Perceptions of Argentina as a volatile Latin American economy may be wrong when you look how it handled it’s debt crisis compared to the Eurozone.

So when the cry goes up that departure from the eurozone would be a calamity for Greece, the obvious riposte is: how much worse can it get? Greeks fully understand that life outside the single currency would be tough. They know that defaulting on debts and currency devaluation will have costs, including a likely plunge in output, a fresh squeeze on living standards and the risk of much higher inflation. But the alternative – year after year of economic depression as Greece tries to make itself more competitive – does not sound like a bed of roses either.

Ideally, Greece would like to stay in the euro without the current level of austerity, but if these objectives prove incompatible it will eventually have to choose between the two. The argument for exit rests on four pillars: it makes economic sense, the pain would be over more quickly, the costs are exaggerated, and it would be better for Europe.

Greece is currently labouring under a bastardised form of the sort of structural adjustment programme the International Monetary Fund imposes on developing countries. The difference is that the classic IMF remedy is devaluation plus domestic austerity, to ensure gains from a cheaper currency are not frittered away through higher inflation. Greece (and the other bailed-out eurozone countries) are expected to do it all through an internal devaluation – cuts in wages and public spending designed to reduce costs and boost competitiveness. This, though, takes a lot longer and can be self-defeating if the domestic economy contracts more rapidly than exports expand. If this happens, as it has in Greece, the debt problem gets worse.

That’s why critics of the current bailout argue that while Greece would suffer severe transitional costs from a go-it-alone strategy, the choice is between a deep V-shaped recession and a decade or more of permanent depression.

Argentina provides the template for a country that defied the doomsters and made a go of life after devaluation and default. In the 1990s, Argentina’s position was broadly comparable to that of Greece after monetary union. It had pegged the peso to the dollar, a policy that in the first half of the decade led to much lower inflation, but in the second half of the 1990s resulted in much lower growth. By the end of the 1990s, the currency peg came under strain, and like Greece, Argentina tried and failed to muddle its way through with a mixture of austerity, IMF bailouts and debt rescheduling. When the country went its own way in early 2002, there were predictions of economic Armageddon, but from 2003-2007 growth averaged 9% a year.

Comparisons between Greece and Argentina are not precise, because Argentina is a big commodity producer and devalued when the global economy was booming. Greece, by contrast, is part of a recession-mired eurozone, and the turbulence caused by its exit from the single currency might make matters worse.

That, though, is debatable, given that Europe has staggered from crisis to crisis since the full extent of Greece’s debt problem became apparent two and a half years ago. Provided departure was planned and smooth rather than disruptive and contagious (a very big proviso, admittedly), the rest of the eurozone might be able at last to move on.

Original Article by Larry Elliott
The Observer, Sunday 13 May 2012