Milei’s Tightrope Act

Before Argentina’s midterm legislative elections last month, many believed that President Javier Milei’s party, La Libertad Avanza (LLA), was bound for electoral defeat. After nearly two years in office, Milei faced a shortage of the foreign currency reserves needed to halt a run on the Argentine peso, raising fears of yet another debt crisis in a country that has repeatedly defaulted. His economic adjustment program, which entailed massive spending cuts and layoffs, had brought hardship to many Argentines. And in September his party had lost by a 13-point margin in the provincial election for mayors and legislators in Buenos Aires, the country’s largest electoral district.

But in October, Argentine citizens rewarded the party with 41 percent of the vote, a convincing plurality. LLA even won in Buenos Aires. The victory reflects Milei’s success in curbing inflation, which fell from above 200 percent when he took office in December 2023 to around 30 percent by the time of the election. Voters signaled renewed patience with a president who promised that hardship would bring rewards. The result also suggested lingering fears among the public that an alternate approach risked bringing even worse economic instability. Importantly, the victory has reopened the possibility of Milei’s building the legislative coalitions necessary to pass libertarian reforms, including labor deregulation and tax cuts, that he promises will put Argentina back on the path to prosperity. 

But Milei’s electoral mandate is not a blank check for his party’s agenda. To advance reforms, he must build a broader coalition capable of navigating a fragmented National Congress. Stabilizing the peso through a credible exchange-rate policy—one that enables the accumulation of reserves, manageable debt service, and lower interest rates—will also be essential to restore investor confidence and spur growth. Ultimately, his political survival depends on delivering prosperity to voters. If he cannot control inflation and translate his market-oriented agenda into tangible gains for a majority of Argentines, the electorate that brought him to power may quickly turn elsewhere.

“MAKE ARGENTINA GREAT AGAIN”

Milei’s rise is an outgrowth of Argentina’s recurrent economic crises. Since the 1970s, successive governments have faced currency shortages, runaway inflation, and cycles of exchange rate controls and devaluations. To address its lack of foreign currency, which it needs to stave off default, Argentina has relied on credit even when it has lacked access to private bond markets. Currently, it is the International Monetary Fund’s largest debtor, accounting for roughly one-third of the organization’s outstanding loans. For half a century, Argentine citizens have been desperate to end the cycle of permanent economic crises.

Leaders across Argentina’s polarized political spectrum have failed to fix its economic woes, contributing to Milei’s ascendance. Since the 1940s, Argentine politics has revolved around Peronists and anti‑Peronists. Named for Juan Perón, the country’s president from 1946 until 1955 and from 1973 to 1974, Peronism fused labor mobilization with social welfare expansion and economic nationalism. In the 1990s, Peronists embraced neoliberal reforms, opening the economy, privatizing most state-owned companies, and taming inflation by pegging the peso to the dollar. But the overvaluation of the peso under President Fernando De La Rúa destroyed the competitiveness of Argentina’s exports, plunging the country into a recession that culminated in a sovereign debt default in 2001. The Peronists won the following election, in 2003, and benefited from China’s demand for Argentine soy, which lifted export revenues and fiscal revenue. Under the Peronist administrations of Néstor Kirchner and Cristina Fernández de Kirchner, the state nationalized public utilities, expanded welfare programs, and increased protectionism. After a decade, inflation picked up and growth stalled.

In 2015, the center‑right businessman Mauricio Macri ended 12 years of Peronist rule, winning the presidency by promising to control inflation with a program that would reduce public spending gradually. But Macri’s efforts faltered, as he could not control inflation and the economy continued to stagnate. Even a record $44 billion IMF loan, which Macri secured with U.S. President Donald Trump’s support, failed to stem a run on the peso after it became clear that Macri was unlikely to be reelected in 2019. That year, the Peronist Alberto Fernández won the presidency. To ease pressure on the country’s foreign exchange reserves, he restructured Argentina’s debt and activated a $5 billion tranche of an existing $10 billion currency swap line with China. But at the end of his term, inflation still exceeded 200 percent, poverty was rising, and the economy was not growing.

In 2023, Argentine voters felt that neither Peronists nor center-right parties could solve the country’s crises and turned to the outsider Milei, a libertarian economist who wielded a chainsaw as a campaign prop to symbolize deep cuts to the state. He denounced the political elite as “the caste,” flirted with dollarization—that is, adopting the dollar as the country’s currency—and, borrowing from Trump, promised to “make Argentina great again.” After securing roughly a third of the first‑round vote, he captured 56 percent in the runoff by winning over most of Macri’s supporters. He won a majority in most provinces, even those where he had scarcely campaigned. Milei’s campaign galvanized not only the traditional anti-Peronist coalition of educated and well-off voters but also younger and poorer Argentines, who had traditionally supported the Peronists.

HITS AND MISSES

Milei’s draconian reforms, although painful, tamed inflation, the top concern of voters when he was elected. His government turned a primary fiscal deficit of nearly 3 percent of GDP into a surplus, largely through drastic spending cuts. He reduced public employment by more than ten percent and allowed inflation to erode the value of pensions, public wages, and welfare benefits. Capital spending collapsed as infrastructure projects were halted. The only social program that expanded in real terms was cash transfers to vulnerable children.

