Austerity Failed to Stabilize Economy & Debt 10 Years Ago
One decade ago, the country which had once been the most wealthy country in South America, with high economic growth rate, universal health care and a historic living standard equal to that of Canada, suffered economic crisis, defaulted on its debt, and collapsed. Although Argentina has since seen some recovery, living standards never recovered to historical levels. Between 1998-2002, GDP shrank by 20%.
How Austerity and Neoliberal Reforms Ruined a Nation
In 1989, Menem began neoliberal reforms amid massive inflation. The reforms reduced public-sector employment while eliminating employment protection and insulation for local businesses. A spike in unemployment followed of course. By 1995, unemployment was at 19% and there were strikes all over Argentina. In 1991, the Convertibility Law pegging Argentina's peso to the Dollar was enacted. While this did reduce inflation dramatically, it also eliminated Argentina's monetary tools, which should have been used to combat crises. Moreover, both public and private sectors accumulated large US-dollar-denominated debt and liabilities. Argentina's debt also mushroomed as a result of the enormous costs associated with privatizing its social security system.
By Mid-1999, the Argentina was full recession. This was largely due to Argentina's unprotected exposure to the Brazilian and Mexican markets, a construct of Menem's 1989 reforms. In September of that year, Argentina passed the Fiscal responsibility Law, under which it committed to large spending cuts at both the local and federal level in response to the recession.
In 2000, the De La Rua administration tried to solve the country's austerity and neoliberalism-based economic problems with more austerity and neoliberal reforms. $1 Billion in budget cuts followed, as did labor market reforms. That same year, the IMF came to Buenos Aires offering Argentina a three-year $7.2 Billion package under conditions of strict austerity and assumptions of 3.5% economic growth. In fact Argentina grew only 0.5%. Because austerity had failed to solve the recession, reduce debts, or produce economic growth, 2001 began with Argentina announcing voluntary debt restructuring, and a fourth round of austerity. Three months later, a nationwide strike against the austerity plans. By year's end, there had been a run on the banks, rioting, looting, and the resignation of three presidents. In December, Argentina could not guarantee foreign debt.
What Does it Mean Today?
In Argentina a decade ago, as in Greece, Spain and Italy today, the relinquishing of monetary authority initially served to improve investor confidence and reduced inflation worries. In both cases, the side-effect was the loss of monetary tools needed to fight an economic downturn. This put more strain on fiscal policy makers to deal with recession on their own. Under the strain of recession, fiscal policy also lost its ability to confront economic circumstances.
Two Key Lessons of Argentina:
1: Monetary autonomy is indispensible if an economy is to stay afloat in the long-run. The meaning of this for Europe is that monetary policy has to be formulated in the benefit of the countries who actually use the Euro, not just some of the Eurozone's member states. Otherwise, growth will be almost non-existent and crisis response will be nearly impossible.
2: Austerity does not get you out of a recession. Neither do neoliberal reforms. This is especially true when the recession is actually caused by austerity and neoliberal reforms in the first place.
Max Berre is an economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.