Could the “sur” become the “euro” of Latin America?
A new president’s first foreign visit is a politically significant event, full of symbolism, and above all a moment in which the new administration can present its vision and ambitions. President Luiz Inácio Lula da Silva chose Argentina, Brazil’s neighbor and fellow Mercosur member, for this visit. The memorandum of understanding he signed with his Argentine counterpart included a reference to the creation of a South American currency. The press reacted immediately, inevitably drawing a parallel with the euro.
The memorandum of understanding clearly states that the envisioned “new South American currency” would differ from the euro in three fundamental ways. First, it would be a common currency, while the euro is a single currency. Unlike the European currency, which replaced all the national currencies of the countries that adopted it, the Brazilian real and Argentine peso would remain sovereign currencies, regulated by the respective central banks, and the two countries would not give up any instrument of national monetary policy. In other words, the Brazilian and Argentine governments would fully preserve their ability to intervene in their economies, expanding or contracting them through the self-determination of exchange and interest rates.
Second, the new currency, which for simplicity’s sake we will call the “sur,” would differ from other fiat currencies such as the euro in being digital. In practice, the sur would be like a cryptocurrency. However, instead of decentralized control by blockchain computing power, confidence in the sur would be ensured by the institutional power of central banks. This virtualization of the common currency entails considerable cost advantages, whether in its issuance, which would tend toward zero marginal costs, or in transaction costs, which would be sharply lower, particularly if the sur does not remain confined to Brazil and Argentina but is also adopted elsewhere in Latin America.
Third, the sur would differ from the euro in terms of creation process circumstances. The construction of the euro followed nearly 50 years of a common market, in which successive enlargements demanded strict economic, legal and political requirements from candidate countries. This means that before adopting the single currency, the member countries had already limited a large part of the spectrum of their economic policies. After entering the eurozone, the member countries, quite simply, had to give up their national monetary policies. On the other hand, although this South American common currency would be created in two Mercosur member countries, the scope of these countries’ economic, legal or political sovereignty would not be reduced.
For these three reasons, when evaluating the question of creating a Latin American currency, Brazilians should not just compare the narrow advantages and disadvantages, but also consider the Brazilian government’s long-term intentions regarding the construction of this currency and other instruments for strengthening Mercosur.
The creation of the euro played a fundamental role in strengthening economic cohesion between European countries. As well as eliminating exchange rate costs in intra-community transactions, the single European currency has been able to challenge the supremacy of the U.S. dollar in extra-community transactions, enabling the eurozone’s countries to reduce their reserves of American currency. The euro strengthened against the dollar almost immediately, becoming a strong currency with the capacity to issue debt on international markets. Access to better funding conditions boosted the economies of the more fragile countries, ending a structural competitive disadvantage they had experienced for decades.
Furthermore, the growth in European cohesion was only possible thanks to the commitment of member countries with stronger economies. Brazil is the largest economy in Latin America, which gives it the greatest responsibility in building Mercosur. A common currency shared by just Brazil and Argentina may not fit into the most orthodox monetary policy recommendations, but if it provides the
starting point for a multilateral common currency for most Latin American countries, then it may threaten the hegemony that the U.S. dollar enjoys today in commercial transactions in the Southern Hemisphere. If that happens, the participating Latin American countries will be able to reduce their dollar reserves and invest in strengthening their respective currencies, dispelling the ghost of the dollarization of their national economies – a phenomenon that incidentally is happening in Argentina and Venezuela.
The single European currency was founded in a strong economic community of European countries. Similarly, but in reverse order, a common Latin American currency could pave the way to a strong economic bloc and integration between the many countries of Latin America, leading to a large Mercosur, which will be an inevitable part of the construction of the global economy. This is a responsibility that Brazil cannot ignore.
