Six months ago Domingo Cavallo, the all-powerful Minister of Economy for Argentina from 1991 to 1996, had a warning for Greece. 'Don't even think of abandoning the euro,' he said, 'because that will provoke a financial catastrophe in Greece and various other countries in Europe.'
Best known for his 1991 Convertibility Law, which forced Argentina to abandon the austral, its hyperinflationary currency, and replace it with a strong peso pegged to the US dollar, Cavallo was reappointed Minster of Economy in 2001 during the debt and currency crisis that led ultimately, in early 2002, to the devaluation of the peso and a default on the country's debts.
Cavallo believed in 1991 that since Argentina could not rein in its profligacy, a currency policy that prevented the central bank from allowing out-of-control expenditures would enforce monetary discipline. Similarly, by holding firmly onto the euro, Cavallo argues that Greece would be forced into cutting expenditures.
Since under the current system the Greek central bank cannot print euros, the market's refusal to continue lending money to the Greek government would leave it with no choice but to cut its spending. It would also force labour costs into alignment with those of its stronger European neighbours.
There is a fierce debate about whether or not countries like Greece, Spain, Ireland, Italy, Portugal and Belgium are better or worse off in the long term by maintaining the euro and forcing an adjustment through rising unemployment and sharp fiscal cuts.
But whatever the economists decide, it is important to remember that this is ultimately a political decision. As far back as 1922 economist John Maynard Keynes pointed out that the process of currency and debt adjustment is above all a political process. Whether a country adjusts by restructuring debt, devaluing its currency, raising unemployment or inflating, the choice decides which sectors of the population are going to pay for the cost of the adjustment.
Here the track record of Argentina since 2002 is very suggestive. During Argentina's glory days - after the imposition of the Convertibility Law until the Mexican crisis of late 1994 - Argentina grew solidly by about 6-7 per cent annually. Thereafter it struggled to maintain growth for any long period and went into deep recession in the two years before the crisis, with GDP contracting by up to 8 per cent.
