Argentina: More Lending Guarantees Creeping Austerity

By Gino Brunswijck

Cross-posted at Eurodad. 

Against a backdrop of public protests, on 25 October the Argentinian government approved the 2019 budget including US$10 billion worth of cuts in essential areas such as education and public works. The next day, the Executive Board of the International Monetary Fund (IMF) completed the first review of a loan agreement paving the way for the disbursement of a tranche of US$5.7 billion to the debt-stricken country. At the same time, the Board gave the green light to increase Argentina’s bailout loan to US$56.3 billion. However, this loan comes with a significant price tag.

The higher the bailout, the greater the austerity

The IMF review calls for stronger and faster fiscal consolidation in Argentina. The budgetary targets for the short and medium term were tightened compared to the initial agreement. Initially, the IMF allowed Argentina to maintain a 1.3 per cent deficit for 2019. Following the first review, the Fund is now demanding a zero deficit, which must be turned into a surplus above one per cent from 2020.

A range of budget cuts and increased taxation will seal the deal, while the insurance policy is provided by new structural conditionalities that promise to lock in these fiscal targets for the foreseeable future. For instance, the Argentinian government was required to present a budget in line with the zero deficit target to Congress to secure the next tranche of the IMF bailout loan. Unsurprisingly, one new conditionality gave Congress a November deadline for approving this budget – which it did last Thursday, representing a clear restriction on the parliament’s budgetary rights.

To satisfy the terms of the agreement, Argentina also has to pursue a restrictive monetary policy, complemented by keeping interest rates above 60 per cent as long as inflation is high. The bottom line is that Argentina will get more funding in exchange for more belt-tightening measures.

Argentina: 20 Years on, Has the IMF Really Changed Its Ways?  

By Gino Brunswijck, Maria Jose Romero and Bodo Ellmers, The European Network on Debt and Development (Eurodad)

Argentinians are experiencing deja-vu this month as the government announces massive layoffs and a hiring freeze as part of an adjustment package attached to a loan from the International Monetary Fund (IMF). Thousands of public servants are being forced yet again to swallow the bitter pill of austerity, which the IMF programme – published last Friday – aims to patch up through increased targeted social assistance.

For many Argentinians the financial crisis gripping the country, and the return to the Fund, brings back bad memories of 2001. Then, IMF-induced policies triggered the worst economic meltdown in Argentinian history.  A cocktail of austerity measures contributed to the contraction of economic activity with a loss of 20 % of GDP between 1998 and 2002. They also compromised the government’s ability to provide essential services; unemployment soared above 20 % while real wages dropped by 18%; and poverty affected more than half of all Argentinians. Children were most affected, with seven out of 10 falling below the poverty line.

To appease popular discontent, the government and IMF officials have emphasised that this time the Fund has changed its ways. However, a comparison between previous and current agreements points to business as usual, focusing on traditional austerity with a few cosmetic tweaks.

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Leadership Failure Perpetuates Stagnation

Jomo Kwame Sundaram

What kind of leadership does the world need now? US President Franklin Delano Roosevelt’s leadership was undoubtedly extraordinary. His New Deal flew in the face of the contemporary economic orthodoxy, begun even before Keynes’ General Theory was published in 1936.

Roosevelt’s legacy also includes creating the United Nations in 1945, after acknowledging the failure of the League of Nations to prevent the Second World War. He also insisted on ‘inclusive multilateralism’ – which Churchill opposed, preferring a bilateral US-UK deal instead – by convening the 1944 United Nations Conference on Monetary and Financial Affairs at Bretton Woods with many developing countries and the Soviet Union.

The international financial institutions created at Bretton Woods were set up to ensure, not only international monetary and financial stability, but also the conditions for sustained growth, employment generation, post-war reconstruction and post-colonial development.

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The Fiscal Policy Experience Since the Great Recession

Philip Arestis and Malcolm Sawyer

In the period before the global financial crisis, macroeconomic policy was dominated by monetary policy; fiscal policy had become, at least in academic circles, largely dismissed. Governments still operated fiscal policy in the sense that budgets were presented and adjusted in light of economic circumstances. The countries of the Economic and Monetary Union of the European Union were supposedly constrained in the size of their budget deficits, though the constraints were frequently not observed.

