Milei’s reforms have set Argentina on a path to recovery after years of debt trouble

With a significant amount of foreign debt coming due next year, the conventional wisdom was that an exchange-rate-based stabilization programme—letting the currency depreciate by less than the inflation rate to push inflation down—had led to a massively overvalued currency and an external deficit that was bound to precipitate a crisis.

But I thought this consensus was far off the mark.

Breaking from the pattern of past failed economic-stabilization episodes, Argentine President Javier Milei used his 2023 election victory to implement the strongest fiscal-austerity and structural-reform policies in the country’s history. In 2024, the primary fiscal adjustment (excluding interest payments) amounted to 5% of GDP, setting the stage for a strong economic rebound after some early softness.

At that point, the Argentine peso may have been modestly overvalued, given the lack of a fully flexible currency regime, but at least the current-account deficit was very small. If the country regained market access, it could roll over its looming external debt liabilities; and if electoral uncertainties could be overcome, Milei’s reforms and the country’s huge natural-resource endowments were bound to attract huge amounts of foreign direct investment (FDI).

Moreover, the inflation rate had already dropped dramatically from over 100% before Milei’s election to around 30%.

Thus, heading into the recent legislative election, Argentina’s problem was about liquidity, not solvency. With electoral uncertainties weighing on growth this year, especially after the Peronist opposition performed better than expected in Buenos Aires’s provincial election in September, investors had grown nervous.

Following a couple of corruption scandals and tactical mistakes on Milei’s part, the peso had weakened, despite interventions to keep the exchange rate within a set band. Domestic interest rates surged, Argentina’s sovereign spread widened significantly, and the stock market weakened.

If the Peronists could take enough seats to wield an effective veto, Milei’s entire reform programme could unravel.

But since Argentina’s problem was merely about liquidity, Milei sought and received a controversial $20 billion swap line from the US Treasury, whose support was conditional on him prevailing in the election.

In the event, he and allied parties triumphed, picking up seats in both chambers. By fixating so much on electoral uncertainty, Milei’s political links to US President Donald Trump and an overvalued exchange rate, the financial commentariat had ignored the promise of his radical fiscal and other reforms.

Now, for the first time in ages, Argentina may escape the policies that have repeatedly driven it into debt defaults and high inflation. After the most recent Peronist administration had pushed the country close to an inflation spiral and another default, Milei started cleaning up the mess with ruthless efficiency.

While many have criticized his draconian approach, the results of the October election show that the Argentine people would prefer short-term economic pain over a return to Peronist policies.

Milei will now reach out to other moderate forces to build a coalition that can continue his programme via legislation, rather than decrees, starting with labour-market and tax reforms. Further economic liberalization will then attract a surge of domestic and foreign investment, ensuring strong economic growth for the future. While no economic policy package is perfect, Milei’s overall approach is sound, especially compared to the failed policies of the past.

Yes, the exchange-rate regime will have to become more flexible over time. But proposals for an immediate shift to a fully floating exchange rate or (at the other extreme) full dollarization do not make sense.

The first could lead to excessive exchange-rate volatility, especially once capital controls are fully phased out, while the latter is not even feasible, because Argentina does not have sufficient foreign-currency reserves. Milei, a vocal libertarian, may have flirted with full dollarization in the past, but he now recognizes that it is not really an option.

The better option is a currency regime that would allow fluctuations within a wide band, perhaps with targets based on the nominal effective exchange rate together with some monetary aggregate to anchor growth. That would limit volatility while still ensuring that the currency value is competitive, and the external balance positive. The returning flows of capital and new FDI could be used to replenish the country’s dwindling foreign-exchange reserves, lest they drive unwanted currency appreciation.

The market reaction to the October election confirms that investors are on board with Milei’s strategy. The panic leading up to election day was not about him, but about the prospect of a Peronist return. With the electoral uncertainty behind it, Argentina now has a clear path to political stability.

We will likely see significant inflows of FDI, allowing growth to accelerate over time. Argentina may even become a model for the kind of market-oriented economic reforms and fiscal austerity measures needed in other Latin American economies, like Chile, Brazil and Colombia, which will hold elections in the coming years. ©2025/Project Syndicate

The author is professor emeritus of economics at New York University’s Stern School of Business and author of ‘MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them’