Commentary: What A `Euro' Could Do For The Latins

While the world focuses on the euro's imminent launch, South Americans are quietly laying the foundation for a common currency of their own. At a regional summit in June, Argentine President Carlos Menem will renew his call for a single monetary unit for Mercosur, the customs union made up of Brazil, Argentina, Uruguay, and Paraguay. When Menem first raised the idea last December, pundits dismissed it as folly. But they're wrong. Anticipation of the benefits of the euro is already yielding Europe a bonanza in the form of corporate restructurings, lower interest rates, and booming stock markets. In the same fashion, a single Mercosur currency--perhaps called the "merco"--could bring economic stability to the region by opening borders and improving trade. Even the Brazilians, whose participation is key, are discussing the possibility. For one thing, adoption of the merco could pressure their procrastinating Congress to cut budget deficits and reduce debt.

Indeed, some of the same forces that are helping get the euro off the ground are evident in South America. For one thing, the region's economies are increasingly converging. Average inflation within Mercosur is now 8.5% down from 275% in 1992. Except for Brazil, fiscal deficits hover close to 3% of gross domestic product--the level required for membership in the European Monetary Union. And since Mercosur's creation in 1991, trade among members has quadrupled, to $17 billion annually. Because most of the Mercosur currencies are linked to the dollar, they already trade within a close range.

Formalizing a monetary accord will be easier in Mercosur than in Europe, since there are fewer economies to coordinate. And it will offer many of the same benefits. For instance, less exchange rate volatility will increase trade within the region by making it easier for companies to expand across borders. Improved stability and more competitive exports also will lure new foreign investment.

To be sure, regionally coordinated monetary and fiscal policies are still a long way off. Interest rates are widely divergent--Brazilian three-month yields exceed 27%, while Argentina's are only 6.5%. But Europe had the same problem until single-currency fever took hold and interest rates converged. Also problematic are the high levels of domestic and foreign debt in Brazil and Argentina and a lack of common Latin trade rules. As relative newcomers to democracy, there's no guarantee that the region's future governments will advocate the monetary and fiscal synchronization a common currency would demand. Imposing monetary union without economic and trade reform would be disastrous.

The Latins have more work to do, but these concerns should not be a barrier to beginning the process. Working toward establishing a merco would keep the region's economies on track for sustained growth. Just look to Europe for proof.

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