With the global financial crisis, attention quickly swung to fiscal policy. Initially through late 2008 until early 2010, the automatic stabilisers of fiscal policy were allowed to function and budget deficits rose; there was additionally some relatively modest and temporary discretionary spending and tax reductions. At least the mistakes of the 1930s of cutting public expenditure in the face of recession were initially avoided, though unemployment rose substantially and the largest declines in GDP since WW2 were seen. It should have been self-evident that the upward swings in budget deficits were a direct result of the recession, and that attempts to reduce the deficit through austerity would undermine recovery. The sensible response should have been that, as recession caused the rise in budget deficit, recovery would bring a fall in the budget deficit. However, governments were panicked into a drive to “eliminate the deficit” whether or not the economic conditions were appropriate for deficit reduction. The panic was fostered by a “debt scare” with a focus on the often large rises in public debt, which occurred between 2008 and 2010. The idea was promoted that budget deficits were in some sense too large prior to the financial crisis, even though there was scant reason to think they had in any sense been unsustainable.

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Prospects for the Spanish Left, Part 2

William Saas, Jorge Amar, David Glotzer, and Scott Ferguson

This is the second part of a three-part series on Spain’s economic crisis, the program of the new leftist political party Podemos, and both the limitations and potential of the Spanish left today. This installment focuses on the relevance of Modern Monetary Theory (MMT) in transcending conventional balanced-budget thinking. Part 1 is available here.

William O. Saas is an assistant professor of rhetoric at Louisiana State University. His work has appeared in symplokē and Rhetoric & Public Affairs.

Jorge Amar is a Spanish economist, president of Asociación por el Pleno Empleo y la Estabilidad de Precios, or Full Employment and Price Stability Association), and a doctoral candidate in applied economics at the Universidad Valencia. Recently, Amar served as economic advisor for Spain’s Unidad Popular party.

David Glotzer is a valuation analyst at Solidifi, and freelance writer whose background is in Economics and Mathematics. His writings have appeared in CounterPunch, Investig’Action, Strategic Culture Foundation, and Young Progressive Voices.

Scott Ferguson is an assistant professor of humanities and cultural studies at the University of South Florida. He is also a Research Scholar at the Binzagr Institute for Sustainable Prosperity. His essays have appeared in CounterPunch, Naked Capitalism, and Flassbeck Economics International.

When one shifts focus from the public spectacle of political discord to the more vital behind-the-scenes debate over political economy, the prospects for the Spanish left look a lot more promising. Several major figures in Unidos Podemos, besides Garzón, do understand that the fiscal strictures forced upon Spain by the Troika institutions foreclose any hope for true economic recovery. Informed by the insights of Modern Monetary Theory (MMT), a select and well-placed few clearly see that monetary union without fiscal union is a tried-and-true recipe for endless austerity (see Alejandro Reuss, “Eurpoean Social Democracy and the Roots of the Eurozone Crisis: Part 1—Monetary Union and Fiscal Disunion,” D&S, July/August 2016). They recognize that jobs and demand, not equilibrium and “confidence,” are the key ingredients of economic well-being. Most importantly, they understand that the last best hope for Spain is to again become sovereign in its own currency.

The impending collapse of PSOE will leave masses of Spanish voters alienated and in search of alternatives to the newly formed PP-led government. While some voters might prefer the familiar feel of PP’s austere embrace, it is a safe bet that many more will defect to the parties that make up the Unidos Podemos coalition. This is, we feel, a very promising development. But in order for a reinvigorated Unidos Podemos to follow through on its promise to deliver the Spanish working class from austerity, the coalition must finally disavow, without apology or regret, the utopian dream of a single-currency Europe.

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Is Fiscal Policy for Prosperity Back in Place of Austerity?

Philip Arestis and Malcolm Sawyer

Fiscal policy has not been taken seriously by policymakers since the Great Financial Crisis (GFC) of 2007-2008, with some exceptions over the period 2009-2010, notably after the G20 meeting in London (April 2009). The GFC prompted significant government and central bank interventions, both to restore confidence in the financial system and to contain the impact of the crisis on the real economy. Monetary and fiscal policy responses became very accommodative in many countries. Central banks responded by flooding the financial markets with liquidity, while fiscal authorities attempted to deal with the decline in the solvency of the banking sector. Those policies before 2010 had helped to avoid a complete collapse of the financial system and the real economy after the emergence of the GFC. Subsequently “unorthodox” monetary policies have been implemented, which have not been successful in terms of producing and maintaining healthy growth in the economy. Fiscal policy has increasingly been concerned with “balancing the budget” and “expansionary austerity” rather than being genuinely expansionary.

There are several reasons for such a change in terms of fiscal austerity going out of fashion. An important one being the failure of the austerity policies to bring about significant recovery despite the claims made for “expansionary fiscal consolidation.”

