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The election of Javier Milei as President who took office in December 2023 have made 2024 a year of radical change. The results of his fiscal austerity, aimed at ending monetary financing, and his management of the peso are both impressive (budget surplus, important disinflation) and mechanical (progress on the inflation and external accounts fronts can also be explained by the recession). Reducing imbalances also comes at a high social cost.

The two pillars of J. Milei's strategy

Achieving a primary surplus has been the cornerstone of the President's strategy (violent spending cuts, concentrated on social spending, reduction of primary spending from 20% to less than 16% of GDP, reduction of total spending by more than 20% in real terms). The primary surplus could reach 1% of GDP by 2024, for a total budget deficit of 0.5%. The government is targeting a primary surplus of 1% for 2025, i.e., a budget deficit of 0.3% despite the abolition of the “Impuesto País” (a 30% tax on dollar transactions and imports), a loss of revenue which the government plans to offset by increasing other taxes (fuel taxes, export duties and income taxes). The government's forecasts for growth (5%) and inflation (18%) seem optimistic compared to consensus forecasts (4.4% and 30%).

The second key element of Milei's economic strategy was a significant devaluation of the peso in December 2023 and the introduction of a crawling peg (monthly depreciation of 2% against the dollar). These measures have considerably reduced the gap between the official and parallel exchange rates: a reduction also favored by the BCRA's interventions.

The exchange rate regime, however, remains under debate. Dollarization, initially envisaged by Milei as the solution to the peso's disaffection, seems to have been temporarily discarded in favor of “currency competition”, which aims to strengthen the role of the dollar (implicit dollarization?). In addition, discussions have emerged on the possibility of reducing the monthly slide to 1.0-1.5% as progress is made on inflation and foreign exchange reserve accumulation (nostalgia for the peg?). However, this strategy is likely to put pressure on the peso, as the real effective exchange rate has appreciated sharply. The goal (including that of the IMF) is a floating peso, but legitimate concerns about the lack of a nominal anchor, the impact of inflation and low reserves persist. Finally, more generally, structural problems remain. It relates notably to resident disaffection towards the peso, de facto dollarization, narrow export base, limited responsiveness of exports to depreciation.

Falling inflation: estimable progress, partly mechanical

The Milei administration has made significant progress in the fight against inflation. Annual inflation has fallen from a peak of almost 290% (April 2024) to 193% (October 2024). Monthly inflation rates have fallen below 2.5%, and projections for year-end 2025 range from 18.3% (government estimate) to 45% (IMF forecast).
This improvement is the result of a drastic fiscal adjustment, the end of monetary financing, a clearer exchange rate policy and, ultimately, a fall in domestic demand. This has enabled the central bank to lower interest rates and reduce its balance sheet. Real interest rates remain negative.
After a severe recession, the economy is showing some signs of recovery, mainly thanks to the primary sector (mining exports) and a sharp drop in imports. The primary sector has rebounded after a drought-stricken 2023. Industrial production is recovering slowly. Services are slow to recover. Domestic demand remains weak, due to a decline in consumption (loss of purchasing power of wages and pensions) and investment (lack of visibility, lack of demand, capital restrictions). The effects of lower interest rates and the resumption of credit (due to the increase in dollar-denominated bank liquidity following the amnesty) are unconclusive (limited impact due to low credit penetration in Argentina).
The situation is still precarious, but the economy should recover by 2025. Growth could exceed 4%, thanks mainly to a mechanical recovery in private consumption. Sales of durable goods and supermarkets have stabilized; after falling, real wages are slowly recovering, suggesting that the worst may be over. One of the major risks is an increase in imports as demand recovers, a risk all the greater given the peso's appreciation in real terms. While stimulating imports, an overvalued peso could damage the competitiveness of companies, particularly in tradable services, and small manufacturing firms. The abolition of the PAIS import tax in 2025 will add further pressure on their competitiveness. Finally, capital controls are likely to continue to limit investment.

External accounts: a largely mechanical recovery

The nominal depreciation of the peso, the adjustment of public finances and the recession led to an improvement in the external accounts. The current account showed a surplus of 0.4%, mainly due to strong exports (agriculture and energy) and a sharp drop in imports. Aided by the amnesty program, external financing has improved, but reserves remain insufficient, particularly in net terms (excluding the PBOC FX swap lines) and regarding external payments in 2025.
  
By 2025, the current account should show a slight deficit as imports recover. Foreign direct investment is likely to remain moderate until capital controls are lifted, and the foreign exchange regime is definitively stabilized.

