Why Paul Krugman Thinks Common Brazil-Argentina Currency Is A 'Terrible Idea'

Nobel laureate and noted economist Paul Krugman has poured cold water on the concept of a shared currency between Brazil and Argentina, calling it a "terrible idea."

What Happened: Krugman on Sunday shared a Financial Times article about economists questioning the South American giants' plan to create a common unit that would promote regional integration and challenge the U.S. dollar’s dominance.

Krugman criticized the idea based on the theory of Optimum Currency Areas, which according to Investopedia, states that "geographic regions may be better off using the same currency instead of each country within that geographic region using its own currency," subject to specific criteria.

What with everything else going on, haven't commented on proposed currency union between Argentina and Brazil. But it's a nice opportunity to apply the theory of Optimum Currency Areas — which tells us that it's a terrible idea 1/ https://t.co/DTufAGaq0y

— Paul Krugman (@paulkrugman) January 29, 2023

Krugman argued that the proposed plan would make sense only if the two Latin American countries were each others' major trading partners and similar enough not to face large "asymmetrical shocks."

He shared a data snapshot of Brazil's export destinations, for which China accounted over 31% and the U.S. over 11% but Argentina only 4.2%.

"Argentina sends more to Brazil, because Brazil's economy is larger — but still only 15%," Krugman said while pointing out another stark difference: Argentine exports are mostly agricultural goods, while more than half of Brazilian exports were finished goods or fuel.

"So shocks to the world economy likely to cause big changes in equilibrium real exchange rate," Krugman said. "I don't know who came up with this idea, but it surely wasn't anyone who knows anything about international monetary economics."

Why It Matters: The idea floated by Brazil and Argentine leaders aims for greater economic integration in the region and eventually rope in other Latin American countries.

Argentina is also trying to recover from the brink of insolvency for many years, with shrinking central bank reserves and thinning trade with Brazil owing to a shortage of dollars. It has also failed to stymie soaring prices, with inflation currently running at a year-on-year rate of over 90%, delivering a severe blow to wages and earning power.

Cryptocurrency enthusiasts, meanwhile, are debating whether the two nations should ditch fiat currency and adopt either Dogecoin DOGE/USD or Bitcoin BTC/USD as a "right long-term bet."