A Cato Institute member points to President Milei the inconsistency of the exchange system implemented and explains why the weight should be allowed not to float the economic improvements achieved.
Several voices, on one side and one, rose after the electoral results of Buenos Aires recommending both adjustments and the maintenance of the economic program. In this framework, days ago, the Spanish liberal academic, Lorenzo Bernaldo de Quiróshe pointed out through a publication that The positive reforms of the Milei government have been accompanied by a fixed but adjustable exchange system, which is not only inconsistent with the philosophy of the Argentine leader, but is a dangerous and potential source of instability. This global liberal referent, member of the Cato Institute, head of the International Foundation for Freedom, among other organizations, advises Milei that, given the historical and empirical evidence, Argentina should adopt a floating exchange rate system, without intervention by the Central Bank, especially for the political-electoral uncertainty prevailing in the country. “If President Milei does not achieve good results in the next legislative elections in October, his ability to advance in the application of his program will be significantly complicated. In this context, the flotation apart from being convenient would be a very useful instrument to not put at risk the macroeconomic achievements reached to date”Bernaldo de Quirós wrote in voice.
There the liberal economist in addition to weighing the radical change in the direction of the Argentine economy that produced Milei in his two years of mandate, managing to drastically reduce inflation and eliminating the fiscal deficit, which together with a deregulator program resulted in “Strong economic growth, in a brutal decrease in poverty and unemployment”he points out that “that virtuous scenario has been accompanied by an exchange policy, a fixed but adjustable exchange rate system, not only inconsistent with the philosophy of the Argentine leader, but, as economic theory teaches and endorses empirical evidence, constitutes a dangerous and potential focus of instability.” It details the exchange scheme implemented of fluctuation bands in the wholesale market between $ 951 and $ 1,471 where the Central Bank (BCRA) intervenes whether the exchange rate approaches or exceeds these limits. “However, That apparent mixture of fixity and flexibility is precisely the weak point of that system ”he affirms and explains that When a government tries to maintain a fixed-adjustable exchange rate, it generates perverse incentives: if the markets perceive that the currency is overrated, devaluation expectations are createdwhich encourages speculators and the citizens themselves to take their capitals from the country to avoid losses, then, to defend the exchange rate, the Central Bank must use its international reserves, but these are finite. “The situation is further aggravated in the assumption that a country in which those are scarce, Argentine case, which makes it very vulnerable to the potential envy of speculators.”
Exchange system to Argentina: the lessons
In this regard, he resorts to the historical experience pointing out that the world is plagued by examples of exchange systems, such as the one established in Argentina, which were destroyed by speculation: this It happened with the mechanism of exchange rate of the European monetary system (SME) that suffered an imposing speculative attack in 1992 by coverage funds, where the sterling pound and the Italian lyre were subject to mass sale and the central banks of the United Kingdom and Italy tried to defend their currencies with rates of interest rates and the use of their reserves, but the pressure was unsustainable, and in the end, they had to let their coins float. “Similarly, the 1994 Mexican weight crises and the 1997 Asian were precipitated by the collapse of exchange models such as the one described. In all these cases, the perception that the currencies were overvalued and the reserves were not enough to maintain the exchange rate unleashed a capital escape that forced chaotic devaluations and caused deep economics, ”said Bernaldo de Quirós.
Therefore, given the lessons offered by the experience, he argues that Argentina should adopt a floating exchange rate system, where the value of the weight would be established by the supply and demand in the currency market, without intervention of the Central Bank, which would bring with it a series of crucial benefits for the economy.
Dollar flotacion bands
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Dollar: The 5 reasons for the weight floating
What would be the reasons that would justify such recommendation? According to the Spanish economist there are five reasons of an economic nature for the implementation of a floating type system in Argentina, which are reinforced by the reigning political-electoral uncertainty.
- In First, it would act as an automatic shock absorber in front of external shocks or changes in internal economic conditionsfor example, a drop in exports prices would not require an abrupt and disorderly devaluation, since the currency would gradually depreciate, helping to preserve the competitiveness of those.
- In Second LugaA, if weight is allowed to adjust freely, The accumulation of imbalances and pressures that usually derive in mass devaluations and crisis would be avoidedthus the corrections would occur continuously and less volatile, reducing the risk of “outbursts” exchange.
- In third placenot having to defend a fixed exchange rate, The BCRA would regain control over its monetary policy, which would allow it to focus on its main objective: control inflationand instead of using interest rates and reserves to defend the dollar, you could use them to stabilize internal prices.
- In fourth placelet the weight float It would be the clearest sign that the government is confident that its fiscal and monetary sanitation plan is sustainable in the long termand it would show investors and citizens that macroeconomic stability achieved is genuine and that the exchange rate does not need to be artificially sustained.
- In fifth placein a floating change system, there is no fixed value of the currency to be maintained, because it is constantly determined, which It makes it very difficult to identify a specific weakness to be exploited by speculators, consequently, they have less incentives to act because, among other things, the possibility of reserves is eliminated.
“If President Milei does not achieve good results in the legislative elections of next October, his ability to advance in the application of his program will be significantly complicated. In this context, the flotation apart from being convenient for what was pointed out would be a very useful instrument to not put at risk the macroeconomic achievements achieved to date,” he says.
Who advises
Who is Lorenzo Bernaldo de Quirós?: He is president and partner of the FreeMarket Corporate Intelligence consultant; Academic of the Cato Institute, founding partner of the Von Mises Institute of Barcelona and a member of the Board of Directors of the International Foundation for Freedom (Vargas Llosa), the Institute of Strategic Studies and the Board of Trustees of the Hermes Foundation, director and advisor of several Entities of Studies and Business, and author of numerous publications of an economic nature and ten books, including, “Socialism is the problem” (1986), “process to the State” (1986) “The Spanish economic model” (2005), “For a liberal right” (2015) -a reasoning about why the Spanish right must move away from conservatism and approach liberalism -co -author of “Market or State?” (2011) Together with Jordi Sevilla, and participated with a chapter in the collective work “Podemos. Deconstructing Pablo Iglesias” (2014).
Source: Ambito
