In early 2023, Brazil and Argentina announced their ambitious plan to explore a currency union under the name “sur” (the south). While the proposal was quickly met with skepticism from economists, who noted the significant differences between the two economies, the underlying objective of reducing reliance on the U.S. dollar warrants deeper consideration. Despite the low probability of success in the medium term, the idea of de-dollarization in South America carries interesting implications, particularly as the region seeks greater economic autonomy amid a shifting global landscape.
The concept of a common currency in South America, while politically appealing, faces substantial economic challenges. For Brazil and Argentina, two nations with strong trade ties and similar yet uneven productive structures, the disparity in their economic conditions presents a formidable obstacle. Argentina, grappling with rampant inflation nearing 100% in 2022, stands in stark contrast to Brazil, where inflation has been relatively controlled at 5.8%. Such differences in economic stability make it difficult to imagine how a unified monetary policy could be effective for both countries.
The historical precedent of the European Union and its journey toward the euro offers valuable lessons. The euro, despite its challenges, was the result of decades of political and economic integration in a region with a unique balance of power between France and Germany. In South America, however, Brazil’s dominance, with an economy more than three times the size of Argentina’s, raises concerns about the feasibility of a balanced and stable currency union. Without the credibility that Germany provided in the European context, it is unlikely that a similar model could succeed in South America.
Moreover, the geopolitical implications of such a move cannot be overlooked. In a world increasingly characterized by great power competition, a South American initiative to reduce reliance on the U.S. dollar might face resistance from Washington, especially in light of growing Chinese influence in the region. The U.S. Federal Reserve’s role as the world’s central bank, providing critical liquidity to global markets during crises, underscores the challenges of moving away from the dollar. Even the European Central Bank, despite issuing the second most significant reserve currency, had to rely on the Fed during financial crises, highlighting the enduring dominance of the U.S. dollar in global finance.
Furthermore, the practicalities of implementing a new currency for bilateral trade and finance must be considered. The deep and liquid U.S. financial markets offer unparalleled legal and regulatory certainty, making the dollar the preferred currency for global transactions. Simply creating a synthetic currency for Brazil and Argentina’s trade will not address the broader exchange rate risks that these countries face in the global economy.
In essence, the proposal for a South American currency union, while intriguing, appears to be more of a symbolic gesture toward deeper economic integration and reduced dollarization than a feasible economic plan. The initiative, spurred by the arrival of Luiz Inácio Lula da Silva as Brazil’s president, may indeed encourage further integration in South America. However, as the European experience shows, a sustainable monetary union requires a level of fiscal and political unity that is currently lacking in the region.
If the goal is to eventually create a common currency that can rival the dollar’s dominance in South America, this project will require decades of careful planning and significant structural reforms, far beyond the current political cycles of the involved nations.
Commentary by Federico Steinberg and Miguel Otero-Iglesias, originally published by the Center for Strategic and International Studies (CSIS).
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