It is said that those who do not remember the past are doomed to repeat it. Evidently, Brazil’s President Lula and Argentina’s President Fernandez have not remembered Europe’s unfortunate experience with the Euro over the past two decades. Had they remembered that dismal experience, they would almost surely not have launched the idea of a common currency for two countries quite as divergent as Argentina and Brazil.
When the Euro was launched in 1999, Europe’s leaders had great hopes for the common currency. They hoped that it would contribute to economic prosperity and stability for all of the Eurozone’s 12 founding member countries. They also hoped that it would promote the economic and political convergence of the Eurozone’s Northern and Southern member countries.
Most ambitiously, they hoped that a monetary union in Europe would pave the way for a European political union that would make for something like the United States of Europe. They also hoped that the Euro would become a serious rival to the US dollar as the world’s international reserve currency.
Unfortunately, the European economic experience with the Euro has fallen far short of expectations. While it is true that the Eurozone’s Northern member countries, like German and The Netherlands, have prospered, its Southern member countries, like Greece and Italy, have languished. As if to underline this point, beginning in 2010, Greece experienced a deeper and longer economic depression than that of the United States in the 1930s. Meanwhile, Italy’s real per capita income today is below its level in 1999 and the gap between the Italian and German economies has only widened.
Over the same period, and especially since the 2010 sovereign debt crisis, the political tensions between the Eurozone’s North and South have deepened. The Northern member states have resented the fact that they have been called upon repeatedly to bail out what they consider the fiscally irresponsible Eurozone economic periphery. With the recent spike in the Eurozone’s inflation to a multi-decade high, they have also regretted having given up their monetary policy control to the European Central Bank. For their part, the Southern European countries have bridled at the repeated requests from the North for belt tightening. This was especially the case at a time when these countries found themselves experiencing economic recession.
Needless to add, the great hopes that the Euro would pave the way for a European political union proved to be a great illusion. Today, while Europe might have made some progress towards a banking union, the Eurozone is as far as ever from a fiscal union.
At the heart of the Eurozone’s problems is that it made no sense tying economies as divergent as the highly productive German economy to sclerotic economies like Greece and Italy. This was especially the case when labor mobility between these countries was limited and when those countries lacked wage price flexibility to make up for losses in competitiveness in a monetary union. This was also the case when these countries did not have a fiscal union that might have allowed budget transfers from the stronger economies to support those weaker economies entering into economic recessions.
The weakness of the Eurozone became particularly evident in 2010 during the Eurozone sovereign debt crisis when the countries of the Eurozone’s periphery experienced public finance problems in a recession. Stuck within a Euro straitjacket, they no longer had a currency that they could depreciate to promote their export sectors as an offset to budget belt tightening. In these circumstances, their attempts at budget austerity proved counterproductive. They deepened their economic recessions without correcting their public finances.
In light of the Eurozone’s dismal experience, it would seem a major policy mistake for two countries as economically divergent as Argentina and Brazil to be thinking of a currency union. They simply lack the necessary prior conditions for a successful monetary union. Neither Argentina nor Brazil is known for exchange rate or price stability. They are light years away from any semblance of a political or fiscal union. Neither enjoys a great degree of labor mobility or wage flexibility that could correct any losses of competitiveness that might arise in such a union.
Instead of dreaming about a currency union, it would be better for both Argentina and Brazil to focus on meaningful domestic economic policy reform that might promote economic growth and price stability. A good place to start might be to establish a sound framework for more disciplined budget policies than either of these countries have experienced. Such budget reform might serve to provide them with the price stability that has long eluded them.
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