Javier Milei: Is Argentina's new president really blowing up the central bank?

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Election winner Milei

Photograph:

Juan Ignacio Roncoroni v EPO

Argentina's new president, Javier Milei, has announced plans to blow up the central bank, saying he prefers the mafia to the state – and organ trafficking is just a market. Milei, who is also called "Peluca" because of his wild haircut, the wig, appeared during the election campaign with a chainsaw and appeared singing in a superhero costume.

On Sunday, the populist Milei won with 56 percent of the vote against his challenger, the left-wing Peronist Sergio Massa. The man, who appears as a colorful bird, is politically radical, he describes himself as an "anarcho-capitalist". How could such a politician be elected president in Argentina and what can be expected from him? The most important questions and answers.

1. Why is Javier Milei compared to right-wing populists like Donald Trump and Jair Bolsonaro?

Milei describes himself as a radical liberal and anarcho-capitalist. But he is liberal or even libertarian only in the economic field. Politically, he is polarized in a similar way to Trump and Bolsonaro, he has strong authoritarian and anti-democratic tendencies. Before his victory, he warned of electoral fraud, and he probably would not have accepted a narrow defeat. He adheres to conspiracy theories and doubts that climate change is man-made. He wants to liberalize gun laws, he is completely against abortion. Milei also sees himself in a messianic struggle against socialism. He has called the pope a lousy socialist. He wants to break off relations with China and Brazil, Argentina's most important trading partners, because they are controlled by communists. He sees himself on a divine mission to liberate Argentina from the "dictatorship of socialism." He put the horrors of the brutal Argentine military dictatorship (from 1976 to 1983) into perspective.

2. What are its main political intentions?

Milei wants to dissolve the central bank and drastically reduce the number of ministries – from 18 to 8. The dollar is to become the national currency and replace the peso.

3. Why does Javier Milei want to dollarize the economy?

At the beginning of the 20th century, being rich "like an Argentine" was considered a compliment – that's how great Argentina's economic prosperity once was. But after decades of economic crises and political mismanagement, Argentina's economy is considered a chronic problem. This can also be seen in the loss of purchasing power of the national currency, the peso. Most recently, the inflation rate climbed to 143 percent.

Milei, the winner of the election, promises to solve the inflation problem with a switch to the dollar in one fell swoop. In the case of so-called dollarization, the state would abandon the peso, and the Argentine central bank would also be abolished. In the future, only the dollar would be considered legal tender. The government or the central bank would no longer be able to determine the money supply. This is intended to ensure that the state is obliged to be frugal and that inflation is contained.

4. Can dollarization help address Argentina's economic problems?

This is controversial and also depends on how the plans are implemented in concrete terms. To be sure, Argentina would not be the first country to switch to the dollar as its currency. Panama, El Salvador and Ecuador have also switched to the dollar. But Argentina is the second-largest economy in South America, so dollarization would be an XL-sized economic experiment. From 1991 to 2002, the Argentine peso was pegged to the dollar.

The example of Ecuador shows that switching to the dollar can have advantages: the country was also plagued by economic weakness and high inflation and made the dollar the sole currency in 2000. In fact, inflation fell massively as a result.

For example, the market-liberal Cato Institute also sees clear advantages from switching to the dollar. "Dollarization is the best way to bring inflation down to single digits quickly and permanently," the libertarian think tank argues. The pivot to the dollar could protect the purchasing power of inflation-plagued Argentine citizens.

At the same time, however, the peg to the dollar would have a high economic price, critics warn. For an economy, dollarization is like handcuffing yourself and throwing away your keys, comments the New York Times. It's an act of desperation when nothing else works."

Numerous renowned economists – including French economist Thomas Piketty and German economist Isabella Weber – warned against Milei's plans in the run-up to the election. These are "very harmful to the Argentine economy and the people."

Economists doubt that Argentina even has the necessary reserves to stock up on US dollars. There is a risk of an unfavourable exchange rate against the peso, which could even lead to inflation rising in the short term. In addition, the country is losing economic flexibility. "In the long run, it would be impossible to achieve monetary sovereignty." The real problems of the Argentine economy will not be solved by the changeover, according to the economists.

6. What would be the consequences of radical liberalization for the Argentine economy and companies?

In view of the weak peso, many people in Argentina have long since switched to other currencies for their business. For Argentine companies and consumers, dollarization would have an undeniable advantage: they would no longer have to deal with the fluctuating peso exchange rate – it would make it easier to calculate loan agreements or long-term investments. The other side of the coin is that companies and consumers are directly affected by external shocks. After all, if you don't have your own currency, you can't simply devalue it in order to remain competitive. This lack of flexibility proved to be the downfall of countries like Greece in the euro crisis.

Critics of dollarization fear that in a recession, the Argentine state would have no choice but to drastically cut government spending – which would further increase the social imbalance in the state. The dollar peg is "crazy," warns the prominent South Korean economist Ha-Joon Chang. If you want to make the dollar their official currency, you should apply to become a colony of the United States of America. Because that's what they become."

7. What are the chances that Milei will be able to implement his plans?

It's going to be very difficult. Most of its measures must be approved by Congress. Milei does not have a majority there. In the Chamber of Deputies, his party "La Libertad Avanza" has 39 out of 257 seats, in the Senate eight out of 72. Even if you include the MPs of traditional right-wing parties who want to support him, it is not enough. The Peronist unions will litter the country with strikes and protests to stop Milei.

8. What role models does the economist Milei refer to?

Milei admires the liberal so-called Austrian school of economics, which was coined by economic theorists Ludwig von Mises and Friedrich Hayek. He also adheres to the libertarian American economist Murray Rothbard. Milei named his five dogs after his favorite economists. Experts accuse Milei of copying parts of his books from Mexican economists. In Argentina, he admires the late Argentine ex-president Carlos Menem. In the 1990s, he had pegged Argentina's currency to the dollar at a fixed parity, thus stopping the inflation he had inherited from his predecessor. Milei's sideburns are a tribute to Menem.

9. Why do so many young people support Milei?

Many young Argentines do not see a future in their country, they only know the country in a state of economic crisis, they have not experienced dictatorship. They reject state interventions such as social benefits for the poor and the levying of taxes as a restriction on their personal freedom. Above all, the numerous corruption scandals under the government of Peronist Cristina Fernández de Kirchner, the current vice president, have alienated them. They are striving for radical change. They rejected the traditional right-wing parties in the first round of voting because they hold them partly responsible for the decline.

10. Milei is considered emotionally unstable. Why didn't that scare off voters?

Milei has confirmed that he trusts his dogs in front of all and believes that he is in spiritual contact with his deceased mastiff "Conan". But many followers still consider this information to be fake news. They see them as part of a campaign of fear by the Peronists, which is being stoked by the media. They get their information mainly from social media, where Milei is very present.

11. What does Milei's election victory mean for Argentina's international relations?

Milei has said that he considers the U.S. and Israel to be his most important allies. Relations with Brazil and China, the most important trading partners, are likely to deteriorate. He has described the Chinese system as "murderous" and Brazil's President Lula as a "communist" for him. The Mercosur economic alliance could break up under Milei, and the adoption of the free trade agreement with the European Union is likely to become even more difficult. Milei is also expected to stop Argentina's planned accession to the BRICS group of countries. Relations with most left-wing countries in Latin America will deteriorate.