Bulgaria Delays the Euro

Sometimes the inner voice of conscience can drive offenders insane. Not so, the Greeks, it seems. The country’s misrepresentation of its fiscal readiness to enter the European Monetary Union has damaged the bonds of trust among the EU member states.

In Bulgaria under a new government, conscience again holds sway. Following a damning Transparency International study last year ranking Bulgaria in a dead heat with Greece and Romania as the most corrupt countries in the European Union, Prime Minister Boyko Borisov’s center-right Citizens for European Development was swept into power last July on a platform of reform. In an early action, the party called for a revision of the country’s 2009 budget, and revealed massive discrepancies between the reported figures and the real ones. Furthermore, the study showed a massive gap in additional hidden contracts [and annexes] made by the previous socialist government, which resulted in increasing state obligations to private companies. The new Minister of Finance Simeon Djankov has now publicly acknowledged the falsified reports.

The unavoidable conclusion is that Bulgaria’s finances are not consistent with Eurozone criteria. The recalculated 2009 deficit effectively doubled from 1.9% to 3.7% of GDP as a result of the unmonitored contracts that had been signed by the previous government under the Socialists – the self-proclaimed successors to the Bulgarian Communist Party. This difference has derailed Bulgaria’s drive to enter the list of Eurozone aspirants in 2010, which would have enabled joining by 2013.

"We have given up applying for the Eurozone," announced Prime Minister Borissov at an Apr. 9 press conference. "For the moment we don’t meet the criteria, and it would have been insolent to do so." The falsified accounts had placed Bulgaria among the first in line to join the EMU waiting list.  It was a castle built on sand.

"We have in fact lied to our [EU] colleagues about our readiness for the Eurozone," admitted Finance Minister Djankov, "being unaware of this trap [of the hidden contracts]."

The entrance requirements for the EMU are demanding. To join, a country must be a member of the EU and a member of the European Exchange Rate Mechanism (ERM II) for at least two years. While Bulgarian lev is not part of the ERM II, the currency had been stabilized by being pegged to the euro since 1999. Appearing to fulfill most of these criteria, Bulgaria would have entered the ERM II in November 2009. Appointed in July, Djankov postponed entry to Dec. 22. In the meantime, he cut the budget deficit substantially and stabilized the economy in less than a year, making Bulgaria one of the few EU member states to receive an economic upgrade during the financial crisis. Now, the newly recognized obligations have further postponed Bulgaria’s entrance to the ERM II.

From Apr. 16 to 18 in Madrid, Djankov met with the European People’s Party’s finance ministers.

"I hope that the European Commission [and others] will understand, because trust is the most important thing in finances," said Djankov a week before the meeting.

The conclusion of the two-day meeting was fairly optimistic. Djankov enthusiastically announced that, "following the positive assessment of the Convergence Program, Bulgaria continues striving for ERM II. I have already informed almost all my [EU] colleagues not to worry about what is happening in Bulgaria." Submitted under the Stability and Growth Pact, the Convergence Program’s goal is to maintain a stable budget under current economic circumstances. The representatives of the European Commission are scheduled to visit Bulgaria in May to review the books and assess whether the government is really taking the necessary steps.

"After the positive assessment by the European Commission [in April], we are passing to an entirely different stage of talks," he concluded.

Djankov’s rapid and effective interventions have won Bulgaria widespread support in the EU, and the confidence of its financial leaders.

"Whether to apply for the ERM II or not is a decision of the Bulgarian government," said Jean-Claude Juncker, the Prime Minister of Luxembourg and Chairman of the Eurogroup, an informal committee of the European Union to coordinate the tax and economic policies of the member states. "Sofia has to decide whether to submit documents for the waiting room of the Eurozone. The Bulgarian Prime Minister is well aware of my conviction that Bulgaria is on the right track, but the decision [whether or not] to enter the ERM II is his," Juncker asserted.

The goal of the April meeting was to come up with a realistic solution and guidance for the Bulgarian government on how to survive the financial crisis. Harvard economist Alberto Alesina sees two possibilities: reigning in the economy through a more restrictive fiscal policy or by way of a tax increase.

"In 70% of the cases where countries successfully exited the crisis and the economy grew more quickly than the average, the governments had pursued a restrictive fiscal policy," said Alesina, who attended the meeting. "For two-thirds of the cases it was found that this had led to growth."

But as to whether the country’s fiscal policy should be controlled by the European Commission, like the monetary policy, Djankov was clear: "The research gave a definite answer – no," he said. While some countries need a higher level of wealth redistribution, some do better with lower rates.

"The less developed an economy is, the lower level of redistribution is useful for it," Djankov explained during the discussion. "For this reason, [Bulgarian] fiscal policy should remain a national task and will remain this way for a long time."

Pension reform, however, should be resolved on a European level.

"This is the topic which, from the perspective of public finance, dominates all conversations in addition to Greece," Djankov said. "But it affects almost all European countries."

According to The New York Times, there are at least 580 high-risk jobs in Greece that qualify for early retirement – at the age 50 for women and 55 for men, the lowest in Europe – equaling around 14% of the entire Greek labor force. During the financial crisis, the pension system hemorrhaged, forcing a preliminary increase in the country’s retirement age to 63.

"This type of reform will also take place in Bulgaria at some point," Djankov stated. "As all the finance ministers have stated, this issue cannot be very much delayed, and the situation is becoming harder in terms of public finance."

Finally, the ministers agreed that Bulgaria needed centralized supervision, meaning "that European Central Bank will now have more powers not only in regard to the banking sector, but also in regard to insurance, investment funds, rating agencies" among others, Djankov explained.

Bulgaria’s new transparency is a risk; it suggests that Eurozone candidates follow Sophocles dictum that it’s better to "fail with honor than succeed by fraud."  But the reverse could also follow, that under the pressures of modern economic realities, that honor is a necessary first step on the road to prosperity.

The official interviews are found on the Bulgaria’s Ministry of Finance website, www.minfin.bg