larger | smaller
comments: 1
NEWPORT BEACH "“ Let me set the scene: an increasingly discredited economic policy approach gives rise to growing domestic social and political opposition, street protests and violence, disagreements among official creditors, and mounting concerns among private creditors about a disorderly default. In the midst of all of this, national leaders commit to more of the same harsh austerity measures that they have been unable to implement for two years. Official creditors express skepticism, in private and public, but hold their collective nose and get ready to disburse yet another tranche of money into what they fear is a bottomless pit.
Sound familiar? It should, but not just because it encapsulates Greece today. It is also what Argentina faced in 2001. Unless Europe reflects on key lessons from that experience, the parallels that extend to Greece may also end up including a financial meltdown, a deep output collapse, and social and political turmoil.
I remember 2001 well. I was serving on PIMCO's Emerging Market desk, where we were closely following developments in Argentina. In August of that year, the country was again begging the International Monetary Fund for more money in order to avoid a default. The authorities were willing to enter into yet another set of commitments knowing that they had consistently over-promised and under-delivered, and that the country had failed to make any progress on restoring growth, halting its competitiveness decline, and containing the rise in debt.
A blame game broke out over who was responsible for "losing" Argentina. Official creditors, led by the IMF, pointed to the Argentine government's repeated policy failures. The government countered that official creditors were nickel-and-diming the country, rather than providing the financial cushion needed to restore confidence and re-engage private capital. Neither side seemed willing to acknowledge what was obvious to many: the country's economic and financial framework gave it little chance of addressing the dual problem of too little growth and too much debt.
Not surprisingly, Argentine citizens were becoming increasingly fed up with the whole lot, caring little about distinctions between the government and official creditors. They had lost trust in an approach that continued to sell austerity as the price of stability, even as virtually every economic and financial indicator had worsened in the meantime, with scant hope of a brighter future.
Then there were Argentina's neighbors "“ particularly fellow members of Mercosur, the regional political and economic agreement "“ which feared a tidal wave of contagion. Having experienced technical dislocations in their financial markets, they were urging Argentina to get its act together "“ while also building stronger defenses in case it did not. Meanwhile, Argentina complained that other Mercosur countries' policies were magnifying its economic challenges.
To understand much of what is happening today in Europe, one need only replace Argentina with Greece, and Mercosur with the eurozone. Of course, Greece is a more advanced economy than Argentina. It is part of a far stronger regional arrangement than Mercosur, with vastly greater financial resources and better-developed economic and institutional underpinnings. Yet the similarities are strong enough to ask whether Europe can learn from Argentina's experience a decade ago.
After the Argentine parliament approved yet another new austerity package, the IMF agreed to release its financing tranche. But it was too late to save a discredited approach, further undermining the Fund's standing.
Indeed, rather than engendering confidence, Argentine citizens withdrew their bank deposits over the next few months. Capital flight accelerated. The government again failed to deliver on its policy commitments. Most important of all, social and political pressures mounted, reaching a tipping point.
Argentina defaulted in December 2001, closed its banks, and experienced the mother of all "economic sudden stops." The country was forced to dismantle its economic framework in a highly disorganized manner, staging a messy, unplanned transition to a new currency system in the midst of capital controls and domestic-asset confiscation.
Greece's future will resemble that of Argentina if its government and official creditors (namely, the European Central Bank, the European Union, and the IMF) fail to internalize some of Argentina's lessons and do not undertake an urgent mid-course correction.
Specifically, they should take four steps. First, they should stop repeating the claim that there is no "Plan B." Telling people that there is no alternative to a discredited policy merely pushes them either to resist an approach that does not work, or to opt for mayhem. Recent official remarks heard in Greece ("We must show that Greeks, when they are called on to choose between the bad and the worst, choose the bad to avoid the worst") do little to engender hope.
Second, Greece and its foreign interlocutors must recognize that Plan B, while not easy, has become critically necessary. It entails much deeper economic and debt restructuring, as well as institutional changes so that Greece can gain greater policy flexibility, improve competitiveness, and promote investment. All of this inevitably involves short-term risks, but it also promises brighter prospects for growth, employment, and the restoration of financial soundness.
