Political Analysis
"The Argentine Experiment": The first months of the Milei government

On November 19th, Argentina elected a new president. The candidates were libertarian populist Javier Milei of La Libertad Avanza (Freedom Advances) and government candidate Sergio Massa of left-wing Unión por la Patria (Union for the Homeland). Shortly before the tally ended, Milei had secured 55.69 percent (14,476,462 votes), while Massa got 44.30 percent (11,516,142 votes).

Victorious Milei primarily benefited from the anger of many Argentinians over the current economic crisis and the political establishment. Despite massive state intervention in the economy and extensive social programs, at the time of the election over 40 percent of the population were living below the poverty line, with the inflation rate at a little over 140 percent.

Milei is attempting to save the critically ill patient that is Argentina with a tough recovery programme. "No hay plata" ["There is no money"], was how he described the state of public finances at the beginning of his term. Milei is a follower of the Austrian economist Friedrich August von Hayek. He therefore opposes the omnipresent state interventionism in Argentina, which he holds responsible for the recurrent economic crises. He aims to deregulate the economy and make things less bureaucratic, reducing the state to a minimum.

The 53-year-old president is demanding a lot from the people. The radical reforms he had announced are exactly along the lines of what he is now seeking to implement. This makes him credible, even to those who actually oppose him. So far, Milei benefits from having predicted a "difficult first year" – and he is fulfilling this "prediction". According to polls, more than half of Argentinians continue to support him, roughly the same number that voted for him. People from all walks of life are counting on him, hoping he can halt the century-long decline of what was once a wealthy nation. Milei relies on his ongoing popularity among the population. It is the guarantee of his political survival, given that his party holds less than 15 percent of the seats in Congress.

After five months in office, Javier Milei, gives cause for both concern and hope. The initial balance of this "argentinian experiment" is mixed.

Financial Policy Achievements

The monthly inflation rate decreased from around 25 percent in December to around 20 percent in January and further dropped to 13.2 percent in February. Milei commented on the "significant slowdown" in inflation, saying it was “the result of the work done by the national government”.

"The most important achievement is the decrease in inflation, which has so far managed to surpass expectations", says Buenos Aires-based economist Carl Moses. The mood is better than expected. The prices of Argentine stocks and bonds have risen. "Many people are hoping that the sacrifices will pay off this time and that things will improve by next year at the latest," Moses adds.

In December, the government devalued the peso by over half in order to at least partially close the gap between the official exchange rate and the black market rate. Foreign exchange reserves have increased by over $7 billion. The government has managed to extend the maturity of a whole series of peso-denominated debts, thereby reducing pressure on the state's treasury. People are even putting their US dollars back into savings accounts at Argentine banks, which can be interpreted as a sign of trust, since traditionally in Argentina people hoard their US dollars abroad or under their mattresses. Markets are beginning to believe in the country. The Argentine country risk index, which indicates the risk of default, has reassuringly decreased.

In order to demonstrate that the days of the money printing press are over, Milei aims to achieve a budget surplus (before interest payments) of 2 percent of GDP this year, a significant improvement on last year's deficit of 3 percent. In both January and February, the government achieved monthly budget surpluses, for the first time in more than a decade.

The Rise in Poverty

"Argentina's financial data has significantly improved since December. At the same time, the crisis in the real economy has dramatically worsened. The recession is the worst one since the crash of 2001”, says Moses.

The purchasing power of the population is decreasing, and poverty is on the rise: According to official statistics, 60 percent of the people now live below the poverty line. UNICEF expects child and youth poverty to increase from 62 to 70 percent.

Some of Milei's initial financial policy successes can be attributed to what has been dubbed the "chainsaw" approach. The number of ministries has been halved, and the National Institute against Discrimination, Xenophobia, and Racism (INADI) has been dissolved. Many temporary contracts at Radio Nacional, the national public radio network, have not been renewed. Sectors like health and education, energy and transportation are receiving fewer or no more subsidies, and funds for provincial governments have been cut. The brutal austerity measures have led to certain state services not being available. Hospitals are no longer providing patients with medication. Trains are being halted due to a lack of spare parts and public transportation prices have increased tenfold.

The increase in pensions and social benefits lags behind the rise in the price level. An increase in spending that falls short of the inflation rate constitutes a real cut. Compared to the first two months of the previous year, spending on pensions, the largest single item in the budget, has decreased by almost 40 percent in real terms. "The government is letting inflation do the dirty work”, says Moses. However, Milei cannot sustain his austerity measures through inflation indefinitely. "The inflation tax is not a sustainable instrument for fiscal consolidation", concludes investment bank JP Morgan.

Rent prices are skyrocketing. Many tenants can no longer afford their apartments. Food prices are rising rapidly. A steak in Buenos Aires, where many consider daily meat consumption a kind of human right, now costs around $25. Even the previously flourishing tourism sector is suffering from the rising prices. Until recently, cafes and restaurants were bustling until late at night. In recent weeks they have been noticeably emptier. Fees in heavily attended private schools have doubled. Some parents are withdrawing their children from private schools because they can no longer afford them and are sending them to state-run institutions. However, the latter are also facing budget cuts and can hardly maintain their operations as a result.

