Paul Krugman, the recipient of the Nobel Prize in economics, argued that Argentina should adopt Euro. His remarks come as the nation struggles with triple-digit inflation and a falling peso. “Trade between Argentina and the EU is roughly two times greater than trade between Argentina and the US. If anything, they ought to go to the euro.” Krugman wrote in a post on X on Thursday.
According to the Ministry of Foreign Affairs, International Trade and Worship of Argentina, the European Union accounted for Argentinian exports standing at 10.1% and imports standing at 14.6%. Recent commentary has argued that Argentina should abandon the peso and Argentina should adopt Euro as its official currency to combat its dreadful inflation issue.
Is Dollarization a good idea?
Those who have spoken in favour of dollarization include economist Steve Hanke and Javier Milei, a candidate for president of the South American country. Any decision to embrace the dollar would, however, undo Argentina’s recent efforts to reduce its reliance on the US dollar.
113.4% was the annual inflation rate in Argentina in July, according to official statistics. The Argentine peso is in decline and fell 20% against the dollar on Monday alone, contributing to the rising pricing pressure. The lack of US dollars has been a significant factor in the currency crisis, which has led the country’s commercial banks to set up deposit facilities.
What are the main benefits of the Euro?
The euro was established to support economic unity, growth, and stability in Europe. The euro was initially a unifying currency that was used for trade within the union. Each country’s citizens kept using their respective currencies.
The expanded trade is one of the euro’s key advantages. By doing away with the requirement for currency exchange, travel became simpler. Significant foreign exchange risk exists for investors in nations that use different currencies, which can result in an ineffective allocation of capital. Exchange rate risks also exist in stocks, but because of their lower volatility, bonds are significantly more affected than stocks.
What did Paul Krugman say?
American Nobel laureate Paul Krugman recently voiced his opinion over Argentina’s potential dollarization process later this year. Given Argentina’s trading realities, Krugman, who was awarded the Nobel Prize in Economic Sciences in 2008 for his examination of trade patterns and the distribution of economic activity, argues that the dollar might not be a better alternative to the peso but that Argentina should adopt Euro.
In response to a comment by economist Brad Setzer, who formerly worked for the U.S. Treasury, who likened the conditions in the U.S., Canada, South America, and North America as “optimum currency areas,” Krugman said: Argentina trades with the EU approximately two times as much as it does with the US. Instead, they ought to switch to the euro.
Setzer emphasized that the U.S. dollar was not a commodity currency and that Latin American exports were linked to the Chinese and global cycle of commodities rather than the U.S. cycle.
The dollarization issue in Argentina has been heated. The government plan put forth by Milei calls for, among other things, a reduction in the number of ministries, a switch to the dollar as a fiat currency, and a reduction in inflation and devaluation.
The official peso exchange rate had to be devalued by the Argentine government just last week, reaching 350 pesos to the dollar. However, the “blue” rate, an unofficial and parallel exchange rate of the peso, which reached almost 800 pesos to the dollar, disrupted the price of items in retail outlets and drove Argentines to turn to stablecoins for safety. However, Millei has long stated that Argentina is not devoid of resources for dollarization of Argentina.
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