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Why a Common Currency for Argentina and Brazil is a Bad Idea

The rationale of the two governments is that a trading currency would boost bilateral trade. But neither country is interested in free tra

The rationale of the two governments is that a trading currency would boost bilateral trade. But neither country is interested in free trade.

Afew weeks ago, Argentine minister of economy Sergio Massa told the Financial Times that his country and Brazil are starting preparations for a common currency. We know that this is an old idea, as it has been floated since at least the 1980s. But is it a good idea?

The way that the news on a common currency for Brazil and Argentina was reported is somewhat confusing. In the FT interview, Massa seemed to suggest that both countries would abandon their current currencies in favor of a new one, just like countries in the euro zone did a few decades ago. But a few days later, Brazilian president Luiz Inacio Lula da Silva said both countries were in talks over a “trading currency,” which is quite different.

The rationale of the Argentine and Brazilian governments is that a trading currency would boost bilateral trade between the two countries, which at first glance seems positive but is actually problematic. Indeed, one only needs to look at recent South American history to notice where the problem lies: Neither country is interested in free trade and, instead, both are quite interested in supporting crony capitalists.

The example of Mercosur, the bloc that Brazil and Argentina created along with Uruguay and Paraguay in the 1990s, is notable because it has failed to expand trade beyond its borders. Contrary to what it was supposed to be, Mercosur has simply turned some protectionist countries into one big protectionist bloc that hurts consumers. This has become so evident that Uruguay is now threatening to sign unilateral free-trade agreements with other nations.

In fact, the one time that Brazil and Argentina came close to advancing freer trade was during the negotiations between Mercosur and the European Union, and this resulted in an agreement in 2019, but circumstances are different now. Back then, the two countries were ruled by relatively pro-free-market governments, and the only reason the agreement never went into effect was because of environmental concerns and protectionist worries on the part of the EU. Today, though, the Left is back in South America: Lula da Silva has already said he will seek to renegotiate the deal in favor of his country’s industrial development, while Argentine president Alberto Fernández has similar concerns and is even more reluctant to move forward. It does not seem, then, as though free trade is in the plans of either administration.

Citing it as an advantage, in the case of Argentina, some officials have stated that an increased level of trade with Brazil would remove the only barrier to economic growth in the country, but this is blatantly false. Although Argentine consumers would certainly benefit from cheaper goods and services, they are unlikely to get them just from Brazil, which is already the country’s main trading partner. Most importantly, however, most of Argentina’s long-standing economic issues have nothing to do with trade, but with irresponsible fiscal and monetary policies that have caused several debt crises and an annual inflation rate of just under 100 percent. It is persistent fiscal deficits that cause stagflationary conditions as well as the “lack of dollars” to which the government alludesWhen the government takes 100 percent of commercial profits, people keep their money away from it at all costs.

What Brazilians and Argentines need are fiscal reforms that let individuals keep more of their earnings and not just half of them, as is currently the case, yet the leftist administrations that now rule both countries are unlikely to advance tax cuts. In the Brazilian case, minister of economy Fernando Haddad has also said he plans to significantly boost public spending, something that the Argentine government has also tried to do in recent years more limitedly as it seeks to abide by a bailout deal with the IMF. More taxes, more public spending: Neither administration is thinking of fiscal reforms to address its fiscal deficits.

If anything, rather than a good idea, the initial announcement by Argentina’s Sergio Massa and the later comments made by other Brazilian and Argentine officials seem to have been a smokescreen designed to avoid discussing actual reform. Indeed, neither side is interested in advancing free trade or in making their countries more attractive to local and foreign investors. But as long as those goals are out of the agenda, economic growth is likely to elude Brazil and Argentina, and the quality of life of their citizens is unlikely to improve, no matter how strong their protectionist ties get.

source : National Review