“This is crazy,” former IMF chief economist Olivier Blanchard said without further explanation, when he heard talk of the south, a common currency for Argentina and Brazil.
“A terrible idea”, added Paul Krugman, who did include a reasoning: for the Nobel Prize in Economics, sharing currency would only be studyable if each of the two countries were the main trading partner of the other and their economies did not present so many differences.
Neither of the two conditions are met.
Brazil is the market for 14% of Argentina's exports and its main trading partner, but the equation does not work the other way around: Argentina ranks third in Brazilian exports, far behind China and the United States.
The differences in the economy are also evident.
In Brazil, inflation did not reach double digits last year and its foreign currency reserves exceed 300,000 million dollars, while Argentina ended 2022 with a 95% rise in the CPI, more than 10 exchange rates and reserves. falling until it pierced the barrier of 40,000 million dollars in mid-February.
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Does that mean that Alberto Fernández and Luiz Inácio Lula da Silva's announcement of moving towards a shared currency made at the end of January has neither head nor tail?
According to the economist and member of the board of directors of the Central Bank of Argentina Jorge Carrera, the answer is no.
Although neither of the two governments have yet given the details, he says, what is clear is that in a first phase the objective of the project will never be a single currency that replaces the respective national currencies, in the style of the euro.
In any case, a shared currency for foreign trade operations that facilitates exchange between the two nations.
"What Blanchard says about madness is because someone will have told him, or he himself will have read in haste, that it was a single currency for Mercosur, but here the word 'single' is the one that must be crossed out," says Carrera.
"The proposal is minimalist and therefore has more possibilities of viability: a currency that can function as a unit of account for bilateral trade."
There has been talk of linking the price of the south to that of a basket of goods in each of the two economies, which would leave out the problem of artificially making it cheaper for Argentina, the country with the highest inflation.
In the absence of details, the mechanism that Carrera imagines is a daily compensation of the souths exchanged by the two central banks.
A scenario in which the currency could function as an accounting entry, without physical banknotes, with an automatic conversion into the currency of each country.
It could be argued that this daily compensation system would also work without the intermediation of the South: if each commercial agent uses its own national currency, the central banks could calculate at the end of the day which of the two has to compensate the other for having imported more than what you exported
But the advantage of putting the south in the middle of the operation is that the commercial agents of the two countries would thus use the same reference price to know how much they are buying and selling for.
Skipping the market for buying and selling dollars, the current reference currency in the region, and starting to use its own currency would imply a reduction in transaction costs and, therefore, an incentive for trade between the two countries.
These costs are especially high in a country like Argentina, where the chronic shortage of dollars has led the government to impose controls on the acquisition of the currency.
"After soccer, the second national sport in Argentina is buying dollars, because we haven't had a stable currency for decades and nobody saves in pesos," says Elisabet Bacigalupo, from the Argentine consultancy Abeceb.
"That's why we have capital controls and trade controls to avoid devaluation, which is what would happen if you left the market in a context of excess demand for dollars."
As Bacigalupo explains, for an Argentine company to be able to import today, it must first obtain permission from the Central Bank to acquire the dollars with which to pay its foreign supplier.
A process of months that leaves out smaller companies without financing from their suppliers.
Despite this, he says, the creation of a new currency does not solve the underlying problem in the bilateral relationship, which is "the structural trade deficit that Argentina has with Brazil."
In the November 2022 measurement, Brazilian exports to Argentina exceeded imports from the same country by 2,238 million dollars.
But, as Carrera says, the deficit is never the problem, but rather what is done with it, "how it is reduced."
“It is the same problem that countries like Spain face in Europe, which have a trade deficit with Germany, for example,” he explains.
In addition, he says, the bilateral trade relationship will change in a short time, when the construction of a gas pipeline that will allow Argentina to "replace Bolivia as Brazil's main gas supplier" is finished.
“Argentina currently imports 13,000 million dollars from Brazil, but if the system were more fluid and had these benefits in transaction costs, which save you 5% or 6% in costs for trading with that currency, the comparative advantage it will cause more trade.”
Comparison with the trade deficits of European countries has its limits.
To begin with, because it is more difficult for Argentina to obtain the necessary financing to cover them.
Could Brazil take charge of saving that problem with new lines of credit to its neighbor to the south?
According to Thierry Larose, from the Swiss manager Vontobel, it would not be the most sensible thing to do for a country like Brazil, with a very healthy balance of payments and level of reserves.
“It wouldn't do much good except to show a willingness to help another country that is a close trading partner,” he says.
And if this is the first step in a process that ends in a single currency for the countries of South America, in the style of the euro?
If that is the intention, it does not make much sense to talk about it now because it would be a decades-long project, says Larose, "much further than the mandate of the current presidents."
It is true that with the current macroeconomic disparities between the two countries it seems impossible, or “insane”, in Blanchard's words.
But, as Philip Pilkington, host of the Multipolarity geopolitical podcast, says, when the euro plans began, there were countries with widely disparate inflations and exchange rate fluctuations.
"Italy, especially, had back-to-back devaluations of the lira, and in fact the goal of the euro for those countries was to discipline their economies, and in that sense it worked."
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