This policy paper analyzes Javier Milei’s shock therapy in Argentina as a response to chronic inflation, fiscal disorder, institutional weakness, and collapsing trust in economic policy. It examines the preconditions of Argentina’s crisis, the logic of rapid adjustment, and the main reform areas: fiscal consolidation, monetary stabilization, labor-market reform, deregulation, and external sector and market opening. It argues that Milei’s early successes like lower inflationary pressure, improved fiscal indicators, and restored market confidence, reflect a credibility-driven break with Argentina’s previous policy regime. At the same time, the adjustment has imposed significant, mostly short-term social costs, including recessionary pressures, declining purchasing power, and political conflict. The central finding is that shock therapy can stabilize expectations when gradualism has lost credibility, but its long-term success depends on whether fiscal discipline, monetary restraint, and structural reforms translate into broad-based growth and durable institutional consolidation. For Europe, Argentina is not a direct blueprint, but a warning case: credibility, sequencing, and clear political communication matter before crisis makes radical reform unavoidable.
Key findings:
- Argentina’s stabilization demonstrates that restoring fiscal discipline is the essential first step in ending chronic inflation. Milei’s government rapidly eliminated the fiscal deficit, reducing the need for monetary financing and laying the foundation for disinflation.
- Inflation can be reduced without immediate dollarization. Although dollarization was central to Milei’s campaign, the government achieved substantial progress through fiscal consolidation, monetary restraint, and exchange-rate reforms while postponing full dollarization.
- Credibility is a crucial ingredient of successful stabilization. Strong political commitment, institutional reforms, and consistent policy implementation helped anchor expectations despite severe short-term adjustment costs.
- Gradual reforms failed where decisive action succeeded. The paper argues that previous stabilization attempts were undermined by fiscal dominance, policy reversals, and a lack of political credibility, whereas the Milei administration pursued a comprehensive stabilization strategy from the outset.
- Macroeconomic stabilization is only the beginning of Argentina’s reform agenda. Sustaining long-term growth will require further structural reforms, including deregulation, tax reform, labour-market liberalization, privatization, and stronger institutions.
Link to Policy Paper: 2026_05_IREF_Policy-Paper_02_Schumann
