Krugman says Argentina and Brazil’s common currency is a lousy idea

Paul Krugman, a Nobel laureate in economics, said the proposed shared currency between Argentina and Brazil is a “terrible idea” conceived by someone with limited knowledge of economics, adding to public criticism of the plan being pushed by the leaders of the two countries.

“A shared currency can make sense between economies that are each other’s main trading partners and are similar enough not to face large asymmetric shocks,” Krugman said in a Twitter thread on Sunday.

Despite being neighbors and trading partners, Brazil sends only 4.2% of its exports to Argentina, while Argentina’s exports to Brazil are 15%, Krugman said.

He also noted that the countries’ trade structures differ greatly, with Argentine exports being basically agricultural and more than half of Brazil’s being manufactured goods or fuels.

“Therefore, shocks to the global economy are likely to lead to large changes in the equilibrium real exchange rate,” Krugman wrote.

Brazil’s newly elected president, Luiz Inácio Lula da Silva, and his Argentine counterpart, Alberto Fernández, announced their intentions to discuss a “common South American currency” in an open letter published last weekend in an Argentine newspaper.

They wrote that the unit would be used “for financial and commercial exchange, to reduce operating costs and reduce our external vulnerability” to the dollar.

The announcement came amid the Community of Latin American and Caribbean States (CELAC) summit.

There, finance ministers from both countries clarified that they are thinking of “common means of payment” that would not replace their own national currencies.

With information from Bloomberg