The Economist: Javier Milei’s next move could make his presidency—or break it
Radical experiments with the currency could spell disaster
photograph: augusto casasoli/foto a3/contraso/eyevine
When argentina’s president, Javier Milei, donned his leather jacket and belted out rock songs to a stadium last month he cut an eccentric figure. And when he insults his country’s Congress (“a nest of rats”), the governor of Buenos Aires province (“a communist dwarf”) and Spain’s prime minister (“the laughing stock of Europe”), he comes across as just another boorish populist. Both characterisations have a grain of truth. Even so, by most economic measures Mr Milei is beating expectations.
In December, as he took office, Argentina’s economy was a tangle of rampant inflation and unsustainable price controls. To clean up, Mr Milei slashed spending. The central bank stopped printing money to finance the deficit. As a result, Argentina has had fiscal surpluses for five months in a row. Inflation spiked after a sharp devaluation, but has since fallen to a monthly rate of 4.2% in May, the lowest in over two years.
Mr Milei’s coalition has so few lawmakers in Congress that some analysts feared he might have pursued his agenda by sidelining Argentina’s democratic institutions or wrecking them. Instead, after Mr Milei’s administration negotiated with legislators, the Senate passed two bills on June 13th to liberalise the economy, promote investment and raise revenue. The lower house is expected to give its final approval soon.
Mr Milei’s success so far rests on his unrelenting attacks on Argentina’s establishment and unions, which have been sufficiently convincing—and entertaining—to keep his approval ratings above 50%. That has given him cover to keep reforming, even as spending cuts have caused a deep recession. His fanatical commitment to fiscal surpluses has underpinned the fall in inflation. Just as important, he has learned to compromise in order to get legislation through Congress.
Yet Argentina’s knot of economic failures will be devilishly difficult to untie—and the hardest part for Mr Milei is still to come. Monthly inflation may creep up in June as energy prices rise. That will exacerbate fears over the Argentine peso, which once again appears to be overvalued. Mr Milei angrily denies the currency is too strong. But the longer he ignores it, the greater the risk of a more damaging and inflationary devaluation later.
Very soon Mr Milei must also decide on the future of the central bank and the peso. Argentina’s awful history of inflation and default means it is right to explore new ways to anchor the economy. Yet on this front Mr Milei has so far offered monetary anarchy rather than a new order. On the campaign trail he promised to dollarise the economy and “blow up” the central bank. Now he and his team talk of “currency competition”, whereby the peso would coexist with other currencies. But the details remain worryingly vague. And he still wants to close the central bank. All this uncertainty has costs. Investors do not want to sink cash into a country where the monetary system and currency are up for grabs.
Mr Milei still harbours radical visions, even if some on his team do not. In May he declared that he wanted “endogenous dollarisation”. Argentines could use dollars or pesos, but the supply of pesos would be fixed. When the economy grows (and thus needs more money to circulate) Argentines would therefore be forced to start using their own dollar savings. The peso, he said, would become a “museum piece”.
This half-baked scheme raises more questions than it answers. It has never been tried elsewhere. Freezing the money supply could lead to deflation. Or, if the goal is to push people away from pesos entirely, even for transactions, then it could stoke inflation as the supply of pesos outstrips plummeting demand for them. The imf, which has a $44bn lending programme to Argentina, seems worried. Mr Milei has promised to tell the fund all about his monetary plans by the end of the month. But, if endogenous dollarisation survives, it would probably be less likely to lend his government new cash.
The art of the deal
Such a radical experiment is not just risky, it is also unnecessary. Across the Andes, Peru has the kind of currency competition that could work in Argentina. There, dollars are used alongside the sol. But in contrast to Mr Milei’s plan, the central bank adjusts the supply of the sol and supports its use. Mr Milei succeeded in Congress by compromising. To avoid squandering his hard-won gains, he needs to foster certainty and sanity by giving ground over the peso, too.■