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Expansionary Fiscal Consolidation Myth

Anis Chowdhury and Jomo Kwame Sundaram

The debt crisis in Europe continues to drag on. Drastic measures to cut government debts and deficits, including by replacing democratically elected governments with ‘technocrats’, have only made things worse. The more recent drastic expenditure cuts in Europe to quickly reduce public finance deficits have not only adversely impacted the lives of millions as unemployment soared. The actions also seem to have killed the goose that lay the golden egg of economic growth, resulting in a ‘low growth’ debt trap.

Government debt in the Euro zone reached nearly 92 per cent of GDP at the end of 2014, the highest level since the single currency was introduced in 1999. It dropped marginally to 90.7 per cent at the end of 2015, but is still about 50 per cent higher than the maximum allowed level of 60 per cent set by the Stability and Growth Pact rules designed to make sure EU members “pursue sound public finances and coordinate their fiscal policies”. The debt-GDP ratio was 66 per cent in 2007 before the crisis.

High debt is, of course, of concern. But as the experiences of the Euro zone countries clearly demonstrate, countries cannot come out of debt through drastic cuts in spending, especially when the global economic growth remains tepid, and there is no scope for the rapid rise of export demand. Instead, drastic public expenditure cuts are jeopardizing growth, creating a vicious circle of low growth-high debt, as noted by the IMF in its October 2015 World Economic Outlook.

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Robust Global Economic Recovery Needs Coordinated Policy Response

Anis Chowdhury and Jomo Kwame Sundaram

In the wake of releasing the IMF’s latest assessment of the global economy, Chief Economist Maurice Obstfeld noted in his blog, “Global growth continues, but at an increasingly disappointing pace that leaves the world economy more exposed to negative risks. Growth has been too slow for too long.”

The IMF anticipates 3.2% global economic growth this year, down from 3.4% predicted in January, 3.6% last October and 3.8% last April. Nonetheless, this continuously downward revised forecast is still higher than the United Nations global growth forecast of 2.9% and 3.2% in 2016 and 2017 respectively early this year.

‘Solution’ is the problem
The United Nations has been warning against early fiscal consolidation and austerity since 2009 before G20 leaders retreated, in mid-2010, from their earlier commitment, at their April 2009 London Summit, to coordinate their responses involving large fiscal stimulus packages to prevent the global financial crisis from becoming a depression. In effect, Gordon Brown, the host, considerably strengthened the IMF, ostensibly to better support affected countries, to ensure a coordinated and balanced global recovery.

But the first ‘green shoots of recovery’ provided the pretext for a policy U-turn once powerful financial interests had been saved. Rapid ‘fiscal consolidation’ through budgetary austerity measures, it was claimed, would restore investor confidence, thus ensuring higher investment and growth. Even though much cited research justifying ‘fiscal austerity’ was discredited as flawed, and the IMF admitted that such advice was based on erroneous ‘back of the envelope’ estimates, leaders in Europe have stuck to their contractionary fiscal policy stance.

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Fiscal Policy: It’s the Same Old Story

John Weeks

For almost two years each successive ONS quarterly report on the UK economy brings much the same news 1) the Treasury fails to achieve the target for the overall fiscal balance set way back in the summer of 2010; and 2) the recovery from the Great Financial Crisis, always predicted at last to be robust and sustainable, shows continued vulnerability.

Much like a fire started with damp wood, the recovery flickers, belches smoke, but fails to ignite. The preliminary estimate of the Office of National Statistics for GDP came in at 0.5% higher than for the fourth quarter, an increase from 0.4% for quarters two and three (statistically non-significant and very much in the eye of the bean counters). This modest expansion calculates to an annual increase of 1.9%, bringing the Osborne-managed economy to 6.6% higher than the pre-crisis peak of 2008Q1 (see further discussion of GDP performance by Graham Gudgin).

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Neoliberalism Resurgent: What to Expect in Argentina after Macri’s Victory

Matías Vernengo

The election of businessman Mauricio Macri to the presidency in Argentina signals a rightward turn in the country and, perhaps, in South America more generally. Macri, the candidate of the right-wing Compromiso para el cambio (Commitment to Change) party, defeated Buenos Aires province governor Daniel Scioli (the Peronist party candidate) in November’s runoff election, by less than 3% of the vote.

Macri is the wealthy scion an Italian immigrant family that made its money on the basis of government contracts. He went on to work for the family business and later, defying his father’s wishes, became president of the most popular professional soccer club in the country, Boca Juniors. In 2007, he won election as mayor of the capital city, Buenos Aires—the springboard for his eventual election to the presidency.

This is a momentous change in Argentina’s history, since it is the first time that a right-wing party has won the presidency by electoral means. In the past, conservatives had only gained power through military coups or by disguising neoliberal policies under more progressive electoral promises and the mantle of a left-of-center party—as in Carlos Menem’s Peronist government in the 1990s.

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