The Feasibility of a Monetary Union in MERCOSUR

Based on the progress of the European Union (EU) and the development of the European Monetary Union (EMU), many economists have studied the possibility of implementing a single monetary unit system in other regions of the world. When considering the countries in the region of Latin America, experts suggest they are currently not ready for a monetary union. This paper analyzes the feasibility of a currency union within MERCOSUR – a trade agreement between Argentina, Brazil, Paraguay and Uruguay – with a long-term perspective. In order to form a conclusion, the concept of a currency union in MERCOSUR was analyzed qualitatively and quantitatively. The existing Euro model was studied and frequently used as an example. In addition, the country profiles of all four members of MERCOSUR were conceptually compared and also analyzed with econometric models to test the current level of integration. The results suggest that these four countries are not ready for a currency union because their level of integration is not strong enough and there is too much volatility in their economies. To develop into an optimum currency area, several actions must first occur: Argentina, Brazil, Paraguay and Uruguay must increase their level of integration amongst each other, improve their economic performance, and lastly, all four countries must believe and act in such a way that shows they are unified under a single goal. Lastly, the Eurozone has proven that to have a sustainable currency union, there must be fiscal integration to absorb and smooth economic shocks. If the ultimate goal is a monetary union, then an economic union should also be taken into consideration.