Is the eurozone going "Latin"?

"You say how 'we didn’t become Argentina’. I wish that we had: Argentina went through huge difficulties and its citizens were able to stand with dignity.” - Greek opposition leader Alexis Tsipras (Tsipras: 'I wish we had become Argentina' Athens News 09/07/2012)

Simon Johnson and Peter Boone think that the eurozone is going "Latin", but they aren't necessarily completely happy with the prospect. In Introducing the Latin Euro Economix 09/13/2012.

The balance of power and decision-making has shifted toward the troubled periphery of Europe. The “soft money” wing of the euro area is in the ascendancy.

This is not the end of the crisis but rather the next stage. The fact that the European Central Bank is willing to purchase unlimited debt from highly indebted nations should not make anyone jump for joy. The previous rule forbidding this was in place for good reason; the German government did not want investors to feel they could lend freely to any euro-area nation and then be bailed out by Germany.

They think this sets up the economically weaker eurozone members to demand an end to austerity:

So the battleground moves from whether the European Central Bank can bail out nations to whether austerity programs should be required for bailouts. The peripheral countries will fight this issue tooth and nail, and they will win.

Unemployment in Spain is now around 24.6 percent; in Greece it is 24.4 percent (with unemployment for those 14 to 24 at 55 percent). Both Portugal and Ireland have made progress with their austerity programs, but they are not growing, and their debts remain very large (gross general government debt is projected by the I.M.F.’s Fiscal Monitor to be 115 percent of gross domestic product next year in Portugal and 118 percent of G.D.P. in Ireland).

They see this a leading to a bad state of affairs which they describe as follows:

We’ve seen such a dynamic operate time and again around the world. When strong regional governments are fighting for resources against national governments, there is a tendency for regions to accumulate large debts, then demand new bailouts at the national level. These battles often end in runaway inflation, messy defaults or both (think Argentina many times or Russia in the 1990s).

The European Central Bank has handed the euro zone’s peripheral governments a great victory at the expense of those who hoped to keep the euro area a solvent, “hard currency” zone through disciplined public finance.

It may be difficult to imagine that wealthy European nations could follow the tragic path to inflation and defaults seen for so long in Latin America. Yet with each “step forward” in this euro crisis, Europe moves further along that same route.

Up until those concluding paragraphs, they seemed to be arguing that all the eurozone countries including Germany would be forced to the recognition that the euro isn't working and would see they had to give it up. But in those last paragraphs, they sound like they are just predicting a debt disaster.

Argentina's problem in 2001 was not primarily that the provinces had borrowed too much money. It was that the Argentine peso was pegged to the US dollar, creating a currency trap much like that of the eurozone, and the neoliberal government of Carlos Menem had opened the country to foreign capital flows in such a way that the country became excessively vulnerable to financial speculators. Oversimplifying a bit, perhaps, the more serious problem was the currency trap. And essentially, once Argentina took itself off the dollar peg and could resort to the normal tool of devaluation, they were able to begin recovery.

Certainly, it has been a long road. But their economy would have been damaged much more seriously without taking that course.

Which gets back to Alexis Tsipras' comment. As long as Greece and other so-called periphery countries within the eurozone remain tied to the common currency, they will face overwhelming economic pressure for what is known as internal devaluation, i.e., lowering their wages and living standards in a drastic way.

Yes, getting out of the euro will be disruptive and recovery from the current situation will take a while. But for Greece, Ireland, Italy, Portugal and Spain, that's a far more constructive course than letting both their economies and their democratic institutions be furthered damaged by the euro trap.

The only real alternative would be rapid moves to make the eurozone a genuine fiscal and transfer union, which would among other things mean massive transfers of funds from Germany and other northern European countries to the weaker southern ones.

It's hard to imagine how that can be accomplished rapidly. So for the countries currently being so badly damaged by the austerity policies imposed by Germany, going the "Latin" route - more specifically, the Argentinian route - would be the good news for them.

For Germany, however, having mismanaged this crisis so badly, it would be a heavy economic blow.

Tags: argentina, austerity economics, eu, euro, european union, greece