Do populists always crash the economy? | Economics
“foreign exchange, exchange.” Under the blazing sun, dozens of moneychangers sell US dollars on Florida Street, a lively pedestrian street in Buenos Aires. known as Arbolitos (“little trees”) are flourishing ahead of the October 26 midterm elections in a country long accustomed to saving dollars.
“The best time to buy is now,” one person says arbolitoHe refuses to give his name. “[The dollar] It fell a little, but it’s a fraud; It will rise again.”
Like him, different economists also expect the devaluation of the Argentine peso after the voting is over. President Javier Milei put a cap on the currency to rein in triple-digit inflation, and now it remains overvalued and reserves are being depleted; leaving Argentina’s economy stagnant as consumers turn to cheap imports.
Textile industrialist Luciano Galfione says the 75-year-old family company he heads is experiencing “the worst moment in its history.” Since chainsaw-wielding Milei took over, Galfione has laid off about 50 workers at its factory in Buenos Aires and laid off another 45 due to reduced consumption.
Between December 2023 and July 2025, 18,000 businesses closed and 253,800 registered jobs were lost, according to the Argentine Center for Political Economy (CEPA). Besides freezing the exchange rate, which has made Argentina the most expensive country in South America, Milei’s government – unlike Donald Trump – has reduced or eliminated tariffs, leaving heavily taxed local industries at a disadvantage against imports from China.
“This is the perfect storm,” says Galfione, who sees no easy way out of Milei’s predicament. “If it devalues the currency, inflation will rise rapidly. Its only success for now is to keep inflation under control at the cost of a major recession.”
Along with retirees who protest massive pension cuts outside Congress every Wednesday, Galfione is among those calculating the cost of Argentina’s return to the Milei two years ago.
Milei’s populist experiment now faces a decisive moment. Politicians around the world, from Trump trying to prop up the Milei and the peso with a $20bn (£15bn) foreign exchange lifeline to Italy’s Giorgia Meloni, Hungary’s Viktor Orbán and the UK’s Nigel Farage, are watching closely what happens when populist economic prescriptions collide with reality.
fertile soil
Argentina is a very special case. The country has been repeatedly hit by debt defaults and economic crises, and its voters have been susceptible over the years to left-wing populism in the form of the powerful Peronist movement and now to Milei’s right-wing version.
Milei is a consummate populist: charismatic, iconoclastic, promising strong policies on behalf of the people to take back control of the economy from the establishment.
These key characteristics are shared by Trump, his northern ally, and Farage, who describes himself as the people’s champion despite being a privately trained former stockbroker.
Until recent months, Milei’s approach, which included sweeping privatizations and deep cuts in public spending, had won praise from the IMF for helping to control inflation. The program has something in common with that of Milei’s idol, Margaret Thatcher, who saw inflation as a dragon to be slain no matter the cost.
But financial markets have begun to lose confidence in Milei’s radical project in recent months, following poor results in state elections and a series of corruption scandals. Only Trump’s massive fiscal intervention averted what appeared to be a full-blown currency crisis.
Milei’s travails raise broader questions about the appeal of charismatic populists offering simple answers in today’s complex and fragmented global economy.
Across Europe, the consequences of the 2008 financial crisis provided fertile ground for populists to flourish. While the banks were bailed out by taxpayers, the cost of rebuilding after the great crash was borne by ordinary citizens. The Covid epidemic and Russia’s invasion of Ukraine caused new turmoil. Stagnant living standards, as evidenced by slow wage growth and rising prices, have fueled a hunger for change and scapegoats.
In France, Emmanuel Macron is trying to avoid calling early elections for fear his centre-right Renaissance party will lose to populist Marine Le Pen. At the heart of the debate is dissatisfaction with France’s package of austerity policies aimed at tackling a growing budget deficit and calming jittery bond markets.
Italian voters turned to charismatic right-wing populist Meloni in 2022. Meloni served in Silvio Berlusconi’s coalition cabinet as a member of the far-right National Alliance and in 2011 founded his own party, Brothers of Italy, which offered a radical right-wing alternative to the austerity policies of Mario Monti’s technocratic government.
He didn’t bring the tear-it-all-together approach to economic policy that Milei employed — he quietly walked back earlier calls for Italy to exit the euro, for example — but he appealed to voters’ desire to upset the status quo by blaming immigration for Italy’s struggles.
Ben Ansell, professor of comparative democratic institutions at Oxford University’s Nuffield College, says Farage’s appeal in the UK is not difficult to diagnose. “The answer is probably quite simple: People feel rotten about the economy, and have done so since the end of Covid or the start of the Ukraine war. They’ve changed the government, they still feel bad, they don’t trust the main parties, so they turn to someone who says ‘Everything needs to be turned upside down: trust me’.”
contradictions
The Brexit vote in 2016 arguably followed the same logic, with its leader Boris Johnson dispelling doubts about the economic details with his bullish determination to implement the “will of the people” in the face of the horrors of the establishment.
