Argentina & Greece Again

The Economist is now removing Argentina's consumer price inflation number from its list of economic indicators because it is so obviously false that the official numbers are of no use, comparable to past budget data from Greece. That seems like the right thing to do, though The Economist seems to have missed that the manipulation of inflation data has implications not just for the inflation numbers themselves, but also for real growth numbers. Since real growth is a function of nominal growth corrected by price inflation, an underestimation of price inflation implies an overestimation of real growth.

Which brings us to Roger Bootle's telegraph column where he repeats the myth that because Argentina boomed after devaluation so would Greece.

In my view, the greatest threat to the euro is that Greece will make a success of default and devaluation. Something like it has happened several times before, notably with Argentina in 2002, when it defaulted and devalued. The country went from an appalling financial crisis to growing by 11pc in the space of 18 months.

Suppose that once the new drachma has fallen by 30pc to 50pc, Greece begins to show signs of growth. How would it then be possible to persuade the electorate of Spain, Portugal, Italy, and even Ireland, that there is no alternative to years of misery?

Well, obviously, if Greece becomes a success after devaluation while Spain, Portugal, Italy and Ireland don't while remaining in the euro, then devaluation will look appealing. But there is no reason to believe that will happen. Britain's and Iceland's economies, for example, have remained weak years after their dramatic devaluations.

Argentina is a misleading example because first of all, as pointed out above, its dramatic underestimation of inflation means that real growth has been far lower than the official numbers indicate. And secondly, to the extent the boom has been real it was as I pointed out in a previous post due to the fact that the prices of Argentina's export commodities coincidentally sky-rocketed in the years after its devaluation.