Provincial governors are protesting furiously, even in court, against the reduction in their revenue sharing payments. Social organizations also sharply criticize the government's course. The Catholic Church in the homeland of Pope Francis is focusing its attention on the needy. Priests working with the poor report that the number of people seeking help through food distribution has noticeably increased. Resistance is also emerging from the streets and unions have been mobilizing for weeks.

Unequal Distribution of Adjustment Burden

It is only a matter of time before social protests increase, especially since the costs of the tough recovery program – at least until now – have been unevenly distributed. The poor, the elderly, and the lower middle class get to bear the brunt.

How long people's patience will last if economic recovery does not occur in the foreseeable future is a concern even for the International Monetary Fund (IMF).

When Gita Gopinath, the First Deputy Managing Director of the IMF, visited Buenos Aires in February, she supported Milei's efforts to consolidate Argentina's budget, but also stated that the burden of adjustment should not fall disproportionately on working families. Instead, it should be distributed across society as a whole.

The Foreign Policy Component

With Milei's election, Argentina's foreign policy is also being reoriented. Argentina is making a U-turn and now aligning itself with the United States, Israel, and Europe. Milei invited Ukrainian President Volodymyr Zelensky to his inauguration. He then travelled to Israel to express his sympathy and solidarity following the Hamas October 7th terrorist attack.

Approval from Washington is crucial for Argentina. With a $44 billion loan, Argentina is by far the largest debtor to the IMF. The IMF continues to make disbursements to Argentina, but only enough for the central bank to be able to meet its debt payments. If the IMF were to terminate the agreement, Argentina would be cut off from international financial markets.

However, this scenario is unlikely, as Milei is currently firmly anchored in the West like few other Latin American heads of state. He condemns dictatorships like Russia and China, rejects membership in the BRICS grouping, and shows solidarity with Ukraine and Israel. For the IMF, Milei is an unexpected stroke of luck because he is implementing exactly what Argentina has always been asked to do, albeit perhaps a bit too quickly, according to sources in Washington.

Germany and Europe see Milei as an important ally in the stalled negotiations over the association agreement between Mercosur and the EU. The German government chose Buenos Aires as the location for German Accelerator, its international start-up network program. Germany is presenting itself as a "partner interested in long-term fair exchanges" according to Ulrich Sante, the former German ambassador to Argentina. This is hugely important; especially after the Milei government opted against joining the China-dominated BRICS and instead chose to partner with the Organization for Economic Cooperation and Development (OECD), thereby supporting a rules-based international economic order.

Difficult Consensus Building

Milei has so far made little progress as regards the announced radical overhaul of the country. His extensive reform package – referred to as the "Omnibus Law" due to its length – has been stuck in Congress for weeks. Now, the Senate has also rejected his “mega-decree” – which aims to flexibilize the labour and housing markets, among other things.

The ability to organize solid majorities and a readiness to engage in dialogue are not Milei's strong suit. Instead, he responds with tirades on social media and even calls some former allies "traitors" and "rats" while clashing with conservative provincial governors who are basically open to his economic liberal agenda.

Milei's fundamental political problem lies in the fact that his aggressive approach to established politicians, a group to which he refers as "the caste", is crucial for his popularity. However, he relies on the support of these very individuals, who dominate Congress, to push through profound reforms. Yet, if he compromises too much, he risks losing his outsider status and thus some of his support among the population.

Milei now intends to win over the 24 provincial governors to his side, as they have great influence in Congress. Milei is offering them a Ten-Point Agreement, which they are supposed to sign on Argentina´s National Day, May 25th. The Agreement is a copy of the Washington Consensus, a neoliberal economic program once promoted by the IMF and the World Bank.

The specific points are as follows:

• Inviolability of private property
• Non-negotiable budget balance ("debt brake")
• Reduction of public spending to 25 percent of GDP
• Reduction of the tax burden to promote trade
• Renegotiation of fiscal equalization between the central government and provinces ("To put an end once and for all to the current extortionate model", in Milei’s words)
• Obligation of provinces to engage in resource mining
• Labour market reform in keeping with the needs of the 21st-century economy
• Sustainable pension reform
• Reform of public administration, requiring that political representatives always align their interests with those of the people they represent
• Opening of the Argentine economy for full integration into the international value chain

The Washington Consensus is deeply hated throughout South America. The provincial governors would hardly agree to such a pact voluntarily. Nevertheless, some of them have already expressed positive views on it. The reason: 80 percent of their budget goes to personnel and they receive 90 percent of their budget from the central government, which has now turned off the tap. They fear that they will soon run out of money. If they are no longer able to pay their employees, their political base will crumble. In addition, they sense that Milei is still popular with many voters.

In the next 100 days, Milei aims to ensure long-term budget consolidation through, among other things, tax reform. The pension formula also urgently needs revision. All of this requires approval from Congress. Additionally, Milei needs successes in Congress in order to demonstrate to potential investors that he has enough allies to suppress or at least survive future protests. He is far from being secure against impeachment proceedings.