Why Greece should not become Kirchner’s Argentina
by Federico N. Fernández*
Last Saturday November 21st I participated in the European Students for Liberty Regional Conference in Thessaloniki. It was a spectacular event with great speakers and a huge crowd of 250+ who were very engaged throughout the whole day. As you may have read on this blog, Thessaloniki is truly a hotspot for Libertarian ideas.
The main organizer, Nikos Kostopoulos, asked me to talk about the relationship between Greece and Argentina. What I call the Argentina hypothesis peaked when Alexis Tsipras said, at the Greek Parliament, “I wish we had become Argentina.” At the base of this claim lies the assumption that what happened in Argentina after the crisis of 2001 was a “successful devaluation.” That’s the official narrative used by people like Tsipras, populists in Latin America, and leftists around the world.
To understand why Argentina may look like a desirable destination for these people one has to go back in time to the late 1980s. Precisely in 1989 Argentina was suffering of hyperinflation which precipitated the fall of president Alfonsín administration. The change of government did little to control the situation and in 1990, again, there was an outbreak of hyperinflation. In such desperate situation Domingo Cavallo was appointed as Minister of Economy and he launched the Convertibility Plan. Such a system, in a nutshell, meant that the Central Bank of Argentina had to store one US dollar for every peso (the national currency) that was circulating.
This system had two very obvious consequences:
1) You can’t devaluate your currency. The exchange rate is fixed. In the case of Argentina it was 1 to 1 (in fact it was 10,000 australes to one dollar originally, but then the austral disappeared and was replaced by the peso erasing four zeroes).
2) You can’t print money. Or at least you can’t print like crazy. This is because for every new peso you wanted to print you needed to get a dollar and stored it at the Central Bank first.
Hence, the parallelisms between Argentina back then and Greece today are quite clear. With the euro, Greece is able neither to devaluate its currency, nor to print any money.
Coming back to Argentina, convertibility was in fact a measure of last resort to restore confidence in the local currency by technically forbidding the government to do any monetary policy. Cavallo himself said that the system meant that they have closed the door and threw away the key. And it definitely worked in what regards to stopping inflation. Almost five decades of high inflation and the hyperinflation peaks of ’89 and ’90 almost magically became a rumor from a distant past.
A monetary system like convertibility, which by its very nature is extremely tight, should have been accompanied by a set of measures. The first and most obvious is balanced budgets. But those never arrived. In fact, since ’95 Argentina had started to run deficits of u$s 10 billion a year. So, our spendaholics in charge needed to find a way to keep the party going. They knew that they had thrown away the key to the door of the money printing presses, so they decided to open the window of debt.
Their irresponsible behavior proved to be suicidal, and by the beginning of 2001 markets doubted the sustainability of Argentina’s debt. By the end of that year everything finally collapsed and Argentina defaulted its sovereign debt, abandoned the convertibility regime, and devaluated its currency.
According to the official populist narrative of people like Tsipras, once Argentina abandoned the evil regime of convertibility and defaulted its debt, you automatically get the growth which Argentina experienced starting from 2003.
But I have two claims against this narrative.
Firstly, I believe the social costs of leaving convertibility were huge and very painful. In a very heavily dollarized economy, abandoning convertibility directly resulted in the destruction of all the contracts that existed. The most brutal example of this was what happened with bank deposits. All of them were seized by the government and they were compulsorily converted into pesos. What’s more, the exchange rate of this forced conversion was way below the market exchange rate. Thus, for every dollar you had they gave you 1.4 pesos… but as soon as convertibility was abandoned the exchange rate jumped to 3 pesos! For many people, this meant losing the life savings. For some, it meant losing their lives.
The crisis of 2001 meant a massive transfer of wealth from society (particularly the middle class) to the banks and the government. Millions of people were suddenly impoverished and some of them have not recovered ever since.
Secondly, I believe that the economic growth my country has experienced since 2003 has been in spite of the government and not as result of its populist measures.
The 21st century has been so far a century of a weak dollar and an easy monetary policy by the Federal Reserve. This easing is characterized by excess of liquidity and extremely low interest rates. International exchange rates have reacted accordingly, with a sinking dollar against the euro. Gold also experienced a rally unseen for many decades. This weakening process was accompanied by a boom in commodity prices.
Historically, there is a correlation between commodity prices and the US dollar cycle. What is more, as substantial mainstream and Austrian parts of the literature claim, a strong case can be made in favor of the causal relationship between US monetary policy and the behavior of commodity prices. In the words of Steve Hanke, “the evidence suggests that the Federal Reserve is a major culprit in the commodity inflation story.”
The government of Argentina can be counted as some of the biggest beneficiaries of the Fed’s easy money policy. Argentina, starting with the unelected transition administration of 2002–2003, heavily taxed commodity exports. Indeed, one of the unintended consequences of the commodity price boom has been the windfall these governments received thanks to their commodity exports. Contrary to the claims of their propaganda apparatus –which spans public education, media, and the intellectuals– the driving force of the sociopolitical process in both countries is not the so-called “accumulation model with social inclusion” but chiefly the dollar cycle and its commodity prices repercussions.**
Moreover, I’m willing to make the counterfactual claim that had Argentina endured a little longer, the change of the international scenario would have saved convertibility. Or, at least, allowed for an orderly way out.
After showing many of the catastrophic results of Néstor and Cristina Kirchner’s populist policies, I concluded with this three main ideas:
1) Leaving the euro will have the same painful and regressive consequences for Greece that leaving convertibility had for Argentina.
2) There was no “populist miracle” in Argentina. What happened was that the Kirchners benefitted from a spectacular and unique international context.
3) As Carlos Rodríguez Braun says: “If devaluations were the way to national wealth, Argentina would be rich and Switzerland would be poor.”
PS: If you’re interested in Argentina’s convertibility, you must watch this video by Iván Carrino (in Spanish) with his presentation at the Fifth International Conference “The Austrian School of Economics in the 21st Century.”
PPS: Drop me a line on Twitter if you want the Power Point I used with some useful charts and nice pictures of Argentina… a beautiful country with terrible politicians.
* Federico N. Fernández is Senior Fellow of the Austrian Economics Center (Vienna, Austria), and Vice president of Fundación Bases (Rosario, Argentina)
** This was the main thesis that Barbara Kolm and I were to present at the 2015 APEE conference. Unfortunately, we couldn’t attend because of overlapping days with the Free Market Road Show.
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