Paradoxically, the word that appears to define Argentina’s (and the world’s) first ultra-libertarian president is pragmatism. Initially seen as a positive characteristic allowing the economist to shake off some of the fringe characters and ideas that made up his La Libertad Avanza coalition, Milei’s pragmatism could also lead to negative outcomes if his plans don’t work out.
The economist-president was smart in creating an electoral alliance with Mauricio Macri and Patricia Bullrich, along with PRO party hardliners, and later moved strategically to show independence from the former president to avoid being portrayed as a puppet, like his predecessor. He gave Bullrich the Security and Defence Ministries, minimizing Vice-President Victoria Villaruel’s power and therefore her dictatorship-denying influence, particularly over the security forces. He also sealed a deal with Luis ‘Toto’ Caputo – a leading economic figure from the Macri’s 2015-2019 administration – behind the ex-president’s back, apparently distancing himself from certain extreme measures proposed during the campaign such as dollarization and torching the Central Bank —where the economy minister’s business partner Santiago Bausili at financial consultancy Anker Latinoamerica has taken the reins.
While Caputo had fallen into disrepute, his recycling by Milei didn’t spook the markets initially, or certain sectors of society and the media that appear to have already aligned themselves with Milei. As the nascent administration begins to put its “chainsaw” austerity plan in motion, society will begin to feel the pain of the extreme measures and its tolerance will be tested, as will Milei’s and his team, at the center of which once again sits ‘Toto’ Caputo.
Toto was the first to face the music and lay out an economic plan for the Milei administration, even before the president who mustered the courage only when he announced the DNU emergency decree that came before the Omnibus law. During the first announcement, Caputo sought to deliver a didactic message that made clear the weight of the situation left behind by the Fernández-Fernández administration (“la herencia”). He looked uncomfortable, just as he did during his previous public service posts where he avoided the media and is said to have left the government suffering from panic attacks. His decision to take the “electric chair” ministry remains bewildering. The minister announced a series of measures aimed at achieving a fiscal surplus in their first year in office including aggressive budget cuts and tax hikes.
Caputo’s announcement represented the first time that Milei’s plans were laid out in any sort of detail beyond a declaration of intentions. While in line with the campaign promise of reducing the state’s obligations by more than five percent, the severity of the devaluation of the official peso-dollar exchange rate (120 percent taking it to 800 pesos) and the rest of the measures has set off alarms. Most prices have risen aggressively over the last several weeks, particularly gasoline and food, indicating inflation will spike and could persist. The December reading already hit 25.5 percent, and many expect similar numbers for January. At the same time, it is becoming apparent that forcing the “caste” to absorb the totality of the austerity plan is logically contradictory, as it inevitably affects the everyday citizen which is evident in subsidy reductions and cuts in social spending. Milei had promised he’d rather amputate his arm than raise taxes, but he’s raised export duties and the PAIS tax which pushes the value of the dollar even higher for certain transactions.
The ‘caputazo’ (as the plan is being jokingly called) replaced pure austerity with a mix of higher taxes together with spending cuts and the “dilution” of part of the deficit through high inflation. The next few months will see runaway inflation run even farther away and put intense pressure on the population, as wages and salaries fall even farther behind. Milei had warned that we would have to suffer on our way to libertarian utopia. Leftist social movements and unions have already begun to mobilize against the government, including a general strike at the hands of the General Confederation of Labor. Given Bullrich’s hardline predisposition, these were peaceful marches. Will they remain so in a few months if the middle class joins in, desperate to make ends meet?
Once again, the question of Milei’s pragmatism will be front and center. Assuming the impact of his economic plan is as painful as it seems, the level of social conflict will likely rise dramatically. At the same time, he needs to continue to negotiate legislative support for his ambitious reform package, which initially seems to rest on the possibility of an “anti-Peronist” front as seen in the Senate first and at the commission level in the Chamber of Deputies later. How much will society accept that it voted Milei for an orthodox austerity plan that directly hits its purchasing-power? Will the charismatic libertarian be able to retain public support, or convince his voters that excruciating pain is a necessary condition for economic redemption? How long will Caputo resist this time? And if the plan doesn’t work, how much of the blame will Milei be able to pin on the financial trader?
At this point, we have many more questions than answers.
This piece was originally published in the Buenos Aires Times, Argentina’s only English-language newspaper.