Nobel economist Paul Krugman slams Brazil and Argentina's joint currency plan, saying 'it's a terrible idea'
- Paul Krugman criticized Brazil and Argentina's plan to create a common currency for trade.
- "It's a nice opportunity to apply the theory of Optimum Currency Areas — which tells us that it's a terrible idea," he said on Twitter.
The euro-like shared-currency project proposed by Brazil and Argentina is a "terrible idea", according to Nobel Prize-winning economist Paul Krugman.
A common currency would work for countries that are each other's top trading partners and are similar enough to avoid the threat of so-called "asymmetrical shocks", but the two South American nations don't fit the bill, according to him.
"I don't know who came up with this idea, but it surely wasn't anyone who knows anything about international monetary economics," Krugman said in a Twitter thread posted on Sunday. "But it's a nice opportunity to apply the theory of Optimum Currency Areas — which tells us that it's a terrible idea."
—Paul Krugman (@paulkrugman) January 29, 2023
According to the optimum currency areas theory, a common monetary unit can boost economic efficiency only if the participating countries meet certain criteria.
Brazil sends only 4.2% of its exports to Argentina, which sends only 15% of its goods to the former. "Argentina sends more to Brazil, because Brazil's economy is larger — but still only 15%. And the two countries' structure of exports is very different," Krugman said.
While Argentina mainly exports agricultural products, more than half of Brazil's outward shipments are fuel and manufactured goods. "So shocks to the world economy [are] likely to cause big changes in equilibrium real exchange rate," he explained.
Krugman's remarks add to a slew of criticism that the countries' leaders — Brazil's new president Luiz Inácio Lula da Silva and Argentine leader Alberto Fernández — have faced after announcing their plans to start discussing the initiative in a joint statement published on January 21.
The proposed currency, which Brazil wants to call the "sur" (south), would become the new medium of exchange between the two nations, and eventually other South American countries too, creating the world's second-largest currency bloc after the euro.
The idea is that a currency union would boost trade in the region and decrease dependency on the US dollar because conversion costs and exchange rate uncertainty would be eliminated.
But as Argentina's inflation edges closer to 100% amid the central bank's frantic money-printing to keep up with spending and with Brazil's debt pile mounting amid six-year high interest rates, Krugman and other critics of the plan worry that a common currency could threaten an already unstable economic environment and spread shocks between the countries who opt in.
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