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Argentina

Argentine Malaise: The Bill Arrives For Bad Economic Choices

How did the Argentine economy arrive at a point of complete exhaustion, asks Brazil's leading daily. Here's a checklist of the errors made over the past decade.

At a standstill, in Cordoba
At a standstill, in Cordoba

- Editorial -

SAO PAULO — The peso’s plunge in value is just the latest symptom that Argentina’s economic and political model of the past 12 years is close to exhaustion. The country suffers from a growing scarcity of hard currency, particularly dollars, and it remains cut off from international financial markets since it defaulted on its debt in 2001-2002.

Government interventions — including controls on prices and foreign commerce — have driven away investment. Argentina counts solely on foreign commerce to acquire other currencies and pay for what it imports, but now this revenue source has been drying up. Slow global growth since 2008 has limited both the price and quantity of exports, while government intervention is restricting production capacity. Inflation, which is high and rising, causes costs to climb, which badly affects the country’s commercial balance.

Since the end of 2010, Argentinian reserves in hard currency have fallen 43%. To avoid a stronger dip in reserves, the government imposed new restrictions on trade and on the purchase of dollars. Such measures have driven inflation higher, causing Argentines to spurn the peso, creating a frantic demand for dollars.

Indeed, inflation is the root of the problem, and it is fueled by economic policies that are either extravagant or untenable. Argentina has had a budget deficit problem since 2009. It spends too much on salaries, social benefits, energy and public transport subsidies. And although the deficits are rather small, they are financed by inflation, maintaining economic growth above Argentina’s means. The country’s Central Bank finances the government, on top of playing the role of a development bank.

Excessive spending produces inflation, making Argentina less competitive and leading to a scarcity of dollars. And if devaluation is seen as among the solutions to the problem, it will actually achieve nothing if inflation continues to rise, because it cancels out any competitive gains.

It seems greater control of public spending and interest rate increases are unavoidable. This would eventually mean a policy of temporary recession, of salary restrictions and welfare spending, which would of course cast doubt on the pact that has kept intact the Peronism of the Kirchner presidencies since 2003 — first Néstor Kirchner and now his wife, Cristina, who has been president since 2007.

Argentina was very successful at overcoming the crisis of 2001-2002. It didn’t, however, have the capacity to see that some adjustments were necessary, at least from 2009 onward. Fiddling with economic policies now won’t solve the huge imbalances that have been accumulating since then.

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Economy

Will China Invade Taiwan? Volkswagen's €180 Billion Bet Says 'No'

German automobile giant Volkswagen will invest billions in China to manufacture electric vehicles. It has deemed the risk of China invading Taiwan "unlikely," a peek into the calculations that private-sector conglomerates make, just like state actors.

Photo of workers at the production line of SAIC Volkswagen in Shanghai

Workers at the production line of SAIC Volkswagen in Shanghai

Pierre Haski

-Analysis-

PARIS — Automaker Volkswagen has decided to accelerate its investments in electric vehicles: €180 billion, mainly in the United States and China. The Financial Times has reported that the company's management evaluated the risk and concluded that China would not invade Taiwan in the short term. It decided as a result that it was reasonable to invest in China, one of its main markets.

It's an interesting vantage point to undertand events. Governments around the world are questioning China's intentions towards the island of Taiwan, which Beijing claims as its own. What is less known is that large companies also need to calculate geopolitical risk and conduct their own analyses.

A few months after Russia's invasion of Ukraine, the President of the European Chamber of Commerce in China, which represents thousands of companies, sounded the alarm in an interview with an economic magazine. Joerg Wuttke mentioned the trauma of Western companies forced to leave Russia and lose everything, and warned Chinese authorities that the same thing could happen if China invaded Taiwan.

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