Argentina

The practical test for Javier Milei begins

This Sunday, the new Argentinian President Javier Milei will be inaugurated in the presidential palace "Casa Rosada". He clearly won the run-off election on 19 November against his challenger, the outgoing economy minister Sergio Massa.

However, Milei and his new cabinet will not have much time for rose-tinted dreams in view of the disastrous economic situation they inherited from the previous Peronist government under President Alberto Fernandez and the difficult majority situation in Congress.

Cabinet as a mixture of close confidants and experienced experts

It is not possible for Milei to fill his cabinet with only close confidants from his political movement "La Libertad Avanza" ("Freedom Advances"), which has only been in existence for two years, even if some of them find themselves in top positions in the cabinet: Above all, there is his sister Karina Milei, whom he himself refers to as "El Jefe" ("The Chief"), as the president's designated cabinet minister, and Victoria Villarruel - controversial due to her relativisation of the crimes of the 1976-1983 military dictatorship - as Vice President.

In other key portfolios, however, Milei relies on political experience, particularly in the central tasks of economic and foreign policy. The new Economics Minister will be the economist and former investment banker Luis Caputo, who was already Finance Minister under President Mauricio Macri and then - for a short time - President of the Argentinian Central Bank. Caputo has proven that he can conduct debt rescheduling negotiations just as successfully as placing bonds on international financial markets. This expertise is likely to be the main reason for his appointment, particularly in view of the difficult negotiations with the International Monetary Fund (IMF) and the country's dependence on bilateral financing (especially from China). Critics, on the other hand, point to Caputo's lack of macroeconomic and economic policy experience, although it can be assumed that Milei himself will exert a strong influence here in order to reduce the excessive influence of the state in Argentina and unleash market forces for more entrepreneurship, investment and growth.

After Milei's victory, the abolition of the Argentine central bank and introduction of dollarisation, which he had vehemently called for during the election campaign, have been postponed as unfeasible in the short term (at least for the time being). The main task of the new designated central bank president will be to end the current state financing through the central bank press and to reduce inflation to a level that is comparable regionally and internationally for one of the largest 20 economies in the world (G20). Joaquín Cottani and Santiago Basuili, two names with extensive political and financial market expertise, are being considered for this Herculean task. As was already the case under President Macri, Patricia Bullrich, who was eliminated as a presidential candidate in the primaries, is to become Security Minister. Her immediate support for Milei after her defeat and her equally immediate willingness to take on a ministerial position led to a deep disagreement with Macri as leader of the conservative PRO party (Propuesta Republicana = "Republican Proposal"), who accused her of a lack of coordination with the party - and ultimately with himself. As expected, the designated foreign minister is the economist and internationally experienced Diana Mondino, who is already making public appearances in anticipation of her future role, both with positions in the (social) media and with leading organisations and foreign ambassadors.

As announced by Milei during the election campaign, he will significantly reduce the number of ministries from the current 18 to 8 by bundling tasks, for example in newly created ministries for human capital and infrastructure, which will enable synergies between related tasks, as well as the cost-saving consolidation of administrative tasks from several ministries. On the other hand, liberalisation measures are intended to eliminate tasks and thus make the authorities previously involved redundant, e.g. for price controls and (at least in the medium term) foreign trade permits. While these measures are to be welcomed, it should also be criticised that previously institutionally anchored tasks in the areas of women's policy, anti-discrimination and the protection of indigenous minorities may also be removed. While a "lawnmower approach" seems to be necessary for Milei, this agenda could also harbour potential for social unrest.

