The fragility of the Eurozone should be a warning for Brazil and Argentina
According to the Financial Times, Argentina and Brazil are “starting preparatory work on a common currency”. Eventually, the plan is to invite other South American nations to join — which would create the world’s second biggest monetary union (after the Eurozone).
What would the new currency be called? One suggestion is the sur, which means ‘south’ in Spanish. However, a more appropriate name would be the loco — because the entire notion is completely mad. It’s not that South America is somehow unworthy of what Europe has but, rather, that the European Union’s disastrous experiment should be a warning to the rest of the world.
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The greatest danger posed by a single currency is to its economically weakest members. In Europe’s case, the peripheral economies thought they’d benefit by sharing a currency with wealthier countries. And for a while, countries like Greece were able to borrow on much more favourable terms.
But we know what happened next. The Global Financial Crisis begat the Eurozone crisis — and the money markets then turned against the so-called PIIGS. Unable to adjust their interest rates or devalue their currencies, these countries were forced to accept savage austerity programmes instead. To this day, they remain beholden to the European Central Bank — which is inevitably run in the interests of the richest and most powerful people in the richest and most powerful member states.
In the absence of a full fiscal union — which compensates for geographical inequalities through the substantial transfer of wealth from rich to poor — monetary union can only endure if the poor surrender their economic sovereignty to the rich.
One could argue that, compared to Europeans, there’s greater cultural unity — and thus cross-border solidarity — among South Americans. For instance, most people speak one (or both) of two closely related languages: Spanish and Portuguese. However, other differences go deeper. Just look at GDP per head, where some of the disparities are huge — such as that between Uruguay ($18,083 in 2022) and Bolivia ($3,431 the same year).
Then there’s the matter of size. The Brazilian economy is over three times bigger than the next biggest South American economy, that of Argentina. In the Eurozone, Germany is the biggest economy by a clear margin, but it isn’t several times the size of, say, the French economy. Though German interests dominate, there is at least some counterweight.
Political risk is another problem. Right now, South America is comparatively united, with most countries led by politicians of the democratic Left. But that can’t be taken for granted. The pendulum could swing back the Right, which, in cases like Brazil, means the far Right. There’s also a history of Left-wing governments descending into populist misrule.
Ironically, it is this record of instability that makes the idea of a single currency so attractive. In theory, the discipline imposed by a shared central bank should act as a constraint on national governments. In practice, however, this is putting the cart before the horse. It is not monetary union that sustains a stable political system but the reverse.
Remember that the Eurozone has only survived (so far) because the EU establishment is willing — and able — to do “whatever it takes” to defend the system. In the case of the last crisis, that meant overriding the democratic will of the Greek people and condemning them to permanent austerity.
Is this really the future that progressives want for South America?