The Greek debt bailout and austerity saga, including the recent agreement between Greece and the Euro Summit, has important parallels with the Argentine experience of the late 1990s and early 2000s. Even given country specific differences, these similarities are relevant to the choices facing Greeks today.
The terms of the agreement, embodied in the “Euro Summit Statement” of July 12, 2015, are troubling on at least two counts. First, from an economic policy perspective, considering that Greece is in a depression, many of the commitments go precisely in the wrong direction. Increasing consumption taxes, reducing pensions and a “zero [fiscal] deficit” will only hurt economic activity and, therefore, impact negatively on fiscal accounts and debt sustainability. Even the IMF, a staunch promoter of austerity policies, has recognized that Greece’s debt is not sustainable.
Second, the Euro Summit Statement violates Greek sovereignty and democratic institutions. The agreement requires the Greek parliament to approve legislation under tight deadlines and the threat of not renewing liquidity assistance for Greek banks, which the ECB had closed down. This facet of the agreement is so coercive that one can hardly speak of an agreement at all. It also mandates the Greek parliament to review all legislation enacted since Syriza came to power, and possibly repeal any that are contrary to Troika doctrine. Finally, it stipulates the creation of a fund, under Troika supervision, to manage the privatisation of Greek public assets.
In other words, Greece has been effectively placed in receivership by the Troika, despite the popular vote, the country’s laws and institutions. It also sends a clear message to Spain, Ireland, Portugal and any other country that may try to diverge from Troika demands. It is not surprising that the recent agreement has been labelled “blackmail” by Greek Education Minister Aristides Baltas or “terms of Greece’s surrender” by former Greek Finance Minister Yanis Varoufakis.
However, the terms of Greece’s agreement with the Troika are not really new. Argentina had a very similar experience in the late 1990s and early 2000s. Indeed, much of the wording in the “Euro Summit Statement” can be found in the IMF’s successive memoranda of understanding signed by Argentina, including “ownership” (of austerity policies by local authorities), “zero deficit”, “privatisation”, “structural reforms”, etc.
During the 1990s, burdened with a heavy debt, Argentina implemented a series of far-reaching “free market” reforms similar to the austerity policies implemented in Greece today. These included privatisation of all state enterprises, utilities and the “pay-as-you-go” social security system. Trade, finance and the labour market were all radically deregulated. Finally, Argentina implemented a currency board which pegged its currency to the dollar on a fixed, one-to-one, exchange rate. In doing so, Argentina de facto renounced the possibility of carrying out independent monetary policy, which is critical to any country’s ability to manage its economic health. The currency board was a less drastic measure than the Euro monetary union, but almost as damaging.
Far from putting Argentina on the path of debt sustainability, economic reforms made matters worse, with the privatisation of social security particularly harmful to fiscal accounts. As Argentina’s rapidly growing debt became unsustainable, it turned to the IMF for bailouts. The IMF’s conditions, like the Troika’s today, turned Argentina’s recession into a depression, making the debt even more unsustainable. IMF prescriptions were also deeply interventionist, including the requirement that Argentina’s bankruptcy code be changed to facilitate foreign buy-outs of bankrupt domestic businesses and repealing a law against white-collar crime.
By December 2001, Argentina was in a full-blown political and economic crisis, including banking restrictions. Default was not only inevitable, but necessary to break the stranglehold of the IMF and its destructive economic policies. The second essential step was to repeal the currency board and regain control of its currency and the ability to conduct active monetary policy once again. Argentina did both, and just three months later, in April of 2002, the economy began to grow after four consecutive years of recession.
One should not idealise Argentina’s default and currency recovery process — it was unplanned and quite chaotic. Argentina waited until the last possible moment and when the IMF-sponsored scheme crashed, did the only thing it could: default and devalue. Despite being an unplanned and chaotic process, its benefits materialised shortly after.
Argentina’s experience is relevant for Greece today, despite differences between their economies. The “Euro Summit Statement’s” neoliberal economic mandate will not take Greece to debt sustainability, as even the IMF acknowledges. It is more likely to deepen the Greek crisis, worsening already devastated social and economic conditions.
Defaulting and recovering monetary sovereignty were key for Argentina’s recovery. When creditors are inflexible, it is up to the debtor nation to act based on its best interest. Policy priorities should shift from servicing the financial sector to dealing with economic growth and social demands.
It may be a good time for Greece to re-evaluate the costs and benefits of belonging to the monetary union. Are the Greek people, economy and productive structure better off as a result of eurozone membership? Perhaps a good use of the time bought by the current bailout is to prepare diligently for the implementation of Plan B.
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