Bulgaria Wants to Join Euro

August has now started, and this is the month Brussels notoriously empties out (together with Paris, etc.), you can’t find anyone who can actually make a decision, and so nothing can get done. But when they come back in September EU officials will face a full plate, topped by Brexit but also refugee policy (the incoming hordes have now notably shifted to Spain), Poland/Hungary, Trump, and all sorts of other things. None of those is a particularly pleasant subject, so the EU mandarins will surely cherish all the more any good news on their agenda – like Bulgaria know knocking on the door of that EU club-within-EU club, the Eurozone, as Martin Ehl recently reported for the Czech business newspaper Hospodářské noviny.

This is nothing particularly new. Rather, we’re just past an important milestone for this effort by Sofia (no, not any female but rather Bulgaria’s capital), which namely happened in June when the Bulgarian government struck agreement with Eurozone officials on a program of six economic/financial requirements the country will have to meet by June of 2019 to then be admitted into the so-called European Exchange Rate Mechanism II (ERM II), a monetary arrangement allowing a divergence of only ±15% around a set central rate. It is standard that any given national currency be subject for at least two years to ERM II before that country is allowed to adopt the euro.

Membership Requirements: No Sweat!

For Bulgaria, upholding that ±15% should be no problem, as the Central Bank has long had its currency, the lev, “shadow” (i.e. stay close to) the euro around a fixed point (and before that, the lev “shadowed” the deutsche Mark). When it comes to the three fundamental criteria for euro membership, as well, Bulgaria meets them all with room to spare:

  • Inflation: 1.4% in 2017 (1.9% max allowed)
  • Government budget deficit: Actually had a surplus last year of 0.9% GDP (max allowed deficit is 3%);
  • Overall government debt: Now 29% of GDP (max allowed 60%)

It is hardly unknown for central bank authorities to have their national currency “shadow” a dominant neighboring currency, even though such a policy effectively means giving up control of national monetary policy to that “shadowed” money: the Netherlands authorities long had the guilder shadow the deutsche Mark, while Denmark still today does the same for its krone with regard to the euro (it’s the only other country currently within ERM II).

The reason is clear, namely that it is quite useful to local businessmen to be able to assume what is in effect a stable relationship between local and shadowed currency as they do their cross-border buying and selling. As one would expect, Ehl reports that some 60% of Bulgarian businessmen are in favor of acceding to the Euro. Frankly, you’d even expect more than that 60% figure. As for the population in general, it’s more even-steven: polling by the EU Commission’s Eurobarometer office recently showed 50% support for adopting the euro.

Hold On There – Bad Idea!! Stop!!

But let me speculate a bit further here: if one were to ask economists’ opinions, you might find 5% support, if you’re lucky! That’s because there is this overwhelming consensus about the euro among that crowd: IT’S POISON! STAY AWAY! Some economists (e.g. Paul Krugman) were clear-eyed enough to see these things (and warn) even as the whole Eurozone mechanism was being formed and implemented at the turn of the last century, but the euro’s history since that time has made it clear to most how that represents a monetary strait-jacket that no EU member-state should ever enter into voluntarily.

This issue once again came to prominence in the wake of the Italian general election of last March. Much was made then of the fact that that country has essentially achieved zero economic growth every since it took up the euro as an original member back in 1999. The question whether any new Italian government would try to take the country out of the euro dominated much of the subsequent extended political maneuvering which finally produced a coalition government of the Lega and the Five Star Movement. Interior Minister Matteo Salvini of the Lega, who now clearly dominates that government, has made it clear that, although the euro is ultimately “a wrong experiment,” taking his country out of it is a bad idea, so that all that can be done is to try to make the best of a bad situation.

And it is a bad situation: the euro cuts off the traditional answer to a country’s loss of international competitiveness, namely a devaluation of the local currency to make goods and services cheaper to foreign buyers. With the euro the only way to regain that ability to sell your goods internationally is so-called “internal devaluation,” namely lowering one’s local costs – most especially wages – so as to lower prices that way. That always tends to be rather more excruciating, politically and economically, and certainly takes longer to accomplish, if it can be done at all. What’s more, adopting a currency over whose supply one’s government has no control also has rather serious implications for government debt, which in Italy currently stands at around 140% of GDP. Other governments with their own money, when the supply of that runs short for repaying those debts, just “print” what is needed; that is not an option for Eurozone members, as we have seen most painfully in the case of Greece.

