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ECONOMY | 10-06-2019 09:09

A common Brazil-Argentina currency? A 'distant mirage' for now

Worried about possible noise caused by the discussion, Brazil’s Central Bank issued a statement late at night on Thursday denying there are ongoing plans or even studies for a monetary union with Argentina.

Brazil's President Jair Bolsonaro’s suggestion that South America’s two largest economies could have a single currency akin to the euro was greeted with scepticism last week.

After meeting his Argentine counterpart Mauricio Macri in Buenos Aires on Thursday, Bolsonaro said the nations were taking a “first step” toward “the dream of a single currency in the Mercosur area, the peso real.” He doubled down on the suggestion on Friday at an event in Rio de Janeiro.

The idea was also discussed by Brazil’s Economy Minister Paulo Guedes and business leaders in the Argentine capital, according to UOL website.

Guedes, who was traveling with Bolsonaro, cited the example of Germany and said the nations would first need to make fiscal adjustments to reap the benefit of increased competitiveness from a common currency. Brazil and Argentina are members of the Mercosur trade bloc along with Uruguay and Paraguay.

Economists and politicians in both countries, which share a history of financial instability and even hyperinflation, reacted with distrust. In Brazil, Lower House Speaker Rodrigo Maia suggested on Twitter the plans could cause the real to weaken and inflation to return. In Argentina, Carlos Rodríguez, a former economic policy secretary and professor at UCEMA, referred to Bolsonaro and Macri as an “ignorant pair, speaking of topics they don’t know to satisfy populist demands of people that don’t understand.” Memes of the 'peso real' currency quickly started circulating on social media.

Worried about possible noise caused by the discussion, Brazil’s Central Bank issued a statement late at night on Thursday denying there are ongoing plans or even studies for a monetary union with Argentina.

While the idea isn’t new -- former Presidents pernando Henrique Cardoso and Carlos Menem discussed it two decades ago -- the notion now comes at a difficult moment for both countries. Amid its second recession since Macri took office, Argentina’s peso weakened more than 50 percent in 2018. Meanwhile, Brazil’s economy has struggled to grow little more than 1% per year since emerging from its worst-ever recession in 2017.

To be sure, both Guedes and Argentina's Economy Minister Nicolás Dujovne said the initiative would take a long time to be implemented given the necessary convergence of fiscal policies, among several other factors.

“A common currency would be unfeasible without some dramatic reforms in both countries and the timeframe for actual implementation would probably span several administrations,” said Pablo Waldman, chief of strategy of INTL FCstone Argentina. “At this point, it’s really no more than a distant mirage at best.”

by by Simone Iglesias & Carolina Millan, Bloomberg

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