Javier Milei, a year of chainsaw

Few imagined that Javier Milei, an eccentric economist and TV polemicist, a proponent of the most extreme free market, would ever be able to win elections in a country as statist and corporativist as Argentina against the Peronist party-system. Even fewer thought he would succeed in implementing his economic program: fiscal adjustment unprecedented in the world, at least in recent decades, liberalizations and privatizations. Above all, no one would have imagined that he would maintain such high approval ratings after implementing it. According to the most recent polls, Milei retains the same approval levels as when he was elected (56 percent): after one year in government, he has a higher popularity rate than any of his predecessors.

Italy’s Prime Minister Giorgia Meloni will welcome Milei as the honor guest on Saturday at her Brothers of Italy party’s convention, named Atreju after the main character of Michael Ende’s “Never Ending Story”. Meloni herself had shown some caution about this Argentine self-described anarcho-capitalist. Partly because of the different cultural background: the Italian social right has little to do with the Austrian school of economics; in fact, in many ways it is closer to the tradition of Argentine’s caudillo Juan Domingo Perón, who was inspired by Fascist Italy. Somewhat because Milei's challenge really does seem like a mission impossible, on the one hand because of the country’s desperate situation and on the other because of the historical legacy as an irredeemable country: Argentina has made nine defaults, the highest number in the world. Former Italian Prime Minister Giulio Andreotti said once that "madmen are of two kinds: those who believe they are Napoleon and those who believe they are restoring the State Railways." El loco, the madman, is precisely one of Milei's nicknames: one who believes he is restoring Argentina. While thus showing political sympathy for his project, on Dec. 10, 2023, at the inauguration ceremony of the new president, the Italian government sent University Minister Anna Maria Bernini to Buenos Aires: neither the premier nor Foreign Minister Antonio Tajani nor the other deputy premier Matteo Salvini or a minister from Brothers of Italy went.

"Ladies and gentlemen, this model has failed. It has failed all over the world, but it has failed especially in our country," Milei said in that first presidential inaugural address, exposing a disastrous economic situation: out-of-control inflation, budget deficit, trade deficit, negative net reserves, poverty rising well over 40 percent. "There is no alternative to ajuste. Nor is there any room for debate between shock and gradualism". The ajuste is the fiscal adjustment, i.e. a correction of the public balance by 5 points of gdp, to be implemented immediately. In the first month of government. For comparison's sake, Italy is making a correction of about 0.5 of gdp with the Fiscal Structural plan agreed with the European Commission (and some cry about savage cuts). Milei's adjustment was ten times that and was done in one month. By January 2024 Argentina was in budget surplus, for the first time in 16 years.

Meloni's caution was not unwarranted. Could the democratic path to anarcho-capitalism ever have worked in a country like Argentina? The Chicago boys' reforms, but without the generals? The most likely scenario, conjured up and to some extent prepared by the Peronist opposition, was of massive street protests and roadblocks, until the president fled by helicopter, as happened to the radical Fernando de la Rúa during the 2001 crisis that had opened to a two decades of almost uninterrupted rule of Peronism dominated by the Kirchner family. Before the elections, in September 2023, The Economist described Milei as "a danger" to democracy: "This paper would be delighted if Mr Milei were to usher in a new age of liberalism in Argentina. However, that seems unlikely. His policies are poorly thought through. Far from building a consensus, he would struggle to govern. And if frustrated, some Argentinians worry, he might conceivably turn authoritarian". A few days ago, the British weekly devoted its cover story to Argentina's president, praising his "lessons for the rest of the world": how he has cut government spending, liberalized the economy and brought down inflation, but "perhaps the biggest lesson is about courage and coherence. Like them or not, Mr Milei’s policies align with each other, which magnifies their effect".

That foreign observers, the International Monetary Fund and rating agencies appreciate a government that puts the public accounts back in order, cleans up the Central Bank's messy balance sheet and reduces inflation may come as no surprise, despite the president's eccentricities and international institutions' distrust of his libertarian ideology. But that this is also appreciated by the people, after months of deep cuts in government spending, especially in a country accustomed to state interventionism and welfarism, is surprising. The alignment between the favor of international markets and Argentine voters was truly unthinkable. How was this possible? To paraphrase a well-known phrase, one can say, "It's the inflation, stupid!"

