Tuesday, April 24, 2012

Pierpaolo Barbieri in the WSJ misstates Nouriel Roubini and fails to comprehend what went wrong in Argentina and is going wrong in Europe

This article makes a poignant plea for the Eurozone as a “worthy” project and supports the disastrous Argentina experiment to peg the Peso to the US dollar.  Whilst the writer makes some good points about the present populist regime in Argentina and recent expropriation of YPF, the Argentine oil company controlled by Spain's Repsol; he cannot seem to get it together on the politics and economics that led Argentina to collapse nor what is happening in the Eurozone.

Barbieri first puts his foot in his mouth when he accuses Nouriel Roubini of “making Argentina a model for Greece.” What he seems to mean is Greece leaving the Eurozone. I doubt that he has read seriously anything that Roubini has written on Greece. He does not appear to understand why Argentina collapsed and how this has affected the thinking of those like MIT’s Simon Johnson, who were involved personally at the IMF in this debacle.

Both Nouriel and Simon have been urging Greece and the E.U. to take measures to avoid economic collapse and disorderly debt default. Roubini has been calling for a consensual divorce from the Eurozone with serious debt restructuring. He even calls for measures to avoid a devaluation overshoot.

Barbieri, like many Greek commentators, makes the specious argument that the peso-dollar peg and single currency union is a necessary agent for structural reforms. In fact, linking a weak economy to a hard currency was essentially a political gimmick that has had disastrous results.

Both countries have suffered from corrupt populist regimes centered on charismatic personality cults. These leaders led them to economic ruin: Argentina has the Peron legacy and Peronistas, Greece has the Papandreou legacy and PASOK – an entrenched, rapacious and highly corrupt political elite.

In Greece, the purpose of Eurozone entry was to promote this populist and corrupt regime, not to build a sound economy. Even today, the political elite in Greece have no scruples about putting the general Greek population into abject poverty if it means preserving their privileges. Barbieri is a professor of government at Harvard. His inability to recognize the political and economic dimensions of these situations and how difficult structural changes are in such an environment is inexcusable.

In fact, Barbieri has got matters upside down: there no sense for a country moving to hard money unless structural reforms are already in place. He clearly does not understand the inherent dangers in artificially locking into a hard foreign currency, as the Argentine and Greek political elite did, for lower interest rates to whitewash a weak economy. He doesn’t seem to realize how mispriced credit can lead to destabilizing asset bubbles and crippling over indebtedness in such cases.

He claims spuriously that Argentina and Greece achieved “hard-won low interest rates.” In fact, the low interest rates were never earned, rather they were 'borrowed” as credit enhancement from the currency peg! There was huge resistance to structural reforms in these countries. The decoupling between actual credit risks and underlying economic fundamentals proved lethal. The borrowing and spending binge in these two countries, unleashed by this artificial hard currency link, eventually crashed and degenerated into sky-high unemployment, widespread poverty and credit lines from the International Monetary Fund.

At this point, Barbieri accuses the Argentine politicians of clinging “to an overvalued exchange rate” in the face of chronic deficits, capital flight and deepening recession. Well, this was the poison fruit of the currency peg. Greece is in the same unenviable position in the Eurozone.

As for his “harder, productivity-enhancing reforms like decreasing bureaucracy or improving labor-market dynamism,” this would take many years to achieve and would be a challenge even in a normal Greek or Argentine political climate. It would never be feasible in a deep recession with the ensuing social and economic chaos.

The sad truth is that countries with the political culture of Greece and Argentina require a soft currency for survival. Forcing change by currency pegs or currency zone memberships leads to insurmountable imbalances that degenerate into major credit defaults.

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