Reality Check

For the first time in years, political developments in Argentina, specifically the election of center-right candidate Mauricio Macri as president, have provoked a sense of optimism about the country’s future. Many business’ and news outlets have heralded his arrival with anticipated economic reforms. The media has marked his win as the ebbing of the ‘pink tide’ in Argentina, a shift away from populist leaders for the country. The result is significant for the region with Macri using his post-election comment to seek Venezuela’s temporary suspension from Mercosur, a common market that has taken on leftist political connotations in recent years. However, the impact of Macri’s electoral victory will go beyond overdue economic reforms and an offensive against strong-left governments in the region. His ability to remain in office and persuade other Mercosur members to suspend Venezuela will directly impact the developing identity of democracy in both Argentina and Latin America.

History has not favored non-peronista presidents in Argentina. Macri is only the third non-peronista elected president since Argentina’s return to democracy in 1983 and, if he completes his term, he will be the first to do so. This will also mark the first real transition of power in Argentina, since 2003 when Nestor Kirchner was elected president, and, therefore, illustrates the political and institutional maturity level of the country. In two years prior to Nestor, three different presidents passed through office due to severe economic and social problems in the country.

Macri’s election to office opens the door for the government to shift away from the country’s current populist-oriented model towards more market-friendly policies aimed to bring in investment and fresh sources of US dollars. His plan includes the removal of capital controls, a single exchange rate, transparent economic statistics, elimination of export taxes on grains and reduction in government subsidies. While Macri will be able to pass and implement some reforms, Congressional, economic and social constraints will prevent immediate, broad-sweeping reforms.

Politically speaking, Macri’s Cambiemos alliance holds only 64 of the 257 seats in the Lower House of Congress. The United for New Alternative (UNA) front holds 31 and is the leading alley of the government in Congress. However, UNA’s leader, ex-presidential candidate Sergio Massa, has already said that the UNA will support positive reforms being sought by the Macri government but reserves the right to withdraw said support if UNA feels they are not in the best interest of the people. In the Senate, Macri’s party only holds 16 of the 72 seats. The fluid nature of political party allegiance and negotiations in Argentina means that the current Congressional composition does not guarantee political paralysis.

Macri has also inherited a lackluster economy. Central Bank reserves are about US$ 25.8 billion and most of this money has been earmarked. The reserve’s status will force Macri to assume some behaviors similar to those of the previous government. After defaulting on US$95 billion of debt in 2001, the country has been in a decade-long fight in courts with the hedge funds, also known as hold-outs or ‘vultures’ in Argentina. Prior to assuming office Dec. 10, Macri and his team will talk with vultures about bond payments and to Chinese officials about increasing the value of the currency reserve swap. During the campaign, Macri said that he planned on paying the vultures in full but will likely still need to negotiate plans for payments, especially if he does not get a larger currency swap deal from China.

Another big challenge will be fulfilling his promise to eliminate export taxes on grains, ranging from 20-35 percent depending on the grain, and subsidies. The high export taxes, inflation and low commodity prices have resulted in farmers sowing less crops and withholding crop sales. Lowering taxes would encourage more production and export. However, it also means less tax revenue for the government in this sector. Last year, soy tax revenue alone brought in about US$ 13.7 billion and so far this year grain exports have brought in US$ 17.6 billion in government revenue. Macri has already warned that this tax change will be done ‘little by little’.

Parallel to this the government wants to start cutting subsidies, a leading state expenditure, during the administration’s first year. Subsidy reduction comes at high political costs and means certain social unrest. Macri will likely move slowly and cautiously when pursuing subsidy reduction in order to not put his government at too much risk. He knows the potential social backlash and also has a number of other reforms, such as reducing capital controls, that he can make before tackling something so near and dear to the pocketbooks of the nation.

On the regional level, Macri’s follow-up to his campaign promise to seek Venezuela’s temporary suspension from Mercosur will impact South America’s definition of democratic government. On Nov. 23 he reiterated his intentions to seek the application of Mercosur’s Democracy Clause on Venezuela at Mercosur’s next meeting scheduled for Dec. 21 in Asuncion. The clause in question comes from the Ushuaia Protocol and states that Mercosur members can temporarily suspend a member country from the bloc when democratic order has been ruptured. The Ushuaia Protocol stipulates that member countries must first carry out a series of consultations with each other as well as the member state in question. The involved parties must reach a consensus for the application of this protocol. The ensuing Montevideo Protocol (aka Ushuaia II) also opens up the possibility for the bloc to take more extreme measures against the violating country. Available actions include partial or complete closing of borders, limiting trade, transportation, services and energy. The application of additional actions is dependent on the severity of the situation as judged by Mercosur.

Macri has publicly stated that the imprisonment of political opposition figures and the strong participation of the Venezuelan armed forces in the government are grounds for applying the Democracy Clause. The High General Representative of Mercosur, Florisvaldo Fier (Brazil) has said that the clause applies when there has been a coup, which is not the case for Venezuela.
Precedence indicates that the ‘rupture of democracy’ is subject to interpretation. The Democracy Clause was applied in June 2012 against Paraguay after the impeachment of then President Fernando Lugo.

Paraguay deemed Lugo’s removal from power a legal, legitimate proceeding per the country’s constitution. The rest of Mercosur called the event a parliamentary coup due to the fast pace at which impeachment charges were brought against Lugo and his conviction. Mercosur suspended Paraguay from the bloc until the next democratically president took power in August 2015. It should be noted that during this period Paraguay’s President was former Vice-President Federico Franco, who stepped in to office to finish Lugo’s term. Sanctions allowable under Ushuaia II were never applied to Paraguay. Furthermore, Paraguay was able to negotiate its return to Mercosur and in exchange for rejoining the bloc, allowed Paraguay to recover its passed turn for holding the presidency and for approved measures passed during its absence require Paraguayan approval as well.

Macri’s call for the Democracy Clause in Venezuela reflects the broader process of defining democracy in the region and the use of regional tools to resolve issues. Latin American countries have spent the year trying to help mediate governance of Venezuela between the government and opposition but have failed. Macri’s moves provide yet another potential course of action for regional governments to pressure Venezuelan politicians to regain governability and stability through a process the region deems as democratic. Venezuelan President Nicolas Maduro has already said that Macri should not meddle in Venezuela’s internal affairs. Today’s statement comes just two weeks before Venezuela’s previously delayed legislative elections. It also comes days after the Chilean Supreme Court ruled that the Chilean Government must call upon the Human Rights Commission of OAS to seek protection and monitoring for Venezuelan political prisoners Leopoldo López and Daniel Ceballos. Just after the ruling, Chile’s Foreign Minister Herlado Munoz publicly emphasized that the decision came from the courts and are not representative of a decision made by President Michelle Bachelet. Venezuela also criticized the Chilean Court. How Macri and Mercosur pursue the application (or not) of the democracy clause will further refine and reinforce the region’s definition of what a democratic country looks like, the parameters for its functioning, and the extent to which other countries in the region can intervene in domestic affairs.

GPF Team
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