Other than the fact that few people saw it coming, there's nothing remarkable about the implosion of the Greek and Italian economies. The two countries are following a script – basically a horror movie – that Argentina wrote a decade before, based on an earlier version by Mary Shelley.
In the Frankenstein story, a medical expert tries to create the miracle of human life by inserting a brain into spare body parts. In Argentina, several financial experts believed that switching to a foreign currency would be the miracle cure for an economic crisis. The reason for the experiment was understandable in each case. Frankenstein was fiction. But the concept of galvanism – turning inanimate objects into living things – seemed plausible in 1818, when Shelley published her novel.
In the late 1980s, Argentina had an annual inflation rate of nearly 5,000 per cent. Few companies wanted to invest or hire there. In these circumstances, president Carlos Menem and finance minister Domingo Cavallo believed that pegging the value of the peso to the U.S. dollar would be a magic bullet. The plan worked: When you can't print as much money as you want, inflation disappears. Unfortunately, their creature, like Victor Frankenstein's, went out of control. A strong currency works fine in a competitive economy, but if a country is no more productive than its neighbours, it can get scary.
Post-peg 1990s Argentina was no more efficient than Brazil, which exported many of the same goods and services. The difference was that when foreign importers rejected the price of Brazilian exports, the value of the real fell, to the point where buyers would make a deal.
Between 1996 and 2001, the real obligingly lost half its value against the U.S. dollar. The only way for an Argentine exporter to compete with its Brazilian counterpart would have been to pay less to suppliers and workers. But few workers would accept pay cuts of close to half their income in any country, let alone in Peronist Argentina. (Our slogan: "You name it, we promise to give it to you.")
A country that can't cut the price of uncompetitive goods and services won't sell to others. In this case, the next act of the drama involved borrowing as much money as the country could, while praying for a falling dollar or a rise in the value of the neighbour's currency.
Failing that, the alternative was to go broke, which Argentina did in 2001.
The European story is similar. Italy (in 1999) and Greece (in 2001) adopted the euro, a new currency intended to help rejuvenate the old continent – but the baby turned vicious. Neither Greece nor Italy was, or has become, competitive with their neighbours. The two are stuck with selling goods and services in euros, the value of which they can't change.
Greece and Italy can try to become efficient. Businesses can invest more in technology and training. Companies can stop offering bribes to public officials, who can refuse to take them. Both countries can improve the quality of public education. But it takes years to change human behaviour, even if the people involved are interested in the concept.
The rest of Europe could push for an even closer union. In this scenario, if Greece and Italy want money from competitive countries, they would accept foreign advisers, who would help run the Greek and Italian governments. But getting Greek and Italian nationalists to agree to joint management with Berlin and Brussels would be a hard sell.
The alternative is for Greece and Italy to go back to their old currencies. Reissuing drachmas and liras would be a big administrative pain. Lenders to both countries would lose money. Dealing with more currencies means having to calculate exchange rates, and paying a fee, each time a company or person needs to trade a euro to Greeks and Italians.
Argentina had to deal with most of the same issues when it detached the peso from the dollar a decade ago. But during the next six years, economic growth was Argentina's highest in over a century. Since 2005, purchasing power per person has risen by a robust 33 per cent. Much of this increase in wealth has come from a record-setting surge in exports, thanks mainly to a competitive currency.
Argentina has other problems. But when the peso crashed, it drove a stake through the heart of the monster.
Fred Blaser is publisher of Centralamericalink.com.