its relationship with the sovereignty and self-determination capacity of peoples, especially for countries with currencies considered non-convertible. international market, its managers are more subject to the limitations imposed by the volatility of the international financial market.”

In the article, they acknowledge that creating a currency like the euro would be difficult given the “structural and macroeconomic heterogeneities” of South American countries.

In the case of Brazil and Argentina, the economies live completely different realities — Brazil has annual inflation in the double digits, while in Argentina prices practically doubled in 2022.

According to the proposal, the new currency would be used for commercial and financial flows between countries in the region – but Haddad and Galípolo make it clear that all countries would be free to adopt it domestically or keep their currencies. That is, both Brazil and Argentina could maintain the real and the peso, respectively.

In the article, they propose the creation of a South American Central Bank that would be responsible for issuing the currency. This central bank would be created with contributions from each government, which would be proportional to their shares in regional trade.

“The capitalization would be done with the countries’ international reserves and/or with a tax on the countries’ exports outside the region. The new currency could be used both for commercial and financial flows between countries in the region.”

They cite the “Brazilian monetary experience with the success of the URV”, in reference to the Real Unit of Value, which was used as a transitional currency for the implementation of the real.

The article was written by the authors in April 2022, months before Lula’s election and Haddad’s appointment to the Ministry of Finance.

Upon arriving in Buenos Aires, Haddad told journalists, according to Valor Econômico newspaper: “I was with him [Massa] talking more than once and he wants to increase the trade that is falling a lot. [A situação do comércio] it’s really bad, and the problem is exactly the currency, right? That’s why we are racking our brains to find a solution. Something in common, something that allows us to increase trade because Argentina is one of the countries that buy manufactured products from Brazil and our exports to Brazil are falling.”