May 18, 2013
No cure from currency
If Europe’s crisis is frequently presented as existential anxieties over the single currency (with today’s Greek elections elections something of a D-day) while the scramble here is for dollars, both cases broadly share the same common denominator which is also the real problem — staying competitive. The favourable contrasts so often traced by official propaganda between crisis-torn Europe and a decade of runaway growth here under the “model” are misleading. Any statistical comparison (for example, that seven percent of euro zones households live on less than 1,000 euros a month while 80 percent of Argentines earn under 5,000 pesos) will show that Europe is doing far too well and that is its real problem — almost all its goods and services could be produced far more cheaply elsewhere and its living standards will have to come down a few more pegs to be sustainable and to prevent the defence of current well-paid jobs from ruling out any employment for youth. But any call for countries to live within their means runs afoul of a huge sense of entitlement and massive protests. Austerity is blasted as recessive, a half-truth which does not vindicate the implied alternative that countries spending money they do not have solve their problems by spending even more. Any state which cannot finance its spending out of its own revenues is forced to turn to the international money markets who have the right to set their rates according to the chances of repayment — even if they are portrayed as predatory speculators preying on the weak and deepening the crisis (as indeed happens).
In the case of Argentina, the competitive problem is quite simply dollar inflation. Not allowing the exchange rate to keep pace with inflation ended up making imports increasingly attractive until the brutal escalation of import curbs this year as a follow-up of last year’s exchange controls rather than protectionism (indeed more than four times as many industrial companies reportedly suffer from the lack of inputs as benefit from the obstacles to foreign competition). Because dollar inflation is progressing almost as fast as peso inflation, the impact on labour costs is drastic — thus a wage increase of 20-25 percent (insufficient in the eyes of many trade unions) will means the dollar cost rising by 15-20 percent, which is disastrous in global competitive terms.
While many people in government circles here present the answer as imposing the peso on previously dollarized areas, Greece might well end up opting for the drachma as from today but in neither case should the currency be the issue — even more than the economy (stupid), it should be staying competitive.