From
Beatrice Nofal
Former Undersecretary for Industry and Foreign Trade 1986-1988. Currently he is a member of the Executive Committee of CARI and is a partner of Eco-Axis SA Consulting
The proposal for a common currency in Mercosur was launched during the visit to Argentina by the President of Brazil, Luis Inacio Lula Da Silva, on 23 and 24 January. This is the fourth time that the common currency (MOC) has been contemplated, but without a concrete implementation program or results. The Presidents of Brazil and Argentina, and their Ministers, have clarified that this “South” MoC it would not be a single currency that replaces the currency of reais and pesos, and that it is a long-term project to facilitate trade without resorting to the dollar.
The first proposal was made during the Argentina-Brazil Integration Program, in July 1987, under the presidency of Raúl Alfonsín in Argentina and José Sarney in Brazil. It was agreed to launch a “Gaucho” MoC at bilateral trade exchange in order to make inter-regional payments and facilitate the expansion of tradewhich would be issued and backed by a binational reserve fund.
The second time was at the meeting of the Council of the Common Market (CMC) of 14 and 15 December 1997, in Montevideo, formulated by Carlos Menem, as President – Pro Tempore of MERCOSUR, and Fernando Cardoso as President of Brazil.
The third opportunity was during the CMC meeting in Florianópolis on December 14 and 15, 1999, when Fernando De la Rúa was president of Argentina and Cardoso of Brazil. Argentina presented an ambitious proposal for macroeconomic coordination “a la Maastricht”, with objectives (on inflation rates, fiscal deficit, public debt/GDP, interest rate) and convergence mechanisms, to be approved as a CMC Decision (which would have been mandatory) but it was not achieved, and only the need for macroeconomic coordination was recognized in the Presidents’ Declaration. In 2019 there was talk of the MoC, though no formal negotiationbetween Economy Ministers Pedro Guedes and Nicolás Dujovne, clarifying that it will take years, but the Central Bank of Brazil has denied it.
This story proves it the response of the Brazilian authorities to the MoC was cautious, showing reluctance or skepticism about it. At present, leading international economists have expressed a critical opinion. Paul Krugman, Nobel laureate in economics said so it was a “terrible idea”, who did not know the theory of optimal currency areas; Olivier Blanchard, former IMF chief economist, said yes crazy” (“crazy”). However, a global entrepreneur like Elon Musk (Tesla and Twitter) commented that “it would probably be a good idea” and another regional like Pier Paolo Barbieri (Ualá) said that although it was not realistic at the moment it is a good plan for the future for a real common market with more integration and less protectionism. Less critical political analysts emphasize the goals of promoting regional integration and saving the use of the dollar in intra-regional trade.
It is therefore worth asking whether the MoC in Mercosur is an economically convenient or politically visionary proposition which indicates the final stage of the path of profound economic integration to be followed. Similarly, it is worth asking whether this visionary proposal is feasible or whether it could constitute a distraction from pending and previous matters.
Optimal monetary areas and Mercosur: an advisable proposal?
The theory of optimal currency areas (Robert Mundell, 1961) indicates that a MoC is more appropriate in areas tightly integrated through international trade flows and movements of factors of production (capital and labour). The costs and benefits for a country of forming a monetary union depend on the level of economic integration with its partners.
Based on this theory, Mercosur not an optimal currency area, because it does not constitute an area closely integrated by trade and the movements of factors, capital and labour. The extent of intra-Mercosur trade is small and is declining to reach 11%/12% in 2021. Similarly, exports from Argentina and Brazil to Mercosur accounted in 2021, respectively, for only 17.9% and 6% of its total exports. The movement of the labor factor has not been fully liberalized and that of capital is liberalized for direct investment, but Argentina’s currency restrictions hinder and discourage it.
other extenuating circumstances are not presentsuch as the similarity of economic structures (evidenced by low intra-industry trade except in the automotive sector) and the absence of capacity to transfer fiscal resources to less robust economies.
Finally, the “credibility theory” in the European Union and the advantage of the Bundesbank’s reputation, seems partially applicable. THE The reputation of the Central Bank of Brazil is significantly better than that of Argentina, but it is far from that of the Bundesbank. This was, in large part, due to the difficulty of reversing reputational problems resulting from the long history of high inflation in both countries. The experience of stabilization in Brazil since 1994 has been successful but is young and Argentina’s high inflation is a risk.
Agenda for economic integration: feasible proposal, visionary or distraction?
Only At a higher stage of economic integration, the region will be able to form an optimal currency area.. For this reason, before agreeing on a common currency, Mercosur must discuss, agree and resolve the tasks of consolidation and deepening and macroeconomic coordination. both tasks they are preliminary and necessary steps to achieve a high degree of economic integrationwhich is necessary to realistically address the MoC proposal.
Now, it’s worth asking whether, based on this agenda The visionary proposal of the MoC is feasible in the medium term. If what you want to indicate is the future path to follow in terms of deepening Mercosur, it is more useful Eliminate import barriers within the zone, consolidate openness (with a common external tariff that is not increased or violated) and integration with the world, and promote macroeconomic coordination and harmonization of investment policies. These are the most critical issues, which are stressful and need to be addressed without delay, with concrete and cooperative agreements. The truth is that Brazil and Argentina, in order, must be honest what kind of integration are you committed to: whether they improve the customs union to move towards the single market and the MoC or reformulate it into a free trade area.
In conclusion, given the need to perfect and deepen the customs union, and until a program of concrete and realistic measures is formulated and agreed to resolve outstanding issues and advance macroeconomic coordination, the proposal for a common currency It seems impractical to do and more like a distraction. This, except politically, in the coming months, and under a new impetus for regional integration in Mercosur, led by Luis Inacio Lula Da Silva, said the deep integration program has been agreed and implemented.
Source: Clarin