External financing difficulties persist. While the prospects of a new agreement with the IMF are encouraging, the implications should not be overestimated. The IMF is due to review the current program ($44 billion) in the very near future; this program has been widely criticized by the IMF's own internal control bodies (lack of coherence, conditionality, etc.). In terms of austerity, Argentina, the IMF's biggest debtor, has gone well beyond what the IMF could ask for, but has not reached the target in terms of reserves. The IMF should continue to insist on the (floating) exchange rate regime and the accumulation of net foreign exchange reserves (outside China's swap lines). It may limit its assistance to renewing its commitment with little or no new money.

Despite uncertainties, the markets have reacted positively; however, a return to the markets could be premature and could prove dangerous (cf. the increase in foreign debt under Macri's presidency, much appreciated by the markets). Finally, the question of Argentines' disaffection with the peso (cf. accumulation of assets abroad and positive net external position) remains key.

With a handful of jumbled, disruptive and ambiguous phrases, Trump showed the entire world just how much geopolitical room for manoeuvre he will have: for the time being, his allies’ strategic autonomy seems to extend – mentally, at least – only as far as he allows… However, what’s most important today is not that we understand (or, heaven help us, bet) whether or not he intends to invade Panama or annex Canada, but rather that we observe an already palpable reality: which type of words and topics are choosen by Trump, and how western governments and public opinions are reacting. These kinds of observations provide us with five broad categories of information for the future. We might call these the five stages of the Trump rocket.

Transactions vs. manipulation

The first stage is media manipulation: what little protest Western governments have raised has been weak. There is a mix of explanations for this apparent apathy, the first of which is outright shock. At the heart of the Trump playbook (as demonstrated by many things Trump has said) is the strategy of cultivating a kind of “power through uncertainty” which vaguely echoes Nixon’s “madman theory”¹ and which, above all, is a classic technique of cognitive warfare designed to mentally destabilise one’s opponent. Judo and Clausewitzian military strategy share a similar approach here: finding the enemy’s balance point and using to it bring them down. Trump also explains in his business manual² that he always begins negotiations by hitting hard – so hard that it catches his opponent off guard. Think big! After that, he harries his opponent.

At this stage, though, it’s important to remember Marie-France Hirigoyen’s³ analysis of how narcissists communicate both ambiguously and forcefully to leave their interlocutors wondering what they mean and whether they’re serious. Although what we’re seeing is a textbook case of what Trump calls negotiation, but others would call it manipulation⁴. And the more we agree to view Trump’s approach not as manipulation but as a transaction, the more power he will gain. “Don’t worry – at least he’s negotiating!” Remember that transactions don’t involve paralysing your enemy – and that consent extracted using an armlock is not freely given. In geopolitical terms, this is very important because it runs counter to the very idea of what it means to be allies.

From blindness to fear and submission  

The second stage of the Trump rocket is the difficulty of perceiving reality. Part of the West’s utter shock lies in the fact that it’s hard to believe that, behind its status as a vital ally, the United States is not the benevolent and disinterested “American friend”⁵. This goes right back to the Marshall Plan, which was not just about the interests of Europe but was also a power play⁶. Structurally biased ever since the Second World War, Europe struggles to see just how fundamentally unequal its relationship with the US is and just how brutal an economic war the US has long been waging⁷. While this is at least clear with Trump, blindness is liable to give way to fear and submission. 

The once and future president is literally forcing us to change our mental world, one of the symptoms of which is Mark Zuckerberg’s belated alignment with the libertarian ideology of Elon Musk: fear is growing in the United States (and elsewhere). Fear of reprisals, first of all among judges, the administration and the media. Fear is the third stage of the Trump rocket. This is very bad for civil society and is not without implications for investors because it undermines judicial impartiality. At the same time, the fundamental idea of rules-based regulation is coming under attack in Europe from the tech giants. Since discontent with regulations is a politically unifying theme, this is also undermining judicial power in Europe.

All of this more or less bears out the theories of Frank Furedi⁸ and various other sociologists. Furedi has long been sounding the alarm about a culture of fear in the West (both words are important, with fear and culture blending into an inseparable whole), and about what a powerful political springboard such a culture is. Linguistic analysis highlights the harmful effects on public discourse of a combination of threats seen as existential (climate change, pandemics, terrorism, war, etc.) and day-to-day micro-fears, all amplified by social media. As an example, Furedi refers to studies showing that, out of fifty ingredients featured in a cookery book, forty are suspected of being carcinogenic. So Trump’s electoral base is obsessed by fear of migrants, the Chinese and… raw milk⁹. As trust is eroded and fear and anger grow, everything gets lumped together. An “us and them” culture merges with the hunt for scapegoats (the “Who’s to blame?” of the QAnon protests¹⁰), creating fertile ground for authoritarian political figures¹¹.

The United States is changing not only its president but its regime

Everything is pointing towards what we were saying before the election: the United States is changing not only its president but its regime¹². In fact, Trump’s “charismatic” legitimacy – increasingly less supported by the sacrosanct US Constitution – means he must now write his own heroic story, to the detriment of the balance of power. At the time of Watergate, Hannah Arendt¹³ was already highlighting this institutional weakening, which she saw as a major crisis . She talked about the danger of arguments based on “national security” being used to stifle debate and impose a permanent state of exception.

