The new elected president of Argentina, Javier Milei met this week in Washington with officials from President Joe Biden’s Administration. Having campaigned as a scourge of the Trump-style elite, who considers climate change a “lie of socialism,” he said that closer alignment with the United States will shape his foreign policy and that he felt “very comfortable” with the way the conversations had gone. This does not help to dispel the uncertainty about what awaits his country.
Definitely, Milei will need US support to restructure the country’s debt with the International Monetary Fund, Not to mention his electoral promise to close the central bank and dollarize the economy. But Milei’s ambitions don’t end there. To repair Argentina’s economy, this devastating insurgent has also promised to drastically cut public spending and dismantle the country’s public sector. “There is no room for gradualism,” he told voters after his victory was announced.
Caputo, even without dollars, foresees high inflation
Argentina’s economic situation is extreme, and Bold measures will be necessary to right the course. At least initially, the country’s investors celebrated its success. But, as her visit to the US demonstrates, Milei continues to convey the feeling of not understanding what is needed.
In principle, His plan to dollarize the economy is not far-fetched. For years, Argentina’s central bank has validated the government’s fiscal incontinence by printing money and fueling inflation, a classic case of “fiscal dominance.” Abandoning the peso and adopting the dollar would put an end to this in one fell swoop. But dollarization requires, first of all, an adequate level of dollars. Argentina’s international reserves have dwindled to nothing, and foreign credit agencies will not rush to help.
How to avoid hyperinflation
Even if Milei’s government could achieve the necessary balances, ruling out monetary expansion would not by itself make the country’s existing debt more sustainable. These issues must be addressed directly by cutting public spending and raising taxes. Otherwise, instead of leading to hyperinflation, The continuation of fiscal excesses will only lead the country more quickly to a debt default already a brutal economic recession.
Without a doubt, Milei has insisted on the need to curb spending. She says she will reduce the size of the state by 15% of gross domestic product. But she has led voters to believe that this cut will be achieved primarily by being mean to bureaucrats (a popular promise, and not just in Argentina), rather than by cutting subsidies to public services and direct aid. As an avowed anarcho-capitalist, he doesn’t see increasing taxes playing any role in reestablishing fiscal discipline. In other words, his campaign has done little to prepare the country for the changes it will have to endure.
The necessary steps that Javier Milei must take
Perhaps, having won the presidency against all odds, Milei can now focus on a plan to really fix the economy. After triumphing in the August primary elections, he has moderated his rhetoric on social issues somewhat, moving away from his previous proposals to privatize health services, allow the sale of human organs and abolish controls on firearms. And suddenly he’s a little more cautious about “blowing up” the central bank. But the president-elect still lacks a viable economic reform plan. And without majority support in either chamber of Congress, he will have to build alliances with the parties he ridiculed to get this far.
Argentines did not vote in search of viable solutions, but to express their discontent with the usual Government, a protest that could be familiar in other places. The country’s voters are right to be angry. But unless Milei becomes a different politician than the one they elected, they are likely to be disappointed again.