The economic legacy received as a dowry from the Peronist government was heavy. Recession (-1.6 percent of gdp in 2023), record negative reserves (-$11 billion), negative current account balance (-3.5 percent), a $44 billion agreement with the IMF impossible to meet, rampant poverty (over 40 percent), but above all, the highest inflation in the world (211 percent in 2023) with hyperinflationary dynamics (monthly rate in November above 12 percent, which means almost 300 percent annualized, and 25.5 percent in December, which means 1.400 percent annualized). Inflation is Argentina's main macroeconomic problem, but also the main microeconomic problem of Argentinians in their daily lives. And it is the issue that has been at the center of Milei's election campaign, "Vamos a terminar con el cáncer de la inflación”, let’s go and end the inflation cancer. Balanced budgets and an end to monetary issuance, were the promises.

While Milei's style is certainly populist, similar to that of Donald Trump from whom he borrowed the Maga (Make Argentina Great Again) idea and also of Beppe Grillo – the founder of Italy’s populist Five Star Movement – from whom he transposed the fight against “la casta” (the caste), the contents are not: he did not promise reindustrialization by means of tariffs nor the consolidation of the public budget by cutting official cars. He pointed to a desert crossing: Argentina will return as prosperous as it was in the 19th century when it was among the richest countries in the world, Milei said, but first there will be suffering. And so it has. The main person in charge of Argentina's fiscal policy is the Minister of Economy, Luis Caputo, who had already served in that role with Mauricio Macri as president and has experience in international markets (Jp Morgan and Deutsche Bank). Caputo is the man behind the recovery plan, the balanced budget, the reduction of inflation, and the reordering of the multiple exchange rate system. In December, as soon as he took office, after an obligatory large devaluation, the removal of many controlled and administered prices, inflation rose to 25.5 percent monthly and poverty jumped to 55 percent. At the same time, there was fiscal adjustment, the phase when the "chainsaw" waved in the election campaign worked in full force: closing ministries and state agencies ("Afuera!"), cutting more than 30,000 public employees, suspending public works for a year, reducing energy and transportation subsidies, cutting discretionary transfers to the provinces, reforming social spending programs, and raising some taxes.

Of course, the fiscal tightening had a strong impact on economic activity, exacerbating the recession that was already under way, with gdp projected by the IMF to fall by 3.5 percent in 2024. The worst-case scenario, not at all unlikely, for Milei's government after such shock therapy was to find itself mid-year with an economy in shambles, no good news to deliver to citizens, popularity plunging, piqueteros in the streets, and no room for maneuver in Congress, where his party, La Libertad Avanza, has just 15 percent of the seats. Instead, the results are flattering, better than any forecast not only by international observers but in some ways by the government itself. And the polls are very favorable ahead of next year's midterm elections.

Inflation has plummeted from a peak of 25.5 percent monthly in December 2023 to 2.4 percent in November 2024, the lowest figure in four years. On an annual basis, it means going from 211 percent in 2023 to 118 percent in 2024 to, according to IMF projections, 45 percent in 2025. The figure is more impressive when looking at wholesale inflation, which was at 54 percent in December 2023 and collapsed to 1.2 percent in October, the lowest figure since 2020. In fact, things seem to be going better than the IMF forecast. According to JP Morgan's latest report, the recession that began under the previous government in March 2023 ended in September 2024 and is now expected to have "a sustained period of growth." For the U.S. investment bank, 2024 will end with a gdp loss of 3 percent (better than the -3.8 percent predicted by the government and the -3.5 percent predicted by the IMF), and 2025 will see growth of 5.2 percent, which is expected to make up for two years of recession. Inflation according to JP Morgan in 2025 will fall to 25 percent, a figure close to the Milei government's 18 percent target, and much lower than the 45 percent forecast by the IMF.