No Christmas break for Congress

Since the election victory, Milei has been working with his closest confidants in his "bunker" in the Hotel Libertador not only on finalising the personnel tableau, but also on a comprehensive legislative package for the most imminent measures required to improve the economic situation. Milei will present the key points in his "speech to the nation" at the inauguration on Sunday. The legislative package itself, which according to reports will comprise several thousand pages, will be submitted by Milei to Congress on Monday for the start of deliberations. As a precautionary measure, he has already called on MPs to work hard on the deliberations and to forego the Christmas break due to the difficult economic situation. The package is to be introduced in the form of omnibus legislation, meaning that the various legislative proposals will be discussed together. In addition to the above-mentioned reduction in the number of ministries and subordinate authorities, key components are likely to be further measures to streamline political and administrative processes, such as the abolition of the PASO (Primarias, Abiertas, Simultáneas y Obligatorias = "Primary, Open, Simultaneous and Compulsory") pre-elections, liberalisation and market opening measures to promote domestic and foreign investment in the energy and raw materials sector (particularly gas, hydrogen, lithium) and the specification of state-owned companies to be privatised. As mentioned above, Milei has (for the time being) abandoned some of his most radical demands from the election campaign, such as the abolition of the central bank and the replacement of the peso with the US dollar. Nevertheless, it remains to be seen to what extent Milei will be able to achieve majorities for his proposals in Congress. Macri has already announced that, in the absence of formal cooperation with Milei, he will only support legislation on a case-by-case basis, meaning that Milei may also have to compromise with the non-Kirchner wing of the Peronists in order to achieve majorities, particularly on social and labour market policy issues (e.g. subsidy cuts, labour market regulation), which would lead to a further watering down of his election campaign programme. An initial conflict between Milei and Congress is already emerging in the appointment of presidential candidates in both chambers, where Milei - without a majority of his own - has officially proposed his own candidates from the ranks of La Libertad Avanza.

New foreign policy priorities already recognisable

During the election campaign, Milei had announced that the USA and Israel would be his most important foreign policy allies. His first trip therefore took him to Washington and New York for 48 hours at the end of November, in the middle of his preparations for his presidency. The political highlights of his short trip were a meeting at the White House with President Biden's security policy adviser Jake Sullivan and a lunch with former President Bill Clinton - organised by Argentinian businessman and Clinton friend Gerardo Werthein. Despite his political closeness to Trump (with whom Milei did not meet), he deliberately sought to connect with top Democratic representatives and rated his visit as "excellent". The reaction from Sullivan, who hoped for "open lines of communication" between the two countries, and from Clinton, who advised Milei to use the first few weeks for his most important political measures, was somewhat more diplomatically reserved.

The designated Minister of Economy, Luis Caputo, met with the International Monetary Fund (IMF) and investment fund managers in New York after Milei's departure. A sustainable solution to Argentina's debt to the IMF of around USD 45 billion is not only important for improving relations and secure further support from the IMF itself, but also has an important signalling effect on Argentina's solvency and reliability in complying with international agreements - and therefore on the political risk and financing costs for investors. The interest of foreign infrastructure companies and funds in investing in the energy and raw materials sector in Argentina is considerable (not only in the USA). However, investors need planning and regulatory certainty in order to turn market observations into concrete investments. Stronger private involvement from abroad is essential for the exploitation of Argentina's enormous wealth of energy and natural resources and therefore for growth and employment, after Milei announced immediately after his election that he had "no money" for infrastructure measures.

After Milei had expressed criticism of the MERCOSUR association of states during the election campaign, the designated Foreign Minister Diana Mondini took a clearly positive stance on the EU-MERCOSUR association agreement in the run-up to the MERCOSUR summit on 7 December in Rio de Janeiro and called on the outgoing President Fernandez not to withhold his approval of the agreement in order not to hold it up. Fernandez justified his refusal to give his approval by saying that he wanted to leave the decision to Milei as his successor. This week, outgoing Foreign Minister Santiago Cafiero had even expressed his opposition to the content of the agreement, which he did not consider balanced and which he feared would be detrimental to Argentinian industry and agriculture. In this respect, Argentina's position on the agreement has been reversed in recent weeks: while the Peronists - despite their political proximity to Brazilian President and current rotating MERCOSUR Chairman Lula - are putting the brakes on the agreement, the new Milei government is sending a positive signal to Europe of its willingness to strengthen free trade between the two regions. In return, of course, this also requires the EU and France in particular to step over their shadows and follow up their Sunday speeches on the importance of free trade, diversification and a community of values in general with a willingness to finalise agreements with partners in the world in concrete terms.

Closer cooperation with the USA and Europe will also be necessary for Milei because political proximity to China is likely to be a thing of the past - with expected effects on China's involvement as an investor and, above all, as Argentina's financial lifeline. The new Foreign Minister Mondino has already announced that Argentina will not join the BRICS group of states - contrary to the plans of the previous government - because membership would not bring Argentina any advantages.

In view of the economic shambles left behind by the Peronists, Argentina is facing a mammoth task. It now remains to be seen whether President Milei is able to formulate a coherent reform programme and implement it politically in such a way that the majority of the population can support it.