Brazil and the Euro - Part 1

Part l – Published in July 1999

“How can currency stability be achieved for the Brazilian economy?”

If Brazil is thinking of the future, they should think in terms of the Euro. If Brazil wants to base its future policy on the past, then it should think in terms of the U.S. Dollar or Pound Sterling.

By Ricardo C. Amaral

On January 1, 1999 the rules of the game for international currency speculation have changed in a drastic manner with the birth of the euro.

The number of currencies which international currency speculators can invest and play their speculative games has been reduced by 10. In the past, we had the currencies of eleven European countries; today these currencies are being replaced by one the "euro."

In the near future the remaining members of the European Economic Community including such countries as England and Sweden will adopt the Euro as their currency and become members of the new European Monetary Union (EMU). Today the amount of money that international speculators have under their management is becoming mind-boggling.

The amount of daily currency transactions in global markets is over $ 1.5 trillion dollars. The magnitude of daily currency transactions is a major contributing factor for many countries losing their capability to defend their weak currencies from foreign attack of these international money speculators.

These countries don’t have the economic reserves necessary to defend their currencies from foreign speculative attacks. It is getting easier for these international speculators to destroy the entire economy of countries such as Russia, Indonesia, Malaysia, Thailand, South Korea, and Brazil.

All they have to do is destroy their currency and the economies undergo a complete collapse. It is a form of modern economic warfare. Brazil should become a member of the European Union and immediately adopt the euro as its new currency. Based on sound macroeconomic analysis, this is the best alternative available to Brazil to achieve its goals of economic growth and currency stability.

The elimination of exchange rate risk between Brazil and the euro countries should stimulate capital flows, improve trading, and access to capital markets. Sound monetary policy will translate into lower interest rates, and long-term economic survival and prosperity.

The Euro—a historic turning point.

We are at a turning point in history. The U.S. dollar is in the same position today in which the Pound Sterling was at the end of the First World War. The U.S. dollar replaced the Pound Sterling as the dominant currency in the following twenty-five years. The best choice among the major currencies of the future is the euro. In a few years there will be three major currencies: (a) U.S. Dollar, (b) Euro, (c) Yen (or some other new Asian currency) and the currency of most countries will not be able to survive with their independent currency policies, including England with the Pound Sterling.

The new European Central Bank under the leadership of the Germans will be recognized as a new leader in international money matters, and the euro will qualify in short order as a strong international currency. Markets will recognize the strength and stability of the European Union’s economy, and in the future the euro will be one of the major reserve currencies in the world.

It will not take twenty-five years this time around for this process to develop. This will occur at a very fast pace. It would be a smart move for Brazil to apply for membership in the European Union and to adopt the euro immediately as the new currency in Brazil. Today, countries around the world have official reserves as follows:

Percentage share by currency:

U.S. Dollar = 60 percent of market

Euro Group = 20 percent of market

Yen = 6 percent of market

Other = 14 percent of market

Most people should not be surprised if in ten years the breakdown of official reserves of the countries around the world will be as follows:

U.S. Dollar = 35 percent of market

Euro Group = 35 percent of market

New Asian Group = 25 percent of market

Other = 5 percent of market

The decline of the U.S. Dollar.

The U.S. dollar and the U.S. economy will encounter many problems in the near future related to the bursting of the Wall Street bubble, the costs of taking care of an increasing number of elderly citizens, and its over $ 7 trillion of cumulative government debt.

If Brazil is thinking of the future, they should think in terms of the euro. If Brazil wants to base its future policy on the past, then it should think in terms of the U.S. dollar or Pound Sterling. Brazil is being pressed by the international currency speculators to bite the bullet at this point. To best position the Brazilian economy for the future, the Brazilian government should adopt the euro immediately as its new currency and should plan to bring Brazil as close as possible to the European Monetary Union.

Why should Brazil make this transition immediately?

The timing is perfect for this transition. This move would give Brazil a chance to go through this period of economic adjustment at the same time as the European countries. This process would bring the Brazilian and European economies closer, and would promote further economic integration. If the Brazilian government decides to bring Brazil to the U.S. dollar group, then Brazil always will play second fiddler to the United States.

On the other hand, membership in the European Monetary Union will mean that Brazil will be treated as an important member of that group. The adoption of the euro by Brazil would provide the currency stability necessary for long-term growth, investment, lower interest rates and access to European money markets.

After speaking with some Brazilian newsmen and some Brazilian bankers in the United States, I was surprised at their response to my questions. They told me that they have not given any thought to the possibility of Brazil belonging to the European Monetary Union and adopting the “Euro” as its new currency. Everybody seemed surprised by my suggestion.

U.S. Dollar = Yesterday, Euro = Tomorrow.

The Brazilian politicians will try to keep the old game on, but with official reserves around U.S.$ 40 billion it will not be long before this small reserve is run down to the ground. When this scenario develops, Brazil will be economically demoralized and in a very weak position to adopt the euro or the U.S. dollar.

If the Brazilian government reserves are run to the ground (a very real possibility) and Brazil becomes bankrupt or in a similar situation as Russia or Indonesia, then Brazil will be in a very weak position to request membership at that time.

By adopting the euro immediately as its new currency, and working out the details for full membership to the European Monetary Union, later Brazil will be in a better economic position to meet the requirements for full membership.

Brazil is going through a difficult economic time, because of the new global economy. It is time to wake up and adopt the euro as its new currency. Keep in mind that this change will have major beneficial long-term consequences and would place the Brazilian economy on the correct path towards prosperity in the new millennium.

Part l of this series- originally published by

“The Brasilians,” issue number 295, pg. 4E, July 1999.

Copyright © 1999 All rights reserved.

By Ricardo C. Amaral.

Author and Economist

brazilamaral@yahoo.com

This article was reprinted on “Brazzil” magazine in June 2003.

.