Common currency and economic integration in Mercosur

Latin America has a long history of attempts to achieve regional integration, yet success has been modest. This paper contends that this is essentially due not so much to protectionist practices in the various countries, but to the lack of a common currency, or, at least, of a tightly managed exchange rate band. We reviewed the optimum currency area criteria that indicate it is prudent to increase economic integration before attempting to establish exchange rates coordination. Yet, we show that in the Mercosul there are already the minimal requirements to work on this direction. Diminishing exchange rate instability could encourage trade and investment flows across Latin American economies. We also performed a simplified exercise to understand how feasible would be the efforts to achieve exchange rate parity stability in the two larger economies in the region (Brazil and Argentina) and step forward toward adopting a common currency.