Professor Luca Fantacci, monetary expert and economic crisis historian at the University of Milan. Inflation is approaching 140%, almost half of the population (40%) lives below the poverty line, central bank reserves are at zero and the national currency is in free fall. Is Javier Milei, the newly elected president, right when he proposes the dollarization of Argentina?
There is a good reason for this, namely inflation of 140%. This suggests that Argentina’s central bank has lost credibility by spending too much money. From this point of view, dollarization with the closure of its own central bank is a shortcut. This is intended to stop inflation, which destabilizes all economic relations within the country and in relations with other states. Dollarization is the most effective and immediate way to reduce price increases and appease your international creditors, including the IMF, which has loaned tens of billions to Argentina.
What is the problem then?
Once you give up issuing money, you give up monetary sovereignty. They no longer have the ability to adjust monetary policy and interest rates to national needs. Second aspect: The dollarization announced by the elected president is a formal dollarization that would be grafted onto a dollarization that already exists at an informal level. Anyone who already has dollars, such as those who have relations abroad, would be at an advantage. Let’s say the richest. However, dollarization will put an end to the dollar black market.
The so-called “blue” dollar exchange rate, as it is called locally…
Exactly. Today, the use of the dollar in Argentina is through an official exchange rate that is greatly overvalued in favor of the peso, which, however, is not realistic. If you want dollars in Argentina today, you have to pay a lot more for them. As soon as the country switches to the dollar, the black market should be abolished. On the one hand, this reassures international investors and therefore makes it easier for everyone who has access to international foreign exchange markets. Those who get into debt, those who ask for loans on the markets, especially from the state itself, have an advantage. On the contrary: citizens who live and work domestically for most of their lives live in a state in which there is no longer a central bank to create money when necessary or to lower interest rates when access to credit and investments needs to be promoted .
To sum it up again: Inflation would be defeated, but not poverty, which even threatens to increase?
Dollarization reduces inflation, but is not the right way to combat social inequalities. Inflation primarily affects those who are least able to defend their purchasing power, which is threatened by rising prices. However, for the reasons stated above, dollarization does not mean that it benefits the poorest groups. It should also be said that other options for fighting inflation in Argentina have been exhausted. The central bank has been trying for years without success.
The introduction of the dollar in Argentina is an inadvisable step, but perhaps at this point it is the only one left available to an economically unsuccessful country?
I don’t get around to saying that. Also because it is not the first time that Argentina has gone in this direction. In the late 1990s, the government fixed the exchange rate at the American dollar, but this fell apart with the 2001 crisis. It didn’t work back then because dollarization, as it is still today, was called viaticum public coffers: If the state can no longer finance itself by “printing money”, i.e. by borrowing money directly from the central bank, it will the sustainability of the accounts is promoted more strongly. However, this is not necessarily the case if, due to dollarization, the state borrows not from the local central bank, but from foreign companies.
Will Dollarization Incur Huge Costs in Argentina?
Depends on. The Economist wrote some time ago that the operation was impossible due to the exorbitant costs. Because in order to replace pesos in the country, you have to automatically convert them into US dollars. Doing this overnight is not sustainable given the availability of the Buenos Aires Central Bank. However, another question is whether Milei will gradually advance dollarization. As has happened in other countries that have dualized in the past. I am referring to the cases of Ecuador, El Salvador and Panama.
Argentina can take this as an exampleThe Cases?
There is a big difference between them and Argentina. They are much smaller countries. For a small country in Latin America that likely has trade and financial ties with the United States, giving up monetary sovereignty may have more advantages than disadvantages. This is what happens, among other things, with San Marino and the Vatican City, which ultimately do not print their own currency. These are very small countries that are strongly linked to a larger currency area. The case of Argentina has very different characteristics: it is a very large economy, oriented towards the United States, but also has important trade and financial ties with other powers such as China. Argentina was recently able to access direct loans from the Chinese central bank.
Does Argentina have to ask the United States for permission to introduce its national currency?
No. Dollarization can occur without the support of the Federal Reserve. All you need are the dollars. Of course, dollarization would make little sense without the support of Washington, since one of the reasons why a state does it is precisely to count on the support of the United States in the event of a crisis, supporting the Fed as the lender of last resort. .
Libertarian revolution. The Argentine Titanic in the hands of Javier Milei: “It is not a moment for the weak”
by Emiliano Guanella
Mileis Argentina turns away from Pope Francis. The announced return to his homeland is becoming more complicated
by Maria Antonietta Calabro