Argentina And Brazil Look To Establish A Common Currency

On Sunday, January 22, Argentine minister of economy Sergio Massa told the Financial Times that Argentina and Brazil were starting preparations for a common currency. We know that this is an old idea as it has been floating at least since the 1980s. But is it a good idea?

This article was originally published by Mises.

The way that this news was reported was somewhat confusing. In the Financial Times interview, Massa seemed to suggest that both countries would abandon their current currencies in favor of a new one, just like countries in the eurozone. But a few days later, Brazil’s President Lula da Silva said both countries were in talks over a ‘trading currency,’ which is quite different.

The idea is that a trading currency would boost bilateral trade between Brazil and Argentina, which at first glance seems positive but is actually problematic. Indeed, one only needs to look at recent South American history to notice where the problem lies: neither country is interested in free trade and, instead, both are quite interested in supporting crony capitalists. The example of Mercosur, the bloc that both Brazil and Argentina created along with Uruguay and Paraguay in the 1990s, is notable because it has failed to expand trade beyond its borders. Mercosur has simply turned some protectionist countries into one big protectionist bloc that hurts consumers, something that has become so evident that Uruguay is now threatening to sign free trade agreements with other nations.

The one time that Brazil and Argentina came close to advancing freer trade was during the negotiations between Mercosur and the European Union (EU), which resulted in an agreement in 2019, but circumstances are different now. Back then, the two countries were ruled by relatively pro free-market governments, and the only reason why the agreement never went into effect was because of environmental concerns and protectionist worries on the part of the EU. Today, though, the Left is back in South America. Lula da Silva has already said he will seek to renegotiate the deal in favor of his country’s industrial development, while Argentina’s President Alberto Fernández has similar concerns and is even more reluctant to move forward. It does not seem, then, as though free trade is in the plans of either administration.

Citing free trade as an advantage, in the case of Argentina, some officials have stated that an increased level of trade with Brazil would remove the only barrier to economic growth in the country, but this is blatantly false. Although Argentine consumers would certainly benefit from cheaper goods and services, they are unlikely to get them just from Brazil, which is already the country’s main trading partner. Most importantly, however, most of Argentina’s long-standing economic issues have nothing to do with trade but with irresponsible fiscal and monetary policies that have caused several debt crises and an annual inflation rate of just under 100 percent. It is not lack of trade but rather persistent fiscal deficits which cause stagflationary conditions as well as the ‘lack of dollars’ to which the government alludes. When the government takes 100 percent of commercial profits, people keep their money away from it at all costs.

What Brazilians and Argentines need are fiscal reforms that let individuals keep more of their earnings and not just half of them, as is currently the case, but the leftist administrations that now rule both countries are unlikely to advance tax cuts. In the Brazilian case, minister of economy Fernando Haddad has also said he plans to significantly boost public spending, something that the Argentine government has also tried to do in recent years more limitedly as it seeks to abide by a bailout deal with the International Monetary Fund. More taxes, more public spending—neither administration is thinking of fiscal reforms to address their fiscal deficits.

If anything, rather than a good idea, the initial announcement by Sergio Massa and the later comments made by other Brazilian and Argentine officials seem to have been a smokescreen designed to avoid discussing actual reform. Indeed, neither side is interested in advancing free trade or in making their countries more attractive to local and foreign investors. But as long as those goals are off the agenda, economic growth is likely to elude Brazil and Argentina, and their quality of life is unlikely to improve, no matter how strong their protectionist ties get.