A Latin American common currency? Not really.

This analysis is excerpted from our weekly newsletter PIIE Insider. To receive exclusive analysis, information on PIIE virtual events, and more, subscribe to PIIE Insider here.

Anjali Bhatt (PIIE)

The presidents of Brazil and Argentina caused quite the stir with an announcement this week on their intention to ?discuss a “common South American currency”?for?financial and commercial transactions. Brazilian president Luiz Inacio Lula da Silva (Lula) made further news by showing up at a summit of the Community of Latin American and Caribbean States (CELAC), a group that former president Jair Bolsonaro withdrew Brazil from in 2019. The presidents also called for strengthening and using Mercosur, a trade bloc that includes Paraguay and Uruguay, as a platform to advance regional integration.

The proposed common currency—possibly the “sur” (“south” in Spanish)—would not be an actual currency that could replace the Brazilian real or Argentine peso (or become a Latin American equivalent of the euro) but a unit of account to foster bilateral trade between the two countries to reduce reliance on the US dollar. Brazilian finance minister Fernando Haddad clarified that the goal of the “common unit of trade” would be to facilitate Argentine purchases of Brazilian exports without drawing on its dollar reserves. Argentina, battling an annual inflation rate of nearly 100 percent, has been using its foreign currency reserves to pay down dollar-denominated foreign debt (including over $40 billion it owes the International Monetary Fund) and to intervene in domestic markets to try to arrest further ?depreciation of the peso. The central bank is reluctant to use its dwindling dollar reserves to pay importers to trade with Brazil in dollars, so this alternate unit of account could help maintain trade between the two countries. For its part, Brazil wants to expand exports of manufactured goods to Argentina.

As part of the nascent initiative, working groups from finance ministries in both countries will develop proposals for “foreign trade and transactions between the two countries that is done in a common currency,” Lula told reporters, while Haddad said a clearing house with a common currency to settle accounts may be created. A common “regional unit of account” would have to align financial regulations between the two countries. Given the vast difference in regulations and economic conditions between Brazil and Argentina, their central banks would have a lot of distance to cover before any meaningful convergence of economic policy.

Any road to a common unit of account—let alone actual currency—in Latin America, even between just Brazil and Argentina, will be very long and full of obstacles. After all, it took Europe over three decades to achieve the euro…and that was an entirely different project, in terms of political and economic context, the global economy, and goals. A strengthened Mercosur is probably more achievable, but no one can argue the two presidents are not dreaming big.

To receive exclusive analysis like this, information on PIIE virtual events, and more, subscribe to PIIE Insider here.