How feasible is a Latin American regional currency?

This month, former Argentine president Mauricio Macri threw his weight behind a single regional currency that has been proposed as an attempt to integrate South America's regional trade bloc, the Southern Common Market, known by its Spanish acronym Mercosur.

While attending an economic forum in Brazil, the Argentine politician made calls for improved financial alignment with regional neighbours and trade partners making up Mercosur, which has been around since 1991 and comprises of Argentina, Brazil, Paraguay and Uruguay.

"We have to move towards a monetary unification with Brazil. The single currency would strengthen Argentina more initially, but both countries in the long term," Macri said.

Adopting a single currency is usually the last step in a regional trade agreement. It follows a large process of adjustments and convergence of policies in several areas, including fiscal, tax, labour, and monetary sectors, explains Ricardo Caichiolo, Professor of International Relations at the Ibmec University in Brasilia.

Speaking in Brazil's financial capital, Sao Paulo, Macri compared it with what 20 European Union member states already have in place.

"If Mercosur is serious, we need to have the same rules and the same currency as the Eurozone. Commercial monetary unification makes sense with fiscal adjustment," said Macri.

The former Argentine leader also outlined why he believes a single currency would outweigh Argentina's new far-right President, Javier Milei's bid to dollarise the economy.

According to Fernando Ferrari Filho, an economist and former president of the Brazilian Keynesian Association, Milei's bid to dollarise the struggling Argentine economy will likely not materialise given the country's dwindling forex reserves. But he could adopt an exchange similar to the 1990s peg.

Macri, Argentina's leader from 2015 to 2019, added, "I understand the symbolic advantages of dollarisation, but Ecuador has gone back into fiscal deficit."

This year is not the first time that the idea of a common currency has garnered interest across Latin America.

In January, the idea of the 'sur' - a potential financial currency and counterweight to the dollar was floated in a meeting between then-Argentine president Alberto Fernandez and his Brazilian counterpart, President Luiz Inacio Lula da Silva.

In May, both leaders met again, pledging to continue negotiations to shift away from reliance on the US dollar.

Unlike the euro, Argentina's and Brazil's 'sur' would be exclusively for bilateral trade transactions and aims to reduce dependence on the dollar, says Caichiolo.

"It would not circulate physically within the countries and would not replace the Brazilian and Argentine currencies," Caichiolo tells TRT World, referencing the respective currencies of both nations - Brazil's real and Argentina's peso.

He explains that if the 'sur' were to materialise, it would likely not be used by the population and only by governments. Although it would potentially face challenges getting "off the ground" amid a lack of "unanimity regarding its benefits".

Filho is sceptical regarding monetary and financial integration that includes adopting a single currency between Argentina and Brazil.

He underscores Argentina's range of potentially widespread impediments that he believes do not make the project viable from "huge inflation, the balance of payments deficits, and shortage of international reserves."

Nevertheless, Fernandez and Lula said it could be set up through both nations' banks.

Filho explains that adopting a single currency in the region would require all regional central banks to radically shift their practices, including losing their "monetary policy autonomy".

As such, he says governments in the region would have to adopt similar fiscal rules and a "neutral" exchange rate. Such a move makes Filho regard it as "not feasible."

He also outlines how the respective economies of the four Mercosur nations are performing vastly differently in terms of inflation, GDP growth, trade balance, and domestic and external debts.

"It is difficult to implement rules for macroeconomic policies, which are the prerequisite for the adoption of a single currency," says Filho.

A historical push

Nevertheless, the idea of a common currency has been raised across the region over the last six decades.

Since the 1960s, there have been various initiatives, starting with the Central American Monetary Council of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic. However, the initiative failed to deliver a common currency.

Some 20 years later, in the late 1980s, Brazil and Argentina discussed the 'gaucho,' although the potential currency has yet to materialise.

In 2009, Bolivia, Cuba, Ecuador, Nicaragua, and Venezuela, as part of the Bolivarian Alliance for the Peoples of Our America and the People's Trade Agreement (ALBA), pushed the Sucre to counteract the dollar's hegemony for trade exchanges. But, it did not materialise.

Also, in 2009, Venezuela's late socialist leader, Hugo Chavez, floated the idea of the Petro at the Second South America-Arab Countries Summit (ASPA) for the major oil producers, but it did not take hold. The notion was partly revived some eight years later by the next Venezuelan President, Nicolas Maduro.

The gaucho was again floated during Macri's tenure in Argentina and the presidency of Jair Bolsonaro in Brazil.

"During the last thirty years, there hasn't been such a process of adjustments and convergence of policies in Mercosur," says Caichiolo.

"By adopting a single currency, economies generally centralise monetary decisions in a single authority, and so far, there is no consensual political interest among member countries to implement something like the eurozone," he tells TRT World, describing the idea of a common currency among Mercosur nations as "more of a political rhetoric".

Experts also describe various political and ideological differences among regional partners, which they suggest make a single common currency more complex.

Mercosur is administered differently to the EU, with negotiations entered by the countries' presidents as the South American trade bloc is not a "supranational body," explains Caichiolo.

He says there are typically divergent interests in the nation's foreign policy, encompassing social, political and commercial dimensions. He references Uruguay's push for a free trade agreement (FTA) with China, which has been at odds largely with the Mercosur consensus to negotiate as a bloc with the Asian superpower.

Adopting a single currency is considered challenging and a "controversial topic", according to Caichiolo, particularly amid different economic structures and performances between member nations. It makes him "quite sceptical" that it could be adopted.

"Brazil has accumulated inflation of 4.68 percent and an interest rate of 11.75 percent; Argentina has inflation of 160.9 percent and an interest rate of 133 percent," he says.

Filho says South American leaders "must think about a real economic integration in the Region," noting the EU's longevity of nearly twenty-five years of economic integration.

Analysts point to more alignment among key areas in the Eurozone.

"The euro's success is strongly linked to the high level of economic integration, labour mobility, synchronisation of economic cycles among European countries, fiscal policy, and other factors," Caichiolo says.

He believes such prerequisite conditions still need to be implemented among Mercosur partners for a single currency to be fully viable.

Amid the push towards deep economic integration in Latin America, Filho suggests implementing a Regional Market Maker would be useful for potential trade - whether through Mercosur or South America and the EU.

The body would provide companies and retail investors with expert, in-depth knowledge of stocks and more extensive coverage in South America.

Filho considers it "necessary" to assure macroeconomic stability, which he describes as being "understood" in terms of sustainable economic growth, curbing inflation, fiscal adjustment and external equilibrium.

This year, some Latin American nations have signalled their intent to reduce their reliance on the dollar, whose hegemony has existed since World War II.

The push for multilateral monetary systems has been driven particularly by deepening ties between Beijing and the region.

Filho believes shifting away from the dollar would best serve the region.

"Instead of having a 'sur' currency, implementing a payment system on local currency, to stimulate the bilateral trade relations with peso and real, eliminating the dollar as an intermediary of trade relations between Argentina and Brazil, is a better solution."