Abstract
In the debate about a possible exit of Greece from the euro area, Argentina is often referred to as an example–both by those in favour of and those warning of the adverse effects of a Grexit. Yet, while Argentina pulled off an impressive economic recovery after its 2001-02 crisis–one that goes beyond a mere commodity boom–there are important structural differences between the two countries, which still render a potential Grexit a very risky endeavour.
Highlights
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If a solution to Greece’s current over-indebtedness remains elusive while it remains part of the euro area, the uncertain costs of a Grexit might become more attractive than the known costs of permanent stagnation
Summary
In the debate about a possible exit of Greece from the euro area, Argentina is often referred to as an example – both by those in favour of and those warning of the adverse effects of a Grexit. In order to address all these challenges, the Argentinian approach to crisis management was based on four main pillars: 1) the default and restructuring of public debt; 2) a strategy to stabilise the exchange rate and prices; 3) a comprehensive cash-transfer programme to contain the negative effects of the crisis on the most vulnerable social groups; and 4) the transformation of dollar-denominated contracts into pesos, the so-called “pesification” of contracts. Helped by newly introduced tariffs on commodity exports, it stimulated public spending, especially social spending, through the cash transfer programme It boosted private spending – especially residential investment – due to the positive wealth effect that the real devaluation-cum-pesification had on the private sector’s balance sheet. Argentina’s successful performance with a SCRER was first interrupted by the effects of the global financial crisis and later by a shift in the country’s macroeconomic policy
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