In sum, both nations treated themselves to one-time consumption binges courtesy of adopting monetary and exchange rate policies that gave them temporary credibility and temporarily enhanced access to capital markets. But both foreign exchange rate policies were unsustainable, absent significant structural reforms and programs to unwind their uncompetitive labour costs.
While there are many similarities between the Greek and the Argentine experiences, as a member of the Eurozone, Greece cannot inflate (and reduce its real debt burden) and it cannot devalue its currency. This is a severe constraint. In December 2001, Argentina defaulted on its debt (resulting in principal reductions of nearly 75%, similar to the effective recent default on Greece’s debt held by foreign private creditors) and abolished its currency board and US dollar peg, and the Argentine peso depreciated approximately 75%. The depreciation foment generated a temporary spike in inflation (equivalent to a 40% rise in its general price level) that reduced real wages and income, but stimulated exports (benefiting from rising commodity prices, exports rose 52% in the first five years of recovery). This fuelled a near 300% surge in business investment, which fed back into modest increases into jobs and domestic consumption.
Greece’s present situation may be more severe than Argentina’s, and its road to recovery faces imposing challenges. Recession is pushing up Greece’s unemployment, pushing its fiscal targets further away and hindering reform efforts. To receive the next round of financial support, Greece has promised more fiscal austerity (3.6% of GDP reduction in deficit), which may accelerate the fall in domestic demand (see Wyplosz 2012). Greece’s exports are also declining, and its unit labour costs have risen roughly 40% more than Germany’s since 2000. Greece must regain competitiveness through some combination of rising labour productivity and lower wages. In an environment of declining aggregate demand, the burden of adjustment will fall largely on real wages. Without the ability to inflate, Greece therefore faces an unpopular adjustment that may further social unrest. And even if Greece were to somehow implement economic reforms and restore competitiveness, its export base is very modest, and it is highly unlikely that Greece’s exports and investment will surge as Argentina’s did.