This brings us straight to the fourth stage of the Trump rocket: the theme of national security combined with geopolitics. It’s clear that the Panama Canal and Greenland occupy strategic positions with regard to Russia and China. And the longer Russia remains unbeaten in Ukraine, the faster the Arctic front opens up. It’s also clear that Greenland and Canada both have essential resources, particularly critical metals. All of this may be true but Trump’s words should not be taken lightly: his language is that of the school of geopolitical realism whose authors – from Hans Morgenthau and Kenneth Waltz to Fareed Zakaria and John Mearsheimer – see states as players on an “anarchic” international stage not subject to any higher regulatory body. The actions of these states are driven purely by their own interests, to maximise their power or security, depending on the threats perceived by their elites. Meanwhile, the global scenario is driven by alternating confrontations and negotiations around strategic regions and sectors.

But do these words and arguments provide a sufficient rationale for everything Trump says? According to Georgia Meloni, the president-elect’s words are nothing more than a “message” to China. Really? Doesn’t this kind of rationalisation risk masking the fact that a giant is waging geopolitical blackmail against its more modest allies, a classic pattern in history? Max Weber long ago talked about Machtstaaten, a German word denoting powerful states whose mission is supposedly to protect smaller ones¹⁴. While there is nothing new about this idea, it serves as a reminder that geopolitics is as much a succession of worldviews as it is a mechanism for explaining conflicts based on geography, trade or resources. 

Lastly, what makes these arguments based on national security and “vital” interests – Trump’s words bear a striking similarity to Ratzel’s “living space”¹⁵ – particularly difficult to manage is that they are the same arguments Russia deploys about Crimea and China about Taiwan. That said, Trump has captured a big chunk of disenchanted global public opinion, which is becoming increasingly attuned to “realist” theories as accusations of double standards undermine the geopolitics of human rights. 

A new alliance between mercantilism and geopolitics 

The final stage of the Trump rocket is the continental projection of power and the capture of resources. Yet the realists set great store by alliances, and no geostrategic rationale will hold water when it comes to allied powers whose loyalty to the Western order is not in doubt. In reality, Trump projects a mental map that goes beyond the theories of realism, dominated by a desire for continental power and resource capture. This sort of “mercantilist geopolitics” was on display at the muddled press conference he gave at Mar-a-Lago last week. 

This type of projection of a world divided into continental blocs controlled by dominant powers – a well-known pre-war grammar¹⁶ – risks encouraging those nostalgic for empire, and those who would like to belong to the club of powerful countries, to move from thought to action. To find examples, one only need to look to Azerbaijani talk of a fascist Armenia¹⁷ or Syria’s Turkish ambitions. Yet there is reason for hope: all this looks strikingly like the outline of a geopolitics of the balance of power – though that would require another Congress of Vienne¹⁸. Henry Kissinger, who advocated for just such a balance, must be rejoicing in his grave. It remains to be seen who would be invited to the negotiating table. The great powers, of course: America, China, Russia. But what about Musk, who is a power all by himself? And what about states considered “secondary”, such as India, Saudi Arabia, Turkey, Brazil, Indonesia, and so on? And Europe? Perhaps. Above all, though, Trump is showing that he knows how to twist Europe’s arm to get what he wants.

References

As K-dramas¹ go, we’d come to expect better plots than the one that unfolded in South Korea during the night of 3 to 4 December. 

In the midst of negotiations over the budget bill, part of which had already been rejected by the centre-left opposition, which holds a parliamentary majority, President Yoon Suk Yeol decreed martial law, prohibiting all political activity and rallies and putting the press under the control of the army. This extremely surprising and inordinate power grab – a tactic widely used by the authoritarian military regimes that ruled the country from its independence in 1948 to the late 1980s – could have brought South Korea face to face with its old demons.

To justify his decision, the president said he wanted to protect the country from “the threat of North Korea’s communist forces”, “eradicate anti-state forces that shamelessly align with pro-North elements and plunder the freedom and well-being of our people” and “safeguard the free constitutional order”. He was referring to opposition members of parliament, who have held a majority since the parliamentary elections of April 2024, creating a situation – unprecedented in South Korea – where the president does not command a parliamentary majority. 

Negotiations over the 2025 budget have proved particularly turbulent, with President Yoon accusing the Democratic Party of cutting “all key budgets essential to the nation’s core functions, […] turning the country into a drug haven and a state of public safety chaos”. Another bone of contention was a vote – also brought by the opposition – to impeach the Chief Auditor, tasked with auditing the accounts of state and administrative bodies and of some public prosecutors. 