The other strongly improving index, inextricably linked to inflation, is poverty, the issue that has cost the Milei government the most criticism and the country's most important social problem. After peaking at about 55 percent in the first quarter of 2024, it has been steadily declining. Data from Indec, the National Statistical Institute, are semi-annual and arrive with a lag. According to the latest update, the poverty rate was 52.9 percent in the first half of the year. But monthly, near real-time analyses done using the same methodology as Indec by independent observers show a rapidly changing picture. According to Torcuato Di Tella University's nowcast de pobreza, the six-month poverty rate dropped to 48.1 percent in June-November and 45.7 percent in November alone. According to the Observatorio de la deuda social of Argentina's Catholic University, poverty fell to 44.6 percent in October. This is the combined effect of falling inflation and economic reactivation, which for several months now has been raising nominal wages more than price increases, especially for informal workers, of which there are many in Argentina. Real wages, at least in the private sector, have almost returned to their pre-Milei level. Alongside the closing of the fiscal deficit, the Milei government also canceled the quasi-fiscal deficit: it zeroed out monetary financing of the deficit by the Central Bank and strengthened its independence from the Treasury. International reserves were rebuilt. The trade balance returned to a strong surplus, partly due to an increase in exports but mainly due to a collapse in imports. Thus, in just a few months, Argentina went from twin deficits to twin surpluses.

The results are impressive and "better than expected," as the IMF certifies, but how did Milei maintain such high approval ratings? The first answer, as mentioned, is inflation. The most devastating tax on the economy, the most hated by Argentinians, partly because it weighs most heavily on the poor: seeing month by month that price growth systematically slows from the dizzying pace of the past year conveys the idea that the cure, however harsh, is working. Another aspect is social spending. As the IMF also reports, Milei has cut public spending by about 30 percent in real terms, but has doubled in real terms some universal and direct subsidies such as the Asignación universal por hijo (a children allowance) and the Tarjeta Alimentar (food stamp); in the face of abolishing the many inefficient and corruption-inducing welfare programs that were being brokered by unions and social organizations.

A key factor in Milei's consensus, however, is strictly political. The opposition is in deep crisis, torn by feuds and lacking credibility. Political and corruption scandals are engulfing the entire Peronist ruling class. Outgoing President Alberto Fernández is on trial because he is accused by his ex-partner of beating her and inducing her to have an abortion; he is also accused of corruption over public sector insurance contracting. Former President Cristina Kirchner, wife of former President Néstor and opposition leader, has just been sentenced on appeal to six years and ineligibility for a huge corruption case. She is also on trial for the infamous “Memorandum with Iran”, an agreement with the ayatollahs' regime to cover up the 1994 terrorist attack on the Jewish community in Buenos Aires that left 85 dead and 300 wounded, carried out by Hezbollah at Tehran's behest. A prominent former Kirchner minister, Guillermo Moreno, was sentenced to three years for manipulating inflation data from Indec (Argentina's statistical agency). But there are also numerous corruption and embezzlement investigations against social and union leaders for their mismanagement of welfare spending programs closed by Milei. The judicial scandals have delegitimized the movements that were supposedly crippling Argentina in response to the government's harsh austerity measures. But in addition to the lack of popular support and the cut in the financial flow coming from the state coffers, the government intervened through Security Minister Patricia Bullrich with an anti-picketing protocol sanctioning unauthorized demonstrations and roadblocks: the piqueteros that were feared to have paralyzed the country have all but disappeared.

