MercoPress. South Atlantic News Agency

Argentine-Brazilian joint currency?

Argentina and Brazil are considering the creation of Monetary Coordination Institute with the purpose of having a common currency, Argentine Deputy Foreign Affairs Secretary Mr. Martín Redrado made the announcement this Monday in Brasilia after holding talks with president Luiz Inacio Lula da Silva.

"We're thinking that the Peso and the Real should move in the same direction, this does not mean tying one of the currencies to the US dollar but rather that they move jointly in the same direction", said Mr. Redrado.

After a full day of meetings with Brazilian Foreign Affairs officials and the Finance Minister Antonio Palocci, Mr. Redrado indicated that "we're moving towards the creation of a Monetary Coordination Institute, and from there on considering ideas on how to create a common currency to support bilateral trade".

Brazil and Argentina have the largest bilateral trade among Mercosur members that also includes Paraguay, Uruguay and associates Chile and Bolivia.

Mr. Redrado refused to anticipate a name for the new currency but the Argentine press described it as the "Mercosur patacón" (Metal piece).

The Argentine official indicated that a common currency can be achieved with bilateral trade agreements with ample reciprocal credit, or coordinating monetary, fiscal and exchange policies.

The Brazilian Congress is currently considering a fiscal reform "and we expect it to be compatible with a similar bill that will be presented in the coming months in Argentina", added Mr. Redrado.

The Argentine currency currently stands at 2,90 pesos to the US dollar, after having reached 3,50 following the 2002 devaluation. A strong trade surplus plus the non payment of interests on the country's defaulted debt have allowed Argentina to enjoy stability after three stormy years.

In Brazil the US dollar is equivalent to 2,95 Reales after a strong recovery from last October when the local currency devalued to the equivalent of 3,95 to the US dollar. Unexpected orthodox economic policies from the incoming Lula da Silva administration have ensured the recovery of the Brazilian currency.

However the initiative has its skeptics. Daniel Artana a renowned economist from an Argentine consulting agency said that "in spite of both having a floating exchange rate, the economies are quiet different", and illustrated with an example, "when oil prices jump, Brazil looses and Argentina wins because the country is a hydrocarbons exporter".

"To achieve a common currency, you need harmonized and coordinated fiscal policies", stressed Mr. Artana.

Argentine industrialists and exporters agreed that the initiative was interesting but before embarking on such a project "fiscal, tariff and other asymmetries must be eliminated".

In Uruguay, one of the junior members of Mercosur the idea did not have a positive response.

"None of the two countries have a fiscal responsibility record, or the commitment to abide by harmonized regional policies; history and politics in both countries rather indicate the opposite", said Uruguayan Finance Ministry sources.

"The current financial stability and melting of the US dollar in both countries has a strong component of short term capital that tend to flee as soon as interest rates begin falling or political instability starts creeping in", emphasized the Uruguayan source.