When Lula da Silva and Alberto Fernández, presidents of Brazil and Argentina respectively, announced last January that the two countries would start preparations to issue a common currency called ‘Sur,’ the reaction was a mix of shock and amusement. “This is insane,” tweeted the former IMF chief economist Olivier Blanchard. Brian Armstrong, CEO of the crypto exchange Coinbase, went one step further, suggesting that Bitcoin might be a better “long-term bet” for the two countries.
A new currency with a long history
The severe backlash, including from local businesses and economists, has pushed the two governments to reframe Sur as a ‘unit of account,’ aimed at facilitating bilateral trade, rather than a fully-fledged currency union. Sur will be used in parallel with national currencies and trade financing will be guaranteed by a common fund, explained the two countries’ finance ministers in a joint press conference. Brazil’s finance minister Fernando Haddad even implied that the plan would only go forward if the currency was partly backed by Argentinian commodities. “It would be a vehicle currency for electronic settlements, without using the US dollar as an intermediary currency,” says Rodrigo Wagner, an economist specialising in currency adoption who teaches at the Adolfo Ibañez Business School, adding: “Unlike initial interpretations, the actual project seems implementable.”
Some hope that a currency union between South America’s two largest economies could lead to closer economic and political integration in the region, following in the steps of the European Union. Trade between South American countries stands at just over 15 percent, compared to 55 percent in the richer and more economically integrated European Union. Lula and Fernández have invited other South American countries to join the fledgling partnership, with little interest so far. “The proposal could gain more traction in the future if it were part of a coherent package for integration,” says Wagner.
If anything, a common currency could facilitate trade and capital flows between the two neighbouring countries. Standing at roughly $28bn in 2022, trade between Brazil and Argentina has stagnated compared to over $40bn just a decade ago, partly because of Argentinians’ inability to purchase Brazilian goods due to a chronic shortage of dollars. “Sur could initially boost trade between the two countries, as Brazilian exporters would have some advantage relative to other exporters, which would charge in hard currency. But that is a classic case of trade diversion, as opposed to trade creation,” argues Alexandre Schwartsman, a Brazilian economist and consultant who has served as Director of International Affairs at the country’s central bank, adding: “At some point, however, when Brazil would want to settle the difference, presumably in hard currency, problems would most likely arise.”
With a thriving manufacturing industry, Brazil could tap into the opportunities offered by the common currency to increase exports to its neighbour. Over the last decade, Brazil has had an annual trade surplus of around $2.4bn with Argentina. However, Argentina would have more to gain from the deal, according to Schwartsman, given its chronic shortage of hard currency: “It would be a major gift to Argentina and some Brazilian exporters, which would be paid regardless of whether Argentina pays its debt. Probably the Brazilian central bank or the treasury would pay exporters and keep the ‘claim’ against Argentina. But there is no major advantage for Brazil.”
Surprisingly enough, the project enjoys support from both sides of the political spectrum in two countries that are deeply divided and have gone through periods of economic and political turmoil. Just four years ago, the previous Brazilian President Jair Bolsonaro proposed a joint currency with Argentina, hastily dubbed ‘peso real.’ The country’s central bank issued a statement clarifying that no such plan was in the pipeline; the following day Bolsonaro insisted, but never mentioned it again.
For the current Brazilian president, who made a surprise comeback to politics and won a third term last winter, the plan is driven by a mix of ideology and geopolitical interests, Schwartsman argues, notably concerns over perceived ‘US imperialism’ and the use of the dollar as a weapon to put pressure on developing countries. Solidarity between the two countries’ leftwing governments might have also played a role. “The announcement was intended to lend some support, mostly moral, to the Argentine government, which is ideologically congruent with Lula’s,” says William Summerhill, an economic historian specialising in Brazil who teaches at UCLA. “It’s a signal of solidarity in the abstract.”
Can it work?
