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The economic lessons of the Argentina-Greece World Cup match

I like to use every chance I can to point out economics lessons in everyday life, and here's one I just can't pass up: Argentina and Greece just finished a World Cup soccer match.

What's economic about that, you ask? Easy: Argentina is yesterday's Greece and Greece may be tomorrow's Argentina.

You have heard all about the Greek debt problem and the contagion it has spread across Europe. Well, a generation before Greece was on the precipice of default, Argentina actually defaulted.

Argentina was one of a number of free-spending, high-living Latin American countries that danced itself right into an economic crisis in the 1980s and 1990s. After years of dictators who knew or cared as much about fiscal stability as Eva Peron cared about humility, Argentina was an economic, debt-ridden mess. Democracy was restored in 1983, and a new currency -- which required new loans -- was instituted. But the country couldn't pay its loans and inflation soared as high as 200 percent. The currency collapsed.

In the 1990s, the country pegged its new currency to the U.S. dollar. But that kept the value of the Argentine currency artificially high. And the country still could not pay its external debts. At the same time, unemployment and corruption soared. Just like Greece. The IMF didn't help matters out at all, as it continued to loan money to the Argentines.

It all came to a head in 2000 and 2001, when Argentines pulled their money out of banks, converted it to dollars and sent it overseas. Other countries lost confidence in Argentina's ability to pay its debts. There were riots across the country. Finally, at the end of 2001, the nation defaulted on the bulk of its $130 billion debt.

The following years were tough for Argentina, but growth gradually returned, thanks to an unexpected occurrence: The devalued Argentine currency made Argentine exports cheap abroad. The country built up a trade surplus, which helped restore the economy.

What's the difference between Argentina then and Greece now? Unlike Argentina, Greece has no control over its currency. As a member of the 16-state euro zone, Greece's currency is the euro, and it has no control over its monetary policy. It can neither inflate or deflate its way out of a crisis, as Argentina and other nations did. That's a crippling problem for not only Greece, but for the rest of Europe, which was forced to pony up a $1 trillion bailout.

In today's match, Argentina -- a traditional soccer power -- beat Greece, 2-0. I thought perhaps Greece could borrow recklessly from one of its European neighbors to buy a goal and then lie about how much it paid for it. But then I realized: Soccer goals must not part of Greece's tough new austerity plan. You gotta start cutting somewhere.

By Frank Ahrens  |  June 22, 2010; 4:30 PM ET
Categories:  Deficit/debt  
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