Economics and politics - comment and analysis
18. August 2023 I Heiner Flassbeck I Economic Policy, Economic Theory, Globalisation and Development

I cry for you, Argentina

At the end of December 2021, on the occasion of the 20th anniversary of the biggest fiscal debacle in recent history, I wrote an article about Argentina with a colleague in which we resignedly stated that there was no light on the horizon of this country. We recalled that it was Argentina’s attempt in the 1990s to fix the Argentine peso at 1:1 against the US dollar that was at the beginning of the debacle. “Fixing forever” was the name of the experiment on a living patient that was carried out in Argentina under the supervision and positive review of the International Monetary Fund (IMF) and failed catastrophically.

When we wrote the article in 2021, the value of the Argentine peso was about 100 to 1 against the US dollar, so it took one hundred pesos to buy one dollar. That was what fixing forever had become. These days it takes almost 400 pesos to buy a dollar. The madness has reached a new dimension. The inflation rate is now over one hundred percent and poverty has become a mass phenomenon. It has taken many social democratic (socialist) governments, a hyper-conservative foolishness from 2015 to 2019 under Mauricio Macri, and the assistance of the IMF to wreck a country that actually has enormous potential for development (for more on this, here is an article from 2022).

In autumn, Argentina will vote again. There have just been primaries to assess the strength of the candidates and, lo and behold, they were narrowly won not by a hyper-conservative like Macri, but by someone much further to the right, an out-and-out crazy libertarian called Javier Milei. He has many great ideas and the best one is, how could it be otherwise in Latin America, he wants to finally abolish the damn national currency and replace it completely with the US dollar. Fixing forever was yesterday, complete dollarisation is the new magic word, then finally there will be no more currency and no more national monetary policy to drive people to despair.

Now, it is by no means a foregone conclusion that Milei will win the presidential election at the end of October, but the fact that such a programme can achieve 30 per cent in a primary election and inspire many young people should give us sleepless nights. Yes, us, because the Europeans, as the second largest shareholder of the IMF, are directly responsible for the madness that this organisation is causing in the world and for the dire political consequences that this will eventually have. German ministers may travel to South America to attract skilled workers, but no one has ever thought to ask their hosts why Latin America is despairing over the currency issue.

Dollarisation is a dead end

What dollarisation means can easily be studied in another Latin American country that is also voting soon and is about to slide into a political situation at least as chaotic as Argentina. Ecuador has been dollarized since 2000 and the result is by no means the great stability and progress that the supporters of this radical step proclaim for their view of things. While there are no more immediate currency crises in a dollarized country, there is usually a creeping decline because inflation is almost always still too high, eroding the competitiveness of businesses, and because the interest one has to pay for dollar loans systematically overburdens domestic investors.

The worst thing about dollarisation, however, is that it really is a journey of no return. Fixing forever was over after less than ten years, but there is no getting out of dollarisation. In Ecuador, President Rafael Correa, now controversial but in my eyes truly enlightened, tried several times during his ten years in office to form a coalition for monetary cooperation in Latin America that would have given him the opportunity to challenge dollarisation. But the whole region let all initiatives come to nothing, out of indifference, out of secret rivalry, out of fear of the Americans, for whatever reason.

Without international agreement, Correa too has not dared to take a step towards a return to a national currency. Once the citizens are in possession of the stable dollar, no government can explain to them that it would be able to create a new national currency that is as stable as the dollar and avoids the serious disadvantages of dollarisation. People traumatised by perpetual inflation and devaluation can never be lured into a new national currency adventure.

Rule-based order without the decisive rule

In Germany, people like to talk about rule-based international orders. The Foreign Minister is virtually an ambassador for such orders. At the same time, however, the simple insight is refused that in a functioning rule-based trade order, no country is allowed to have current account surpluses over long periods of time, because this inevitably means that others will have deficits over long periods of time, i.e. that they will constantly live beyond their means. Germany cannot accept this because it is the world’s biggest sinner in this respect, because it has been systematically living below its means for two decades.

Those who constantly live beyond their means will sooner or later have a currency problem, because current account deficits are caused by overvalued currencies that demand the devaluation of the currency of the deficit country. But this is exactly what our ingenious rules-based trade order has no rule for.

Except in Europe, the decision on whether currencies should appreciate or depreciate is happily left to the currency markets, because that is where our banks and hedge funds speculate with large sums of money, and we don’t want to spoil their business. When countries then get into crises because the speculators get their act together overnight and the currency of a country like Brazil or Argentina depreciates without any limit and against all reason, then we quickly send in the IMF, which makes everything even worse because it is obliged by our mandate to put the power of the markets above everything else.

Latin America must emancipate itself intellectually

But it is by no means the case that the aberrations that are occurring are only the result of an inappropriate international order. The countries themselves are making major unforgivable mistakes. In all of Latin America, it has not yet been understood that inflation always ends in enormous crises and should therefore be prevented in the first place. In almost all countries, there is still the naïve belief that one only needs an independent central bank and it would be easy to control inflation.

Long-lasting inflation, however, is the result of a failure of the political leadership, which does not manage or does not even try to wring a consensus from all social groups that the distribution of income has to be fair and that the one who tries to cheat the other will never win. Such an attempt is probably only credible if it is accompanied by a government’s willingness to tackle the enormous inequalities that already exist by means of tax policy.

Such a social consensus must be forged before businesses are doing their job. This is the only way to prevent massive distribution conflicts and subsequent inflationary phases that can only be stopped by the central bank by force. However, this is often not done because the negative economic consequences in the form of unemployment and even greater poverty are politically unacceptable. If inflation rates are in the order of one hundred per cent and the country is economically at rock bottom, as is currently the case in Argentina, no one can justify stopping this inflation with harsh monetary policy measures.

Argentina can only be successful if it emancipates itself from the neoliberal Western ideas about labour markets, monetary policy, government debt and financial markets. Latin America as a whole must learn from Asia that only an active and enlightened state can successfully manage a market economy. Those who believe that libertarian ideas can be used to launch a modern economy into a world economy that has nothing, absolutely nothing, in common with a fair rules-based order will fail even more miserably than their predecessors. We can only hope that Argentina will be spared this fate.