Given the similarities between millennium-era Argentina and today’s Greece, some wonder if a Greek default and currency exit might not be the worst option for Athens. However, Argentina’s “recovery” would not easily be replicated and the Argentine model should not be considered a blueprint for Greece.
Europe has much to learn from the Argentine default of 2001, but the soundest takeaways are often not the most obvious.
In 2001, Argentina suffered the proverbial “messy default.” To the tune of protesters banging pots and pans throughout the streets of Buenos Aires, the government was forced to disband the currency board that had pegged one peso to one U.S. dollar.
Many of the deepest fears forecasters share over a chaotic Grexit occurred in Argentina. The newly untethered peso plummeted to a quarter of its pegged value, representing massive losses for Argentines who owed debt in dollars. Political instability led to a revolving door in the Executive office. Confrontations in the streets left scores dead as Argentines famously chanted “Que se vayan todos!” (“Everybody out!”) at their government.Over the next eight years, however, something odd happened. Despite pariah status in the international capital markets, Argentina began to grow rapidly. After suffering a 10.9 percent GDP contraction in 2002, Argentina posted growth impressive growth rates from 2003 to 2006: 10.5 percent in 2003, 9.0 percent in 2004, 9.2 percent in 2005, and 8.5 percent in 2006. It went on to average a 5.9 percent annual GDP growth rate in the decade immediately following the largest ever sovereign default.
However, despite strong similarities between the two countries’ experiences, Argentina does not offer a blueprint for Greece. Argentina’s recovery exploited particular circumstances that Greece cannot easily replicate. An agricultural powerhouse, Argentina began its renaissance just as Chinese demand for commodities exploded. Argentine export prices spiked, as did volumes, generating windfall profits for farmers from La Pampa to Patagonia.
Greece does not offer exports that are highly valuable or in high demand in rapidly-developing economies such as China. In fact, none of Greece’s top three export destinations–Germany, Italy and Cyprus–are expected to grow more than 1.7 percent between 2011 and 2015. Even areas of potential export growth face obstacles. International tourists, for example, might be intrigued by cheaper holidays but put off by political and social unrest.
Moreover, despite strong growth figures in recent years, the Argentine “recovery” is deeply problematic at best and fool’s gold at worst. Argentina cannot access international capital, challenging its ability to finance any deficit. Buenos Aires has resorted to capital controls and bizarre import-export regulations that leave car manufacturers exporting wine and regular citizens waiting longer to buy imported goods at steeper prices.
Meanwhile, inflation is estimated at more than 20 percent and, as of early 2012, capital was flowing out of the country at a pace of $2 billion per month. The Argentine economy is not exactly a paradigm of recovery and a wholesale Greek default is unlikely to offer a more stable rebound.
Although the Argentine experience does not offer a blueprint for Greece, there are valuable lessons to be learned. By legally pegging the peso to the U.S. dollar, the Argentine convertibility program offers a fascinating experiment of a “monetary union” with zero fiscal integration. With asymmetric demand shocks, differing inflation expectations and very different legal systems, Argentina and the U.S. fail just about every traditional measure of an optimal currency zone. Lacking fiscal coordination and redistribution, there were no mechanisms to realign the two economies when their growth patterns diverged. Stuck in the middle, the peg could not survive.
The European monetary union has arrived at a crossroads between deeper integration and dissolution. The Bertelsmann Foundation forecasts economic havoc for any dissolution, but this is what inaction might force.
In the meantime, better for Europe to take Messi—and not messy default—from Argentina.
This article is an excerpt from a new Bertelsmann Foundation Paper, “Surviving a Debt Crisis: Five Lessons for Europe from Latin America.”
See the full report here.
