Boyan Nikolaev is Deputy Executive Director of KRIB. He graduated in business administration from City University of Seattle and holds a doctorate in public communications from New Bulgarian University. He teaches in the Department of National and Regional Security of the UNWE and the Department of Media and Communications of NBU. He is an advisor to the President of the Irish-American University in Dublin.
The greatest contemporary libertarian economist – Murray Rothbard – wrote in 1995 that the title “father of modern economics“ should not be carried by the ubiquitous Adam Smith, but by a little-known Irish merchant, banker and adventurer who wrote the first treatise on economics more than four decades before the publication of Smith's "The Wealth of Nations". This is Richard Cantillon, who lived a turbulent, Hollywood-style life and, after faking his death in a fire, disappeared without a trace forever.
Cantillon bequeaths us a single surviving work - "The Essay on the Nature of Trade" - in which we can also find the answer to why the problems with inflation today are in countries outside the eurozone, not in the eurozone. An answer that has been known for 300 years as the “Cantillon effect“.
At the very beginning of the 18th century, the Irishman made a very prescient observation that when new money enters the economy, it is not distributed evenly among all people and businesses. He gives the example of the sudden discovery of a large gold deposit - it produces a money supply that flows into the economy, but it first falls into the hands of the mine owners and the miners working there before it reaches everyone else. Suddenly, people enriched with new money will want to buy more wine and meat, abandoning their traditional diet of bread and beer.
Noticing this, local farmers will abandon grain farming and immediately direct their investments into livestock, vineyards and farms. Poor peasants, far from all these processes, may suddenly find themselves in a vice and become even poorer - firstly, because farmers will produce less bread, beer and grain and they will become more expensive, and secondly, because the prices of wine and meat will skyrocket so high that they will no longer be able to afford them at all.
This simple example from three centuries ago shows why today the rate of price increases in the heart of Europe is much calmer than the inflationary storm that is raging on the periphery outside the eurozone. Today, new money in the eurozone is not created by sudden discoveries of precious metals, but by public spending by large governments and lending by large banks, supported by the European Central Bank, or by technology companies and innovations whose stock market breakthroughs enrich their shareholders. Thus, citizens of the major eurozone countries, shareholders in investment funds, banks tied to the European Central Bank, and industrialists with direct access to low-interest euro loans receive the new money first and buy food, machinery, software, hardware, and other assets at current prices. This is noticed by large traders, wholesalers, machine manufacturers, and even farmers, and they immediately direct their stocks there, reconfiguring production chains to serve the heart of Europe. A little later, the increased money supply leads to a cascade of price increases.
And the periphery waits for the new money to reach it, watching helplessly as the prices of food and production assets soar with each passing month. It waits even geographically simple goods to reach it with a delay - be they French cosmetics, liquid chocolate, Italian clothes, or production robots for heavy industry. And waiting costs money, both in lost profits and in higher costs.
This is not a complex and abstract theory, but prices that we all see in the supermarket, and industrialists see in offers for machines, robots and software. There is hardly a Bulgarian who at least once a week does not watch in a stupor how for at least 2 – 3 years now a small 90-gram chocolate bar has been approaching 5 leva, while the same in Germany has stubbornly stood at 1.3 euros; how liquid chocolate is 18 leva, while in Germany it has not budged from 6 euros; how first-class tuna in Bulgaria is approaching 60 leva, while the same in Brussels sits at 27 euros. All these numbers are clearly visible from Eurostat's food statistics – the inflation rate in the eurozone is lower than the average for all EU member states outside the euro.
For industrialists outside the eurozone, the situation is no different - the rate of price increases is faster and more chaotic than in the heart of the eurozone, and this is especially true for Hungary and Bulgaria:
Industrialists and entrepreneurs in countries outside the Eurozone have another problem - by valuing their assets in their local, relatively little-used currencies, they have a much harder time attracting investment capital. It is no coincidence that Bulgarian unicorn companies are looking for investors on the Frankfurt Stock Exchange and even in the US, which is precisely such a point of injection of new money into the economy. Entrepreneurs vote with their feet and their money, offering their companies' shares in major financial centers in euros and US dollars - if small currencies were so competitive, German startups would come to Sofia, and not the other way around.
Some intelligent opponents of Bulgaria's entry into the Eurozone bring philosophical arguments about the nature of fiat money, budget deficits and the direct monetization of debt throughout the world over the past 50 years. But Bulgaria, with a share of the economy below 0.1% of the world's, handling the Bulgarian lev, whose share of international SWIFT transactions is 0%, will not change the international financial and monetary system today on its own. On the contrary, today we are colonially hooked into this system across the board for the euro, without even having a theoretical voice in its management.
If we remain on the periphery, we will continue to be hit by inflation waves as consumers; we will stand in lines to buy machines as industrialists; we will spend huge money on outsourced offices and financial consultants to offer our shares in the Euro capitals as entrepreneurs. And we will light candles so that the next recession does not hit the financial sector, because without access to the European Central Bank, the only resource available to support the banks and the economy in our country are the savings and taxes of Bulgarians.
It is far better to enter the heart of Europe, where new money will reach us on a par with the Germans and the French, food prices will rise more slowly, and businesses will have faster access to cheaper assets. And from the conference table of the European Central Bank, the governor of the Bulgarian National Bank will be able to propose solutions for changing the global financial and monetary system with a real chance of them becoming reality.