Farage has so far committed to little policy put to paper, apart from calling for mass deportations, which he later quickly revised. He wants to rein in the Bank of England, perhaps even sacking its governor, Andrew Bailey, for his skepticism that the cumbersome institution is a key part of the populist package.
Tax and spending policies appear to be changing: wary of being accused of planning a Liz Truss-style splurge, he recently abandoned a promise to cut £90bn of taxes. Reform Party lawmaker Richard Tice said they would instead focus on cuts in public spending.
Labor hopes this stance will allow it to portray Farage as someone planning to bring back austerity; The chancellor, Rachel Reeves, has repeatedly said this, comparing it to her approach to increasing public investment.
Jo Michell, professor of economics at the University of the West of England, says there are contradictions in Farage’s economic program in its current form.
“Reform is being funded by very rich people who are demanding tax cuts and deregulation, but there’s also a lot of talk about employee grievances and the loss of industrial jobs and things that really resonate,” he says. “There is a tension between wealthy backers who want Thatcherism on steroids and this narrative about bringing back jobs and re-industrialisation to Britain.”
Farage enjoys the company of cryptocurrency entrepreneurs but has also vowed to reopen shuttered steel mills and power them with British coal.
Michell says that if a Farage government tried to impose huge tax cuts without a plan to fund the rich, it would end up as much for international investors lending to the UK as it would for Truss’s mini-budget. “If there were tax cuts without spending cuts, the markets would vomit,” he says.
Reform will face the same formidable challenge of winning markets that governments of all stripes in many advanced economies now face.
The financial crisis and heavy public debts of the Covid years, combined with the need to spend more on defense and aging societies, mean that borrowing has simultaneously increased in many countries and bond markets have become unusually volatile, with knock-on effects on interest rates.
Despite the risks, it is unclear how successful a detailed rebuttal of the Reformation’s economic policy would be, as was the case with the Brexit campaign. Reeves recently acknowledged Brexit was one of the reasons the Office for Budget Responsibility cut its growth forecasts, but Labor has been consistently reluctant to address the issue.
Successfully addressing populist arguments requires masterful political communication, says Ansell. “You have to do it with great charisma and humour,” he says.
Left-wing economist Ann Pettifor agrees that no one should be surprised by the appeal of economic populism. “There is real anger about the wrongness of the system that structurally impoverishes the many and enriches the few,” he says.
Milei’s response to the likes of Trump and Farage would be a left-wing populism that challenges the power of corporations, central banks and the super-rich, akin to that offered by New York mayoral candidate Zohran Mamdani or UK Green Party leader Zack Polanski or, once upon a time, Jeremy Corbyn.
“Trump says: ‘We should blame Mexico, Canada and China,’” Pettifor says. “The left should say the problem is Silicon Valley and Wall Street.”
Trump shares Milei’s love of chaos and showbiz, but his approach doesn’t fit directly into his Argentinian ally’s laissez-faire playbook. While Trump has cut taxes for the wealthy and slashed regulations on some industries, his administration has also taken stakes in strategic firms and used trade policy as a political weapon; It’s a muscular interventionism more familiar in Beijing than Washington.
The impact of the tariff attack on the US economy appears relatively muted so far, but the impact is being masked by a historic boom in AI investment that a growing number of experts warn could be a bubble.
Many experts believe Trump’s attacks on the Federal Reserve and blatant disregard for the rule of law could be more corrosive to the future health of the U.S. economy than his unstable trade policies.
cling to power
In reality, evidence suggests that neither left nor right populists tend to succeed when faced with real-world challenges (though of course each charismatic individual claims to offer something unique).
A. last article The American Economic Review analyzed the performance of 51 populist presidents and prime ministers from 1900 to 2020. The report found that after 15 years, gross domestic product per capita tends to be 10% lower on average in countries led by populist leaders than in similar economies with more mainstream regimes.
“Economic fragmentation, diminished macroeconomic stability and the erosion of institutions often go hand in hand with populist governance,” say the paper’s authors, Manuel Funke, Moritz Schularick and Christoph Trebesch.
But an intriguing finding of the study is that, despite the economic costs, these leaders tend to be good at staying in power for an average of eight years, compared to four years for their more moderate counterparts.
So even if the populists’ plans collapse, it is not clear whether they will be able to pay the price immediately at the ballot box. Like the Brexiteers’ promise to “take back control”, their call extends beyond ordinary economics.
But in Buenos Aires, Argentine citizens have already paid a heavy price, whether Milei’s populist project collapses or is put on life support by Trump.
Additional reporting by Facondo Iglesia
