Wary of Joining Troubled Euro? Not in Bulgaria!

Features |Author: Milena Hristova | November 29, 2010, Monday // 18:05|  views

Uncertainty surrounding the eurozone in the wake of the Greek and Irish debt crises has dampened the entry aspirations of the Czech Republic and the Baltic states, but Bulgaria is still flying the flag. Milena Hristova talks to analysts, politicians and ordinary people to find out why.

Revamped Expectations

Bulgaria, the tiny and poor Balkan state, has consistently pursued European integration with enormous zeal. Now it has made clear that the single currency woes and doomsayers' warnings of a possible crack-up will not give it a pause. Both for its own benefit and the benefit of the eurozone, as the finance minister argues.

"People see what is happening in Europe and some of our neighbors in particular and think they want to escape that," says Minister Simeon Djankov, the most fervent eurozone enthusiast in the country, who has been rushing to adopt the euro since coming into office last summer.

Politicians, analysts and ordinary citizens in all euro aspirant countries have been following closely the protests along the streets of Athens and Dublin and the controversial solutions that Brussels offers. But while the Czech Republic and the Baltic states say the developments make the euro highly unattractive now, Bulgaria seems as desperate to get in as ever.

"The Bulgarian currency the lev has been tied to the euro since 1999, so in a way we are already in a situation where it is as if we have the euro and all of its recent negatives. But we don't have the main positive, which is actually having the euro bills," Simeon Djankov claims.

Bulgaria has repeatedly changed the time frame for adopting the euro. Ambitiously scheduled initially for 2010, the country's entry into the eurozone was first set back for some time around 2012 with experts saying it is conditional on continued fiscal prudence and lower inflation.

The new center-right government, which swept to power last summer, was very enthusiastic about adopting the single currency only to be forced to put off plans after the country's 2009 revised budget gap exceeded the three percent EU threshold.

Now it is back in the game, saying it plans to apply to join ERM II in the second half of 2011 after it has, hopefully, demonstrated that next year's budget deficit will fall below the European Union's ceiling of 3% of gross domestic product in line with the Maastricht criteria.

The failure of previous governments to take that step earlier is often attributed in Bulgaria to behind-the-curtain maneuvers by European officials - Eurozone President Juncker and European Central Bank President Trichet in particular – who allegedly created their own tools for managing the EU.

"Bulgaria is a member state of an international union. It bears the brunt of all the consequences from this membership, pays for it and is entitled to all the rights that this membership entails. This is how the issue of Bulgaria's eurozone entry should be viewed," says Emil Harsev, leading Bulgarian financier and banking expert.

"Bulgaria was ready to join the eurozone as early as ten years ago, but then it was not member of the European Union," adds he.

Harsev concedes that the country does not meet all formal Maastricht criteria, but points out that some of the countries, which are already eurozone members, joined only after being granted the so-called waivers.

"To top it all off, more than half of the eurozone members fail to meet the criteria now," fumes he.

Bulgaria's fitness for the bloc's exchange-rate mechanism, the so-called Eurozone waiting room ERM II, will be decided next year, but all foreign analysts have found the government's goals so far to be wishful thinking.

"At the very beginning [Prime Minister] Boyko Borisov admitted that the aim to adopt the euro by 2013 will be a struggle. We anticipate that Bulgaria may get to adopt the euro in 2014 at the earliest," says Toby Iles, an analyst for Central and Eastern Europe at the Economist Intelligence Unit (EIU).

Others have not hesitated to take the warning a step further, saying that making euro adoption top priority spells out a prolonged recession for the country.

"Is it worth dedicating all your efforts to euro adoption, which in my opinion is impossible for Bulgaria to happen given the current conditions?," G?nter Dobler, a German analyst from Deutsche Bank, asks rhetorically.

According to him EU institutions and member states continue to be skeptical about Bulgaria's readiness, due to the weakness of its economy and despite its budgetary rigor.

"It is enough to just look at Bulgaria's double-digit current account deficits over the last few years to see what I mean," he argues.

Even though there are too many question marks over whether joining would help the Bulgarian economy, Harsev believes the positives outweigh the negatives.

"The collapse of the Currency Board arrangement, which though impossible being a political suicide, is still perceived as a risk by foreign investors. The euro adoption will rule out that risk," he says.

