AArgentina is running from vaults. As annual inflation hits nearly 100% while the central bank prints bills to cover the government’s budget deficit, local banks are making room for skyrocketing peso supplies. Officials have tightened capital controls. Imports stand still. The government goes through the applications with the IMF to avoid the tenth national bankruptcy since independence in 1816. But on January 22, Luiz Inácio Lula da Silva, Brazil’s President, and Alberto Fernández, his Argentine counterpart, announced that they were beginning preparations for a common currency that would eventually lead to full monetary union. which would couple South America’s largest economy to one of its sickest.
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The idea has a history. First came the “gaucho,” a currency that would replace the Brazilian cruzado and Argentina’s austral until the concept was abandoned in 1988 amid economic turmoil. It was followed by a proposal by members of the Mercosur trade alliance to introduce a common currency sugar, a Venezuela-led experiment that had ambitions to reduce the continent’s dependence on the dollar. As it tends to sell foreign exchange reserves to prop up the peso, Argentina is always short of dollars to service loans and pay for imports. A common currency would create alternative reserves and facilitate neighborly trade. Brazil is Argentina’s largest trading partner. By supporting the idea, Lula, as Mr. Silva is known, gets a reputation boost by being seen reviving regional collaboration.
At least that applies to the idea. The case on the other hand is discouraging. A full union with a common central bank would surely collapse. Economists assess how well countries fit into a monetary union using criteria developed by Robert Mundell, a Canadian economist, that measure economic similarities. Normally, central bankers adjust interest rates for individual economies; In a union, one tariff must suffice for everyone. Interest rates in Argentina and Brazil are a staggering 61 percentage points apart. Their business cycles are completely unsynchronized as their main exports – agricultural versus industrial commodities – are impacted by different global headwinds. Argentina’s troubles are making its downturns deeper and its upswings shorter and flatter.
Another condition set by Mundell is that people and money should move smoothly across borders and act as a means of adjustment when a shock hits one country but not the other. While farm workers in Europe hop between jobs and countries, South America’s poor infrastructure makes travel difficult, and Argentina’s capital controls make it nearly impossible to get paid across borders. If workers don’t end up where they are most productive, artificially high wages could trigger inflation in parts of the union. In addition, Brazil would be forced to bail out its southern neighbor as long as it committed to the common currency. Knowing this, Argentina would have every reason to continue spending irresponsibly.
Brazil is already getting cold feet. Officials have stressed that the new currency would be a complement to the two national currencies, not a replacement, and that it is a long-term project. Other countries are not rushing to join. Lula and Mr. Fernández offered the South American leaders the opportunity at a press conference on January 25: so far nobody has taken it up.
This watered-down union would still put Argentina’s problems at Brazil’s door. There would need to be a monetary policy maker, either a currency board or a full-fledged central bank, to oversee exchange rates. the IMF, to which Argentina owes $72 billion, would be less willing to support the peso if Argentina had another legal tender. To make matters worse, Lula would have to ignore his independent central bank, which has opposed the idea. On Jan. 23, barely 24 hours after the big announcement, Fernando Haddad, Brazil’s finance minister, hinted that the idea would only come to market in the form of loan notes backed by Argentine commodities. That would not be currency at all. But it would borrow more, and that’s exactly what Argentina wanted to avoid. ■
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