Why Latin America Keeps Talking About a Common Currency - The Atlantic

Why Latin America Keeps Talking About a Common Currency

And is a long way from making it happen

An illustration featuring coins mocked up as el sur
Adam Maida / The Atlantic

“Nothing is more emancipating than the fraternity of nations,” the presidents of Argentina and Brazil declared earlier this year, “coming together from the depths of history to make the future theirs.” This sonorous language—of emancipation and brotherhood—evoked the aspirations of South America’s great independence hero, the statesman Simón Bolívar. The reality was more humdrum: a fancy way of saying they’d like to create a common currency, known as el sur.

The plan for a currency union is merely the latest in a long history of treaties and proposals for creating a closer bloc in the region. “The ideas of Latin American integration are so old,” Jamil Mahuad, a former president of Ecuador, told me. “It’s a big dream, but a dream that has always fallen short.” During Mahuad’s term in office, in the late 1990s, the country faced an economic crisis so severe that the local currency collapsed. His solution was a desperate one: dollarization—in a way, the antithesis of el sur (literally, “the south”). In effect, Ecuador joined someone else’s currency union, but without any of the privileges of membership.

“Some of the coverage said that the sur would be the second-largest currency union after the EU, but that’s a mistake,” Athanasios Orphanides, an economics professor at MIT, told me. “The largest currency union is the United States.” The Constitution that founded the U.S. federal government in 1789 also made a point of centralizing the creation of money. Without this system, the dollar might not be so mighty; instead, states would have their own legal tenders and the power to set interest rates.

Latin American countries control their own money but at times also lose control of it. Typically, this can happen either because a central bank is pressured to do the government’s bidding and print money, rather than implement good fiscal discipline, or because the vagaries of the global economy force up the price of vital imports. Smaller economies especially tend to have more fragile currencies. When Mahuad decided to adopt the U.S. currency for Ecuador, it was not because he was an apostle of dollarization, he told me, but because he had no better option.

Attempts to bring Latin America into a closer union have met mostly with failure. Bolívar, the leader of independence campaigns in six South American countries, is perhaps the most celebrated for his efforts. In 1819, he proclaimed a single state known as Gran Colombia comprising a territory that includes today’s Venezuela, Colombia, Panama, and Ecuador. And in 1826, he tried to assemble an even larger league of republics in the Americas with a military that could protect them from European powers. The only country that ratified the initiative was the one under his rule, which in time crumbled. The Gran Colombia federation dissolved in 1831, a few months after his death.

One reason for Latin American countries’ difficulty in forming a bloc has to do with what makes them distinct nations in the first place. The Spanish empire insisted that its colonies could not trade with one another, and divided its dominion into viceroyalties, captaincy generals, and territories, each with its own bureaucracy. When these colonies achieved independence, their armies were weak and ill-suited for annexing territory, the historian Alfredo Ávila told me, so these postcolonial nations stayed separate, and some split further (the Kingdom of Guatemala, for example, would eventually become five countries in Central America).

Later, in the second half of the 20th century, the impetus of integration that created the International Monetary Fund and the World Bank produced similar institutions in Latin America, all promising regional forums or more free trade. The 1960s brought the Andean Pact and the Latin American Free Trade Association. Both languished, however, and even their rebranding in subsequent decades failed to reinvigorate them. The two most promising pacts so far have been Mercosur, a customs union established in 1991, and the Pacific Alliance, a trade bloc founded in 2011. But neither has fully delivered: Mercosur has allowed so many exceptions that its zone is anything but tariff-free; the Pacific Alliance has largely failed to increase trade among its members.

And so, today, Latin America remains fragmented. Only 15 percent of trade stays within the region, compared with 55 percent in Europe and 38 percent in North America. Just one-third of continental flights connect Latin American cities to one another, and the Pan-American Highway, a route conceived with the ambition to link a hemisphere, has stretches that flood with mud during the rainy season and develop potholes capable of sinking trucks.

