The Deeper You Dig
Argentina’s lessons for the West.
We should be cheering for Argentina, hoping its economic reforms will succeed and bring the country back to prosperity. And not just in a generous, altruistic spirit.
Remember when…
Argentina was the envy of the world. In the early 1900s, it was one of the ten richest countries, its per capita income on a par with the US and significantly higher that Italy and Spain. Italians were migrating to Argentina for a better future. No Argentinian would have imagined that five generations later, his descendants would be living in a middle-income country racked by recurrent crises, their income less than half that of the average Italian and one-third the US average.
Decades of populism and economic mismanagement can work miracles.
Argentina’s recent economic history reads like Groundhog Day: populist splurges in government spending financed by central bank money printing, rising indebtedness, pervasive government interventions and hopeless obstinate attempts to control the exchange rate. Then extremely high inflation, large exchange rate devaluations, and debt defaults. Argentina defaulted nine times on its sovereign debt — five times in the past 40 years.
Every time the IMF dutifully comes to the rescue — though after 23 IMF programs since 1958, for a total of nearly $200 billion, it must be hard for IMF staffers to muster the conviction that ‘this time it’s different.’
Enter the chainsaw
Admittedly, when the new president shows up with a chainsaw, things do look different. Milei has been criticized for his theatrical approach — it’s not his fault that we live on TikTok. He’s been called a populist — these days, every politician everywhere is a populist.
But he has launched a courageous reform effort, with remarkable success. A drastic fiscal consolidation has brought the government budget into surplus, from an average deficit of 5.4% of GDP over the past ten years.
The government has launched the most ambitious deregulation and liberalization effort that the country has ever seen. It has slashed government spending and public employment, whittling down 18 ministries to just 8. It has eased exchange rate and import restrictions; it has cut taxes, including export taxes on industrial goods; it has started to liberalize product markets.
The results have been encouraging: inflation has dropped to under 2% month-on-month compared to 25% before Milei took over. The IMF expects it to fall to a 20% annual pace at the end of this year and single digits next year, from over 200% at the end of 2023. After an initial contraction, the economy returned to growth in the second half of last year, and poverty has been reduced.
Something was bound to go wrong. Milei’s party suffered a heavy electoral defeat in Buenos Aires, and with midterm general elections coming up next month, investors got spooked. The value of the peso dropped, demand for US dollars increased and the price of Argentinian bonds fell.
The immediate criticism has been that Argentina should have already floated the peso — I’d recommend Robin J Brooks’ razor-sharp criticism. Under the current policy framework, Argentina allows the exchange rate to fluctuate within a band, which is widened month by month — a “crawling peg”. This is not a crazy strategy: it’s aimed at maintaining a measure of currency stability, which helps reduce inflation. But if it crawls too slowly, you lose competitiveness; exports slow, imports rise and your foreign exchange reserves suffer. And like every managed exchange rate, it’s vulnerable to a loss of investor confidence.
A fully flexible exchange rate would help competitiveness and not be subject to speculative attacks, but it could feed into higher inflation. The only offset is even tighter fiscal and monetary policy, and faster liberalization to boost productivity and competitiveness throughout the economy.
The deeper you dig
Truth is, when you’ve dug yourself a deep enough hole, climbing out is hard. You can’t design a reform program with no risks and no weak points. When your economy has accumulated as many distortions and weaknesses as Argentina has, fixing them takes time and stamina. And very few populations today have the patience to support a prolonged painful economic reform process. The US Treasury is stepping up to help — but the key will be the country’s determination to stick to the reform path.
This should be an object lesson for Western countries which are allowing economic distortions and weaknesses to accumulate: outsized government spending bloated by unsustainable social welfare, high and rising debts, extensive regulations, failing education. Europe is already paying the price, its income levels falling far behind those of the US. But the US shouldn’t laugh either, with expanding government interference in the economy and a political polarization that undermines far-sighted policy-making.
When you’re rich, for a while the decline is painless. You can barely feel the erosion in living standards, the lost opportunities. But over time they start to hurt. And the more extensive, complex and deep-rooted your economic problems become, the harder it is to address them when you finally try.
Argentina’s government deserves support, and we should all wish it success. And Western countries should realize that if they don’t act soon, five generations down the line they could be Argentina.
But no, of course that could never happen to us. Right?
Bravo! As always. Only a little too optimistic - if no actions are taken - about the five generations gap before Europe’s falling into poor countries status…. :-)
Europe isnt a country.
It’s a continent made up of dozens of very different nations, each with their own economies and challenges. So lumping it all together and saying “Europe is falling behind” is misleading and frankly a bad take. Some countries, have seen big income gains, while others have slowed down because of things like aging populations or weaker industries.
And the income comparison with the U.S. is tricky. Most European countries tax more, yes, but that money pays for healthcare, education, pensions, and safety nets. So even if the average paycheck looks smaller, people dont have the same out-of-pocket costs for things like medical bills or university. In many ways, what looks like “lower income” on paper translates into a more stable, less risky life.
If you really want to talk about looming decline, look at government debt. The U.S. is running up huge deficits, while countries like Sweden, Norway, and Denmark manage to combine high taxes, strong welfare systems, and balanced budgets. That says a lot about long-term sustainability.
So no, Europe isnt turning into Argentina. It just runs on a different model than the US, with different trade offs. One prioritizes disposable income and low taxes, the other prioritizes stability and public services. Both have strengths and weaknesses, but painting Europe as “already collapsing” really oversimplifies things and makes this analysis quite dumb tbh.