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Why Lula's proposed single currency in Latin America has everything to go wrong

A single currency for all Latin American countries is PT’s newest economic idea. “We are going to re-establish our relationship with Latin America. And God willing, we will create a currency in Latin America, because there is no such thing as depending on the dollar”, said former president Luiz Inácio Lula, joining religion with financial issues, during an event with PSOL deputies on the last day 30 of April.

In the same week, former São Paulo mayor Fernando Haddad and economist Gabriel Galípolo, collaborator of Lula’s campaign in the economic area, 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. It is a fundamental step towards strengthening sovereignty and regional governance, which will certainly prove to be decisive in a new world”, states the text.

Note that the inconsistencies already begin in the scope 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 is not known 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 did not think it was a good idea for Mercosur.

The problem of common exchange

In September of 1950, the edition of the academic journal The American Economic Review reached the hands of the most renowned US economists containing an article by Canadian Robert Mundell entitled “A Theory of Optimum Currency Areas” optimized”, in free translation). In it, the scholar 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 would be celebrated as the “father of the euro”, even if he saw himself as just a godfather, or one of several. The following year, the economist gave an interview to Folha de S. Paulo in which he stated that the 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 being aired.

Now, with the return of the idea to the agenda at the time of elections, it is necessary to explain why it has not yet left the paper — and it will hardly come out, 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 present any of the factors listed by the economist for the success of a single currency.

“Mundell establishes the criteria for creating an area with a common currency: labor mobility between countries; capital mobility with price and wage flexibility in the region; risk control mechanism such as a tax system that allows income transfers to regions affected by negative shocks; and synchronized economic cycle across countries. The group of countries in Latin America, or even Mercosur, does not comply with any of these criteria. In this way, the idea seems to me to be absolutely 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 GDP Brazil would have to play a leadership role that seems out of our reach. We can barely afford it, how can we finance a transfer system for smaller countries that suffer negative shocks? Mexico would hardly leave the free trade agreement with the US to embark on this adventure. With Argentina in a ‘permanent crisis’, it would be up to Brazil to pay most of the bill. Even monetary policies are not synchronized. Argentina is experiencing chronic inflation and Venezuela is better off not talking 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 has even been considered within the government of Jair Bolsonaro (PL), with the endorsement of the Economy Minister Paulo Guedes, without ever having been carried out. Even Argentine experts agree that the plan lacks preconditions to succeed. “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, it requires several prerequisites that Latin America is far from fulfilling”, agrees Eugenio Marí, chief economist at 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 economies are skewed, business cycles are out of flow, and macroeconomic policies are not coordinated. The region as a whole is today closer to the second situation than to the first.”

For economist Paulo Fuchs, presenter of the podcast Tapa da Mão Invisível, another unsustainable 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 nobody has succeeded because, even with the shortcomings, the dollar is a stronger currency than the others. It makes no sense to exchange it for the Venezuelan bolivar, for example, because everyone knows that 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 needs to have a stronger currency.”

Euro is not a good example

On the eve of completing 30 years, the euro does not serve as a parameter for Latin America. “European integration is a process that began after the Second World War, in the 1950 decade. The euro would only come 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 shared threat posed by the Soviet Union”, explains the Argentine Marí. “The economic integration of 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. This is a sign of the state of maturity of Latin American integration, far from the goal of a common currency, which is much more ambitious.”

It must also be considered that, at the time, the countries gathered in the Euro Zone presented very different economic conditions from the countries that would now be part of the Latin American common exchange. None of this was enough to prevent the crisis in Greece that destabilized the currency in the ides of 2011, mobilizing great international aid. For Fuchs, it is not even possible to say that the European currency is a “success”: “Currently, the bloc has a debt of 88% above annual GDP. How is this a success? Even if Germany’s economy ‘pulls’ the rest up, with a debt lower than the others, it is not enough to face the problem”, he evaluates.

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

“It is the interventionist spiral predicted by Ludwig von Mises: with the currency crisis countries, many people are migrating to cryptocurrencies. That is, the State intervenes in the market, causes problems and then creates more interventions to correct the consequent errors. What’s behind it all, in the end, is centralization of power versus decentralization. You take the decision from the individual and pass it on to a bureaucrat in Brasília. Then are we going to take it out of Brasília and go to a supranational bureaucrat?”.

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