A MATTER OF NECESSITY

A MATTER OF NECESSITY

Wed, 10/01/2008 - 13:44

Bulgaria doesn't appear likely to adopt the euro by 2012

Georgi Stoychev.jpg
Georgi Stoychev

The fireworks in the first minutes of 2012 in Bulgaria will possibly put an end to a long story that began on 4 June 1880. Then, Bulgarian parliament passed legislation for the printing of the first leva notes. On 1 January 2012 the Bulgarians will change them for euro notes. The leva will become museum exhibits and the world will lose one more exotic currency.

It was called lev and for more than 40 years it carried the portrait of the Stalinist dictator Georgi Dimitrov. On a couple of occasions in its existence it went through sinister inflation – for the last time in 1996–97.

The Bulgarians will celebrate this event in the same manner in which they did each alteration in the appearance or value of their currency, such as the denomination on 1 January 2000 when 1,000 leva became 1 lev. Some will put aside several notes, for a keepsake. The majority will become worried that the currency change will trigger off price hikes.

But in fact, the Bulgarians have been using the euro for a long time in their lives – although not to buy bread from the corner shop. Banks lend and borrow in euros; property prices are calculated in euros per square metre; landlords want their rents in euros – some accept the leva equivalent, but with a catch: two leva for an euro, ignoring the official exchange rate of 1.95583.

Bulgarians' optimism that the euro is waiting behind the corner has gone as far as to make them vote for the symbol that they want to adorn the flip side of the Bulgarian euro coin – the Madara Horseman.

But 1 January 2012 may simply turn out to be the next New Year in Bulgarians' lives – and nothing more. "Technically, it is still possible for Bulgaria to adopt the euro as it has committed to – in 2012.

"Realistically, however, this will hardly take place before 2013 or 2014," says Georgi Stoytchev, executive director of the Open Society Institute, a liberal think tank. "Bulgaria still is not a member of the European Exchange Rate Mechanism II (ERM II), and according to the rules, the country must stay in it at least two years before its application for Eurozone membership is considered."

ERM II is the codename for a part of the monstrously named Maastricht Convergence Criteria. It is mandatory for the countries that apply for Eurozone membership and is somewhat analogous to a purgatory – if you pass the tests, you will be allowed in the euro paradise.

During their stay in the ERM II the countries must prove to the European Central Bank (ECB) and the EU that their rate of inflation stays below 1.5 percent of the average of the three EU members with lowest inflation rate.

The budget deficit must not exceed 3 percent of the GDP, and the state debt-to-GDP ratio must not be over 60 percent. The average long term interest rate must not exceed by more than two percentage points those of the three best-performing EU members in terms of price stability. The local currency's exchange rate to the euro must be stable.

Currently there are several countries in the ERM II: Estonia, Lithuania, Latvia and Slovakia, and Denmark, which has been in it since 1999. Poland, Hungary and the Czech Republic are currently waiting.

If Bulgaria truly wishes to adopt the euro in 2012, isn't it high time it applied to the European Council and the ECB and be allowed to the ERM II? To be allowed in the ERM II you don't need to meet any standards: "The thing you need is political will on both sides," says Stoytchev.

"The Bulgarian government will hardly apply for membership in ERM II unless it is guaranteed a positive reply. So far it seems the signals point in the opposite direction," Stoytchev says. In his view the matter will not be resolved either by the end of the year or even in 2009. Next year there will be a general election and the ruling coalition won't risk a rejection in a bid for joining the ERM II. "Bulgaria's entry into the ERM II can be expected some time in 2010 or 2011," Stoytchev says.

This is an unfavourable forecast on the backdrop of the current administration's optimism about Bulgaria meeting almost all ERM II criteria. "Almost" is the word to pay attention to.

Bulgaria has been doing well in terms of state debt; GDP, which in 2007 rose by an annualised 6.2 percent; and the interest rate. Also there is financial stability, although it is due to an external factor – the introduction of the Currency Board in 1997 when, after a period of hyperinflation, a dollar went for 3,000 leva.

