Guedes defended a single currency in Mercosur; compare with Haddad’s project

Amid discussions of greater trade integration between Brazil and its neighbors, the debate centered around one proposition: the common Latin American currency, or “sur,” as it should be called. Something similar has already been advocated by former President Jair Bolsonaro’s government, but there are differences with the current project.

In his first year in office, Bolsonaro made a statement during a visit to Buenos Aires on the matter. When asked about the losses to Brazil, the former president said that “in every marriage, someone loses something”.

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“Paulo Guedes has done nothing but take a first step towards the dream of a single currency in the Mercosur region: the real weight. As happened with the euro over there, the real weight can happen here, it can happen,” he said . Bolsonaro in an interview (watch the video at the end of the article).

In 2021, former Economy Minister Paulo Guedes again suggested in the Senate Foreign Relations Committee the creation of a single currency for Mercosur, just as there was in the European Common Market.

“Although each state may have its own fiscal policy, Brazil should imagine a greater approximation, with a free trade area,” he suggested. “We could have complete integration and, in this sense, Brazil would take on a function like that of Germany in Europe”.

That is, Guedes and Bolsonaro were trying to implement a single currency project to replace the real. The current government’s proposal, however, is for a common currency. Understand the differences:

Single currency vs common currency

In the European model, defended by the Bolsonaro government, countries are governed by the European Central Bank (ECB), which controls monetary policies for the euro. As a result, the central banks of each country began to supervise the local financial system, mainly. Furthermore, the ECB controls interest rates in all 20 countries of the bloc.

“This is the last stage of regional integration. In this case, each country abandons its currency and there is a period of adjustment to the currency of the region. This is out of the question because there is a big difference between the countries of the Latin America and every country would lose its independence from monetary policy,” says Julia Braga, professor of economics at the Universidade Federal Fluminense (UFF).

In this model there is no need to convert the currency and the business transactions are also done in the same currency, avoiding the dependence on the US dollar.

Perhaps this is the only meeting point between the proposals of Guedes and the Minister of Economy, Fernando Haddad, the attempt to reduce the need to use the dollar.

This is because the proposal for a common currency does not even envisage a physical currency, the “sur” would only be used for commercial and financial transactions between countries, i.e. a virtual unit of value, without paper currency, a sort of URV, to circumvent the restriction of Argentine dollars and facilitate trade between the two countries.

“It would be a kind of currency intended for Brazil’s trade with the Mercosur countries so as not to use the dollar, as Argentina faces a shortage of the American currency. It would be used for export and import between these countries,” explains Professor Julia Braga.

“We should also define the exchange rate between the peso and the south, between the real and the south. nothing more than a bargaining chip,” he adds.

In Haddad’s proposal, no country gives up its own currency and this means of payment only serves to make international trade feasible.

The UFF professor explains that sur is nothing more than an “improvement” of something that already exists.

“There is an international trade flow that does not need the dollar in its transactions. Argentina, for example, would only need the dollar to pay the difference, the balance between imports and exports, in case it runs a deficit with Brazil. In this new system this would not be necessary, you will pay for the purchase by weight, which will be converted into real money and what remains in the deficit can be paid with guarantee contracts”.

“In essence, it is still a credit mechanism. It is an attempt to increase trade between the two countries, which has almost halved in recent years,” he adds.

Due to Argentina’s financial difficulties, the country runs the risk of reducing imports of Brazilian products, which would be negative for both countries. Therefore, the two governments are trying to create a financing fund for the export of Brazilian products.

The measure aims to implement a credit bank for contracts for commodities, such as oil, gas, wheat and soy, produced on a large scale by Argentines, to replace the dollar, since the neighboring country has difficulty finding the american currency.

The idea is to guarantee the Brazilian government insurance in the event of default or devaluation of the Argentine peso, without interfering in the trade balance between the two economies.

In an interview with journalists this Monday (23), the finance minister did not miss an opportunity to sting his predecessor, Paulo Guedes.

“My predecessor defended the single currency, that’s not what we’re talking about, it’s not about Paulo Guedes’ idea, it’s about going ahead with the planned tools that didn’t work satisfactorily,” Haddad said.

“We are not defending a single currency. We are defending a different engineering than payment in local currency, which hasn’t worked, but it doesn’t reach the stage of monetary unification, as happens with the Euro”, he added.

Bolsonaro defends the single currency

Project would be harmful to Brazil, experts say

According to the Indec Statistics Institute, Argentina closed 2022 with inflation of 94.8%, after the consumer price index rose by 5.1% in December, against 4.9% in November. The expectation is that prices in the country will continue to rise by the end of the year.

Additionally, Argentina was left out of several trade deals due to a $40 billion debt to the International Monetary Fund (IMF), acquired in 2018.

With this, entering a more stable currency, such as the real, would be a “joy” for the ‘brothers’, explains Leonardo Trevisan, professor of economics and international relations at ESPM.

“This would slow down Argentine exporters’ search for dollars, it’s their Achilles’ heel. They can’t afford travel, medicines. They’ve also created the ‘World Cup Dollar’, for people who would go to watch matches in Qatar. This situation reveals an absolute shortage of dollars,” he says.

Therefore, the single currency project faces resistance among Brazilians.

Igor Lucena, PhD in International Relations at the University of Lisbon, says that due to the discrepancy in the social, political and economic situations of Latin American countries, the process must be time consuming and disadvantageous for Brazil.

“Europe took 30 years in this process, when the countries were already similar economically. The dream of an integrated currency in Latin America is very far away, in this project Brazil would be a payer of bills for other countries, in practice, it would only benefit Argentina. The government must calmly explain what its intentions are,” he says.