Inflation Stalks Macri in Argentina

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Buenos Aires

Mauricio Macri

shocked Argentina—and even his own supporters—by winning the presidency in 2015 in a runoff against a Peronist party rival. But if the founder of the young Republican Proposal Party is still in office when his four-year term ends in December 2019, it will be an even greater accomplishment.

The last non-Peronist president to finish his elected mandate was

Marcelo T. de Alvear

in 1928. Two years later the military removed President

Hipólito Yrigoyen

in a coup, the first since the 1853 constitution was approved. A culture of political instability survives to this day.

True, there hasn’t been a military coup in Argentina since 1976. Democracy was restored in 1983. Nevertheless economic crises forced the early resignations of the only two non-Peronist presidents elected in the most recent democratic period. Now Peronists claim that they are the only ones who can govern the country.

Mr. Macri could break the spell. But it is far from certain that he will, and because he underestimated the magnitude of the problems he inherited from former President

Cristina Kirchner,

the case for smaller government now requires even bolder leadership.

Twelve years of Kirchner rule—first

Néstor Kirchner

(2003-07), followed by his wife (2007-15)—left this country bankrupt, both institutionally and financially. The Kirchners jailed political opponents, confiscated private property, nationalized businesses, gagged media critics, fomented street mobs, falsified government statistics, and destroyed the central bank’s independence. Kirchnerismo bloated the government and left the economy in shambles.

When Mr. Macri took the oath to uphold the constitution, the presidential discourse went from imperial and vengeful to civil and conciliatory overnight. Argentina’s international image was also instantaneously upgraded. The Kirchners’ most important alliances were with totalitarian Cuba, authoritarian Venezuela and theocratic Iran. Mr. Macri symbolizes a renewed commitment to Western democracy, including the re-establishment of relations with the U.S.

Argentines describe their country as “normal” again. Yet to succeed, Mr. Macri also has to keep his pledge to slay inflation and restore economic growth. On this score he is running behind and risks running out of time.

The long-term challenge is to liberate an economy shackled by high taxes, heavy regulation and trade protectionism. These are economic policy questions but they are fundamentally cultural hurdles in a nation with deeply rooted political traditions of populism, mercantilism, crony capitalism and an outsize role for organized labor.

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Only a system that guarantees economic freedom can produce fast growth and the wealth creation that Argentines yearn for. The country needs reliable laws that encourage risk taking and competition, and a new narrative in which entrepreneurial success is celebrated and businesses are allowed to fail.

This is a generational project. In the meantime, Mr. Macri faces a precarious fiscal situation caused by runaway government spending and slow growth. Total government spending at the federal, provincial and local levels, including debt service, now generates a staggering annual fiscal deficit of 8% of gross domestic product. Inflation has fallen to 25% from 40%, but bringing it down further requires a more courageous policy mix.

Mr. Macri has promised to curtail government spending. But without majorities in Congress, he has taken a gradualist approach. He imagines he’s erring on the side of caution, but he’s actually playing with fire.

The primary deficit, which excludes the cost of servicing the debt, was 3.9% of GDP last year. If the government’s forecasts are correct, this year it will remain stubbornly high, at 3.3% of GDP, and it will drop to 2.2% of GDP in 2019.

These large deficits are putting pressure on the central bank to print money. It has partially resisted by sterilizing some dollar inflows but, according to the Buenos Aires-based think tank

Libertad y Progreso,

last year the monetary base increased at the same rate as inflation.

In a country where union power is legendary, this is particularly pernicious because it fuels inflationary expectations. Mr. Macri will face his next big test when the government negotiates salary increases with the teachers unions in March. In anticipation of that showdown, union activists—Mrs. Kirchner’s most important constituents—have organized a nationwide mobilization for late February. They hope to paralyze the country, push wages to match current inflation, quash Mr. Macri’s agenda and add his name to the Peronist list of interrupted presidencies.

Mr. Macri’s party did well in midterm elections last year, which means the nation backs his efforts. But today’s benign global-market conditions will not last forever and punishingly high interest rates, now around 28%, stifle growth. Argentina needs a decisive strike against inflation. So does Mr. Macri’s presidency if it is to survive and thrive.

Write to O’Grady@wsj.com.



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