South America’s Make-Believe Money Is Either Dangerous or Irrelevant


After the leaders of Brazil and Argentina announced at a regional meeting in Buenos Aires that they will start preparing for the same currency, you can hear the sound of Manhattan below the Washington headquarters of the International Monetary Fund.

“It is not far from El Salvador to adopt Bitcoin,” said Kenneth Rogoff, who became an economist at the IMF in time to show the devaluation of the Argentine peso in 2001. Olivier Blanchard, who took the job a few years later. it simply meant “madness.”

The Minister of Finance of Brazil, Fernando Haddad, quickly tried to return the expectations, explaining that the “sur” (south, do you understand?), as the new currency will be called, will be a common method of payment for trade and commerce, and not a substitute for the Argentine peso it is the real Brazil; the exchange rate to free the trade of South American countries from the hegemony of the dollar.

However, beyond the willingness in Brasilia and Buenos Aires to show their left-leaning governments in opposition to the rich Neoliberal countries of the north, it is difficult to see another attempt to stick together the economy that, after several shots. in the merger, they remain distant.

Consider all that has happened since the Mercosur trade union was founded almost 32 years ago.

Brazil and Argentina ended hyperinflation. But the strong currency that he used as a tool against deflation collapsed around the turn of the century. Their wealth soared in the boom of the 2000s, then fell when it ended.

What did not happen is Mercosur. A common market with shared value that was considered by Argentina, Brazil, Uruguay and Paraguay in 1991 did not materialize. Neither is his dream of a unified economic policy. Its members never sell to each other. In 2021 only 11% of exports from Mercosur countries went to others in the bloc.

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It is not clear how the new value sector will change there. “How will this help the business,” asked Rogoff. “I don’t see a problem that this solves,” Blanchard said, following Haddad’s explanation. “It seems complicated and useless.”

“It does not reach the level of monetary union seen with the euro,” Haddad told reporters in Buenos Aires. But the minister’s paper last year recommended a “financial cooperation plan in the region,” where members (the plan is to give money to other neighboring countries) can also use the money for domestic use.

That sounds like a trip to the financial union.

Argentina, where inflation is hovering around 100% per year, could benefit from raising its currency to that of its stable neighbor where inflation is hovering around 5.8%. But in Brazil, where the central bank has done very well to keep rates even in very high places, you’d be crazy.

“Argentina has in the past tried all the methods of creating money known to the people and created a few more,” Rogoff said. “There is no use.”

A functional currency requires a balanced monetary policy, which requires a balanced financial system. But how can anyone reconcile fiscal policy with Argentina, where unsustainable government spending is often supported by printing money?

And if you look closely, the common currency is a poor concept in Argentina.

The experience of the euro offers a warning: Even a conservative project with a clear political rationale and many years in the making was on the verge of collapse when weak economies with fragile accounts, such as Greece and Italy, came close to collapsing. the effects of the global financial crisis.

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With no control over their exchange rates or interest rates, unable to force Germany to send money and help them out of the hole, they were forced into a massive breach that brought down governments.

The lesson is clear: Connecting disparate economies with strict rules that prevent them from following independent rules on spending or interest rates will fail when their financial resources – let alone their preferences and constraints – differ.

Given the challenges, sur proponents must answer the most important question: To what end? Their answers, so far, are not good. The prospect of regional integration does not require a single investment. USMCA partners purchase 23% of US exports without such a tool. Eighty-four percent of Mexico’s exports go to its North American partners.

Haddad’s paper from last year makes a compelling case for this idea: part of a defense strategy in a world of economic warfare.

There is a power to have money used in trade and finance around the world. That power can destroy small countries in the world system. Europe and the US have used theirs to punish Russia for its invasion of Ukraine, for example, by suspending SWIFT, the messaging system used by financial institutions around the world to send instructions for millions of transactions every day.

Latin American countries failed to act prudently when the Federal Reserve raised interest rates to counter US inflation in 1979, slowing the global economy and raising the cost of servicing their dollar-denominated debt.

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How can a country maintain its sovereignty if it does not control the money it borrows and sells and is at risk of bankruptcy under the guidance of the permanent IMF system?

Haddad’s cow is not unusual. The prospect of the end of the Fed’s dogfight can be frightening. It stands to reason that trade between Brazil and Argentina (and they have invited other Latin American countries to join) will be better with a common currency.

More realistic is the idea that sur will free Brazil, Argentina and other Latin American partners from the yoke of the world’s largest trade and financial institutions. Latin America accounts for only 5% of global trade. Its foreign currency will be made up mainly of dollars for a very long time.

Who knows, president Luiz Inacio Lula da Silva and Alberto Fernandez may love each other like brothers. But Brazil and Argentina giving their economic power to each other? Dream. Thirty years after Mercosur, we are waiting for economic policy agreement to happen.

More from Bloomberg Opinion:

• Social Media Companies Fail Again in Brazil: Parmy Olson

• Growth of the Left Is the Real Story of 2022: Pankaj Mishra

• Peru’s Unrest Should Not Be Latin America’s Future: Eduardo Porter

This column does not reflect the views of the editorial team or Bloomberg LP and its owners.

Eduardo Porter is a Bloomberg Opinion columnist who covers Latin America, US economic policy and immigration. He is the author of “Poison America: How Hatred Destroyed Our Promise” and “The Price of Everything: Finding Ways in the Madness of the Things That Destroy It.”

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