Third, Greece's official creditors should be more attentive to the expected return on their assistance. Every euro disbursed to Greece under the current approach is diluted in many ways. Rather than a general approach implying multiple "leakages," official creditors would do better to target the country's key needs more directly. Moreover, given Europe's worries about its banking system, interventions should be coupled with greater pressure on banks to raise capital and improve asset quality.
Finally, the integrity and credibility of the ECB and IMF require much greater protection. Europe's opportunism undermines the future effectiveness of these two key institutions at a time when they will be needed not only to stabilize Greece, but also to prevent liquidity problems from turning into solvency crises in other European countries and elsewhere, as well as to limit global contagion.
Greece need not continue to follow Argentina's miserable example of ten years ago. Yet, unless Greek and European officials reflect on that example and adapt accordingly, Greece will be driven down the same dangerous dead-end path.
Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and author of When Markets Collide.
Copyright: Project Syndicate, 2012. www.project-syndicate.org
You might also like to read more from Mohamed A. El-Erian or return to our home page.
Share Tweet
Reprinting material from this website without written consent from Project Syndicate is a violation of international copyright law. To secure permission, please contact distribution@project-syndicate.org. var OB_langJS = 'http://widgets.outbrain.com/lang_en.js'; var OBITm = '1292502431965';var OB_raterMode = 'none';var OB_recMode = 'rec'; var OutbrainPermaLink='http://www.project-syndicate.org/commentary/elerian15/English'; if ( typeof(OB_Script)!='undefined' )OutbrainStart(); else { var OB_Script = true; var str = unescape("%3Cscript src=\'http://widgets.outbrain.com/OutbrainRater.js\' type=\'text/javascript\'%3E%3C/script%3E"); document.write(str); } print recommend Send link clip secure rights COMMENTSYou must be logged in to post or reply to a comment. Please log in or sign up for a free account.
COMMENTSYou must be logged in to post or reply to a comment. Please log in or sign up for a free account.
Username Password New registration Forgotten password alejogaucho 06:48 15 Feb 12Two small comments:
a) the author repeatedly uses the term "discredited" when talking about the current austerity packages imposed on Greece. They are not discredited. *IF* Greece wants to stay in the Eurozone, with the Euro as its currency, *it simply has not choice*. None. Zero choice. Zilch. Nada choice. Why? Because now Greece is like any other state of the United States. Greece does not print its own money anymore, just like Illinois or California or Texas do not print their own money. The states in the US must, emphasize, MUST, balance their budgets. They cannot shove their financial problems under the rug with inflationary monetary policy. Well, so must Greece. The population must understand this, in the same way that Californians and Illinoians understand it. If the Greeks do not want to understand it, they should leave the Eurozone. It is very simple.
b) second comment is that the difference with Argentina is that Argentina retained its domestic currency; it had established a fixed exchange rate of 1 to 1 with the US dollar, but still retained it. And thus, as conditioned worsened, it caused a run on the Argentinian peso, very much like in the early 1980s, when the Southern Cone countries had fixed their exchange rates to the dollar as well. But this is NOT Greece's situation. Greece does not have the dracma anymore. Yes, they can introduce it, leaving the Eurozone, with dramatic consequences on Greece's wealth and asset valuations.
AUTHOR INFO Mohamed A. El-Erian Mohamed A. El-Erian is CEO and co-CIO of PIMCO, and author of When Markets Collide. MOST READ MOST RECOMMENDED MOST COMMENTED How to Create a Depression Martin Feldstein Does Austerity Promote Economic Growth? Robert J. Shiller A Crisis in Two Narratives Raghuram Rajan Will Emerging Markets Fall in 2012? Jeffrey Frankel Coronary Capitalism Kenneth Rogoff A New World Architecture George Soros America's Political Class Struggle Jeffrey D. Sachs Did the Poor Cause the Crisis? Simon Johnson The Risky Rich Nouriel Roubini The Second Great Contraction Kenneth Rogoff Austerity under Attack Daniel Gros Blaming Capitalism for Corporatism Edmund S. Phelps and Saifedean Ammous A Crisis in Two Narratives Raghuram Rajan The Ethics of Internet Piracy Peter Singer Sustainable Humanity Jeffrey D. Sachs Take a link for this article: <a href="http://www.project-syndicate.org/commentary/elerian15/English">From Argentina to Athens?</a> ADVERTISEMENT PROJECT SYNDICATEProject Syndicate: the world's pre-eminent source of original op-ed commentaries. A unique collaboration of distinguished opinion makers from every corner of the globe, Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. Exclusive, trenchant, unparalleled in scope and depth: Project Syndicate is truly A World of Ideas.