In fact, it’s easy to see the line running from the throttling effect the euro has had on the Italian economy to the electoral success last Spring for populist parties, for whom the prospect of taking their country off of the euro actually merited serious consideration. (Not to mention taking up a pro-Russian foreign policy line, a stonewalling attitude against refugees, a suggestion to formally register the country’s Roma population, etc.) It’s frankly a wonder this sort of thing did not happen much earlier.

Damn, They’re Going In Irregardless!

Now, under the set of revised treaties that make up the EU’s constitution, any member-state not already in the euro has an “obligation” to trade in their national currency for the common European one – eventually. (Exception: The UK and Denmark have explicit opt-outs.) In effect, though, because of the complicated procedures (e.g. see the ERM II mentioned above) and explicit national decisions involved in becoming a Eurozone member, those EU member-states still outside know perfectly well that they can put it off as far into the future as they like.

Yet what have we seen? Slovakia, for example, joined the Eurozone on the very first day of 2009; the Baltic states of Estonia, Latvia and Lithuania did so at the very beginning of 2011, 2014 and 2015, respectively! Now Bulgaria wants to follow in their wake. Just what possesses these small EU member-states to play along so willingly with the standard EU narrative? Martin Ehl here does go into that for Bulgaria: seemingly, much of the country’s politicians, bankers and even population “have lost confidence in their own [financial] regulators.” Back in June 2014 there was the infamous case there of the Corporate Commercial Bank (or Corpbank), at the time Bulgaria’s fourth-largest bank, which collapsed in a welter of fraud. Currently several further major banks in the country are on shaky ground financially, something revealed by “stress tests” performed back in 2016. (A further round of stress tests is one of the conditions Bulgaria must fulfill by next year to get into the ERM II.)

You might think now “Ah ha, Bulgaria wants to get into the euro to get closer to that nice European money from other countries that can come in when needed to save its tottering banks!” But that is probably not a true picture: remember, the earliest date for Bulgaria to adopt the euro is around mid-2021; rather, the citizens of that nation quite rightly simply prefer to get that broader, institutional helping hand when it comes to regulating their national banks that comes with Eurozone membership.

Reasons for wanting that membership usually are not just economic, and Ehl notes how that is certainly the case here. We know that the Russians have been on the prowl lately in the Balkans, seeking to extend their own national influence; this article does mention that as a factor in the Bulgarian desire to take up the euro, although how the one leads to counter-acting the other is not quite clear. Perhaps here it is best to look again to the example of the Baltic States: they are in a much needier position when it comes to securing defense guarantees from outside, so that there can be little doubt that that factored largely in their zeal to get into the Eurozone.

Pride In the Club

Plus, all these states (including most especially Bulgaria) were in the Soviet Bloc some thirty years ago, so they are both still relatively poor relative to Western Europe and new to capitalism. Could it be that the sort of “internal devaluation” that Eurozone membership sometimes imposes is something such countries are more able to implement? To a degree, it’s something they all have already had to do, namely following the 2007-08 financial crisis; and that exercise caused considerable human suffering, not to mention almost unreal degrees of the emptying-out of these countries (including Bulgaria) as the best & brightest living there left to seek their fortunes in the West.

Whatever the case, Bulgaria now wants in, and ultimately one has to recognize that much of that desire is simply the aspiration to feel the national pride that will come from joining the exclusive Euroclub. In Slovakia, for example, it is still a source of satisfaction that the Slovak “little brothers” have already used the euro for years while the Czechs are still quite a ways away from that. And really, at the bottom of the almost indescribable economic pain Greece has suffered over the past eight years or so has to be some bull-headed determination not to give up that club membership, no matter what. (Oh, and also because actually leaving the euro would inevitably a very messy and chaotic exercise – although many believe that that is precisely what the Greeks should have done nonetheless.)

Bulgaria is still the EU’s poorest member-state, so imagine that: if it can do what is needed to take up the euro, it will truly be the EU’s mouse that roared.

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