How economically sustainable are Milei's austerity measures? | DW News

Key Concepts

• Midterm Congressional Elections: Elections held in the middle of a president's term, often seen as a referendum on their performance.
• Economic Reforms: Policies aimed at restructuring a country's economy, often involving fiscal austerity, privatization, and deregulation.
• Fiscal Austerity: Government policies aimed at reducing budget deficits through spending cuts and/or tax increases.
• Inflation: A general increase in prices and fall in the purchasing value of money.
• Currency Swap: An agreement between two countries to exchange their currencies for a specified period.
• Investor Confidence: The degree of optimism about the future prospects of an investment.
• Voter Turnout: The percentage of eligible voters who cast a ballot in an election.
• Polarization: The division of a society into opposing groups with extreme views.
• Tax Reform: Changes to a country's tax system.
• Labor Reform: Changes to a country's labor laws and regulations.
• Pension Reform: Changes to a country's retirement income system.

Argentina's Midterm Elections: A Mandate for Reform

Argentina's President Javier Milei has secured a significant victory in the midterm congressional elections, signaling public acceptance of his stringent economic reforms, which include sharp cuts in public spending. This win is expected to unlock a multi-billion dollar US aid package, a key promise from his ally, former President Donald Trump.

Electoral Results and Political Implications

Milei's La Libertad Avanza party exceeded expectations, more than doubling their representation in Congress and more than tripling it in the Senate. This enhanced legislative presence provides Milei with sufficient support to:

• Uphold Presidential Vetoes: Block legislation passed by Congress.
• Fend off Impeachment Efforts: Protect himself from removal from office.
• Push Through Reforms: Advance his ambitious tax and labor reform agendas.

President Milei declared, "The Argentine people have decided to leave behind 100 years of decline and persevere on the path of freedom, progress, and growth. Today we reached a turning point. Today begins the construction of a great Argentina." The results are seen as a decisive shift, with one commentator noting, "The kids voted, democracy voted, the country voted, and this changes the entire situation in Argentina, the entire economy at the national level." Voters expressed a desire for security and a change from a stagnant Congress, stating, "We wanted security. We wanted to change the Congress that's been the same for years while our children suffer."

US Aid and Trump's Endorsement

A substantial US bailout package was a significant factor for Argentine voters. President Trump had signed a $20 billion currency swap to stabilize the peso, with the offer of an additional $20 billion contingent on Milei's party winning the election. Trump himself claimed his endorsement played a role in Milei's margin of victory, stating, "I want to congratulate the victor and he was a big victor and he had a lot of help from us."

Economic Overhaul and Public Reaction

Two years into his economic overhaul, Milei has managed to reduce inflation from triple to double digits. However, the accompanying austerity measures have led to widespread economic hardship for many Argentines.

Market Reaction

Following Milei's victory, Argentina's stocks, currency, and government bonds experienced a significant surge, reflecting increased investor confidence in his economic reforms. Matias Ferningo, an economics professor at Bucknell University, noted that this market rally was "to be expected in the short run." However, he expressed skepticism about its sustainability, stating, "The sustainability of this does not depend just on the you know feeble psychological expectations of of investors. It depends on whether Argentina is capable to repay its debts... and that depends ultimately on the ability to export and and pay back investors."

Explaining the Surprising Victory

Despite a decline in Milei's approval ratings prior to the election, his party secured a surprising 41% of the vote, exceeding predictions. Ferningo attributed this to the tangible reduction in inflation, which fell from approximately 250% to around 30% annually, despite an initial acceleration upon his government's entry. He acknowledged that popularity had been slipping in the preceding months due to exchange rate depreciation and a slight uptick in inflation, exacerbated by the harsh fiscal adjustments leading to increased unemployment and poverty. Nevertheless, he noted that Milei's popularity, around 40%, was "moderately popular" by historical standards for a president during midterm elections. The surprise element was not just winning, but winning in unexpected areas, including the province of Buenos Aires.

The Role of US Support

The influence of Trump's support is debated. While it may have helped stabilize the exchange rate in the weeks leading up to the election, providing a positive effect, it's unclear if it was counterbalanced by potential negative reactions to perceived US intervention. Ultimately, the "relative stability" achieved, despite being a high 30% inflation, was considered a key factor in the victory.

Opposition Strategies and Future Prospects

Ferningo believes the opposition faces significant challenges in unseating Milei in 2027, as his policies are not entirely new and have been attempted before. He highlighted that Milei's finance minister previously served in a government that approached the IMF in 2018. The key for the opposition, he argued, lies in unification. The opposition's vote share was less than Milei's, with a significant portion of the center collapsing. A unified centrist alliance, particularly if the economy stalls, could present a challenge.

Voter Disillusionment and Participation

Ignacio Alba, an Argentina expert at the Atlantic Council, echoed the surprise of the election results, as polls had predicted a near tie. He noted a recent shift in market confidence and consumer sentiment in the weeks prior to the election, which may have contributed to the unexpected outcome.

Regarding voter turnout, which was around 68% in a country with compulsory voting, Alba suggested a combination of factors:

• Disillusionment: A long-term trend of declining participation due to economic stagnation and frustration with political parties. This has de facto shifted the system from mandatory to more optional voting.
• Polarization: A consolidation of support for Milei and his coalition (around 40% of a 66% participation rate), with the remaining half broadly coalescing around the opposition.

Alba downplayed the direct electoral impact of Trump's bailout, suggesting it might have galvanized some on the left to vote against perceived intervention. However, he believes it was more influential in calming markets and reassuring investors, which in turn may have boosted consumer confidence in the final weeks.

The Path Forward: Reforms and Austerity

Milei anticipates a highly reformist Congress. Alba clarified that "austerity" might not be the precise term, but rather a stabilization of the economy through significant cuts in public spending, achieved partly by not adjusting for inflation over two years. He emphasized Argentina's commitment to fiscal responsibility and debt repayment.

The momentum from the election is expected to be used to implement deep-cutting reforms that previous pro-reform governments were unable to achieve. These include:

• Tax Reform
• Pension Reform
• Labor Reform

These reforms are considered crucial for anchoring future expectations and fostering long-term economic growth.