Paul Krugman: Argentina, Brazil’s joint currency is terrible idea

Nobel-Prize-winning economist Paul Krugman said the proposed currency union between Argentina and Brazil is a “terrible idea” dreamed up by someone with a limited understanding of economics, adding to public criticism of the plan both country’s leaders are pushing.

“A shared currency may make sense between economies that are each other’s major trading partners and are similar enough that they won’t face large asymmetrical shocks,” Krugman said in a Twitter thread Sunday.

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

He also pointed out the countries’ trading structures differ greatly, with Argentine exports being basically all agriculture, and more than half of Brazil’s being manufactured goods or fuel. “So shocks to the world economy likely to cause big changes in equilibrium real exchange rate,” Krugman wrote.

Recently elected Brazil 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 the Perfil newspaper.

The unit would be used “for financial and commercial trade, in order to reduce operational costs and lower our external vulnerability” to the dollar, they wrote.

The announcement came amid a summit of the Community of Latin American and Caribbean States. There, finance ministers of both countries clarified they are thinking of “common means of payment” that would not replace their own domestic currencies.