ECONOMY-MERCOSUR: Difficult Path to Monetary Union

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Mar 8 1998 (IPS) - Plans for a single currency for members of the Southern Common Market (Mercosur), which have been on hold for months, have been dusted off again since the economic crisis in East Asia.

Argentine President Carlos Menem, kicked-started the idea of monetary union for Mercosur at the International Economic Forum in Davos, Switzerland, in January. He deemed it essential to win the confidence and further attention of international investors.

Economists here agreed with Menem that a single currency would bring “harmony” to the macro-economic policies of Mercosur members, but opined that Brazil would be the partner most unwilling to give up monetary independence. The bloc comprises Argentina, Brazil, Paraguay and Uruguay – with Bolivia as an associate member.

Menem formally will present his proposal at the next Mercosur meeting in June, when Argentinas ends its term as president. Executive officials from Menem’s office and the Ministries of Economy and Foreign Affairs have been working with private business consultants in laying out the different basic aspects for monetary integration.

The Secretary of International Economic Relations, and Argentina’s principal negotiator in Mercosur, Jorge Campbell, said that the proposal requires fixing the margins of tolerance for inflation, limiting indebtedness, balanced fiscal poli cy and making labor legislation compatible among all the Mercosur countries.

The process will end with the creation of a single currency and a single central bank, Campbell said.

Mercosur came into being in January 1995, although Brazil and Argentina signed an integration treaty 10 years earlier. In just three years, the value of commercial exchange between Mercosur countries leaped from 1.1 billion dollars to 15 billion dollars. The common market with its customs advantages also has attracted foreign investment to a bloc, comprising some 220 million consumers.

A commercial association with Chile, the most stable and balanced economy in the region, which is scheduled to occur soon, will be another element in Mercosur’s favor.

Overseas financial crises of the past few years, such as that of Mexico in 1994 and in South East Asia in 1997, have tested the union. But the partners have responded as a bloc and have emerged stronger than ever.

Argentina now believes that a single currency could be a very positive sign in moments in which investors are abandoning Asia in the search for more stable ground. Before a crisis like that of Asia, Mercosur should take a political decision to adopt a single currency that would offer even greater credibility to the rest of the world, said Menem.

The Argentine consulting agency Capital Foundation agreed with Menem that the crisis of southeast Asia revealed that part of the debacle is due to the so-called “competitive devaluations” that different countries Asian countries engaged in over the past seven months.

The magnitude of the Asian crisis highlighted the importance of acting as a bloc, coordinating exchange policies, according to a report carried out by Capital Foundation at the request of the Secretary of Strategic Planning at hhe president’s office.

The consulting agency recognized that the path is not easy, because it demands coordinated macroeconomic policies between members, stricter parameters of convergence that those that exist for the European Union, particularly in terms of fiscal policy, a minimum quantity of disposable reserves, and the magnitude of the regions indebtedness.

The agency recommended that Brazil must promise by law that resources obtained through privatization this year should go toward canceling this countrys huge internal debt. Brazilian officials, however, already have spoken ouit against such an idea.

Financial anaylysts recognize that adopting a single currency is not an easy task. There are those who believe in a free convertibility with floating exchange rates, while others prefer a system based on a basket of currencies including the dollar, the German mark, and the yen.

Economist Eduardo Curia told IPS that Mercosur’s single currency project is behind schedule, and it should be in process now. The problem is what parity level should be established, because the Mercosur countries are experiencing a delayed exchange rate that is having a perverse affect on the regions economy, he said.

“I believe that this proposal has emerged in order to be better prepared to resist the effects of the Asian crisis and to make it impossible for Brazil to get away with a maxi-devaluation, ” Curia said. “But Brazil will not cede its independence,” he added pessimistically.

“Integrating the region’s currency also implies a strong adjustment by Mercosur members, which must balance fiscal policy by reducing spending, increasing tax es, and making labor laws more flexible in order to lower contract costs,” he said.

But for now, the only objective of a single currency, even if several obstacles stand in the way, is a common project that demonstrates that Mercosur is seeking paths to fine tune the union in the medium and short term.