Vox
May 16, 2012Greece’s economic and financial crisis is quickly deteriorating and there is no strategy – or even a coalition government – to figure out what to do next. This column looks at the lessons from Argentina’s default in 2001 and argues that Greece’s road to necessary economic reforms, fiscal sustainability and recovery may be even more daunting.
Argentina’s deepening recession, run on banks and associated social unrest in 2000-1 stemming from its own policy mistakes forced it to default and abandon its US dollar currency peg. The Argentine peso depreciated dramatically. Inflation soared temporarily, battering standards of living. But the default and currency depreciation set the stage for a turnaround which, aided by a fortuitous bounce in commodity prices, spurred a strong export and investment-led economic rebound.
Greece’s deteriorating economic and financial conditions since spring 2010, and financial support efforts by third party policymakers, are strikingly similar in many ways to the Argentine collapse1. However, as a member of the European Monetary Union, Greece’s policy options are severely constrained – it cannot inflate or devalue its currency. There is no easy solution. The IMF/EC/ECB Troika has already invested heavily to prop up Greece. It must base future policies on even-handed assessments of the future costs and benefits of further financial support strategies versus managing a graceful Greece exit from the Eurozone.
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