Sunday, July 10, 2011

Economics:  Argentina, Greece, and Spending Cuts

"It was a successful default," agrees Weisbrot. "[Argentina's] economy reached the post-crisis level of output within three years, which is going to take Greece 10 years if they're lucky. They took 11 to 12 million people out of poverty in that time."

Like Greece, Buenos Aires had swallowed the textbook analysis — backed by the IMF and the consensus of academic economists and domestic politicians — which said its problem was not an overvalued currency and unsustainable debts, but too much public spending.

As the economists Roberto Frenkel and Martin Rapetti put it in a study of the Argentine crisis for the CEPR, the theory was that "fiscal discipline would entail stronger confidence, and consequently the risk premium would fall and bring interest rates down. Therefore, domestic expenditure would recover and push the economy out of the recession. Lower interest rates and an increased GDP would, in turn, re-establish a balanced budget, and thus close a virtuous circle."

It didn't work. In fact, drastic public spending cuts made the downturn worse, while the dollar peg prevented the devaluation that eventually helped Argentina to get back its competitiveness.

Similarly, Athens — locked into the euro — is unable to devalue, or control its own interest rates, and the solution being pressed on Greece by its eurozone neighbours involves privatisation, liberalisation and drastic public spending cuts.

For much more, see Defaulting Rescued Argentina. It Could Work for Athens Too by Heather Stewart, July 10, 2011 at guardian.co.uk.

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