Threatening the Currency Peg. Or Is Bulgaria's PM Borisov Becoming a Hostage?

Short-lived Appointments

Something rather interesting happened with the Bulgarian government of Boyko Borisov in just five days: two new appointments were “frozen” or withdrawn in a rather hasty and worrying fashion.

First, last Friday, INSEAD Professor Ilian Mihov, an economist with global renown, who was supposed to become a Deputy PM in charge of EU funds absorption and Eurozone accession - announced that he had decided to “freeze” his bid “temporarily” as a result of concerns raised about him by local critics in Sofia.

Mihov explained his past suggestions to modify Bulgaria’s currency peg had become a matter of a malicious political campaign, and that any such internal tensions were no good for a country applying to the ERM 2 (application is expected to be submitted in the spring of 2010), and that he could join the Cabinet at a later and safer stage when Bulgaria is already in the ERM 2, and waiting to join the Eurozone.

Then on Monday, Kolio Paramov, who was appointed an economic advisor of PM Borisov on January 25, i.e. a week earlier (even though the news was not broken until January 30), announced he was resigning over a similar kind of opposition. He declared he had been undeservedly criticized by people that he called “establishment” economists that who him as a threat to the currency peg and as a person wishing to devalue the Bulgarian lev.

Paramov’s case was also complicated by the fact that he has been an agent of the State Security, i.e. secret services of the former communist regime, and that he is a known leftist.

How Threatened Was the Currency Peg, Really?

Mihov and Paramov couldn’t be more different as persons and economists. The first was educated at top US institutions, the second comes from the left-wing (read: former communist) Bulgarian establishment.

Yet, one common thing in their cases was that they were both severely criticized – or, rather, portrayed – as presenting threats to the currency peg, and therefore to the financial and economic stability of the country.

The other common thing between their embarrassing withdrawals was the major sources of criticism. Even though the opposition Socialists and ethnic Turks (defining themselves as Liberals) were about as vocal as usual, the greatest critics of both appointments have come from the Blue Coalition, whose major members – the Union of Democratic Forces, and the Democrats for Strong Bulgaria – together with the ruling party GERB – are part of the European People’s Party, and, at least in principle, support the Borisov Cabinet.

The UDF and DSB were joined by leading Bulgarian economists, mostly leaning to the right. For the record, the two major parties of the Blue Coalition are the descendants of the original Union of Democratic Forces that governed between 1997 and 2001 after a Socialist government had led Bulgaria to a state of hyperinflation and total economic crisis.

The currency peg was introduced by the government of PM Ivan Kostov (1997-2001) – currently a chair of the DSB party and co-chair of the Blue Coalition – as a last resort for providing stability of the Bulgarian economy by pegging the lev to the deutsche mark (later replaced by the euro).

Kostov is a former professor of economics, and Martin Dimitrov, the UDF leader, is also an economist (described by some as Kostov’s protégé), so some would say that those Blue guys are really aware of the value of the currency peg, and by slamming Mihov and Paramov, they have set out to defend this. Bulgaria’s Prime Minister Boyko Borisov is no economist but an ex Interior Ministry officer, so he cannot be well-aware of any threat to the currency peg presented by the two economists that were beaten back into withdrawing, this argument would go.

However, it is safe to say that it is rather unfathomable and that it hardly makes any sense – now that Bulgaria is closer than ever to joining the Eurozone despite all difficulties – that any sane person – Mihov, Paramov, or whoever – would try to sabotage the currency peg. What is more, it is totally unimaginable to that they would be allowed to accomplish any such goal by the government, Parliament, society, political and economic circles.

One argument of Georgi Angelov, an Open Society economist, against both appointments was that the presence of persons questioning the currency peg in some way would look rather bad from the outside – the report of a single foreign journalist would be sufficient to raise serious concerns about Bulgaria’s financial stability abroad.

This argument is actually pretty close to what Ilian Mihov cited as the reason for freezing his Cabinet nomination, and it does make a fair amount of sense. Yet, as already mentioned, any measures threatening the currency peg can be stopped on time. And the Borisov government never declared even the slightest intention of changing the course.

This is why, the fierce opposition of the rightists and of a number of leading economists to the two proposed appointments gives the impression that they were openly hostile to people with other kinds of thinking, with different ideas, thus practically stifling debate. One can’t help but wonder why debate in the economic sphere should be a total taboo.

Flexing Some Blue Muscle...

Whatever reasons – justified or unjustified – the Blue Coalition had for attacking the proposed appointments – there is one clear conclusion demonstrated by the pattern in the cases of both Mihov and Paramov – the rightist allies of Boyko Borisov are flexing their muscles.

A couple of hours after Paramov announced his resignation on Monday, the UDF leader Martin Dimitrov spoke at a news conference. He was rather ecstatic and did not try to hide it. His main points were – first, “we are great because we stopped those appointments,” and second, and more important, “this is great because WE stopped those appointments.”

Both withdrawals of Mihov and Paramov were embarrassments for Prime Minister Boyko Borisov. First, he nominated them, and then a couple of days later he was forced to stand up and say, “Well, there has been pressure from here and there. But we actually will be okay without these guys.” All this is starting to affect his credibility.

It is becoming more and more visible that with his 116 MPs (out of 240) Borisov is a hostage of his partners. He managed to form a government with no formal coalition – largely because the other rightist parties had no better options. Back in the summer of 2009 they could not afford to go to the polls again. Yet, now that Borisov has been in power for a few months, his partners have started to demonstrate some leverage.

Is Borisov Up for More Embarrassments by His Friends?

One should not forget that this combination, Bulgaria’s “ruling majority,” is a weird bunch. You’ve got the Blue Coalition (15 MPs) leaning on the principles of its EPP membership, and then there are the nationalists from Ataka (21 MPs) who have been toning down their previously fiery rhetoric. The relations between these two actors are uneasy.

Borisov’s GERB party is in the middle. Sure, GERB can tell one of those two parties to go some place if they demand too much from the government. But then it will have to lean only on one single partner – so balancing between its Blue and nationalist “friends” seems to be the better option

Borisov already got into a big time embarrassment thanks to Ataka in December 2009 when he said he would support a referendum on the showing of Turkish language news on the Bulgarian National TV – which was largely the goal of Ataka and its leader Siderov. Once the mess became obvious, Borisov somehow stopped talking of referendum.

He has largely managed to save face again – despite the mess with Mihov’s and Paramov’s appointments. But it becomes increasingly clear that he will have to comply in more obvious ways with his “partners.” Bulgarians’ major hope here – which seems fair for the time being – is that this new “three-way coalition” will be more principled and concerned with people’s well-being than the one that ruled from 2005 till 2009.

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