Translation Introduction:

The experience of Europe's single currency (euro) is unique and difficult to replicate. This is evidenced by years of talk in Latin America about the launch of a single currency between two or more countries, which was recently renewed when the presidents of Argentina and Brazil announced their intention to launch a common currency called El Sur. Could Latin America have its own single currency soon? That's what Gisela Salem-Baer, associate editor of The Atlantic, discusses in a report published by the American magazine.

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"There is nothing more liberating than the brotherhood of nations. Nations that unite from the depths of history to own the future," said the presidents of Argentina and Brazil earlier this year. This rhetoric of liberation and fraternity recalled the ambition of South American independence hero and statesman Simón Bolívar, but the reality is more modest than these speeches, as it was their elegant way of declaring their desire to launch a common currency known as El Sur (meaning South).

"Simón Bolivar" (social media)

The plan to unify the currency is the latest in a historically long line of treaties and proposals to create a bloc with stronger ties in Latin America. As former Ecuadorian President Jamil Moawad told me: "The ideas of integration in Latin America are very old. It's a big dream, but it's always failed." During Moawad's presidency, at the end of the nineties of the last century, his country faced a severe economic crisis that led to the collapse of the local currency, and the solution he offered was a desperate solution, which was dollarization (the trend to actually adopt the dollar in the local economy). In theory, dollarization is somehow the antithesis of the El Sur coin. As a result of dollarization, Ecuador then effectively joined a third-party currency union, but without, of course, any of the benefits of membership.

"Some coverage has suggested that El Sur will be the second largest currency union after the European Union, but that is wrong," said Athanasius Orphnidis, a professor of economics at the Massachusetts Institute of Technology, adding: "The largest currency union is the United States." The Constitution, which established the U.S. federal government in 1789, made the creation of funds a central point. Without this system, the dollar might not have been so strong, and US states might even have conducted their own legal tenders and had the authority to set their own interest rates.

Latin American countries control their money, but sometimes lose that control. This usually happens either because the central bank is pressured to do what the government dictates to print money rather than to implement good fiscal discipline, or because of the volatility of the global economy that raises vital import prices. Only smaller economies tend to have weaker currencies. When Moawad decided to adopt his country's U.S. currency, it wasn't because he believed in dollarization, he told me, but because he had no better choice.

The Latin Unity Dilemma

One reason for the difficulty of establishing a bloc or federation among Latin American countries has to do with the characteristics that make them distinct nations in the first place. (Getty Images)

Attempts to unite Latin America into a cohesive union have often failed. Bolivar, the leader of independence campaigns in six Latin American countries, is perhaps the most celebrated for those efforts. In 1819, Bolívar proclaimed a single state called "Gran Colombia" comprising the territories of the countries now Venezuela, Colombia, Panama, and Ecuador. In 1826, Bolívar attempted to assemble an association of larger republics in the Americas with an army that could protect them from European powers. The only country to endorse the initiative was the one ruled by Bolivar, which collapsed over time. The Federation of Gran Colombia disintegrated in 1831, several months after Bolívar's death.

One reason for the difficulty of establishing a bloc or federation among Latin American countries has to do with the characteristics that make them distinct nations in the first place. The Spanish Empire insisted on preventing trade between its colonies, dividing the territories under its control into Crown kingdoms, general provinces, and territories, each with its own bureaucratic system. When these colonies gained independence, their armies were weak and unsuitable for annexing neighboring territories, according to historian Alfredo Ávila. These postcolonial states have therefore remained separate and even more disintegrated, such as the Kingdom of Guatemala, which eventually became five Central American countries.

In the second half of the twentieth century, the momentum of integration – the IMF and the World Bank – created similar institutions in Latin America, all pledging to launch regional forums or freer trade. The sixties brought to the region the formation of the Andean Pact and the Latin American Free Trade Organization. However, both bodies weakened, and their revival by re-promoting them in subsequent decades failed. The two most promising allies so far are the Mercosur, a customs union founded in 1991, and the Pacific Alliance, a trade bloc founded in 2011. But neither has fully met its commitments: Mercosur has allowed too many exceptions, leaving the region far from being a duty-free zone, and the Pacific Alliance has largely failed to increase trade among its members.

What sets Latin America apart from other fragmented parts of the world is its countries' long-standing talk of unity. (Shutterstock)

Therefore, Latin America today remains fragmented, with only 15% of Latin America's trade within the region, compared to 55% of European intra-European trade, and 38% of U.S. and Canadian intra-North American trade (the massive interdependence and trade between countries in one region is one of the necessary conditions to facilitate the establishment of a trade and economic union in it)*). Only one-third of flights around the continent connect Latin American cities, and the Pan America Highway, designed to connect Latin America, is filled with mud during the rainy season, creating grooves that can flood trucks.

