Monedas-Latinoamerica

Can Latin America have a single currency?

October 7, 2022

One of the major monetary experiments is the Euro, and it seems that the experiment works well for the countries that integrate it. That is why other regions in the world look favorably on the integration of a continental currency.

On more than one occasion, the possibility of creating a unified currency for all Latin America has been raised, to counteract the effect of inflation, especially in the long term. Today, we will analyze whether a single currency for Latin America is feasible and whether the conditions exist to achieve it.

Regional integration

The unification of Latin American currencies requires the political unification of the region. A clear example is the African case, where despite being a continent hard hit by authoritarian governments and dictatorships, countries have formed the African Union, which encompasses all African nations in a supranational union; legally well-structured; binding and with a clear objective and route for 2030 and 2040.

Such a union for Latin America seems, at least for now, very complicated. In fact, similar exercises such as Mercosur are a good start to implement a regional currency.

However, although Mercosur is the most developed organization in terms of integration and has a structure already in place, it still lacks immense maturity and a long way to go to become a structure similar to a truly supranational union.

The need for a central bank

Having a regional currency seems a utopian idea, especially because it is a region made up of countries in constant economic crisis. However, this is precisely the main reason for the creation of a continental currency.

The European Union managed to create a common currency thanks to two factors: political unification and the creation of a central bank to back the currency, so to repeat the experiment in Latin America it is necessary to have these two factors.

However, one of the main impediments to the creation of this currency is precisely the fact that so far there is no formal central financial institution that groups or represents all Central and South American countries.

In recent decades, institutions have been set up for this purpose, but they have remained as mere attempts. One of them was the Bank of the South, created as one of the three fundamental pillars of the Union of South American Nations (UNASUR).

The idea of creating an alternative bank that would incorporate different regional financing organizations such as the Inter-American Development Bank (IDB) or even the Andean Development Corporation was a very popular idea among leftist governments. While right-wing governments have been reluctant to this type of banks.

In addition, confidence in national central banks has declined drastically, and they are unpopular in some countries, as in the face of macroeconomic difficulties some governments opt for monetary issuance to finance their social spending programs or to finance deficits.

The failure of the Bank of the South

The Bank of the South was founded in 2003 as a proposal of then Brazilian President Lula Da Silva. The problem with this institution is that the objective wasn’t to function as a South American central bank, but rather to create an alternative financing institution to the World Bank or the International Monetary Fund.

In 2009, the act of creation was signed, with the presence of seven countries: Ecuador, Bolivia, Argentina, Brazil, Paraguay, Uruguay and Venezuela, all of which at that time had socialist ideology governments.

However, this bank never prospered; it started with an insignificant capital of 7 billion dollars, far below the combined GDP of these two countries. During the time it was in operation, it did not reach the goal of reaching a capital of 20 billion dollars.

The Caracas-based Bank of the South quickly became more political than financial and never financed any work or developed a major project in the region, unlike the hundreds of projects that have been financed by the IDB. It was never known what happened to the more than 7 billion dollars that were capitalized, there was never an audit, nor explanations about the billions of dollars that were deposited in it.

The heterogeneous Latin American financial landscape

Another reason why the creation of a common Latin American currency is complicated is due to the complex economic panorama of the region, since on the one hand we have dollarized countries such as Panama and Ecuador, countries that have renounced their monetary policy and therefore can only rely on fiscal policy to execute their government program, thus both governments entered into a de facto monetary union with the US, which forces them to be fiscally responsible.

While there are countries like Argentina that are abusing their monetary policy by printing more and more money, which translates into galloping inflation and a loss of value of the peso.

This brings us to the other condition for the integration of a regional currency, the correlation of the economic cycles of its member countries. What this means is that if one country is in a period of prosperity, the rest must be in a period of prosperity and vice versa.

If a country is in crisis, the central bank, which oversees the stability of the currency, would apply a monetary policy that is the same for all. An expansive monetary policy would get it out of the crisis easily, while the outlook for the other countries would be discouraging because it could generate a bubble and inflation problems.

 

Although the region has a strong potential to create a single currency, it seems that the political and economic landscape of the region does not yet have the conditions for this hypothetical currency to bring benefits to Latin American countries. But now it is your turn, do you believe that the creation of a currency for the region could bring benefits and help stop inflation in the region?