It would alleviate Buenos Aires’ chronic lack of dollars, but the huge gap between the two economies would cause deeper problems.
The talks between Brazil and Argentina on a mercantile currency are intended to promote trade between the two countries. A common currency would alleviate Buenos Aires’ chronic lack of dollars. But the huge gap between the two economies would cause deeper problems. Investors and international institutions should make sure that doesn’t happen.
Brazil’s President Luiz Inácio Lula da Silva and Argentina’s Alberto Fernández have an incentive to maintain close business ties. Brazil accounts for almost 20% of Argentine exports and 15% of its imports, while Brazil exports around 5% of its goods and services to its southern neighbor.
The envisioned currency, which could be called the sur, would allow countries to trade without having to convert Brazilian reals or Argentine pesos into dollars. That could help Argentina, which is suffering from runaway inflation and has been cut off from international capital markets since it defaulted on its debt for the ninth time in 2020. An alternative to the dollar would also give Lula and Fernández, who is running for the re-election battle this October, a chance to stoke anti-American sentiment among voters.
But that’s where the benefits would end. Brazilian exporters are unlikely to want to use the south instead of the dollar. In 2019, only 5% of total Brazilian exports and barely 2.5% of Argentine imports went through a similar system established by Mercosur, according to research from the University of Leeds and the University of Liverpool.
Argentina also has a much worse economy, with inflation of 95% compared to Brazil’s 5.8%, as well as a depreciating peso and no international capital flows. A trade currency with a fixed exchange rate would mean that Brazil would be effectively lending to its impoverished neighbor at lower prices, importing some of its economic problems.
Argentina’s ills necessitate extensive tax reform, cuts in subsidies to utilities and transport, and more specific social aid, as requested by the IMF in its conditions for a loan of 44,000 million dollars. Until then, a new coin would be rather sur…realistic.
