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Beware of Symbols

Argentina's crisis has been heating up for a long time. So long has the country been in crisis, indeed, that the question is no longer if it may boil over, but when.

The origins of Argentina's crisis date back to decisions taken in 1991, in the fight to contain the steep inflation that marked the death throes of the military junta. In that year, Domingo Cavallo, who already held the post of Secretary of the Treasury, took the highly symbolic decision to fix the value of the peso to the dollar through a fixed exchange rate. Moreover, he executed this decision in another highly symbolic way, by setting the rate of exchange at one peso for one dollar.

As symbolism, this was fine. The new ``hard'' peso marked the end of Argentina's inflationary era, a time when the country showed itself, time and again, as incapable of controlling either its budget, its currency, its inflation or its exchange rate. This was to be the beginning of a new era, one in which a responsible, modern Argentina opened itself in a disciplined way to the United States and the world. But, as the ancient Greeks taught, the gods destroy by granting us our wishes or fulfilling them too completely. Without any doubt, Argentina's currency reform of a decade ago forms the roots of today's crisis.

The reason is almost obvious: Argentina is not the United States, and the peso is not the dollar. Argentina is a little economy of the Southern hemisphere; the US is a large and diversified economy of the Northern hemisphere. Argentina exports cows and raw materials; America exports high tech and services. Argentina trades with Brazil, America with Japan. Argentina must struggle to attract capital; America sucks in capital from all over the world. For the two countries to have the same exchange rate is a crime against logic; it proved itself also a crime against Argentina.