This week, government representatives from Brazil and Argentina will meet in Buenos Aires to discuss a common currency project between different countries in the region. The goal of this currency is clear: to increase trade on the continent by reducing the influence of the US dollar.
A future common currency in South America?
Brazil and Argentina, the two major economic powers of the South American continent, they have the ambition to create a new currency that could extend to different states in the region. To carry out this project, discussions between the two countries are scheduled this week at a summit in Buenos Aires: a program must be established to be followed in order to develop this monetary instrument in the years to come.
The purpose of this coin is increase trade between South American countries by reducing dependence on the US dollar in international trade. Initially planned bilaterally, Argentine Economy Minister Sergio Massa says this initiative is now open to discussions with neighboring countries.
” It will decide to study the parameters necessary for the creation of a common currency, which encompasses everything from fiscal issues to the size of the economy and the role of central banks. […] Argentina and Brazil invite the rest of the region. »
If an agreement is officially concluded between the two great powers of the region, this new currency will not be launched before years of discussion and debate : according to Sergio Masse, it took Europe 35 years to develop the euro. Also, Brazil will have time to test and release its own central bank digital currency (MNBC) before this common currency appears.
👉 Learn more about the collaborating partners at MNBC Brazil
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Major geopolitical issues
Creating a new currency for this region of the world is not insignificant. While in 2002 the dollar accounted for 70% of central bank foreign exchange reserves, this rate has decreased over the past two decades to 59% in 2020. In other words, states around the world are gradually detaching themselves from the US dollar to reduce the impact of US policies on the economy of their territories.
Figure 1 – Graph representing the share of major currencies in central bank foreign exchange reserves worldwide, between 1999 and 2021
The economy of a single country not being strong enough to cope with the currency hegemony of the United States, some states have the ambition to create geographical areas that bring countries together around a common or single currency. We recall that while a common currency is distributed parallel to national currencies, a single currency definitively replaces the currencies of the included territories (such as the euro).
The currency envisaged by Brazil and Argentina will initially be a common currency, along with the Brazilian real and the Argentine peso. According to the Spanish economist Alfredo Serrano Mancilla, this common project is an opportunity to be seized by the countries of South America and Central America that want greater economic independence than the United States:
” Monetary and exchange rate mechanisms are crucial. […] Today there are opportunities in Latin America, thanks to its economic strength, to find tools to replace the dependence on the dollar. This will be a very important step forward. »
Note that South America and Central America are pioneering regions in the pursuit of monetary and financial independence: in September 2021, El Salvador had adopted Bitcoin (BTC) as legal tender alongside the US dollarthus provoking the discontent of the United States, the IMF and the World Bank.
👉 Learn more about El Salvador’s adoption of Bitcoin (BTC).
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Sources: Financial Times, Figure 1 – IMF
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