The Corner

What’s Next for Greece?

As things are turning from bad to worse in Greece, a lot of people wondering whether we can learn anything from the default in Argentina and the country’s ultimate recovery. I have a piece in today’s New York Times Room for Debate blog looking at this issue. I conclude that while there are significant parallels between Argentina’s financial debacle of the 1990s and Greece’s current financial nightmare, some clear differences make Argentina a bad role model for Greece. The main ones are probably that there was no risk of contagion to other countries during the crisis in Argentina, and that the country had an alternative currency already printed to fall back onto and which allowed it to devalue its currency.

Tyler Cowen reminded me recently that Greece, unlike Argentina, does not have another printed currency available to ease a break with the euro, as Argentina did when it broke with the dollar. But the peso gave another advantage to Argentina over Greece. While Argentina didn’t have access to bailout money from other countries (than through the I.M.F.,) the country was ultimately able to devaluate, which likely contributed to its recovery.

This option isn’t available to Greece for now, even if a weaker currency than the euro would be more appropriate for this relatively poor country. Germany and France are unlikely to allow it for fear that a bank run in other weak countries like Portugal and Spain would follow, exposing European banks to serious, maybe insurmountable, problems. The same contagion risk exists if the Greek government decides or is forced, as will likely be the case at some point, to restructure its debt. That, too, wasn’t the case for Argentina

The whole thing is here (including a section about why the IMF isn’t the solution) and the other contributions, including one by MIT’s Simon Johnson, are here.

Ultimately, I think there is no easy or painless solution for Greece or for Europe in general. Too many countries have waited too long to address their outrageous overspending issues. While the U.S. situation is somewhat different, I suggest that there is a lesson somewhere in the European experience for America.

Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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