Milei postponed dollarization and, to control inflation, managed the peso-dollar exchange rate, maintained strict currency and capital controls, and kept interest rates high. This formula to shore up the peso had been tried before and risked depleting foreign exchange reserves by selling too many dollars to boost the peso’s value. To counter this, the government rationed importers’ access to dollars and offered a tax amnesty to persuade Argentine citizens to bring their private holdings back onshore. High interest rates dampened the demand for dollars while reducing investment and economic activity. But these efforts could not boost reserves rapidly enough to sustain the peso. In April, the IMF approved a U.S.-backed $20 billion loan for Argentina, and Milei announced a shift to a managed float regime whereby the peso’s value would be permitted to float between thresholds set by the state; the central bank would sell pesos at the lower price and buy at the upper price to stabilize the currency.

Having begun his term with just 38 of 257 seats in the lower house of the National Congress and only seven of 72 in the upper house, Milei could not rely on a legislative majority. Instead, he governed through emergency decrees, tactical alliances with center‑right legislators, and deals with provincial governors who controlled key votes. Congress passed an omnibus reform bill granting him temporary powers to downsize the government, privatize state-owned companies, and overhaul the country’s foreign investment framework to entice extractive industries, such as mining and hydrocarbons. Milei expected the 2025 midterms to enlarge his congressional caucus, which would facilitate the approval of legislation in the second half of his term.

Milei’s political survival depends on delivering prosperity to voters.

But rather than consolidate the alliances that had allowed his program to take off, Milei often chose confrontation, fielding rival candidates against governors who had supported him and referring to former allies derisively. Aggrieved by this, formerly allied legislators joined the Peronist caucus to pass bills expanding university funding, pensions, and disability benefits, as well as increasing funding for provinces—all of which Milei vetoed. Lawmakers then overrode three vetoes with two‑thirds majorities, eroding Milei’s image as an unstoppable outsider. A scandal over corruption in the provision of disability benefits that implicated his sister, Karina Milei, further damaged the president’s brand. Internal rivalries, particularly between his sister and his chief adviser, spilled into public view, tarnishing the administration’s image.

In provincial elections before the October midterms, LLA’s candidates fared worse than expected. A defeat to Peronists in Buenos Aires Province in September suggested that Milei’s party could be beaten at the ballot box the following month. With an IMF loan acting as a substitute for foreign reserves, an unstable peso, and Milei’s image deteriorating, the markets responded with a run on the peso. The following week, the government cut export taxes for grain traders to raise dollars to shore up the peso. The Trump administration subsequently announced a $20 billion currency swap line to supplement the $20 billion IMF loan. U.S. Treasury Secretary Scott Bessent posted on social media that the United States “stands ready to do what is needed within its mandate to support Argentina,” then bought Argentine pesos to support the currency. Milei visited Trump in mid‑October. In a bilateral press conference, Trump effectively made any additional U.S. support to Argentina conditional on Milei’s electoral performance, saying, “If he doesn’t win, we are gone,” causing stocks and the peso’s value to fall further less than two weeks before the election.

Heading into the final stretch, Milei reignited polarization by stirring fears of a Peronist return but was still facing investor anxiety and political scandal. His party’s top congressional candidate in Buenos Aires was accused by his opponent of accepting money from a drug trafficker and withdrew from the race without time to print the name of his replacement on the ballots. The swagger that marked Milei’s rise gave way to a humbler message: the race was too close to call.

PROVIDE OR PERISH

In the end, Milei’s party, the only one running in all electoral districts, won with 41 percent of the vote; the Peronists captured 33 percent. Unlike in 2023, LLA performed better in more affluent areas, which returned to the traditional anti-Peronist voting that had benefited Macri’s coalition. The result was interpreted as a referendum on Milei, but it also reflected the citizens’ fear of returning to economic chaos. The run on the peso in the final stretch of the campaign may even have helped Milei by reminding voters of the real possibility of instability.

The vote has bolstered Milei’s ability to pass crucial reforms in Congress. Although lacking a majority, he won a veto-proof minority. LLA and its allies will have 109 seats in the lower chamber and a third of the seats in the Senate. Potential allies in both chambers could help Milei form legislative majorities, enabling him to govern from a position of strength, especially as the divisions among Peronists widen after their defeat. Stock and bond markets rallied sharply after the election, and the country’s sovereign risk declined.

The midterms breathed new life into Milei’s administration; Trump’s support for his ally has paid off. Milei can use the momentum to build a coalition in support of his reforms. His call for a meeting with 20 of 24 governors to discuss labor and tax reforms is a step in that direction, but the governors’ demands for fiscal resources threaten Milei’s commitment to cut spending and avoid a fiscal deficit. The Argentine president also needs the support of the banks to access private credit, but their support seems contingent on the government’s maintaining fiscal discipline, liberalizing the exchange rate, and doing away with all currency and capital controls. To succeed, Milei will need to figure out how to navigate these conflicting interests between the governors and the banks.

Today, Argentines fear renewed economic instability, but they also worry about jobs and declining incomes. It is worth recalling that Macri’s coalition won 41 percent of the vote in the 2017 midterms yet failed to sustain that backing, losing to a coalition of Peronist factions two years later. The victory of Milei’s party in the midterms has given him a mandate to end economic instability and improve living standards for most Argentines. If he fails to bring prosperity to the people, voters may turn to another alternative in 2027.