Towards a Latin American Monetary Integration? Opportunities and Threats

Fabio Masini
Professor of Theories and History of International Political Economy, Roma Tre University; Jean Monnet Chair European Economic Governance;
Secretary General Robert Triffin International; Managing Editor, Euractiv Italia

As is now well known, Argentina and Brazil are thinking of starting an embryonic monetary integration in Latin America, with a common currency called “sur”, open to the participation of other countries on the continent. This is not the first time this has been discussed: remember the somewhat improvised idea of Raul Alfonsin (Argentine president) and Jose Sarney (Brazilian president), who proposed a common currency called “gaucho” in 1987. It had no follow-up.

Chavez, in his own way, had also tried to move in a similar direction when he proposed the creation of a Banco del Sur to free Latin America from the economic subservience and political influences of the US and the international institutions it controls. The question is whether and why this time the attempt should be more successful. More importantly, what should be the steps to follow.

The announcement was reminiscent of what was decided at the EEC summit in Bremen in July 1978 by Schmidt and Giscard d'Estaing, when the launch of the European Monetary System and the ecu was decided. The European experience may indeed provide a useful reference point for understanding how South American monetary integration might evolve.

It was, however, an experience, the European one, that stemmed from afar, well before 1978: from discussions in the 1960s to reform the international monetary system and get out of the hegemony – the “exorbitant privilege” (as Charles De Gaulle, Raymond Barre and Barry Eichengreen have repeatedly called it) – of the dollar; from the (weak) attempt at a European monetary snake in 1972, which followed the end of the Bretton Woods regime (August 1971). At that time, European countries decided to create a European unit of account (ecu) de facto still pegged to the dollar (it had the same gold content as a US dollar). Until they eventually arrived at the European Monetary System and the ecu became the basket currency of national currencies.

But the ecu, when it came to finally disengage from the dollar, had a strong and credible reference point: the German mark. A similar role could be played, in the case of Latin America, only by the SDR, itself a basket currency used by the International Monetary Fund; toward which interest and attention have grown in recent years. And it is precisely this attention, also with a view to reviving multilateralism, jeopardized by the recent upheaval of the world order, that could breathe new life into the prospects of regional currencies. The sur could find itself in the company of unexpected allies, outside Latin America as well.

What would be needed, however, would be the development of a private sur market; with bonds of large corporations and sovereign states issued in SDRs and/or the new currency. So as to create the preconditions and incentives for its increasing use. Indeed, it was the creation of a growing private market for the ecu that enabled it to evolve from a common currency to the single European currency, the euro, when geopolitical conditions made it realistic and feasible with the end of the bipolar equilibrium.

Concerns with respect to economic gaps between countries, on the other hand, while not to be ignored, should be of lesser concern, as the European case has once again shown. Of course, it is still necessary to embark on paths of macroeconomic convergence among Latin American economies (an arduous task, due to the even less homogeneous starting conditions than there were in Europe), in order to revive their economies and the credibility of their public finances. But the European experience has shown how political will can trigger virtuous mechanisms that, if well exploited, can help convergence, and make regional economic and monetary integration increasingly solid.

While the optimality criteria of a currency area are not automatically met once the political decision is made, it is nevertheless undeniable that, for example, the dividend of the euro – i.e., the fall in interest rates (and thus the cost of servicing debt), due to the expectation of the entry into the single currency – allowed Italy in the 1990s to enjoy hundreds of billions of additional resources that could have been directed to promote growth, investment, and increase the potential of the Italian economy. It did not happen: the dividend of the euro ended up almost entirely in current spending. But that is another story, all Italian. One that we hope will not be repeated in Latin American countries.

In addition to learning from the successes of the European monetary integration experience, it would indeed be useful for South American countries to learn from European mistakes as well. We Italians, in this sense, have much to teach.