The fightback against Javier Milei’s radical reforms has begun


Javier Milei has wasted no time. Forty-eight hours after taking office on December 10th his economy minister, Luis Caputo, a former banker, unveiled measures to cut public spending by 3% of GDP. He devalued the peso, pledged to slash subsidies, and eliminated nine of 18 government ministries. One week later Mr Milei decreed that state-owned companies could be privatised, price controls would be eliminated, and labour laws reformed.

In the midst of Argentina’s worst economic crisis in two decades, this flurry of activity is intended to push the budget into surplus (before interest payments) by the end of 2024. The IMF, to which Argentina owes $43bn, has noticed. On January 10th it agreed to restart pay-outs to the Argentine treasury, stating that Mr Milei’s government had “moved quickly and decisively” to “restore macroeconomic stability”.

image: The Economist

But as well as striving for fiscal rectitude, Mr Milei is doggedly determined to destroy what he has dubbed “the caste”, a network of corrupt politicians, business cronies, media lapdogs and, most importantly, powerful unionists. On December 27th he sent a sprawling “omnibus” bill to Congress, designed to “free the productive forces of the nation from the shackles of the oppressive state”. It would allow Mr Milei to rule by decree for two years, change Argentina’s electoral system, and enforce prison terms of up to six years for those who organise protests that obstruct transport or damage property. All the better to break the caste. One month into Mr Milei’s presidency, the caste has started fighting back.

Lawyers are furious about plans for divorces to be fast-tracked through the civil registry without requiring their services; doctors hate a new requirement for them to preferentially prescribe generic medicines. Art types are protesting against the closure of the national theatre institute and a national fund for the arts. Fishermen are cross about permit deregulation. Sugar producers are railing against plans to remove import-tariff barriers. Football clubs are manoeuvring to escape plans to turn them into limited companies in order to attract investment from what Mr Milei calls “Arab groups”.

But no group is more affected by Mr Milei’s shock therapy than Argentina’s trade unions, or more enraged by it. His labour reforms would kneecap them by requiring employees to opt-in to union membership, rather than having dues taken automatically as they are at present. This would leave the unions out of pocket.

They are leading the pushback. The day after Mr Milei vowed to “break the shackles of the oppressive state” the General Confederation of Labour (CGT), Argentina’s largest union group, called a national strike for January 24th. That is record-setting time for an Argentine president to prompt such action. Mr Milei will face a general strike just 44 days into his term; the average Argentine president manages 692 days. The unions are fighting back through the courts, too. On January 3rd a court suspended the chapter on labour reform in the emergency decree, in response to an injunction filed by the CGT.

Trade unions are central to the system Mr Milei seeks to tear down. They are powerful, and enduring, often run like family businesses. Take the truckers’ syndicate. It has had the same boss, Hugo Moyano, for 36 years. His oldest son is installed as the union’s co-chief. A daughter and another son sit on the board, while a different son ran a separate union established for toll workers. He then became a congressman. The family has owned football clubs and runs a political party. They have been investigated for corruption, money-laundering and fraud, but few investigations have ended in charges. The Moyanos, who can freeze the transport of food and petrol around the country, have hitherto seemed untouchable.

Markets were initially buoyant about Mr Milei’s plans. Bond prices hit a two-year high after the emergency decree was announced. But since then investors have begun to question the political feasibility of Mr Milei’s project.

Union opposition is not the only hurdle. To reach a primary surplus, Mr Caputo wants not just to slash public spending but also to raise annual revenues by 2% of GDP. He aims to build up the central bank’s net foreign-exchange reserves, which are $7bn in the red. He would do this by raising import and export taxes, and by using a crawling peg to the dollar which devalues the peso by 2% every month.

But Congress has not yet approved the tax rises, and revenues are cratering. Argentina is in recession. Last year GDP contracted by 2.7%, according to the World Bank, largely because of a historic drought. Mr Milei’s devaluation and the lifting of price controls will fuel inflation and deepen Argentina’s recession, at least in the short term. This combination means that by the time taxes are collected, their worth will have fallen. Econviews, a consultancy in Buenos Aires, estimates that the government could lose 0.8% of GDP in tax collection in 2024. Populist bungs have also hurt revenues. In September, before the presidential election, the Peronist candidate, Sergio Massa—who was also the economy minister at the time—all but abolished income taxes, which accounted for almost 11% of the government’s revenues.

Many analysts are beginning to fear that the 2% crawling peg is not enough, as prices rise faster than expected. Annual inflation surpassed 211% in December, higher than the rate in Venezuela. The peso is once again weakening on the country’s black market, which offers a route around currency controls. If another sharp devaluation looms, prices could rise even more.

It will also be difficult to pass much of the omnibus bill in its current form. Even with the support of centre-right parties, Mr Milei cannot muster a majority in Congress, which threatens his tax rises too. He is attempting hardball, nonetheless. Congress, Mr Milei says, can either do the right thing and pass his law, or dedicate itself “to destroying the lives of Argentines”.

The mastermind behind much of this slash and burn, Federico Sturzenegger, a former central-bank president who advises Mr Milei, seems unbothered. He says the government is only getting started. In an interview with Bloomberg, he said the administration will send another bill to Congress soon to scrap 160 “absurd” regulations. Boldly, he claimed that the only way to change Argentina’s rotten economic structure is “to disarm it” and “drain it of its resources.” That will not sit well with the likes of Mr Moyano, his offspring, and the country’s caste.■



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