Along with the stick of austerity, Milei is trying to stimulate growth with the carrot of supply-side reforms. The Terminator of bureaucracy is the Minister of Desregulación, Federico Sturzenegger. A professor of economics, the holder of a Ph.D. from the MIT, and a former governor of Argentina's Central Bank from 2015 to 2018, Sturzenegger is not his first experience in government: he had briefly served as secretary for economic policy under President Fernando de la Rúa in 2001. It was on that very occasion that he had learned a key lesson, which he recounted in a podcast to Luigi Zingales: after a very long discussion with Economy Minister Domingo Cavallo and other colleagues about two alternatives for dealing with a certain issue, the best option had been chosen. Except that the next morning the minister had signed a measure to the opposite effect, justifying himself by saying that they provided very good arguments, but their internal opponent delivered a draft of the decree to sign. Sturzenegger understood that ideas are not enough: one must make them operable, "have the papers”. So, many years later, even in the wake of the reformist failure of moderate President Macri, when the rise of Milei was not yet in sight, he had set up a multidisciplinary working group at the university to come up with a proposal to revise Argentina's mammoth legislation.

The years of work produced a simplification plan delivered to center-right candidate Patricia Bullrich, but she was defeated in the first round and then allied with Milei on the ballot. Thus, after the victory, Sturzenegger handed over the plan to Milei who asked him to implement it. Sturzenegger's philosophy is summed up by a motto that reverses a classic Peronist maxim attributed to Evita Perón: "Where there is a need, there is a right", said the caudillo's wife. "For every need, there will be a market”, is Sturzenegger's version instead. His strategy is to purge the legal system of all those provisions that create or strengthen rentier positions, so as to give free rein to people's ingenuity and entrepreneurial spirit. Virtually every day there is a decree. The tireless production testifies both to the intensive preparatory work and to the thicket of pork barrel legislation that have been layered over the years.

The list of his attempts-some successful, some rejected-is endless. To give just a few examples: he has angered lawyers by allowing consensual divorce without going through the courts. He abolished the Economy Ministry's authorization for the export of works of art ("do you know how many times it has been denied in the last 30 years? Zero"). He canceled type-approval certificates for car parts ("make them more expensive, with more theft and insurance price hikes"). He introduced e-prescription with mandatory indication of a generic drug for medicines, which cost much more in Argentina than elsewhere. He liberalized the importation of low-cost drugs. The latest decree concerns gas stations and allows self-service, which incredibly is banned in Argentina. The line is dry: "It's not about simplifying procedures, it's about eliminating them." Hence the choice of the ministry's name, which is not of "Simplification," but precisely of "Deregulation."

Each of these reforms may appear marginal and in themselves have little influence on the destinies of the country. But put all together they can make a difference, especially in the long run. Not least because then there are bolder measures, too. A few weeks ago, on November 11, Sturzenegger signed the liberalization of the postal service, allowing private individuals to deliver letters, telegrams and parcels up to 50 pounds. Unions opposed to the privatization of Aerolíneas Argentinas (the state-owned flag carrier) were offered to take it over; ground services were liberalized; and workers of Intercargo, the monopoly baggage handling company, who had stranded 2,000 already embarked travelers during a wild strike, were charged with kidnapping. The clash with unions to cut pilots' enormous privileges, which evoked Ronald Reagan's battle with air traffic controllers, brought enormous popularity to the government. And more recently Sturzenegger liberalized taxis. But the most revolutionary and impactful area is the abolition of price controls, which are enshrined in Argentine law. At present Sturzenegger's chainsaw has come down on as many as 43 forms of price caps, including energy. Perhaps the most incredible and best documented case is that of rents. When rent caps were introduced in 2020, many landlords raised rents (so as to anticipate future inflation) or took their homes off the market, keeping them vacant or giving them in the black market. By the end of 2022, there were 200,000 empty apartments in Buenos Aires alone, 48 percent more than in 2018. Eleven months after deregulation, supply grew by 188 percent and the cost of renting was reduced by 48 percent in real terms. Housing market reform also pushed mortgage lending, which had virtually disappeared. Banks went from disbursing a few million dollars a month at the beginning of the year to 22 million in July, 68 million in August, 126 million in September and 175 million in October.

Sturzenegger has not always had it easy. In December 2023, he intended to erase impediments to offering satellite internet, throwing the doors wide open to the many providers of that service (including Elon Musk's Starlink). In this way he hoped to give access to the internet to all Argentinians, including those living in the most remote areas: “How much did that cost the state? Zero”. But he had underestimated the harshness of the reaction from the telecommunications giants. Later he told that he got got a call from a governor, in whose district is the headquarters of one of these companies. He told him that to pass the bill the government needed their votes in the Senate. They will have them, but not on that article.