Analysts also point out that euro adoption will make it easier for Bulgarian banks to keep up their liquidity and reduce the value of the country's debt.

The Spectre of Greece and Ireland

The Greek crisis was the first to trigger concerns that the path of the new EU member states towards economic and monetary union may be affected and Bulgaria's aspirations to join the euro as soon as possible foiled, despite its budgetary rigor.

EU policymakers, who had already shown a tendency towards a very strict application of the Maastricht criteria for euro adoption, are now expected to cast an even warier eye not only on these criteria, but on a broader set of parameters.

"?t is no secret that some established euro members have concerns about admitting faster-growing economies to the euro club, owing to the perceived greater risk of imbalances, which may undermine confidence in the single currency. The Greek crisis is likely to exacerbate these cautious tendencies," says Toby Iles.

Bulgaria was widely believed to be among the countries most at risk from potential spillovers from Greece after banks invested in central and eastern Europe. The country is more susceptible to contagion risk than neighboring Romania or Turkey, because Greek banks control 28 percent of the Balkan country's market. Bulgaria has also adopted Ireland's low-tax strategy in high-tax Europe and there are fears that it may suffer if Ireland is pressed into upping taxes.

"Within eastern Europe Bulgaria is probably the most vulnerable to negative spill-over effects from the crisis in Greece, owing to strong trade and investment links with Greece and the substantial stake Greek banks have in Bulgaria's banking sector," according to Toby Iles.

Is Bulgaria's euro bid related so closely to the debt crisis erupting across the currency bloc?

"No", according to Harsev.

"These foreign analysts have no idea what is going on in Bulgaria and have not read carefully the contracts. The country is a fiscal model and should not be held responsible for other countries' failure to put their financial house in order," says he.

Does he think that outpacing such countries as Poland in euro adoption could raise eyebrows in Brussels and other European capitals where Bulgaria remains synonymous with corruption and organized crime?

"There is no scheduled order for acceding to the euro zone. Everything should be based on our contracts," snaps Harsev.

He agrees with Minister Djankov that its high time Bulgaria, which is likely to turn soon into a net donor of the European Union, reaped the benefits of eurozone membership as well.

Where To Now?

Fiscally sound Bulgaria may well prove to be the only euro aspirant country, which will manage to cut its budget deficit under the EU's cap of 3% of gross domestic product, a requirement for qualifying to join the euro zone. It is forecast to suffer recession this year and to rebound in 2011 and 2012.

"Bulgaria is on the right track and is pushing ahead with efforts to adopt the euro single currency", Finance Minister Simeon Djankov has repeatedly assured.

Djankov's belt-tightening policy however has drawn criticism of creating the illusion of a healthy economy on the back of the people, who are three times poorer than the average EU citizen and are just getting poorer.

Small wonder there are those, who say Bulgaria should be cautious about entering the single currency club, given the social cost that it will have to pay.

"When joining the Eurozone, in spite of all mechanisms and recommendations, there is something which is almost unavoidable – it is the fact that everyday life will become more expensive," says Spain's Ambassador to Bulgaria Jorge Fuentes.

This view is shared by Toby Iles, Economist Intelligence Unit (EIU) analyst.

"One risk from adopting the euro too early stems from insufficient real convergence, as reflected in the significant disparity of income and price levels between Bulgaria and the average for the EU. If this is the case then adoption of the euro can lead to price rises which people are not prepared for," says he.

The government's reliance on slashed spending has not been popular, but the response has been muted, close to zero when compared with the strikes and protests in neighboring Greece.

Public support for eurozone membership has not been seriously dented following the troubling developments in the monetary union. While at the beginning of last year the Bulgarian society was cut in two over calls for immediate introduction of the European single currency, an October survey by the German Marshall Fund found that 40% oppose adoption of the euro.

One of them is Vanya Stancheva, a 45-year-old woman, who works at a small factory for steel instruments in the countryside and says she sympathizes with the Greek employees. When the recession struck, Stancheva was forced to take an unpaid leave.

When she returned to work but fell ill, her already meager pay – BGN 250 a month - was cut for the days she had missed. So now she has decided to go to work even when she does not feel well.

"I don't want Bulgaria to adopt the euro. I am afraid that prices will jump overnight," Stancheva says. She adds that even these days in Bulgaria "if you want to buy a proper meal and clothes, you have to hold yourself in pretty high regard."

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