"The Currency Board has had a positive effect on Bulgaria, as it guarantees the economic criteria for entry in the Eurozone. However, there has never been a case in which a currency board country has adopted the euro and ECB's attitude towards this mechanism is not unqualified," Stoytchev says. That's why the Bulgarians will need to drop it. Here the rate of inflation is the stumblingblock. It is much higher than what the Maastricht mechanism prescribes. It was 11.6 percent in December 2007; for 2008 optimistic forecasts point to 8 percent.

How will the lev's depreciation affect the adoption of the euro? According to Georgi Stoytchev, the high inflation rate is not a positive phenomenon despite the fact that Bulgaria is outside the ERM II. "Theoretically, the low-inflation standard must be in place after the country has been allowed in the ERM II; this means the current high rate of inflation should not worry us," he says. "But we must bear in mind that the ECB requires that the ERM II criteria be adhered to over a long period. Traditionally, ECB's analyses cover the last 10 years."

The bad thing is that the rate of inflation may not fall off. Although at a slower rate than elsewhere, the global economic crisis is reaching Bulgaria. The first sign for this is the decrease in demand for real estate. What impact will the economic crisis have on the adoption of the euro?" It's a negative effect.

The crisis pumps up the rate of inflation, but there's also a purely psychological consequence: The Eurozone countries become nervous and wary in taking risks – and this includes accepting new members in the Eurozone," Stoytchev says. This summer the European Commission froze EU funding for Bulgaria due to suspected corruption and mismanagement.

"In economic terms this might even have a positive effect, as it curbs the inflation pressure," Stoytchev says. However, the political fallout is much more serious. "It is a sign of political distrust. Furthermore, there was a particularly telling sentence in one of the European Commission's variant reports concerning the suspended funds. It bound Bulgaria's membership of the Schengen zone and the Eurozone with progress in the fight against corruption and organised crime.

Eventually this sentence was dropped from the text, but already the spirit had been let out of the bottle." The conclusion is that until it has proved that it is fighting corruption and crime at a level other than mere words, Bulgaria will not be trusted to join the Eurozone.

Bulgaria's road to its new currency is beset with more obstacles than is Super Mario's in his quest to save Princess Peach. Why then has Bulgaria set a date for adopting the euro so early? Hungary plans to abandon the forint in 2013, and Romania proposes to do so with the lei in 2014. "Joining the Eurozone is not a competition, the important thing is to get there when you are ready. For example, the Czech Republic is in no hurry because it wants to retain its flexibility to guide its monetary policy," says Georgi Stoytchev.

Yet Bulgaria needs the euro urgently. Its financial stability is on external crutches – now the currency board, then the ECB. "It stands to reason that countries like Bulgaria will be in a hurry. For one reason or another, they have abandoned the pursuit of an independent monetary policy. Let us not forget that in Bulgaria the currency board is stable because there is a clear prospect that its oversight will be replaced by that of the Eurozone."

This rush has also a psychological dimension. "The Bulgarians are not like the British, who reject the euro because they trust their own national institutions and prefer that their financial policy is hammered in London rather than in Frankfurt. The Bulgarians traditionally have no faith in their national institutions and trust the international ones.

This was the reason behind the introduction of the currency board," Stoytchev says. After the hyperinflation and bank collapses due to bad loans in the mid-1990s the Bulgarians just don't believe that an independent monetary policy would pay off.

But Bulgaria will have to discard the lev in favour of the euro regardless of anything.

"Bulgaria committed to joining the Eurozone by virtue of its accession to the EU. The country does not have the British freedom not to do it," Georgi Stoytchev says. "Switching over to the euro is a necessity," he concludes. "Bulgaria will gain much. The only drawback perhaps will be the rounding up of prices at the moment of the currency change." But most probably this will occur way after 1 January 2012.

The only certain thing is that whenever the time comes for Bulgarian ATMs start spewing out euros, it will not be named "euro" but evro.

Issue 25

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