Project Syndicate provides the world's foremost newspapers with exclusive commentaries by prominent leaders and opinion makers. It currently offers 58 monthly series and one weekly series of columns on topics ranging from economics to international affairs to science and philosophy.
PROJECT SYNDICATE The Next Financial Order Barry Eichengreen Will the euro or the SDR become the world's major reserve currency, ending the decades-long reign of the dollar? ...read more Capitalism Then and Now Harold James Is globalization reversible? Do currencies rise and fall like empires? How does culture influence economic development and performance? ...read more Economics and Justice Jeffrey D. Sachs Does free trade bring progress or misery to countries that open themselves to unbridled globalization? Are economics and the search for equality enemies? ...read more © Project Syndicate 1995 - 2012 How to become a member | Member papers | Support us | About us | Contact us _bizo_data_partner_id = 790 var OBCTm='1292510578203'; var _comscore = _comscore || []; _comscore.push({ c1: "2", c2: "8756795" }); (function() { var s = document.createElement("script"), el = document.getElementsByTagName("script")[0]; s.async = true; s.src = (document.location.protocol == "https:" ? "https://sb" : "http://b") + ".scorecardresearch.com/beacon.js"; el.parentNode.insertBefore(s, el); })(); _qoptions={ qacct:"p-f8E80KYHdFRZg" }; (function(w, c) { (w[c] = w[c] || []).push(function() { try { w.yaCounter6251587 = new Ya.Metrika({id:6251587, clickmap:true}); } catch(e) { } }); })(window, 'yandex_metrika_callbacks');You must be logged in to post or reply to a comment. Please log in or sign up for a free account.
You must be logged in to post or reply to a comment. Please log in or sign up for a free account.
Two small comments:
a) the author repeatedly uses the term "discredited" when talking about the current austerity packages imposed on Greece. They are not discredited. *IF* Greece wants to stay in the Eurozone, with the Euro as its currency, *it simply has not choice*. None. Zero choice. Zilch. Nada choice. Why? Because now Greece is like any other state of the United States. Greece does not print its own money anymore, just like Illinois or California or Texas do not print their own money. The states in the US must, emphasize, MUST, balance their budgets. They cannot shove their financial problems under the rug with inflationary monetary policy. Well, so must Greece. The population must understand this, in the same way that Californians and Illinoians understand it. If the Greeks do not want to understand it, they should leave the Eurozone. It is very simple.
b) second comment is that the difference with Argentina is that Argentina retained its domestic currency; it had established a fixed exchange rate of 1 to 1 with the US dollar, but still retained it. And thus, as conditioned worsened, it caused a run on the Argentinian peso, very much like in the early 1980s, when the Southern Cone countries had fixed their exchange rates to the dollar as well. But this is NOT Greece's situation. Greece does not have the dracma anymore. Yes, they can introduce it, leaving the Eurozone, with dramatic consequences on Greece's wealth and asset valuations.
Project Syndicate: the world's pre-eminent source of original op-ed commentaries. A unique collaboration of distinguished opinion makers from every corner of the globe, Project Syndicate provides incisive perspectives on our changing world by those who are shaping its politics, economics, science, and culture. Exclusive, trenchant, unparalleled in scope and depth: Project Syndicate is truly A World of Ideas.
Project Syndicate provides the world's foremost newspapers with exclusive commentaries by prominent leaders and opinion makers. It currently offers 58 monthly series and one weekly series of columns on topics ranging from economics to international affairs to science and philosophy.
Read Full Article »