Latin American Currency Area Bad News For Debt-Laden Countries Like Argentina

Argentina and Brazil are making plans to develop a single currency area for Latin America.

However, those doing so might find it is not without some massive hurdles.

Much but not all of the European Union operates with a single currency, the euro. And in many ways, that makes sense. With the overwhelming majority of the population using the same money, then the risks of trade such as sharp inter-country currency movements — are eliminated. That in turn, lowers the uncertainty of doing cross-border business and will likely increase international trade and hence provide economic growth.

Remember, that’s just the theory.

It hasn’t been good for Europe over the last two decades of a single currency. The debt crisis a little over a decade ago partly highlights the problem. The so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain) had all gotten into massive debt problems. However, non of those countries could inflate their way out of debt.

How so? They couldn’t lower the value of their national currency, so prompting the real value of their debts to devalue. Instead, they mostly went through periods of renegotiating debt repayments for many years. Greece is the prime example of this, and that country went through a long, drawn-out period of austerity that could have been less acrid if only the Greeks held on to the Dracma.

Fast forward now to South America. Both Argentina and Brazil have suffered debt crises. The latter country appears to still be in one, and ended 2022 with an official inflation rate of nearly 100%. The country’s current financial mess comes after decades of similar none sense.

That of course, prompts questions:

How will Argentina fare if it does enter a new single currency area?

Won’t it suddenly be trapped and unable to claw its way out?

Why aren’t Buenos Aires’s leaders talking sense about this matter?

Who knows. But economic disaster looks probable if a Latin American single currency area kicks off with Argentina included.