The Sur: Implications and Challenges in a Modern South America
Brazil and Argentina have recently unveiled plans to create a common currency. The move would see a monetary union between the world’s twelfth and twenty-seventh largest economies respectively, and the two largest on the South American continent.
With plans to later expand to neighbouring countries, it could create the world’s second largest currency bloc, second only to the Euro. The eurozone currently accounts for 14 per cent of global GDP, while a currency union involving all Latin American nations would account for 5 per cent.
As the euro was for the European Union in 1999, the currency may serve as the unifying economic force for the Mercosur trading union. The ‘sur’ (meaning ‘south’) would initially run in parallel to the Brazilian real and Argentine peso, and would help in removing reliance on the US dollar.
Originally, Argentine Minister of the Economy Sergio Massa announced the currency as a common currency, akin to the Euro or the CFA Franc. Such a currency would see Brazil and Argentina abandon their own currencies, the real and Peso respectively, and see them both adopt the sur, which would be overseen by a new form of Central Bank.
President da Silva of Brazil later said that what is planned for now is not a move towards a common currency, but rather a “trading currency,” so that transactions between them could move from peso, to sur, to real, rather than peso to USD to real. This would aid both countries, particularly Argentina to sever its reliance on the USD and would prevent fluctuations in the USD’s value relative to either currency affecting trade, essentially streamlining trade between the countries and giving them greater control.
The original announcement of a common currency was met with surprise by many investors and financial analysts. While Brazil continues to grow and is set to become one of the world’s preeminent powers, Argentina continues to be stricken with high debt, high inflation, and a struggling economy with a weak industrial base.
Argentina’s Continuing Woes
A common currency would see the largest economy on the continent shackled to one of the continent’s most troubled. Last year, Argentina had the sixth worst inflation rate in the world, behind only Zimbabwe, Lebanon, Venezuela, Syria and Sudan.
Argentina has been wracked with financial difficulties for decades, and has been largely restricted from access to international markets following its 2020 default. Inflation now stands at 100% and depositors continue to abandon the peso in favour of more reliable currencies like the USD, weakening the peso further.
Argentine Government debt in September 2022 was 238% of nominal GDP. Successive governments have failed to tackle spiralling prices and continue to borrow and spend. Instead of taking the necessary actions required to control inflation, this worsens the situation. Argentina is now in negotiations with the International Monetary Fund to prevent further default, as it seems unlikely it will be able to meet its 2023 goals for foreign currency reserves, taking into account the war in Ukraine and a drought effecting large exports like soy and meat.
The move is part of President Lula de Silva’s attempt to reassert Brazil’s influence in the region and reaffirm ties, which had been strained under the tenure of his predecessor, Jair Bolsonaro. Bolsonaro had a strained relationship with Argentina’s left-wing President, Alberto Fernández. The announcement came at a conference to encourage further economic integration in the region. The sur is seen as a possible means to bolster this integration, while helping Argentina in its struggle to replenish its Dollar reserves.
Argentina is Brazil’s third largest export partner and fourth largest import partner, behind only China and the United States. Meanwhile, Brazil is Argentina’s largest export market, and largest import market. The sur would allow Argentina to continue purchasing Brazilian industrial goods, by better controlling the purchasing power of the peso relative to the real.
Many believed that the announcement was nothing more than a theoretical project doomed to fail, given the disparity between the two nations. Even with the less ambitious plans for a trading currency, there are significant challenges. Brazil and Argentina proposed a similar currency in 1987 called the ‘gaucho.’ That plan never went passed the declaration.