The Devaluation of the Peso and the End of the Peg to the Dollar Along with Fiscal Consolidation Will Bring Economic Recovery to Argentina.

The devaluation of the peso and the end of the peg to the dollar along with fiscal consolidation will bring economic recovery to Argentina.

Argentina’s situation

After the economic reform in the 1990s and under the Convertibility Plan, Argentina’s economy was doing well. This reform brought to the Argentineans both economic stability and growth. In 1998, Argentina began showing some signs of economic slowdown. Then, in December of 1999, the new president, Fernando De La Rua, confirmed the serious economic problems of the country. At the end of 2001 and after several attempts at trying to solve the situation through various measures, such as the Impuestazo, the blindaje, the megacanje and the corralito, Argentina’s economy was about to collapse. The possible explanations for the crisis were the restrictive currency arrangement and the fiscal mismanagement. I believe that the devaluation of the peso and the end of its peg to the dollar along with the fiscal consolidation will bring economic recovery to Argentina restoring competitiveness and eliminating the structural tendency for deficits.

Benefits for Argentina from the devaluation of the peso and the end of the peg to the dollar

Restore competitiveness

The main consequence of Argentina’s fixed exchange rate system was the growth decrease. The GDP has decreased continuously since 1998 [Exhibit 1a and Exhibit 2]. In the late 1990s, the dollar was overvalued; therefore, the peso was overvalued as well. A pegged currency eliminates the ability to change the monetary policy to address what is happening. As a consequence, Argentina suffered a loss of competitiveness, its imports experienced a great increase because of the appreciation [Exhibit 2 and Exhibit 3] and since 1998 Argentina has experienced deflation [Exhibit 10]. Tightening the money supply leads to appreciation and deflation. Devaluating the peso and breaking the peg to the dollar is the solution for Argentina to become productive and competitive once...