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The Roadblocks to a Common Currency in Latin America: Part 2

Creating a currency union is not a silver bullet solution to the economic challenges facing Latin America. In addition to economic convergence and political stability, a currency union would require a high degree of political cooperation and coordination between the countries in the region.

One major obstacle is that a common currency would favour one of the countries over the other in the short term. Argentina, with its high inflation rate, would stand to gain more from adopting a stable currency like Brazil’s real. Brazil’s central bank has successfully kept inflation in check since 2004, while Argentina has had to resort to capital controls to manage its currency. Furthermore, a common currency requires more than just the adoption of the same banknotes. Countries must have stable political systems and a shared view of macroeconomic policy. They must remove trade barriers, harmonize business regulations, and enable the free flow of labor and capital between them. In short, a common currency is the last step in a long process of economic integration, not the first.

The EU Example

The example of the European Union (EU) is instructive in this regard. The EU has a common currency, the euro, but it also has a range of institutions to support it, including a central bank and a system of fiscal transfers. These institutions help to ensure that the benefits and costs of the common currency are distributed fairly across member states. The EU also has mechanisms for resolving disputes and enforcing rules, which are critical for maintaining trust among member states.

Latin American nations would need to develop similar institutions and mechanisms to support a common currency. They would also need to address basic infrastructure problems, such as the hours of delay motorists face at the border between the two countries. Such issues undermine trust and make it difficult to build the kind of cooperation necessary for a common currency to succeed. In addition, a common currency like el sur would need to be backed by reserves in gold or a reserve currency, such as the US dollar. This is ironic, given that the aim of the currency is to reduce dependence on the dollar. However, without such backing, the currency would lack credibility in international money markets.

No Faith, No Credit

Alexandre Schwartsman, who worked at the Brazilian central bank in the 2000s, is sceptical that el sur could ever become a fully operational joint currency. He argues that the project is premature and that countries need to address more fundamental issues before adopting a common currency. This includes building trust, resolving disputes, and creating institutions to support economic integration.

In conclusion, the idea of a common currency is an attractive one, but it faces significant challenges. These include divergent macroeconomic conditions, lack of trust, and inadequate infrastructure. To make a common currency work, the countries would need to address these issues and develop the kind of institutions and mechanisms that have made the euro a success in Europe. However, the process of economic integration takes time, and the adoption of a common currency should be the last step, not the first. Before that can happen, Latin American nations will need to build the necessary foundations for economic cooperation and build trust between them.