Within three months, it was seen that the Argentine peso lost a third of its value relative to the US dollar - nothing new there.

Argentina has addressed its social and economic problems with immense state interventionism and deficit spending for seven decades, funded by their printing press.

The overall result has always been the same - economic sluggishness and inflation. Now, Argentina has one of the least free economies in the world and some of the world's most complicated and highest taxes. Furthermore, the hidden inflation tax has been inhuman, at 50 per cent annually between 1934 and 2012.

It is clear that Argentina is still suffering the consequences of the reign of the former president and military general Juan Domingo Perón – Peronism as they call it.

The essence of Peronism

Peronism is a manifest of union dominance of the economy and a politicised central bank. As a consequence, centrally planned trade has blocked the ports, leading to Argentina's disgraced score of 0.29 out of 10 for trade openness, according to KPMG.

In addition to, the country itself is well known for worker strikes having had 1,235 in 2015 alone. The Independent Review, a journal of political economy, has published an extensive assessment of the Central Bank of the Argentine Republic. The authors note that the latter have a counterproductive directive in place when it comes to social fairness as well as the fact that the central bank is incapable or reluctant to efficiently manage the supply of currency. Given this doubtful decree of the central bank, Argentina has one of the world's highest inflation rates, at 32 per cent annualised. To add insult to injury, the National Institute of Economic Census, for many years, fabricated official inflation rates far below the real rates.

As a countermeasure, nationally authorised price freezes leave supermarket shelves empty because of the price ceilings in place; it is impossible for producers to supply the product at the below-market price.

Change is possible

In 2015, the people voted for change and sound economic policy and thus, Macri was elected and accepted a credit line of $50 billion from the IMF, which includes limited fiscal-sternness conditions. However, the pending question is whether he will tackle all the economy’s structural problems.

A possible prescription for the country itself is to cut spending, work harder and liquidate assets until their debt is under control.

How can this be achieved? It is easier said than done.

The first necessary step (but not sufficient) would be flexible dollarisation i.e. getting rid of the Argentine peso and replace it with the US dollar, for example. Having sound money and a low inflation policy would make way for businesses to plan and produce effectively again but would reign in widespread speculation and inflation arbitrage.

However, Ecuador is a case in point, having made the transition successfully, and removing the central bank would put a stop to higher inflation and deficits founded by monetary expansion. Argentina would benefit from this since it has already experienced creeping dollarisation, as people tie big-budget items and contracts to the US dollar.

The second vital step is to make immediate reforms in order to make Argentina competitive globally and cut government spending. A crucial component to achieve the latter would be the end of union monopolies for each industry and a freeing up of the labour market. Unions dominate political discourse, stand in the way of economic competitiveness, and discourage foreign investment.

That being said, Macri has already started to implement some of these reforms, but the unions have made every step of the way problematic and it seems that the government could not resist the enticement of using the printing presses of the central bank to cover losses in revenue.

In order for Macri to succeed, there can be no exceptions when it comes to  reforms and in that way no claims of unfairness. Otherwise, Argentina will fall into old patterns of economic and financial crisis.


This article was issued by Maria Fenech, investment management support officer at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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