BBC News Online: Business: The Economy

Argentina plans monetary union

The blue-print for the 'dollarisation' of the economy was prepared by the President of the central bank, Pedro Pou, at the request of President Carlos Menem.

Brazil is one of Argentina's biggest trading partners and its decision to devalue the real has hit the Argentinian economy hard.

To ensure monetary stability, Argentina wants to:

• Negotiate a treaty of "monetary association" with the United States, adopting the US dollar as its national currency.
• Offer other countries across the Americas to join the treaty, effectively creating a pan-American monetary union.
• Adhere to strict fiscal discipline, similar to the Maastricht criteria that form the basis of Europe's Economic and Monetary Union.
• Get a share of the income received by the US Federal Reserve for printing dollars
• Open its markets to imports from the dollar-zone and negotiate better access for its products to the US market.

This ambitious plan, however, has had a cool reception so far.

Outlining its proposals, the Argentinian central bank said it had formed a working group, supervised by the International Monetary Fund (IMF) and including US Deputy Treasury Secretary Lawrence Summers.

This has been denied by both the IMF and the US Government. "There is no formal working group or treaty process under way", a Treasury spokeswoman said, adding that "we are aware of Argentina's interest".

The IMF meanwhile called the plan to create a monetary association "interesting", but insisted that the "IMF has no direct involvement in it".

Dollar peg

Argentina's former economy minister Domingo Cavallo, who decreed the peso's peg to the US dollar, said the proposals were "logical" and would help the country's economy.

The peg to the dollar put an end to Argentina's history of hyperinflation and the government is determined to continue this policy.

Brazil had steered a similar path, but profligate government spending and huge capital flight forced it to give up the defence of its currency. As a result the real lost nearly 30% in value within one week.

Guillermo Estebanez, international economist at Bank of America, said the proposals were "all about damage control and the efforts to limit the extent of the Brazilian real crisis".

Other analysts say that the plans are Argentina's way of proving to the financial markets that it is determined to defend the peso's peg to the dollar.

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