From The Hill
People love to use moral hazard as an excuse to inflict pain on others. So do governments, as we are seeing as the European Union once again threatens Greece with severe measures for that nation’s failure to fully implement the EU’s harsh austerity measures. The argument is extraordinarily simple: if a country cannot discipline itself, then we will teach it discipline through financial lashes. After all, didn’t Greece bring this pain on itself?
A similar mindset drove debt restructuring in Argentina in 2001. The U.S. treasury wanted to make Argentina an example for the whole Latin American region: If Argentina did not reduce its fiscal deficit to zero as promised, the argument went, the nation would deserve to suffer and the government would need to go. Indeed, Argentina did not reduce its deficit to zero, but it got it down to 0.6 percent in the third quarter of 2001. This effort by the Argentinean government was, unfortunately, unaccompanied by similar efforts in its provinces, but still, it was a massive success. But not to the enforcers, who basically said the efforts were not good enough.
Were we to use the same stick to measure public policy in the US, UK, Japan, or Europe as we did in Argentina then or Greece now, we’d see a new government a month.
I believe the disciplinarians’ emphasis and arguments are flawed. Their whole premise is that the disciplinarians believe they have something to teach, and that the countries such as Argentina and Greece have a lesson to learn. Morality aside, the approach has backfired.
Argentina did indeed suffer, but did the government learn anything? Was there lasting, positive change? To the contrary, after going through what seemed a president a week and an eventual bailout, the economy ended with the worst political situation imaginable: A Chavez wannabe is in power. Once they took over, the populists used the “disciplinary” attitude of the U.S. as a license to do more of what their misguided ideology offered. This is Argentina’s history repeating itself: Juan Peron did the same thing the first time he ran.
Read the full post at The Hill.
Roberto Rigobon is the Society of Sloan Fellows Professor of Management and a Professor of Applied Economics at the MIT Sloan School of Management.