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Is Monetary Unification Feasible in Latin America?

At the beginning of 2023, within the framework of an agreement to promote bilateral trade, the governments of Argentina and Brazil proposed the creation of a common currency, to facilitate the exchange between the two countries. Likewise, the leaders of the two great ones of the South invited the other nations of the region to join.

And although so far only the government of Venezuela has shown interest, this has revived interest in the discussion about whether monetary unification is feasible in Latin America. Next, we will learn a little more about the potential benefits and disadvantages of a common currency project for LATAM.

Pros and cons of monetary unification in LATAM

Regarding the proposal of monetary unification in Latin America, there are arguments for and against, expressing in some cases serious objections, considering that there are many obstacles, given the economic instability of the region, among other problems. Let’s look in detail.

Arguments in favor

By presenting the arguments in favor, the supporters of the idea, now and before, explain what would be the advantages of having a single currency in LATAM. Among these, the following are mentioned:

– Products from other Latin American nations could be imported without resorting to their international reserves in dollars.

– In the same vein, by skipping the dollar buying and selling market, another advantage of monetary unification is that it would imply a reduction in transaction costs. This is even more beneficial for countries like Argentina, where there is a shortage of North American currency.

– It is claimed that a common currency would help to increase and balance trade between countries in the region. To mention a comparison, in 2021Brazil’s imports from Argentina reached USD 12 billion, and from the United States USD 39.3 billion. But, this panorama could change.

– It is thought that, if the commercial agents of the two countries involved in the exchange use the same reference price, they can know better how much they are selling and buying for and with a compensation system, they could calculate who has to repay the other, for having imported more than they exported.

Arguments against

In the appreciation from the IMF, a common currency, in this case for Argentina and Brazil, does not look like a good idea, since their economies have many differences and neither is the main trading partner of the other, as noted.

In particular, it is highlighted that inflation in Brazil is much lower, not reaching double digits on average per year. While, during 2022, the CPI rose 95% in Argentina. And this same nation has several different exchange rates.

The same arguments are used when talking about a common currency for the entire region. In this regard, it is stated that Latin America is not as economically cohesive as the Eurozone.

And even more, the experts consider that neither the commercial, political nor social interests of the countries of the region are on the same path; although in some cases they may coincide.

What is needed for a single currency in LATAM?

As can be seen, monetary unification looks like it could be more feasible in Latin America. Now, what is required to achieve it? Let’s see what are the main requirements to meet:

– A primary need would be for most of the trade to be between the Latin countries themselves. This has not yet been fulfilled. To mention one case, in Colombia’s foreign trade, less than half of the transactions take place with its neighbors in the region.

– The common currency must have a more or less stable value (although no currency is exempt from suffering volatility); for this, it is required to overcome the long history of political and economic instability that has prevailed in the region, and that affects its currencies.

– Another important aspect is that the new currency must be born with strong support from central banks in each country. However, it is known that these entities often have difficulties related to their own national currencies.

– Without a doubt, one specific aspect is that the least economically developed countries must move forward, to get on par with the bigger ones. It is not possible to compare the economy of Mexico with that of Bolivia, so the exchange equality between them would be rather fictitious, if not non-existent.

– In the same order of ideas, we have to work on issues such as the fiscal deficit, the balance of payments, inflation, interest rates, debts and confidence from foreign investors, so that this can, in turn, be transmitted to the new currency.

– Likewise, progress should be made in areas such as integrated financial systems and to harmonize in the legislation, both banking and foreign exchange policies.

Now, according to some research on the topic, the current reality of many of our countries allows us to affirm that all these requirements mentioned so far are not met, therefore, monetary unification in Latin America is still not feasible.

The united south

The name for the common currency proposed by the governments of Brazil and Argentina has a rather symbolic value: South. But, for now, the idea is not to do something as ambitious as the euro. Rather this currency would be used for commercial bilateral transactions, with no intention of replacing the real or the peso. However, if implemented, it can be a good thermometer, to see how it would work and so perhaps other countries can join the proposal.

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