Journal of Commerce / August 5, 1998
By Larry Luxner
Encouraged by the EU's rush to achieve monetary union by 2002, South America's two leading trade blocs may do likewise early next century -- leaving the continent with only two currencies instead of today's 13.
The Southern Cone Common Market (known by its Spanish acronym Mercosur) is toying with the idea of a common currency for its four founding members, Argentina, Brazil, Paraguay and Uruguay, and its two associate members, Bolivia and Chile.
The most vocal proponent of monetary union is Argentine President Carlos Menem, whose country's peso is on par with the U.S. dollar and therefore the most stable currency in Latin America. Felipe Frydman, economic attaché at the Argentine Embassy in Washington, says a common currency for the $1 trillion Mercosur market "would facilitate trade and investment as well as confidence in the economy, because no one country could change the value of the currency by itself."
But at a two-day seminar on Mercosur monetary integration held in Buenos Aires last month (June 12-13), Winston Fritsch of Dresder Kleinwort Benson said that "the adoption of a common currency must be a political decision. Economic considerations are insufficient."
Adds Francisco Cressall is manager of corporate finance at Quilmes Industrial S.A., a Luxembourg-based beverage giant that last year sold $891 million worth of beer, soft drinks and mineral water in the six Mercosur countries: "Personally, I think we are miles away from Europe in terms of economic integration and fiscal policies. While it's something good to aim for, there is no common policy at all at the moment. You have to get your deficits in order and coordinate central bank policies. We're talking years."
Jorge Carrera, an economist with Argentina's Universidad Nacional de La Plata, says his country has three alternatives: "Keep our currency pegged to the dollar, float it together with Brazil, or peg both currencies to the dollar. Creating a common Central Bank is not necessarily a good idea. But continuing to study the subject is certainly a good idea."
In the meantime, Colombia's Association of Banks and Financial Institutions (known by its Spanish acronym Asobancaria) has proposed that a single currency be created within the Andean Community to replace Bolivia's boliviano, Colombia's peso, Ecuador's sucre, Peru's nuevo sol and Venezuela's bolívar.
The group said in a statement May 25 that the five countries "should follow the example of the European Union, which has created the euro to broaden its financial horizons and reduce financing costs." Although Andean firms are free to trade with currencies of other member nations, says Asobancaria, "the lack of compensatory mechanisms makes this process highly risky and bears high transaction costs."
If Mercosur adopts a common currency and the Andean nations do likewise, that would leave Guyana and Suriname as the only South American currencies not freely convertible on the world market (French Guiana, which uses the franc, is an overseas department of France and therefore part of the EU).
Yet not everyone is thrilled with this prospect, least of all Uruguay -- often called the "Switzerland of South America" because of its relative financial stability. "While I think having a common currency is a good idea," says Uruguay's ambassador in Washington, Alvaro Diez de Medina, "this is probably not the moment."
Less diplomatic is Uruguayan Economy Minister Luís Mosca. When asked at a recent press conference how he views Menem's proposal, Mosca shot back ironically: "We already have a common currency -- the dollar."