The opposition wasted no time in reacting. After gathering for an emergency meeting, the Democratic Party’s 170 members of parliament managed to enter the parliament building – closed off and guarded by the army – and pass a resolution calling for martial law to be lifted. Backed by twenty members of parliament from other parties, the resolution was passed unanimously by all present, representing a majority of all members (190 out of a total of 300). The vote was authorised and validated by the parliamentary speaker and was in keeping with the constitution, which stipulates that if a law is voted down, it must immediately be lifted by the president. 

Despite restrictions imposed by martial law, tens of thousands of people also gathered outside parliament to condemn President Yoon’s attempted power grab. Trade unions called for an indefinite general strike and the leader of the presidential party declared the law unconstitutional. 

Backed into a corner, the president admitted defeat and withdrew the decree imposing martial law. His main collaborators (his chief of staff and national security advisor) tendered their resignation and the army withdrew. 

Market impact: while the worst has been avoided, volatility could set in

The Korean won (KRW) lost some ground following President Yoon’s announcement, with the exchange rate falling below KRW 1,400 to the dollar and sinking as low as KRW 1,425 to the dollar. Stock market indices declined slightly (down 1.4%) when the Seoul stock exchange – already closed when Yoon made his declaration – reopened on 4 December. This market reaction was to be expected and could have been even more pronounced: the impact was limited by the opposition’s quick response, the mobilisation of civil society and the withdrawal of the decree. By the end of the week, the Korean won had lost just over 1% against the dollar, the Kospi stock market index had lost around 3.5% and the spread to US Treasuries had risen by just over 4%. 

This is good news: South Korea’s economy could do without high volatility in its currency, already struggling relative to other Asian currencies. The Korean won has lost 10% of its value since January 2024, making it Asia’s second worst performing currency after the Japanese yen. Last week, South Korea’s central bank announced an unexpected interest rate cut², basing its decision on slowing economic activity and the stabilisation of inflation.

Already faced with a number of trade-offs and seeking to prevent the won from depreciating too quickly, the central bank would have been forced to intervene if the currency shock had been any more powerful. Although it has substantial currency reserves ($415 billion, equivalent to 25% of GDP), committing to a policy of defending your currency during a period of high volatility is always a risky business and can even end up being counterproductive. Keen to reassure investors, South Korea’s finance minister also said the government and the central bank would provide interbank markets with liquidity for as long as necessary. 

Now that the motion to impeach has failed, what are the options?

As allowed by the constitution, opposition members of parliament immediately filed a motion to impeach the president, which was put to the vote on 7 December. To reach the 200 votes (two-thirds of the National Assembly) needed to impeach the president, Democratic Party members needed to enlist the support of eight members of the presidential party. In the end, only three conservative members of parliament stayed in the chamber and voted for the motion. The rest left to block a quorum, making the outcome invalid whichever way the vote went. The opposition is already planning to put forward a similar motion again on 11 December. President Yoon, more or less hidden from view since his statement on 3 December, presented his “sincere apologies” to the people of South Korea and explained that his action had been “a desperate decision made by me, the president” for which he would “not avoid legal and political responsibility”. He also promised that he would not seek to impose martial law a second time.

So overwhelming are the facts against Yoon that it is increasingly hard to imagine how he can possibly remain in power: in reality, his declaration of martial law – which had the appearance of a hasty decision – was accompanied by a plan to neutralise key opposition figures as well as some media outlets and was based on the idea that the parliamentary elections in April had been rigged by the Democratic Party. 

Seventy-five percent of South Koreans are now demanding Yoon’s resignation, with hundreds of thousands demonstrating since 3 December. While prime minister Han Duck-so has promised to stabilise the situation, it is looking increasingly hard to escape the conclusion that Yoon is going to have to go. Moreover, were he to end up in prison, he would not be the first president to do so: his predecessors Lee Myung-bak (2008-2013) and Park Geun-hye (2013-2016) were both convicted in corruption cases. With the charges against him – including “treason” – much more serious, Yoon would risk life in prison.

Our opinion

Although this (bad) Korean soap opera is surely far from over, there is one positive point worth noting: South Korea’s young democracy held firm and people immediately sprang into action to defend their rights and freedoms. Even the army, whose very nature is to follow orders, appeared uneasy about the president’s power grab and limited its response to the bare minimum: while soldiers guarded Parliament, they did not bend over backwards to stop members entering the building to vote to repeal martial law, nor did they disperse protestors by force. 

The rest is a bit more worrying. This episode will take its toll on the presidential party, driving a wedge between those who want to hold onto power and those who don’t. And, since markets always take a dim view of uncertainty, it will also leave its mark on the economy. On 9 December, the Korean won fell to a new record low of less than KRW 1,430 to the dollar.

Article completed 9 December