Introduction
Mexico’s economy is increasingly approaching a dangerous stage similar to or worse than past crises. Throughout history, Mexico has experienced numerous economic crises primarily caused by imbalances in the balance of payments, resulting in devaluations, high-interest rates, and substantial capital losses. Many businesses and families have witnessed their wealth vanish within days.
Historical Context and Reforms
Following the 1995 financial crisis, former President Ernesto Zedillo laid the groundwork for a free-floating exchange rate system and granted full autonomy to Banco de México. Additional reforms include the TLCAN (now T-MEC) by Carlos Salinas, Zedillo’s TLCUE, and other trade agreements promoted by Vicente Fox. These extensive commercial agreements have bolstered Mexico’s trade capabilities and facilitated foreign currency inflows, along with the robust banking consolidation observed at the recent Bancaria Convention.
Current Economic Challenges
The current predicament in Mexico’s economy is primarily internal, with risky government borrowing that doesn’t translate into development, a persistent lack of growth for seven years, forced wage increases without corresponding business revenue growth, and inflation above Banco de México’s target despite interest rate reductions.
- Economic Stagnation: The economy is not growing, and prices are rising, leading to stagflation.
- Government Debt: Under Presidents López Obrador and Sheinbaum, government debt has consistently increased, resulting in an unprecedented public deficit in the last 36 years. This has forced the government to allocate substantial funds towards interest payments while simultaneously increasing spending on social programs, neglecting areas like health, education, and public safety.
- Increased Spending Power: The rise in remittances from abroad and forced wage increases have further contributed to the internal economic pressures.
The Role of Government Spending in Inflation
In any economy, government spending is the primary driver of inflation. In Mexico’s case, this issue has been exacerbated by increased debt and spending without a corresponding impact on real growth. Consequently, Mexico’s primary concern is an offer-side aggregation problem, which is typically more severe than a demand-side issue.
