Possibility of a single currency for Latin America

In recent weeks, an idea has resurfaced at the regional level: creating a common currency for all Latin American countries and establishing a South American central bank. The idea was voiced by former Brazilian leader (2003-2011) and current presidential candidate Luiz Inácio Lula da Silva during one of his political rallies.

“God willing, we will create a common currency for Latin America because we should not depend on the dollar,” the Workers’ Party (PT) candidate said. According to the latest poll by the Datafolha Institute, Lula da Silva currently leads the polls in Brazil by twelve points over his opponent, the country’s current president, Jair Messias Bolsonaro.

An article published in the magazine “Folha from S.Paulo” entitled “A single currency for all of Latin America, is it possible?”, written by the economist, former mayor of São Paulo, and former presidential candidate of the Workers’ Party (PT), Fernando Haddad, and by Gabriel Galípolo, economist and former president of Fator Bank, provides more details about the new single currency, which would be called “Sur” (South).

The goal of the currency, he said, is to advance the process of regional integration and to counter a conflictual international context such as the war between Russia and Ukraine. “As emerging or developing countries at different levels, we all continue to suffer from economic constraints resulting from the international fragility of our currencies,” the text says.

It mentions that the new currency could be used for trade and financial flows between countries in the region and that “each member country would receive an initial endowment of “Sur” under clear and mutually agreed rules.” They would also be “free to introduce it domestically or to maintain their national currency.”

But what would it mean to follow the Western euro model in Latin America? Is a common currency feasible for Latin America?

Latina Press spoke with two economic experts about the implications and challenges a common currency would pose for the region. For Marco Ortiz, professor of economics at the “Universidad del Pacífico”, the main problem lies in the monetary policies of each country, and it must also be examined whether a common currency would be useful for them.

“When you share a currency, you lose your own monetary policy. So it would be as if each country’s monetary policy was conducted by a centralized, supranational or international institution,” Ortiz explained.

The term “monetary policy” refers to the central bank’s regulating the money supply and interest rates to control inflation and stabilize the currency. So, regarding the concept explained, it might be difficult to achieve continental concordance.

“If you think about this type of monetary union, similar to the one that the European zone currently has with the euro, you conclude that for a currency coordinated between all these countries, a harmonization of policies is usually required,” Ortiz argued.

Jorge Guillén, professor of finance at the “ESAN Graduate School of Business”, agrees with Ortiz that the proposal’s implementation would be complex mainly due to the heterogeneity of Latin American countries. This problem also occurs in Europe with the euro.

He also pointed out that this proposal aligns with a populist and regionalist message. “The European countries that are part of the PIGS – Portugal, Italy, Greece, Spain – are in stark contrast to the Nordic countries, which have more fiscal and monetary orders or policies.

Latin America is also very heterogeneous. South American countries contrast with Central American countries. Even within the Andean countries, Peru, Chile, and Ecuador, many differences exist. For this reason, it is pretty complicated to coordinate monetary and fiscal policies to have a common currency,” he said.

In this sense, Marco Ortiz added that another problem of monetary unions is that there are always “anchor countries.” These countries would be tasked with providing economic support to other countries when they have financial problems.

“At the moment, I can’t imagine who could take on this role within Latin America and how Latin American society, with its volatile political systems, could justify it to its population to send money to another country to help it with fiscal issues,” the expert concluded.

It is not the first time such a proposal has been announced in the region. In 2008, the countries of the Bolivarian Alliance for the Peoples of Our America (ALBA) agreed to adopt the “SUCRE” (Sistema Unitario de Compensación Regional) for transactions.

However, this currency has not been able to consolidate and currently has only a symbolic status in the region.

With information from Latina Press

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