Sturzenegger's action inspired the appointment of Elon Musk and Vivek Ramaswamy to head the new Department of Government Efficiency (DOGE) in the Trump administration. "We exported the chainsaw", Milei said after Trump's announcement. In the president's strategy, deregulation does not only respond to his anarcho-capitalist vision. It serves primarily to impart a positive supply-side shock to the economy, offsetting the negative demand-side shock resulting from fiscal and monetary tightening. Unable to use either the demand lever (as a Keynesian would) or the lever of tax cuts (as a follower of the Laffer curve would), Milei has no choice but to unleash the economy.

This is technically, not just politically, complex: abolishing a subsidy or closing a public bandwagon elicits the obvious protests of those affected, but requires no particular inventiveness. Instead, deregulation presupposes a deep understanding of red tape and their impacts on the economy, because nothing is more damaging than partial or ill-conceived deregulation: that is why Sturzenegger says that, having picked with the chainsaw the low-hanging fruits, one must move on to the "deep chainsaw”. And for this his long preparatory work was crucial. Not only that, the success of fighting inflation is mirrored by deregulation. If the goal is to stimulate economic activity, people must be convinced that the currency will actually be able to perform its crucial function as a store of value: that it will not devalue month after month.

Although Milei often points the finger at labor unions, guilty of plastering the country and often skimming off the social welfare programs they run, he also has Argentina's main Business Association in his crosshairs. According to his economic team, inflation is sustained not only by the dastardly fiscal and monetary policies of the Peronists, but also by the protectionist barrier they had erected around the country and businesses. That is why one of the first measures was a heavy tariff cut, which sparked the grievances of business leaders. The clash came to a climax when the Association of Industrialists held its annual meeting, which was snubbed by government representatives. In an earlier speech at the headquarters of the Industrialists' Union, Milei had openly criticized the entrepreneurs listening to him for their "vicious protective relationship" with the state: Protectionism "only created an industrial sector addicted to the State. This is one of the roots of the structural economic crises we have been suffering for so many decades”.

As can be seen from the sketch of central figures in the Milei administration, such as Sturzenegger and Economy Minister Caputo, the Argentine government differs from many populist experiences in that it has recruited, especially on economic issues, a ruling class of great experience and expertise. The key persons – from Caputo to Sturzenegger to the new Central Bank governor Santiago Bausili – have all had prominent roles in the Macri government. And after the failure of that experience, they seem to have come back fiercer. There is no more room for “gradualism". And for two reasons, repeatedly explained by Milei. The first is that gradualist programs have failed. The second is that Argentina, this time, has no time or credit. "There's no alternative," said Margaret Thatcher. "No hay plata" (There’s no money), says Milei now. Although Argentina's president is a heterodox, Austrian-school economist, his experience is a monument to the mainstream: he is pursuing a textbook correction strategy, and things are going exactly as theory predicts. After years of controversy about reality being different from economists' abstractions, Milei is vindicating the honor of discipline: inflation is being responded to with monetary and fiscal tightening; recession with liberalizations; and a stagnant economy by injecting flexibility into product markets, labor markets and foreign trade. Now staying the course is essential to rebuilding Argentina's international credibility. That's why every Milei "no" reinforces the government's action.

In September, when the economy had bottomed out, the Argentine Senate had approved by a very large majority a pension reform, which would have increased outlays by 1 gdp point, and an increase in funding for universities. With polls down and more than two-thirds of parliament against it, Milei imposed two vetoes. Presidential vetoes in Argentina can be rejected with a two-thirds vote in parliament. In the end, Milei managed to get former President Macri's parliamentarians on his side and block the laws. From there on, due in part to the recovery of the economy, both consensus and macroeconomic data rose again. The Riesgo País (country risk), which was at 2,000 points a year ago, is now at about 750 points halving since September. And although things are looking up and 2025 will be a key election year for the government because it could win a majority in Parliament, Milei has no intention of budging from a balanced budget. "Zero deficit is not negotiable. With zero deficit everything, without zero deficit nothing," said José Luis Espert, the Budget Committee chairman assigned by the president to find an agreement with the other parties.