One reason why the announcement has been met with scepticism is the lacklustre history of monetary integration in South America. Previous attempts to create currency unions have failed, although announced with great bombast. A similar plan to launch another Brazilian-Argentine currency called ‘gaucho’ in the 1980s was abandoned amid the economic crisis that engulfed Latin America at the end of the decade. Twenty years later, several South American countries ruled by leftwing governments adopted a virtual currency aimed at facilitating trade; aptly named ‘SUCRE,’ an acronym standing for ‘Unified System for Regional Compensation’ but also ‘sugar’ in French, the project practically never took off.
A common currency could facilitate trade and capital flows between the two neighbouring countries
Even less ambitious plans to create mechanisms to clear export payments, such as the ‘Convênio de Pagamentos e Créditos Recíprocos’ (CCR) arrangement between members of the Latin American Integration Association, have been shelved. The lack of a common currency is not even the main obstacle to economic integration, says Wagner: “A ‘vehicle currency’ is far from being the most binding constraint to boost trade. Cross-border contract enforcement and massively reducing exchange rate controls seem much more relevant.”
History aside, the vast differences between the two economies pose the greatest challenge. For a fully-fledged common currency to work, Argentina and Brazil would have to remove trade barriers, harmonise regulation, and enable free labour and capital flow. The two economies have grown apart over the last two decades, with Argentina’s inflation rate surpassing the 100 percent threshold this year, while Brazil has been enjoying single-digit inflation rates and a stable monetary environment. Argentina has been cut off from global debt markets since its most recent default in 2020 and has imposed foreign exchange and capital controls to prevent its citizens from buying dollars.
The two countries would also have to share a central bank and harmonise interest rates, which were separated by nearly 70 percentage points in the first half of 2023. A monetary union would also require the two governments to guarantee Sur with large holdings in gold or a reserve currency, possibly the dollar. The lack of a mechanism to coordinate money supply and fiscal coordination makes this viable only as a “small-scale, off-the-books special programme in which the value of anything involved is tightly regulated. Something so specific and scaled-down that it would make no difference,” says UCLA’s Summerhill.
Dropping the dollar
One reason why the two countries are eager to go ahead with the plan is to reduce their dependence on the dollar. Argentina and Brazil are major exporters of commodities whose economies are vulnerable to fluctuation in US foreign exchange and interest rates. Argentina’s fateful decision to peg the peso to the US currency in the early 1990s is widely seen as a main contributor to the crisis that engulfed the country in 2001, a political and economic disaster from which it has yet to recover. During his campaign last winter, the Brazilian President Lula proposed a common currency for South America as a means of increasing economic integration in the region and undermining its dependence on the dollar. “Sur was possibly designed to create some momentum behind the idea of delinking from the use of the dollar in transactions and government reserves,” says Summerhill, adding that a new currency for trade is a topic “very hard to escape,” given the dollar’s dominance in the region’s economy; sanctions imposed by the US against Russia and the ensuing disruption to trade served as a stark reminder of that. “Behind any transactions using other currencies, there is a dollar shadow price for the goods involved, which determines the other countries’ exchange rates,” Summerhill says.
Some see ‘Sur’ as part of a broader scheme of the BRICS countries, a group of emerging economies that includes Brazil, Russia, India, China and South Africa, to minimise the influence of the dollar in world finance. In a meeting this May, officials from Brazil and Argentina discussed the prospect of establishing swap mechanisms that would allow exporters to avoid using the dollar for transactions. “BRICS members do not have a concretely expressed ‘plan’ to de-dollarise the global financial system, but individual members have interests in pursuing the use of local currencies in international trade and investment,” says Zongyuan Zoe Liu, a fellow for international political economy at the US think tank Council on Foreign Relations.
As with previous attempts to create currency unions in South America, many experts expect the initiative to fall into oblivion once the initial enthusiasm and political momentum fizzle out. “The interaction of domestic politics within both countries, including widespread and endemic corruption, the rise of populism, and the unstable nature of their respective economy feed into the political cycle, as well as the lack of robust monetary policy experience, do not make a joint currency credible,” says Liu.“It will disappear into the background as a low priority for Brazil,” Summerhill adds. “There are much bigger fish to fry.”