In the long years that I have been developing the idea of sustainable dollarization (which includes bank opening and trade opening) and exposing it in public, I have met with the enthusiasm of a few colleagues and observers and the skepticism of many, although notice a change in recent years: now they pay more attention to me. I attribute the change to the 2018/19 crisis and the appearance of the candidate Milei.
Before 2018/19, when I became aware that it was not worth insisting on the advantages of dollarization, I proposed to those who listened to me the creation of a regional central bank. I did not develop the idea in writing because, although it could yield a monetary system superior to the existing one, I believe that the regional currency is inferior to dollarization.
Following an innocent proposal by Minister Massa to the Brazilian government in order to create a common currency to pay the balances of trade between the two countries, the idea of a common currency has taken flight in earnest. Deputy Fernando Iglesias (La Nación, Wednesday, February 8) wrote the best article I’ve read on the subject. In essence, Iglesias points out that in this way “monetary policy would stop depending on the Argentine political system.” In the paragraphs that follow, I will list some technical aspects of the creation of a regional central bank (BCR):
1. The BCR is created and the central banks of the signatory countries of the agreement are eliminated. Consequently, the money offers of the signatory countries are replaced by the offer of the new regional currency. Thus, a new monetary area is created that will exhibit a similar price level, a similar inflation rate, and a similar short-term interest rate in the signatory countries.
2. Each signatory country has a single representative on the BCR board, as in the European Central Bank. This would ensure that a relatively large and chronically inflationary country like Argentina would have the same weight in the BCR’s decisions as a relatively small and stable one like Paraguay.
3. The BCR’s policy would consist of increasing the supply of the new regional currency at a low and predetermined rate, approximately in line with the region’s GDP growth rate, or applying an interest-rate targeting policy as is done In U.S.A.
4. The exchange rate of the regional currency against the US dollar would float, and could, for example, depreciate when the region’s terms of trade fall or appreciate when they rise.
The creation of the BCR would have many advantages for Argentina. The most important is that it would make the internal inflation rate converge on the rate that we observed in the region before 2020, a level to which neighboring countries will presumably return. And it has two disadvantages: a) instead of dealing with a first-class coin, we will have to experiment with a coin without a history; b) instead of unilaterally adopting a reserve currency, the replacement of the peso by the new regional currency will depend on the hazardous political process of creating a supranational entity.
What has been said supposes that Argentina will abstain or it will be impossible for it to exert pressure on the policy of issuing the regional currency. In other words, that financial difficulties or the ruling ideology in the country will not be able to influence regional monetary stability. I believe that this assumption is not valid even today, when the country’s economic and political gravitation is at an all-time low.