Greece should follow Argentina into default and devaluation
European policymakers want to avoid Greek default and keep Greece in the eurozone. However, Argentina’s decision to devalue its currency and default was the right one. It was the only step that offered a way out of the crisis facing the country. Greece should do the same.
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Greece joined the euro with high hopes. Much like Argentina during the first years of its peg, Greece enjoyed economic growth for several years after joining in 2001. The country’s borrowing costs came down, allowing for several years of consumption-led growth. Yet the same weakness that doomed Argentina’s currency peg – inflexibility – began to affect Greece once the financial crisis began in 2008.Skip to next paragraph
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Most European policymakers insist that leaving the eurozone would be disastrous for Greece. However, Greece is continuing down a destructive path of further austerity, higher unemployment, and lower levels of output by staying with the euro.
Argentina attempted this strategy before riots broke out in late 2001 that resulted in several deaths and economic paralysis before the eventual default. Now Greece should proactively realize that its current experiment is not likely to end well.
Although the immediate aftermath of devaluation and default in Argentina was grim, after 2002, the economy began a remarkable turnaround. From 2003 to 2011, output doubled, exports almost tripled, and unemployment dropped by two-thirds.
To be fair, the country has benefitted from high prices for its agricultural commodities – and Greece is not an agricultural powerhouse. Also, since 2007, Buenos Aires has aggressively underestimated inflation. And due to lack of credibility, Argentina is basically locked out of the international credit market.
Yet the economy and industrial production continue to grow, a testament to the strength of the devaluation in promoting export-led growth.
Greece could re-introduce its former currency, the drachma, and begin a process that focuses on growth rather than austerity. The immediate effects of this adjustment will no doubt be drastic, as they were in Argentina. The logistics of re-introducing a new currency will be difficult. The effects on the banking system will be severe. And this does put the broader European project, a noble and worthwhile cause, at risk.
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However, the ideals of European integration can only be pursued in a context that accounts for the wellbeing of the Greek (and Portuguese, Spanish, and Irish) people. Devaluing provides Greece with the best hope of returning to a healthier and more sustainable economy, run by Greeks for Greeks.