Lula-Milei clash embodies the world's competing economic views

Not everyone is piling into Argentina just yet. Lula has since backed down in his battle with Brazil’s central bank, and while he has sought to spend more, he has also largely supported Finance Minister Fernando Haddad’s efforts to shore up the country’s public finances and eliminate its primary fiscal deficit — a push markets have cheered.

“In theory, investors are more comfortable with Milei’s model because it’s more fiscally conservative and should help to bring down inflation more quickly,” said Katrina Butt, a senior Latin America Economist at AllianceBernstein in New York. “But Lula has proved to be successful and has avoided pursuing extreme leftist policies.”

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Milei has also run into trouble in Argentina’s congress, where his coalition is in the minority. His sweeping decree to deregulate the economy is at risk after the Senate rejected it earlier in March, while he has had to water down his omnibus reform package in an attempt to assuage opposing lawmakers and hostile governors.

That has left many investors wary of a full embrace of Milei — especially when compared with Lula, who remains a known commodity even if his recent pushes to spend more and use state-controlled companies to speed up economic growth inspire skepticism.

To be sure, the trading of barbs between Lula and Milei has had little practical impact on economic relations between their countries. Brazil and Argentina remain each other’s largest trading partners in Latin America, and their economies are deeply intertwined. Political turbulence is hardly a new dynamic for the two nations whose leaders have rarely been ideologically aligned this century.

What Bloomberg Economics Says

“In the past decade, Argentina and Brazil were — more frequently than not — led by politicians of opposing ideological spectrum: that was the case with Macri-Dilma, Fernandez-Bolsonaro, and now Milei-Lula. This asynchrony matters less than might appear at a first sight. Regardless of their ideological differences, neither leader can sever ties with the other: Brazil is the top destination market for Argentine exports, and Argentina is the third largest market for Brazil’s external sales and the destination of 40% of exports of the Brazilian car industry.

At the same time, even when the governments are in sync, neither country can go beyond in helping: The indebted Brazilian government typically does not loan large amounts to other countries, and cash-strapped Argentina, regardless of how liberal its seating president may be, won’t completely open markets to Brazilian products. That renders the economic relationship of both countries a lot more sensitive to their economic cycles and currency swings than to the changes in political winds.”

— Adriana Dupita, Brazil & Argentina economist

It’s in the competition for foreign investment and political alliances that Milei’s and Lula’s role will be crucial. The White House has so far sought to keep both nations in the U.S. orbit. Even as Lula bucked the U.S. position on Russia’s war in Ukraine and pushed to strengthen ties with China, he has met Biden twice, securing a pledged contribution to Brazil’s flagship Amazon rainforest protection fund and a joint partnership to bolster worker protections.

Secretary of State Antony Blinken, meanwhile, visited both nations last month, and specifically cited Milei’s support for Ukraine and Israel in their current conflicts as a primary source of agreement between the two governments.

“Lula’s government has not fully committed to fill the role the United States asks of it, opening up the chance for Argentina to step up instead,” said Alejandro Diaz, the chief executive office of the American Chamber of Commerce in Argentina. “Milei’s proactive indication that his two geopolitical allies will be the United States and Israel clearly sets him up on that path.”

Lula and Milei have never met. The Brazilian skipped the Argentine’s presidential inauguration. At this rate their paths will only cross — inevitably — at the Group of 20 summit of leaders in Rio de Janeiro, where Lula will have the advantage of being the host.