Brazilian entrepreneur, President, CEAL Conselho Empresarial da América Latina – Brasil
The visit of Brazilian President Bolsonaro to his Argentine counterpart President Macri, was surprising for some ideas that have not been heard for many decades in our hemisphere. Already during the election campaign in Argentina, Brazil’s president left no doubt as to the support for re-election of his colleague Macri in the second half of 2019.
The economic news from Argentina is not good, but the value of the strategic partnership between Brazil and Argentina is considered of great strategic importance in the continent. The debate on the fate of this partnership involves the immediate implementation of some actions, such as, the closure of the Mercosur-European Union Agreement, and the facilitation of trade between Mercosur countries. From this rather immediate understanding of the effect of the elections, President Bolsonaro launched the challenge of a single Peso-Real currency for the continent, starting with Mercosur. The surprise is general, since in the first moment we think of the enormous Brazilian challenge of stabilizing its economic structure by the radical reforms that are ahead, like the New Social Security, State Reform, Tax Reform and Politics. In Argentina, the situation is not different, due to the stabilization of the currency, the reduction of inflation and the privatization of state services
How in this situation would it be possible to think of a single reference currency, called Peso-Real? It seems more like an impossible South American mission.
However, we have an antecedent in the formation of the Euro. Maybe this can teach us something.
Europe, which emerged from one of the bloodiest world wars, has sought successively its integration since the 1950s, when through the Treaty of Rome in 1957, it established policies aimed at improving economies, eliminating trade barriers and promoting the circulation of workforce and capital between European countries. In 1979, new progress came about with the creation of the European Monetary System.
The most significant step in moving towards the European currency was to sign the Maastricht Treaty in 1992, which gave the name of “European Union” and promoted Economic and Monetary Union (EMU). According to them, national currencies will give rise to a single European currency – if the participating countries meet a number of economic conditions. The most important of the “Maastricht criteria” imposes that a country’s budget deficit cannot exceed 3% of its Gross Domestic Product (GDP) for more than a short period. The public debt may not exceed 60% of the same GDP. Prices and interest rates should also remain stable, as should the exchange rates between the currencies of the participating countries.
The single European currency, the Euro, emerged on January 1, 1999. From that moment, the European Central Bank became responsible for the monetary policy that is defined and executed in Euros. Currency exchange operations in Euros started at a rate close to $1.18 per euro. The Euro remained a “virtual” currency in the first three years, mostly used by banks and financial markets. On 1 January 2002, the euro became a “real” visible and tangible currency, the date on which euro banknotes and coins came into circulation. At the same time, the period of withdrawal of national banknotes and coins began, ending on February 28, 2002. As of this date, only the Euro has acquired legal tender in the euro zone countries. Like the launch of the currency itself, the introduction of the new currency into 12 European countries was a historic event that required years of meticulous preparation and planning. The countries had to face many challenges, difficulties, and risks involving the European Central Bank (ECB), the central banks and their governments.
Looking at the Euro’s historical evolution, the idea of creating a Peso-Real clearly shows that from idea to realization in a South American ecosystem, it would have to consider the improvement of the Mercosur structure with its established mechanisms to start convergence at the same time as the EU, or say, 13 years. A fundamental aspect of this is to have the vision of a decade of transformation, the union of purposes and the determination of the criteria to be met so that the system is sustainable and the participants could create coherence in their states for joining the system. If we look at the Maastricht criteria for South America, some countries today would be able to participate, such as Peru, Paraguay, Chile, Colombia, Brazil (as long as it has its reforms approved), Uruguay and others. Argentina, Bolivia would face some major challenges, not to mention Venezuela. However, a start could be made with the greater objective of establishing the criteria for a Real-Peso system of economic stability and making possible adhesion and successive entry. The reformulation of this new Mercosur conceived in these frameworks, allowing the entry of more member countries.
There are a number of advantages in having a single currency, which were the main motivation for the creation of Peso-Real:
- Growth of the domestic market due to the increase in purchasing power of the population
- More choice and more stable prices for consumers and citizens
- More security and more opportunities for companies and markets
- Greater stability and economic growth
- More integrated financial markets, increased investments and increased employment
- Greater importance of South America in the world economy
- A concrete symbol of Latin American identity
The advantages of Peso-Real by sectors
- Decrease in transaction costs due to elimination of exchange rates
- Reduced risk in business with non-South American countries
- Easier to use credit due to lower interest rates, which favors investment
For the citizen:
- It is easier to compare prices between the countries of the Real-peso zone;
- Facilitates travel through South America;
- Wages, savings and reforms become more stable
The disadvantages of the single currency
- Loss of sovereignty on the part of the governments on the exchange rate and the interest rate, as autonomous instruments of economic policy, since the decisions at this level are taken by the Central American Bank (BCSA)
- Inability to use devaluations to become more competitive in exports and tourism
The need to harmonize healthy and inclusive economic policies greatly increases democratic institutional security and intra-regional growth by giving strong negotiating autonomy to other currencies and regions. The EU, despite its movements such as Brexit and the existing problems with the new states, is still the best political innovation of 21st century integration. South America, and I do not exclude Latin America, which has a cultural, historical, and linguistic identity much more harmonized than Europe, can leverage enormous potential allies of 21st century technologies that accelerate the progress of all those involved in giving a greater and more equal wellbeing to its citizens.
New Politics, such as being bolder, more courageous, and formulating joint visions, even if they seem now impossible for service, should receive credit to think of a better future and see a Peso-Real in 2032 happen!