Single-digit inflation rates were rare in Argentina in the 20th and 21st centuries, and most Argentines would probably be grateful for a 7% inflation rate like Germany’s. With its gross domestic product (GDP) of the last hundred years resembling a very disturbed heartbeat, the Argentine economy does not fit any clear explanatory model. Once the breadbasket of the world, Argentina can still feed ten times its population —but has also recently experienced nine state bankruptcies.
In 2021, the country’s inflation rate of 48.4% was the sixth highest in the world; in August 2022, it is 64% year-on-year. High inflation cannot only be attributed to rising energy and food prices on the world market. Price trends in Argentina have always been extreme: between 1980 and 2019, the average annual inflation reached a staggering 215.4%.
Economic crises, state bankruptcies, declining savings and real wage losses are daily occurrences. Even children know the meaning of inflation and the current exchange rate. The daily news reports the official dollar and the ‘blue dollar‘ (the unofficial exchange rate) like the weather or the number of Covid-19 cases. This is because as soon as the blue dollar rises, everything becomes more expensive: bread, gasoline and the beloved of Argentines asado or grilled meat which, like football, is a national cultural treasure. Today, incredibly, the largest banknote – 1000 Argentine pesos – is only worth €3.44 (€7.6 officially)!
In July 2022 alone, there were huge fluctuations in prices and exchange rates. The dramatic departure of Economy and Finance Minister Martín Guzmán, a disciple of Joseph Stiglitz, created chaos for the Peronist government. Before he quit, $100 would get you 25,000 Argentine pesos at a currency exchange; a week or two later, nearly 34,000. Another finance minister came and went, and then it was time for the new “super minister” Sergio Massa, who is already tipped as a future presidential candidate. Because Massa is more kindly regarded by the markets, you can now get around 29,000 pesos for $100.
Everything in Argentina revolves around the US dollar and how to get your hands on it. The black market is flourishing. There is no point in saving Argentine pesos because inflation destroys their value. But necessity breeds creativity: discounts in supermarkets are scrutinized, people pay in installments even for small expenses, and schoolchildren invest in cryptocurrencies. Vegetable gardens on tiny city balconies are no longer unusual, and since the last time the state went bankrupt—in 2001—barter markets have been revived.
This is because inflation is swallowing up wages and welfare. Collective agreements are adjusted monthly, the government has introduced price controls for specific foodstuffs, continues to raise the minimum wage and, for a time, even stopped exporting beef to calm prices. But inflation continues at a sustained pace. Today, more than a third of once-prosperous Argentines depend on neighborhood networks and soup kitchens. Inflation has caused a humanitarian catastrophe in Argentina.
Who is to blame is an ongoing issue. These days, the political left is attacking those who borrow billions from the International Monetary Fund (IMF), making Argentines dependent on international financial institutions from the North. Both liberals and conservatives blame populist Peronism, while right-libertarians find that it is the bloated state apparatus of the Peronists that is causing the inflation.
Unfortunately, inflation has been out of control under more progressive regimes and more conservative, peronist and non-Peronist, civilian and military governments. Since March 2022, in addition to the pandemic, there is another factor driving Argentina’s inflation: the global rise in energy and food prices due to the war in Ukraine, which is noticeable throughout the country. Latin America.
The budget deficit will either be financed by debt or by printing money. The lack of political consensus and sudden changes in leadership create an unstable institutional and political framework. The gap between the unofficial dollar and the official dollar, pegged to 130 pesos by the central bank, is now over 100%, which creates all sorts of macro-economic distortions in import/export. An IMF program to refinance the $44 billion loan from 2018 has further reduced Argentina’s room for manoeuvre.
The government’s objectives are to achieve a balanced budget by 2024, accumulate foreign exchange reserves and reduce inflation. All hopes rest on the new Minister of Economy, who is also in charge of the — previously independent — Ministries of Economy, Agriculture and Productive Development. He has already announced his plan to cut public spending to keep the budget below 2.5% of GDP. In addition, no more money has to be printed. If Massa manages to bring inflation down to 30% by the next presidential elections without further impoverishing the population, his program will be hailed as a success.
Svenja Blanke, FES Buenos Aires
When journalists speculate with passers-by in pedestrian areas about the price of butter these days, it is clear that ordinary people in the Nordic countries are also affected by rising costs. Not only for food, but also for energy. But the Scandinavians have a panoply of tools to relieve households of price increases.
Countries partly use automatic mechanisms to compensate for the effects of inflation, among them the Swedish “Prisbasbelopp”, which roughly means “price base amount”. This is regularly calculated by Statistics Sweden based on a consumer price index to help monitor state benefits, such as scholarships, guaranteed pensions and tax deductions. The sum is calculated based on the change in the price base amount, with this year’s increase being the largest in 40 years.
But not all government allowances are automatically adjusted. For example, the amount of child support does not increase with inflation, which means that the relief does not benefit all Swedes equally. The country has also adopted various ad hoc measures, such as tax cuts. In September, the Swedish elections and subsequent budget negotiations will determine what further aid will be offered.
Opinions are divided on the actual salaries. While Swedish business circles warn against offsetting inflation with higher wages, the Swedish Confederation of Trade Unions (LO) fears that real wages could fall. In addition to the current uncertain economic situation, many collective agreements expire next year —another reason why the National Office of Mediation, Medlingsinstitutetsexpects the negotiations to be particularly difficult.
Do some in Scandinavia benefitinflation? Since the Russian invasion of Ukraine, Norway’s stable democracy has become a particularly important supplier of oil and gas to European countries. While its semi-national oil and gas companies and the state are sure to benefit from rising market prices, not all Norwegians are jumping for joy. The relatively small and open economies of the Nordic countries are exposed to strong externalities.
In addition to various Norwegian national causes, consumer energy prices have also risen sharply. Another aspect is also important: like Sweden, Norway is divided into several electricity regions with their own tariffs. Electricity prices in the south are much higher than those in the north, which exacerbates political tensions.
Unlike Germany, the Nordic countries are not at risk of supply problems closely linked to energy prices. Norway, an oil and gas producer, is largely self-sufficient, while other Scandinavian countries depend on a limited amount of fossil fuels from Russia: even when most of the gas comes from Russia, as in Finland, it represents only a small fraction of the national energy mix.
Many Nordic countries use renewable or nuclear energy. Although Russia halted gas deliveries to Finland and Denmark in May and June, it did not create a major supply shortage. However, at the end of June, Denmark and Sweden warned that it could still happen. Contingency plans are in place and other means of replacing the gas are being developed. These could be particularly critical for Denmark, which plans to resume natural gas extraction next year at its large Tyra field in the North Sea: the operating company has warned that, against all odds, the extraction would not resume before winter 2023/24. Alternatives are desperately sought.
Kristina Birke Daniels and Niklas Kutschka, FES Stockholm