Argentina and Brazil are set to begin preparatory work to establish the second largest currency bloc in the world. The name suggested for the new currency is "sur".
The "sur" when it officially becomes a medium of exchange in the two largest latin American economies, would facilitate comparisons of prices and other key investment decision parameters.
What else should investors expect?
A look at lessons from "euro", the largest currency union would be helpful.
The euro eliminates currency risk within the eurozone. It facilitates and promotes cross border invesments by businesses. Businesses operating in both Argentina and Brazil would no longer face currency risks if and when sur becomes a daily currency in both countries.
Elimination of currency risks and facilitation of price comparison would enable cross border businesses in the two countries to lower costs and increase profits. How?
Businesses would have a range of best deals from suppliers to choose from. They would also use the ease of labor mobility to easily move their best hands between both countries.
They would have the enabling environment to create packages that attract best hands from competitors within the currency union.
There's also enjoy benefits deriveable from the possibility of currency stability. One of them would be the lowering of interest rates and the increasing of the possibility of appropriate capital allocation between subsidiaries.
However, during a period of depression in a partner currency, economic growth would slow down and unemployment would increase. When this happens, investors would become apprehensive about liquidity.
A shrinking in the volume of cash in circulation would cause interest rates to rise. The common currency policy is unlikely to allow a partner country to unilaterally print more money, inject it to stimulate the economy and reverse an economic depression. Businesses would have to cut jobs and eventually, die if the situation persists.
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