by Fernando Iglesias
An episode of enormous relevance, but forgotten, the governments of Brazil and Argentina were a few hours away from announcing the creation of a common currency: the peso-real.
In mid-2019, in the midst of exchange rate instability, the Economy Ministers Nicolás Dujovne and Paulo Guedes, and Presidents Macri and Bolsonaro, had decided to jointly launch this common initiative. A few hours before the announcement, everything failed due to the opposition of the president of the Central Bank of Brazil, Roberto Campos Neto, fearful that the chronic Argentine monetary instability would end up infecting his country.
Lula da Silva's recent statements in favor of the creation of a South American currency put the issue back on the table.
This is a question of enormous importance for Argentina, a country in which inflation has been responsible for all the exponential increases in poverty: from 6.2% to 31.2% between 1974 and 1976; from 9.1% to 34.5% between 1980 and 1983; from 21.2% to 47.3% between 1986 and 1989, and from 35.4% to 54.3% between 2001 and 2002; in all cases, with inflationary indices of three or four digits.
A country, moreover, whose only momentarily successful attempt to reduce inflation consisted, basically, in controlling the monetary issue by tying it to an external anchor: the value one dollar = one peso.
Today, faced with the government's suicidal insistence that the issue does not generate inflation and the galloping inflation that is its consequence, there are two solution proposals on the part of the opposition: that of guaranteeing by law the independence of the Central Bank and that of dollarizing. A single currency with Brazil combines the virtues and reduces the related problems of both proposals.
In any of its variants: bilateral, South American or Mercosur, a single currency with Brazil would subordinate the monetary issue to a foreign Central Bank and to an agreement with a country, Brazil, whose dimensions make Argentina a minor partner and which seems to have learned of its previous inflationary processes; so the Real -which had the same value as the peso in the 1 to 1 of the '90s- is worth 25 times more today.
In this sense, with a common currency, the Brazilian real would play a role similar to that of the German mark in Europe, generating the Euro that put an end to inflation and systematic devaluations in countries like Italy and Spain.
The fact that the value of the Argentine currency is tied to a supranational bank responsible for controlling issuance similar to the European Central Bank, and not simply to a law, would give monetary stability a long-term perspective, much longer than four years management by the same government that would enable the mere reform of the BCRA charter, always within reach of parliamentary majorities and a law that modifies it.
Furthermore, it would end the sad habit of competitive devaluations, those “beggar-thy-neighbor policies” as defined by John M. Keynes that were crucial to the collapse of Convertibility a few years after the Brazilian devaluation.
The monetary association with Brazil also has several advantages over dollarization.
First of all, since Brazil is our main trading partner (13% of our exports and imports), monetary stability and the simplification of calculations and procedures would facilitate the integration of production chains and long-term investment planning.
Secondly, an Argentine-Brazilian currency would associate two similar economies, exporters of commodities and importers of inputs and industrial equipment, which tends to synchronize its monetary needs. Quite the opposite of what happened in the 1990s with the United States, whose completely different productive structure generated opposite needs and created enormous problems of monetary synchronization.
Thirdly, future productivity gains for Brazil and Argentina are expected to be similar, while an association with the US dollar would tie the Argentine economy to another with notable productivity differences, generating a progressive exchange rate lag and competitiveness problems.
A single Argentine-Brazilian currency would also favor the development of Mercosur, currently paralyzed, and regional economic integration, generating an economic space of the scale necessary to stimulate investment and promoting the integration of international value chains.
No less important, it would greatly favors another crucial point for the modernization of both countries: the final concretion of the agreement between the European Union and Mercosur, generating the largest common economic space in the world, governed by only two currencies.
Finally, a single currency with Brazil would have the advantage of anchoring our monetary policy to an external factor, avoiding the inconvenience of the dollar being the currency that performs this function; which makes it politically more viable. Some will see in it the possibility of ending inflation; others will see it as a favorable instrument for regional integration. In any case, its political viability and, therefore, its prospect of approval and long-term duration, is greater.
There are not many reasons for economic optimism at this end of the cycle with devastating consequences. But perhaps in this aspect, the monetary one, the planets have magically aligned. Hopefully we will not let this extraordinary opportunity pass us by.