Only a few years ago, inflation in Bulgaria was in double digits. In the past two years, the country has held seven rounds of elections. Corruption is widespread and large industries are few. No one would describe Bulgaria as a country with a stable economy. But, well, let's ignore that. The European Central Bank (ECB) has a great idea. Let's unify its currency with that of Germany, Belgium and France. What could go wrong? This is what Matthew Lynn, a British financial journalist, writes for The Telegraph, quoted by FOCUS.
Well, quite a few things, as it turns out. As Greece showed 15 years ago, forcing a country into the eurozone before it is ready can lead to the collapse of the entire currency. The euro survived the Greek crisis, but that doesn’t mean it will necessarily survive Bulgaria.
This is certainly another important step forward for the euro. On Wednesday, Brussels and the ECB confirmed that Bulgaria has finally met all the criteria for joining the euro. The official decision is expected in July, with the leva swap scheduled for January 1st next year.
We can expect a strong speech from Ursula von der Leyen, the president of the European Commission, on the expansion of the European family. There will also be grand statements from Christine Lagarde, the president of the ECB (if she hasn’t left by then to head Davos), about how the euro is finally taking its place on the world stage. And there will be fireworks as the old currency is quietly buried and the new notes and coins are introduced.
Of course, on the one hand this will be a victory for the single currency. Bulgaria will be the 21st country to adopt the euro, and the fact that more and more countries are joining it is certainly a sign of its strength, even if the truly successful economies in Central Europe, such as fast-growing Poland, show absolutely no interest in it. And at first, it won’t really matter much to the economy. The Bulgarian lev is already pegged to the euro through a currency board, meaning it can neither appreciate nor depreciate.
The problem is that it is very difficult to see how Bulgaria can be seen as part of a natural currency zone with Germany and France. One problem is that a large part of the electorate doesn’t seem to particularly want the euro. A rally was held in Sofia last week to protest the decision, and the country’s independent president, Rumen Radev, has already proposed a referendum on the issue, which the government has criticized as “sabotage“.
One might hope for a somewhat more settled agreement on such an important issue as adopting a new currency. However, leaving that aside, the fundamental economic factors are more worrisome.
For starters, Bulgaria is one of the poorest countries in the EU, with a GDP per capita of $15,800 (£11,700) according to the World Bank, compared to $54,000 in Germany and $44,000 in France. That’s not exactly a small difference, to say the least. The country has consistently missed its inflation targets, with inflation reaching 16% in 2022. Politics in the country is deeply divided, with a series of elections, starting in 2020. There have been eight prime ministers since then, including interim governments.
Even worse, Bulgaria has not had a good record of paying its debts to creditors. For most of the post-war period, it was, of course, part of the Soviet bloc, but before that it defaulted on its debts in 1915 and 1932. Admittedly, this is a better record than Greece, which has defaulted on its debts six times in the last two hundred years, but for most of the 19th century Bulgaria was part of the Ottoman Empire, which was also not known for its financial stability.
Over any reasonable time frame, this does not seem like a very good investment for bond investors. Similarly, the lev has undergone four conversions since Bulgaria became an independent state, the last redenomination being in 1999, when one new lev replaced 1,000 old ones. Again, this is not a currency that has been a good place to store your savings.
Fifteen years have passed since the outbreak of the Greek financial crisis that rocked the eurozone, which is probably long enough for most of its main lessons to have been forgotten. The crisis had many causes, but its essence was this: Greece was forced to join the zone before it was ready and before its economy had caught up with its more developed neighbors, which encouraged its politicians to borrow recklessly in a currency that was as good as Germany's and to accumulate debts that proved unsustainable.
Ultimately, the whole house of cards collapsed, threatening the stability of the entire continent’s banking system. This triggered a series of crises that affected Italy, Spain, Portugal and Ireland, which took years to recover from, and forced the ECB to launch a rescue plan that everyone thought was excluded from the treaties.
In reality, Bulgaria is Greece on roller skates. Of course, the zone managed to recover from the Greek crisis and put itself on a more stable financial footing again. But it was a long and difficult process, a decade was lost, and Greece suffered the worst collapse in production of any developed country since the Great Depression of the 1930s. The zone may be lucky and Bulgaria will integrate smoothly into the wider European financial system.
Yet the harsh truth is this: Accepting Bulgaria into the zone is a very big risk and a decision that was made on purely political grounds. This could lead to another system collapse – and the zone's leaders will only have themselves to blame.