Since his impressive electoral victory in November 2023, the previously unknown Javier Milei has achieved some success with his radical economic stabilization plan for Argentina. Inflation more than halved to about 117 per cent over the course of 2024, the fiscal deficit is under control and the exchange rate has stabilized. Argentina’s president also implemented an ambitious deregulation programme to remove investment bottlenecks and significantly reduced the size of the federal government.
Many of these initiatives have caught the attention – and earned the praise – of world leaders, notably Donald Trump and prominent figures in his government, such as Elon Musk. Milei even attended Trump’s presidential inauguration ceremonies at his invitation.
But Milei’s ‘chainsaw’ economic programme has come at a steep cost to Argentina. Funding for universities and public works has been drastically reduced, leading to halted research projects and causing job losses in the building industry. Some 30,000 government jobs were eliminated during Milei’s first year in office, and several price controls abandoned, alongside subsidies for utilities and public transport.
Poverty surged to nearly 53 per cent of the population, up from 42 per cent the year before. GDP plummeted on the back of steep drops in consumption and investment. Despite these costs, Milei has continued to enjoy healthy approval ratings, unprecedented in a country known for its raucous street demonstrations.
Currency woes
Supporters of Milei in Trump’s cabinet have suggested that his success demonstrates the correctness of their plans to deregulate and downsize government in the United States. That’s nonsense. Argentina had to act radically to reduce its fiscal debt and deficit. By contrast, the US, as issuer of the most important international reserve currency, enjoys a strong economy in no need of the kind of surgery Milei is undertaking.
More importantly, for all their short-term success, Milei’s eye-catching reforms suffer from a major flaw. Because of Argentina’s past experiences with hyperinflation in the 1970s and 1980s, the population has learned to live with two currencies: the US dollar and the Argentinian peso. Although the peso is used for daily transactions, the public doesn’t trust it.
Enter the dollar, widely used for savings and as protection against losses caused by crises. Hence, the existence of two currencies in Argentina forces it to rely on one that it does not control – the dollar – and another that can be issued by the government – the peso.
This arrangement is Argentina’s long-standing Achilles heel. Since the country relies on a steady flow of dollars from abroad, it is often buffeted by market fluctuations that affect the influx of dollars. When dollars are scarce, the exchange rate comes under pressure, leading to one of two outcomes: a loss of international reserves or a sharp depreciation of the peso. A weakening peso results in higher inflation, while a substantial loss of reserves risks a balance of payments crisis.
Milei’s reforms have addressed some of Argentina’s most significant fiscal vulnerabilities but have not tackled the underlying monetary fragility or the lack of trust in its domestic currency. So, the country’s most pressing external vulnerability remains its unhealthy reliance on the dollar.
There are two ways to approach monetary reform in Argentina. The first, widely discussed during the 2023 campaign, is dollarization – the official adoption of the dollar as the national currency, which would eliminate the peso and the vulnerability that comes with it. Milei favoured this approach during the election campaign, but his advisers cautioned against long-term risks, namely the inability to use monetary and exchange-rate policies to stabilize the economy. Ecuador, which abandoned its domestic currency in favour of the dollar in 2000, has been trying to reverse out of dollarization to no avail. Full dollarization is a one-way street.
Political obstacles
The other option would involve an ambitious currency reform similar to Brazil’s in 1994. After failing several times to eliminate hyperinflation in the 1980s and early 1990s, Brazil enacted its most successful plan to restore the country’s ability to have a currency the public could trust. Reforms involved modifications to institutional arrangements governing the budget process and the relationship between the Treasury and the Central Bank.
They also encompassed agreements with local governments to rein in spending and state debt. A new currency, the Real, replaced the old hyperinflationary currency. In principle, it is possible to envisage reforms such as Brazil’s tailored to the Argentinian context. In practice, however, the political obstacles appear insurmountable.
Despite Milei’s popular support, his coalition has little representation in Congress. Mid-term elections this year may or may not change that. On the other hand, Milei’s confrontational style is inimical in a fragmented political system to the political compromises needed for currency reform. Notably, Milei would need to convince governors of the country’s fiscally autonomous provinces to succumb to the federal government’s deficit objectives.
Given the currency’s exposure and geopolitical instability, and despite Milei’s short-term success, a currency crisis seems inevitable, especially if talks with the International Monetary Fund break down. That would plunge Argentina into turmoil once again.