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The Progressive Policy Think Tank

The price of democracy: Greece, Argentina and the rocky road to recovery

Argentina's fall tells us something useful about Greece's political strife but little about its prospects for economic recovery.

Events in Greece today echo the corralito phase of the Argentinian debt crisis, when access to cash in bank accounts was severely restricted and Argentinians were prevented from taking out funds in dollars. But the corralito – or ‘little fence’ – didn’t work. Argentina’s economy was locked in a death spiral, and the descent was relatively rapid: Argentina soon gave up its dollar peg, devalued and rapidly defaulted on its debt. Just like wealthy Greeks stashing their cash in the London property market, the rich got their money out first, crossing the Rio de la Plata carrying suitcases stuffed with dollars to put in Uruguay’s banks and safe deposit boxes, leaving pensioners to bang their pots and pans on the closed up metal doors of the Buenos Aires banks.

Argentina then pursued heterodox economic policies that massively boosted its growth rate and brought unemployment and poverty down sharply. Unlike Greece, it had not given up its currency, and the devaluation of the peso brought tourists and land speculators flocking in, while exports surged. Not all of this export success was based on selling soya beans to China, as some claim. Argentina makes cars and trucks, as well as agricultural products, and a fifth of its exports go to Brazil. But its productive capacity and vast, fertile landmass gave it advantages that Greece does not possess. Grexit will not boost Greece’s exports of refined petroleum, which make up more than a third of its exports, since it has to import crude oil to refine in the first place. In the meantime, it will have to manage the transition to a new drachma, while euros continue to circulate as hard currency.

For these and other reasons, Greek finance minister Yanis Varoufakis argued in a blog back in 2012 that Greece could not leave the eurozone and ‘pull off an Argentina’. As he concluded:

‘Does this mean that Greece ought to grin and bear the massive and misanthropic idiocy of the bailout austerity package imposed upon it by the troika (EU-ECB-IMF)? Of course not. We should certainly default. But within the eurozone. (See here for this argument.) And use our readiness to default as a bargaining strategy by which to bring about a New Deal for Europe (in a manner that I have written about here).’

That is of course the bargaining strategy that the Syriza government has now tested to destruction. The creditors have refused to agree to a New Deal for Greece, let alone for Europe. They have chosen to stick to a failed economic strategy for Greece, despite the manifest catastrophe it has inflicted upon that country – while Tsipras’ brinkmanship in the face of this intransigence has brought the crisis to its dénouement. Greece will suffer terribly, but so will the Europe Union. It has managed to turn the flaws in its currency union into a fully fledged crisis of European democracy.

In this lies another, less often told parallel with Argentina. That country’s long decline over the course of the 20th century, from the fourth-richest country in the world to sovereign defaulter, was in large part attributable to the repeated political cycles of authoritarianism and populism it experienced. It never cemented a stable, rule-bound, political-economic regime, and this failure always undermined its economy – as it has again in recent years. Likewise, Greece entered the EU to leave behind authoritarianism, but joining the euro allowed its corrupt, oligarchic political nexus to flourish. The people elected Syriza to end austerity and to bring this political corruption to heel, but not to leave Europe or the eurozone – which most Greek citizens still see as their only guarantor of a stable, democratic future.

If Greece is forced out of the euro, it will face the painful task of political reconstruction as well as economic recovery. And the eurozone’s leaders will have told it that it can have the euro or democracy, but not both.