Greece just
narrowly avoided crashing out of the euro but for skeptics the clock is
already ticking on when large-scale default and exit from the
"irreversible" euro club are raised once again.
When it is - be that in two months or two years - the lessons from Argentina are sure to be revisited.
Argentina's $100 billion default in 2001 was the largest in history. It yanked the peso from its peg to the dollar and resulted in a 75 percent devaluation.
This shattered the economy. Real gross domestic product slumped 15 percent, inflation reached 40 percent, and household and business finances were crippled. To this day, the government remains cut off from international capital markets.
But, with the aid of serendipitous global economic conditions, Argentina's economy soon recovered.
So severe has been the recession in Greece since 2008 and so great are its debts, that some economists say Greece might be best served also crashing out of its currency union. Could a new drachma, 50 percent cheaper than the euro, be the catalyst for recovery?
"The parallels with Argentina are there. A broken banking system, an unsustainable debt, and the need to restore and enhance international competitiveness," said Barry Eichengreen, professor of economics and political science at the University of California, Berkeley.
"But
there are reasons to think that reintroduction of the drachma and
devaluation would do less for Greece than devaluation did for Argentina.
Greece is less open, it exports less," he said.
The dollar's 30 percent rise over 1999-2001 made Argentina's exports uncompetitive on global export markets, especially when set against the currency collapse of neighbor and rival Brazil, and ultimately forced the central bank to break the dollar peg.
Greece's competitive problems are more deep-rooted. Not even the 40 percent collapse in wages since 2008 has lowered unit labor costs sufficiently to kick-start exports.
This begs the question, if an "internal" devaluation so large hasn't made Greece more competitive or boosted activity, why would an equally large "external" devaluation make any difference?
After all, if there's no demand and limited capacity to boost supply, it makes no difference to activity if a country's goods are cheaper because of lower wages or a lower currency.
Argentina, a major exporter of commodities, was lucky its currency collapsed just as the global commodity boom was taking off. This gave a huge positive terms-of-trade boost to domestic consumption and a major lift to exports.
"That's not going to be repeated for Greece," said Willem Buiter, chief global economist at Citi and co-author of a report in 2012 which introduced the term 'Grexit'.
"It is a much more closed economy, and it has absolutely no hope of getting carried along on a tourism and shipping equivalent of Argentina's global commodity super cycle."
Argentina's $100 billion default in 2001 was the largest in history. It yanked the peso from its peg to the dollar and resulted in a 75 percent devaluation.
This shattered the economy. Real gross domestic product slumped 15 percent, inflation reached 40 percent, and household and business finances were crippled. To this day, the government remains cut off from international capital markets.
But, with the aid of serendipitous global economic conditions, Argentina's economy soon recovered.
So severe has been the recession in Greece since 2008 and so great are its debts, that some economists say Greece might be best served also crashing out of its currency union. Could a new drachma, 50 percent cheaper than the euro, be the catalyst for recovery?
"The parallels with Argentina are there. A broken banking system, an unsustainable debt, and the need to restore and enhance international competitiveness," said Barry Eichengreen, professor of economics and political science at the University of California, Berkeley.
The dollar's 30 percent rise over 1999-2001 made Argentina's exports uncompetitive on global export markets, especially when set against the currency collapse of neighbor and rival Brazil, and ultimately forced the central bank to break the dollar peg.
Greece's competitive problems are more deep-rooted. Not even the 40 percent collapse in wages since 2008 has lowered unit labor costs sufficiently to kick-start exports.
This begs the question, if an "internal" devaluation so large hasn't made Greece more competitive or boosted activity, why would an equally large "external" devaluation make any difference?
After all, if there's no demand and limited capacity to boost supply, it makes no difference to activity if a country's goods are cheaper because of lower wages or a lower currency.
Argentina, a major exporter of commodities, was lucky its currency collapsed just as the global commodity boom was taking off. This gave a huge positive terms-of-trade boost to domestic consumption and a major lift to exports.
"That's not going to be repeated for Greece," said Willem Buiter, chief global economist at Citi and co-author of a report in 2012 which introduced the term 'Grexit'.
"It is a much more closed economy, and it has absolutely no hope of getting carried along on a tourism and shipping equivalent of Argentina's global commodity super cycle."
No comments:
Post a Comment