Why the single currency proposed by Lula in Latin America has everything to go wrong


A single currency for all Latin American countries is the new economic idea of ​​the PT. “We will restore our relationship with Latin America. And God willing, we will create a currency in Latin America, because there is nothing like depending on the dollar,” former President Luiz Inácio Lula said, linking religion to financial issues, during a an event with the deputies of the PSOL on the last day 30 of April.

That same week, former São Paulo mayor Fernando Haddad and economist Gabriel Galípolo, a collaborator in Lula’s economic campaign, defended the idea in an article published in Folha de S. Paulo.

“The creation of a South American currency is the strategy to accelerate the process of regional integration, constituting a powerful instrument of political and economic coordination for the South American peoples. This is a fundamental step towards strengthening regional sovereignty and governance, which will certainly prove decisive in a new world”, specifies the text.

It should be noted that the inconsistencies are already beginning in the perimeter of the currency: Lula spoke of a single currency for Latin America, Haddad limited the currency to South America. Lula also said that “God willing” the currency will be created. It’s unclear what his plans are for the economic future of Latin (or South) America, but even the creator of the concept of a single regional currency didn’t think it was a good idea for Mercosur.

The problem of common exchange

In September 1950, the edition of the academic journal The American economic journal came into the hands of the most renowned American economists containing an article by Canadian Robert Mundell entitled “A Theory of Optimum Currency Areas” optimized “, in free translation). In it, the researcher explained what would be the conditions for the creation of a single currency for countries with similar characteristics to be not only viable, but beneficial for all those involved in the process.

It was necessary

years for the text to earn him a Nobel Prize in economics: in 1999, Mundell will be celebrated as the “father of the euro”, even if he only considered himself a godfather, or one among others. The following year, the economist gave an interview to Folha de S. Paulo in which he declared that common exchange “would not necessarily be the best path for Mercosur”. At the time, the idea of ​​a currency that would unite Brazil and Argentina was already launched.

Now, with the idea back on the agenda at election time, there’s a need to explain why it hasn’t come off the paper yet — and it hardly will, at least for now. Despite the supposed support of Mundell’s theory, defenders of the common exchange rate in Latin America forget that the region does not have any of the factors listed by the economist for the success of a single currency.

“Mundell establishes the criteria for creating a space with a common currency: labor mobility between countries; mobility of capital with price and wage flexibility in the region; a risk control mechanism such as a tax system that allows income transfers to regions affected by negative shocks; and a synchronized economic cycle between countries. The group of Latin American countries, or even Mercosur, does not meet any of these criteria. In this way, the idea seems to me quite inadequate,” says economist Roberto Ellery, professor of economics at UnB.

“Although it does not have the highest GDP per capita, given the size of the population and the GDP, Brazil should play a leadership role that seems beyond our reach. We can barely afford it, how to finance a transfer system for small countries that experience negative shocks? Mexico would hardly leave the free trade agreement with the United States to embark on this adventure. With Argentina in a ‘permanent crisis’ it would be up to Brazil to foot the bulk of the bill. Even monetary policies are not synchronized. Argentina has chronic inflation and Venezuela better not talk about it. In short, it’s an idea that has everything to go wrong”, explained the specialist to Gazeta do Povo.

The Latin American scenario is unfavorable

The idea of ​​creating a common currency between Brazil and Argentina was even considered within the government of Jair Bolsonaro (PL), with the approval of the Minister of Economy Paulo Guedes, without ever having been carried out. Even Argentinian experts agree that the plan lacks the prerequisites for success. “Former President Lula da Silva’s proposal for a single currency for Latin America reflects a political ambition to deepen Latin American integration and for Brazil to be the leader in this process. But from an economic point of view, this requires several preconditions that Latin America is far from meeting,” recognizes Eugenio Marí, chief economist at the Fundación Libertad y Progreso.

“The benefits of adopting a common currency increase when countries are open to trade, labor markets are flexible and financial markets are developed. On the other hand, they decrease if the economies are distorted, if the economic cycles are lagged and if the macroeconomic policies are not coordinated. The region as a whole is today closer to the second situation than to the first.

For the economist Paulo Fuchs, presenter of the podcast Tapa da Mão Invisível, another untenable argument presented by Lula and the others. Proponents of the theory is that the common currency would serve to make the region “immune” to dollar fluctuations. “It is impossible to create a currency completely independent of the dollar within the traditional financial system. Russia and China are discussing alternatives, but no one has succeeded because, even with its flaws, the dollar is a stronger currency than others. It makes no sense to trade it for the Venezuelan bolivar, for example, because everyone knows it tends to zero in the long run. If Brazil wants to have an attractive reference currency, so that other countries can use the real as a reserve, it must have a stronger currency.

The euro is not a good example

On the eve of celebrating its 30th anniversary, the euro no longer serves as a parameter for Latin America. “European integration is a process that began after the Second World War, in the 1950s. The euro will only arrive almost half a century later. First, the region bet on greater political and economic integration and on the formation of a common market, all in the face of the common threat posed by the Soviet Union,” explains Argentinean Marí. “The economic integration of the Mercosur countries has been imperfect and the bloc is among the most closed in the world. For example, the negotiation of the free trade agreement with the European Union has been going on for more than years. is a sign of the mature state of Latin American integration, far from the much more ambitious objective of a common currency.

It should also be considered that at the time, the countries united in the euro zone presented very different economic conditions from the countries that would henceforth be part of the common Latin American exchange. None of this was enough to prevent the crisis in Greece which destabilized the currency on the ides of 2011, mobilizing a great deal of international aid. For Fuchs, it is not even possible to say that the European currency is a “success”: “Currently, the bloc has a debt 88% higher than the annual GDP. How is it a success? Even if the German economy ‘pulls’ the rest up, with a lower debt than the others, it is not enough to deal with the problem, ”he assesses.

Not to mention the political crises resulting from the creation of supranational bodies. It was Mundell himself who said in the 1999 interview that “Europe decided on the single currency mainly because it wanted greater political integration”. “It was necessary to attach the greater unified Germany to Europe to avoid problems, because there has always been a historical tendency for Germany to want to dominate Europe,” the economist said. It turns out that the control of citizens by leaders who have not been directly elected by them is, in itself, a new problem.

“This is the interventionist spiral predicted by Ludwig von Mises: with countries in monetary crisis, many people migrate to cryptocurrencies. That is, the state intervenes in the market, causes problems, and then creates other interventions to correct the resulting errors. What lies behind all of this, ultimately, is the centralization of power versus decentralization. You take the individual’s decision and pass it on to a bureaucrat in Brasilia. So are we going to take it out of Brasília and go to a supranational bureaucrat? “.

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