This lack of links between Latin countries has placed a huge burden on the industry. According to Shannon O'Neill, a senior fellow in the Latin American Studies Program at the Council on Foreign Relations, "No country, not even Brazil, has a domestic market or labor market large enough to manufacture products that compete with Asia. "(Latin countries), for example, can't build their own cars."

Latin America is not alone in its isolation. South Asia, the Middle East, and sub-Saharan Africa have failed to form grand alliances, and rank lower than in intraregional trade. What sets Latin America apart from other fragmented parts of the world is its countries' long-standing talk of unity. Moreover, the idea that Latin American countries share the Spanish language, religion (the continent's dominant Catholic Christianity)* and colonial history, and that they can build on those elements to form a larger union, is an idea that has been re-emerging in the minds of people and decision-makers in the region. Portuguese-speaking Brazil is included in the federation because of its location (at the heart of Latin America)* and its cultural similarity. The appeal of this idea seems strong enough to inspire systematic integration efforts, but it is not enough to make it work.

The single currency. The Impossible Dream

In order to make El Sur work, Argentina and Brazil will first have to lift barriers to trade, strengthen political ties, harmonize trade laws, and take steps to allow the free flow of labor and capital between the two countries. (Getty Images)

Paradoxically, sometimes talk of international cooperation comes from unexpected quarters. In 2019, then-Brazilian President Jair Bolsonaro proposed launching the peso-real, a currency he said his country would share with Argentina, which was also ruled by a right-wing leader. According to Bolsonaro at the time, the move would have been "insurance against the infiltration of socialism." Brazil's central bank issued a statement stating that the new currency project would not take place, and the next day, Bolsonaro insisted on going ahead with it, but did not raise the issue again until the end of his presidency. Then in 2021, Mexican President André Obrador proposed building "something in Latin America along the lines of the European Union, but more in line with our history, reality and identity." Obrador did not elaborate at the time on what exactly this was, saying only that it involved a complex process, and that Bolivar's dreams should be kept alive on his 238th birthday, and that Obrador seems to have abandoned that plan as well.

Along with Bolivar's dream, the EU presents the basic model. However, his upbringing had a completely different purpose. After World War II, Western leaders believed that linking Europe's economies to each other guaranteed peace. What began as an agreement on coal and steel production between France, Germany, the Netherlands, Belgium, and Luxembourg gradually became a common market, after which it added its own institutions and closer relations among its members, allowing for the free flow of labor, and finally, in the nineties, plans for a single currency were adopted. After the economic collapse of 2002-2008, the heavily indebted southern European countries were forced to endure harsh austerity measures imposed by the eurozone's governing authorities, bringing Greece close to withdrawing from the bloc.

In light of this long and thorny history, the first printing of El Sur is a long way off. "It's crazy," wrote former IMF director Olivier Blanchard, while Nobel laureate in economics Paul Krugman expressed his opinion, which Blanchard usually disagrees: "It's a horrible idea." As the EU experience suggests, a single currency requires countries with stable political systems and a shared vision of macroeconomic policy. In order for El Sur to succeed, Argentina and Brazil will first have to lift barriers to trade, strengthen political ties, harmonize trade laws, and take steps to allow the free flow of labor and capital between the two countries. According to Urphnidis, a professor at the Massachusetts Institute of Technology, "You can't just say we're going to adopt a common currency. It doesn't work that way."

El Sur needs member states' central banks to guarantee it with gold holdings or currency reserves, which will often be ironically in dollars. (Shutterstock)

One of the main obstacles to El Sur is that the common currency will serve one party at the expense of the other. In the short term, Argentina will have much more to gain. Brazil has a strong and stable currency, protected by an independent and cautious central bank, and has maintained inflation rates of only 9% since 2004. In contrast, Argentina's inflation rate reached 95% last year, which the president blames on the media. Brazil's monetary policy has credibility in global financial markets, and Argentina has had to impose capital controls to prevent people from buying dollars.

Similar to other currency plans or payment methods developed to replace the use of the dollar in trade in Latin America, El Sur needs member states' central banks to guarantee it with holdings of gold or currency reserves, which will paradoxically be in dollars. Alexander Schwartzman, who worked at Brazil's central bank in the early millennium, expressed doubts about whether El Sur, once realized, would one day be able to function fully as a common currency.

The Argentina-Brazil project is premature, as the single currency requires many other forms of cooperation to succeed, with the use of the banknotes themselves being the last, not the first, step. Before the two countries are ready to share the same currency, they first need to address fundamental issues such as the late hours drivers face in order to cross the border between the two countries in the first place. Until the way is paved for other forms of cooperation, it seems that El Sur will also have to wait.

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This article is translated from The Atlantic and does not necessarily reflect Meydan's website.

Translation: Hadeer Abdul Azim.