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Greece and Argentina

from Dean Baker

With the prospect of Grexit increasing, there have been numerous news stories pronouncing this as a disaster for Greece. There have also been many accounts telling us that Greece will not have the same positive prospects as Argentina.

As Paul Krugman reminds us Argentina recovered fairly quickly after it broke the link between its currency and the dollar. As he points out, the real disaster was in the period leading up to the break.

While many people have emphasized ways in which Argentina has advantages in this break relative to Greece, that was not a general perception at the time. The general story back at the end of 2001 and 2002 was that Argentina faced disaster.

For example, on January 1, 2002 we got this NYT piece headlined, “Argentina drifts leaderless as economic collapse looms.”

Here are the first three paragraphs:

“Without a president, a cabinet or a functioning government, Argentina drifted rudderless today, as people waited for the Peronist party to resolve its bitter internal differences over who should run the country and for how long.

“The surprise resignation of the interim president, Adolfo Rodríguez Saá, late Sunday means that by Tuesday Argentina is likely to have its fifth leader in less than two weeks, counting temporary caretakers.

“But with bank accounts partly frozen, a moratorium on payment of the foreign debt and political leaders clearly at a loss for what to do, the possibility of an economic collapse loomed as an even larger concern. All day long, nervous depositors lined up outside banks in hopes of withdrawing some of their money.”

There was another dire piece on Janauary 4th after a new government had been installed. Among other things, this piece told readers:

“Though most Argentines earn their salaries in pesos, an estimated 80 percent of all debts here were contracted in dollars. That raises the specter of widespread bankruptcies if ordinary Argentines are suddenly forced to pay 30 or 40 percent more pesos to meet their obligations.”

Yes, Argentina did have its own currency before the devaluation, but it faced the same sort of debt problem that Greece will face with many debts denominated in a currency that will suddenly be worth much more relative to people’s pay checks.

Anyhow, this is not to claim that a break with the euro will be easy or that Greece will necessarily do as well as Argentina in the aftermath. But it is important to remember that many people were predicting absolute disaster for Argentina at the time of its default and they were proven wrong. Perhaps these folks’ judgements about economics have improved in the last thirteen years, but I wouldn’t bet on it.

  1. graccibros
    July 15, 2015 at 2:24 pm

    I hope Dean Baker is right. However, there does seem to be a very active level of beyond the usual malevolence directed at Greece by the Euro powers, especially the German institutional banking mindset, and in my responses posted at this site, I’ve been factoring in this aspect. There seems to be a real desire to teach Greece “a lesson,” with Spain, Italy and France as the pupil witnesses. Once having left the zone and the Euro, the question then becomes whether the Troika and other “punishing” Eurozone institutions have the available levers to make life miserable for Greeks and their remaining economic institutions. I’m not the one to answer that; Perhaps Varoufakis, who is one of the pessimists about the cosst, or James Galbraith can. He’s been to Greece often enough as an advisor to Yanis, and before that, the Greek government. I think he’s pretty clear eyed about the country’s troubles, not looking at it with Byronic idealism. I’ve read too much about Greece over the years to be rosy eyed, yet still, what happens is important because this is the most overt challenge to the ideas and practices of neoliberalism yet to arise, and it’s been an revelation on how ugly this regime is willing to get. I won’t go as far as Chris Hedges quote of Nixon about making the Chilean economy “scream” in persecuting Allende, but the Germans are getting there.

  2. mike
    July 15, 2015 at 3:36 pm

    Odd that Mr. Baker forgot to put in all the material about Europe with US support deciding to bury Argentina rather than just let it go in order to demonstrate what would happen to any other nation that tried to break away. Argentina succeeding or failing meant little politically to other major nations at that point. Greece’s success at breaking away would be a major political blow to the Eurozone and cannot be afforded. Of course, you have to understand that the crisis is about politics and not economics before you would understand the real implications.

  3. July 16, 2015 at 7:59 pm

    The obvious, fundamental question for Greeks is whether staying with the euro or returning to the drachma will have more beneficial effects on their health and well-being.

  4. July 22, 2015 at 10:25 pm

    Thanks for this note, Dean. As an Argie, I watch carefully what is transpiring in Greece, and I hope that they will find a way to break free without imploding in the long run in the process.

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