L’Express: Among the many radical proposals defended by Javier Milei, there is that of replacing the peso with the dollar, even if, after his election, the new president seems less forthcoming on this subject. A sign of a return to reality?
Eric Chaney: Basically, the question of the disappearance of the peso is rather a good idea when we see to what extent confidence in this currency is broken. Economic history is full of examples where a drifting currency was replaced by another: in 1948, while inflation was undermining Germany, the Reichsmark disappeared in favor of the Deutsche Mark and many economists saw this as the beginning of the German miracle. Still, Milei’s proposal is more radical, and less credible too: dollarize the economy and close the Central Bank. In the short term, this is impossible. The informal exchange rate of the dollar against the Argentine peso is currently 1:1050, while the official exchange rate fluctuates around 1:375.
However, to convert pesos into dollars, buyers are needed. The message from the free market is clear: for exchange to be possible, the Central Bank must issue an astronomical quantity of pesos to reduce their value. Problematically, this would cause a massive and immediate impoverishment of the population not holding assets in foreign currency, that is to say the vast majority of Argentines… A more credible idea would be to establish what economists call a currency board with the greenback: in such a system, the Central Bank can only issue local currency up to the dollar assets it holds in reserve. The Baltic States and even Bulgaria have tested it. Argentina, too, at the beginning of the 1990s. The government of Carlos Menem had implemented such a system, with success since inflation had quickly fallen. But the Asian crisis of 1998 and the appreciation of the dollar – and therefore the peso – which accompanied Asian devaluations undermined Argentina’s competitiveness and signaled the end of the system. In any case, before dollarizing its economy, Argentina needs to accumulate dollar reserves. Only one method: compress domestic demand to reduce imports and generate a trade surplus.
How ? By reducing public spending, for example? Its economic program therefore has a form of coherence…
Yes ! A bitter course of austerity is inevitable today. Its objective is to reduce public spending by 15%. While it represents 35% of GDP, such a compression would lead to a drop in domestic demand – that is to say consumption and investments – of around 5%. It’s a terrible cure. The other solution would be to increase taxes. Argentina is today one of the most unequal countries in the world, a legacy of Peronist policies: the richest 10% of the country capture almost 44% of distributed income. Once again, Milei has a fairly correct diagnosis but the solutions proposed are bad.
Will Argentina default on its debt again today?
It’s the elephant in the middle of the china shop. The external debt is astronomical: $67 billion in bonds, plus $45 billion owed to the IMF. Foreign exchange reserves are dry and the Argentine Central Bank has already had to resort to a “credit” line conveniently offered by China to repay its debts to the IMF in yuan… A restructuring of Argentina’s debt is inevitable.
How would you characterize Javier Milei’s economic software?
He is an anarcho-capitalist. He sharply criticizes the neoclassical theory which gave rise to the concept of market failures. It is this approach which, according to him, subsequently justified state intervention and therefore socialism. For Javier Milei, the market is king and can solve everything.