A year after Milei's surprise election, the macroeconomic stabilization plan has passed its most critical point, but it is not over. Rather, it is entering its most decisive phase, which concerns the removal of capital controls that, of course, discourage investment: no one invests dollars in Argentina if he knows he cannot take them out. On the removal of the so-called cepo cambiario, Minister Caputo has always been very cautious. He has two main fears: that the liberalization of foreign exchange could rear its head in inflation and exposure to speculative attack. Both of these risks could be resolved, or at least reduced, with a new agreement with the IMF. The economic conditions are there; after all, the Milei government has delivered more than the Fund requested. And there are also political ones given the good relations with the United States, already with the Biden administration, but even more so after Trump's victory.

Trump, however, may also create problems for Milei. The two are friends, allies against the “left", committed to the "culture war" against "woke ideology," and have similar ideas on environmental policies and climate change. But on the economic level they are at polar opposites. Milei draws on Juan Bautista Alberdi, father of the Argentine Constitution, a classical liberal and promoter of openness to free trade. Trump draws inspiration from President William McKinley, known for his battles in favor of protectionism and trade tariffs. Milei cultivates the libertarian ideas of Milton Friedman and Ronald Reagan. Trump, unwittingly, traces the theses of "structuralism" and "import substitution" that had Argentine economist Raúl Prebisch and General Juan Domingo Perón as leading exponents in Latin America. And this is not just a theoretical contradiction, but a practical problem. Should Trump pursue his protectionist agenda, with 10-20 percent import duties, there will be negative consequences for Argentina. Not simply because Argentina's exports would suffer. But because it would increase inflation in the United States, forcing the Federal Reserve to raise interest rates, with a major financial backlash for Argentina and its stabilization plan.

It is precisely on this issue that Meloni and Milei could sign a kind of "Atreju pact" to prevent trade fragmentation from breaking the ties between the European and American continental blocs. Last Friday, European Commission president Ursula von der Leyen went to Uruguay to sign the free trade treaty between the European Union and Mercosur (South America's common market), at the end of a 20-year negotiation. It is a historic agreement, uniting a market of 700 million people by slashing about 91 percent of import duties (around 4 billion euros annually). Just a few weeks ago, Bank of Italy Governor Fabio Panetta called on Europe to "revitalize discussions on trade and investment agreements" such as Mercosur. On the issue, however, there are also many hypocrisies at home. In the EU, the main enemy of the agreement is the “liberal” Emmanuel Macron, who is ready to sacrifice a major European achievement to appease the protests of French farmers. Meloni has not yet spoken. Yet Italy has a decisive role. Blocking the treaty requires the veto of at least four EU countries representing at least 35 percent of the population. At the moment there is France's no, which could be joined by Austria, Poland and the Netherlands, which together represent about 30 percent of the population. Italy is the needle in the balance.

Milei, who just took over the leadership of Mercosur, gave full support to the agreement. Indeed, he attacked other Latin American countries for too much protectionism and wasted time: "We locked ourselves in our own aquarium and it took 20 years to close the agreement with the EU”. The treaty has geopolitical value that transcends mere economic spillovers, which are otherwise positive for both sides. Incidentally, just in the past few days, Milei has started similar negotiations with the United States. If Meloni sides with Macron by vetoing the Mercosur free trade agreement, she would not simply be doing an unpleasant act toward the Argentine president after inviting him to Rome with all honors. Above all, she would be making a political mistake. Playing side-by-side with Milei, reviving new rounds of international trade agreements, might be the only one way to appease Trump and stop like Atreju, the protagonist of the "Neverending Story", the advance of the Nothing made of tariffs, which would hurt Rome as much as Buenos Aires.