That lack of ties has been a significant drag on industry. “No country, not even Brazil, has a big enough local market or labor market to make products that compete with Asia,” Shannon O’Neil, a senior fellow for Latin American studies at the Council on Foreign Relations, told me. “They cannot, for example, make their own cars.”

Latin America is not alone in its isolation. South Asia, the Middle East, and sub-Saharan Africa have also failed to form major alliances, and rank even lower in intraregional trade. What perhaps distinguishes Latin America from other divided parts of the world is how long its constituent countries have talked about unity. The notion that countries sharing the Spanish language, a religion, and a colonial history could coalesce into something bigger keeps resurfacing. (Portuguese-speaking Brazil gets included because of its proximity and similarity.) The appeal of this idea seems powerful enough to inspire periodic integration efforts but not to make them succeed.

Talk of international cooperation sometimes comes from unexpected quarters. In 2019, Brazil’s then-president, Jair Bolsonaro, proposed the peso real, a currency that would be shared by his country and Argentina, which was also then governed by a right-leaning leader. This, Bolsonaro said, would act as “a lock to keep socialism out.” The Brazilian central bank issued a statement that this currency project would not happen; the next day Bolsonaro insisted that it would, but never brought it up again. Then, in 2021, Andrés Manuel López Obrador, the Mexican president, proposed building in Latin America “something similar to the European Union, but more in tune with our history, our reality, our identity.” He did not say precisely what that would be, only that it would involve a complex process—and that, on the 238th anniversary of Bolívar’s birth, his dreams had to be kept alive. López Obrador, too, seems to have dropped the plan.

Besides Bolívar’s dream, the EU provides the main model. Its evolution, however, had a very different purpose. After the end of the Second World War, Western leaders thought that binding Europe’s economies together would guarantee peace. What began as an agreement about coal and steel production among France, Germany, and the Benelux countries gradually became a common market, and then added its own institutions and ever-closer ties among its members, enabling the free flow of labor, and finally, in the late 1990s, plans for a common currency. The euro, fully adopted by 2002, is not universally loved. After the financial crash of 2008–09, heavily indebted Southern European countries were forced to endure severe austerity measures by the eurozone’s governing authorities; Greece, notably, came close to dropping out.

In light of that long and vexed history, the first printing of el sur is a ways off—which may be just as well, given some of the early reviews. “This is insane,” wrote Olivier Blanchard, a former chief economist of the IMF. “It’s a terrible idea,” opined the Nobel laureate Paul Krugman, who usually disagrees with Blanchard.

As the EU experience suggests, common currencies demand that countries have stable political systems and a shared view of macroeconomic policy. For the sur to work, Argentina and Brazil would first have to remove trade barriers, strengthen political ties, harmonize business regulations, and make moves to enable the free flow of labor and capital between the two countries. “You can’t just say ‘We’re going to adopt a common currency,’” Orphanides, the MIT professor, told me. “That’s not how it works.”

One major obstacle for el sur is that a common currency would favor only one of its two proponents. In the short term, Argentina would have far more to gain. Brazil has a strong, stable currency that is guarded by a vigilant independent central bank, which has succeeded in keeping inflation in the single digits since 2004. By contrast, Argentina’s inflation rate reached 95 percent last year—something the country’s president blames on the media. Brazil’s monetary policy has credibility in international money markets; Argentina has had to impose capital controls to keep people from buying dollars.

And like other currency or payment schemes that have set out to replace the dollar for trade in Latin America, el sur would need the central banks of member countries to guarantee it with holdings in gold or a reserve currency—which, ironically, would probably be the dollar. Alexandre Schwartsman, who worked at the Brazilian central bank in the 2000s, told me that he’s doubtful whether the sur, if it materializes, would ever become a fully operational joint currency.

Argentina and Brazil’s project is premature because a common currency requires so many other types of cooperation to work; using the same banknotes should be a last step, not the first. Before the two nations are ready to share a coin, they’d need to fix such basic problems as the hours of delay that motorists face just to cross the border between them. El sur, too, will have to wait.