Argentine Lessons For Greece

9/7/2015

By Paul Krugman

If Grexit happens, then what? As so often in recent years, the best hope for an answer comes from turning to history; even though exits from a currency union are rare, we do have cases that seem to offer reasonable parallels, notably Argentina’s abandonment of the convertibility law — basically a supposedly permanent one-peso-one-dollar rule — at the beginning of 2002.

What Carmen Reinhart tells us is that we should expect very bad things. And maybe we should. But her data analysis here is, I think, misleading.

The problem is a technical one, but with possibly large significance. Carmen looks at annual averages, and finds that in 2002 Argentine real GDP per capita was 8.2 percent lower than in 2001. This seems to suggest that the end of convertibility delivered a terrible blow to the economy.

But as Mark Weisbrot has been saying for years, this gets the story fundamentally wrong. As you can see from the chart, Argentina’s economy was in free fall over the course of 2001 — before the dollar peg was abandoned — thanks in large part to banking collapse and public panic (sound familiar?). But the free fall ended quite soon after the peso was devalued. Yes, average annual GDP in 2002 was much lower than average annual GDP in 2001 — but this mainly reflected the plunge during 2001, before the devaluation. On a quarterly basis, GDP was rising by mid-2002, and the economy was growing rapidly by 2003.

In other words, that big decline from 2001 to 2002 is mainly telling us about the effects of the pre-devaluation panic, not the effects of devaluation itself.

The relevance to Greece seems obvious. Of course, it’s easy to think of reasons why Grexit might not stabilize the situation as quickly as peso devaluation did. But you can’t use Argentina as a reason to fear Grexit at this point, given that once again the financial panic has already happened.

Πηγή