Why Bulgaria should not enter the Eurozone

Recently, Bulgaria's possible entry into the EU's monetary union, the so-called Eurozone, has become a hot topic. Over the past week, a number of experts, led by the former economic team of the NMSV and Ivan Kostov, have taken turns explaining in various media why Bulgaria should abolish the currency board as soon as possible and adopt the euro. The arguments in support of this are expectations that adopting the euro will lead to lower interest rates, reduce the level of risk in the banking system, stimulate investment and generally provide an opportunity for increased economic growth. What all these commentators conveniently miss, however, is that a potential entry into the Eurozone carries with it serious risks, specifically for Bulgaria.

What does joining the Eurozone mean?

Currently, the Bulgarian government is severely limited in how much it can afford to increase its spending. Higher government spending can be financed in three ways: 1) by collecting taxes, 2) by issuing debt, and 3) by "printing" new currency units, i.e. money, initiated by the central bank (BNB), which then directly or indirectly ends up in the state treasury.

Due to the currency board that was imposed after the hyperinflationary episode in 1996/1997, the Bulgarian state can only finance its expenditures through the first two methods – collecting more taxes and issuing debt, but not by printing money through the central bank. This is because under the currency board, the BNB is obliged to maintain a certain fixed exchange rate of the Bulgarian lev against the euro (originally the German mark). Due to this fact, the BNB is limited in how much leva it can print – it is practically obliged to follow the direction of the ECB’s monetary policy and cannot grant loans, either to public or private institutions.

If we abolish the currency board and switch to the euro, this constraint will disappear and our politicians will have the freedom to spend much more than they do now. Why is this dangerous? Remember the spending of Greek politicians in the period 2002-2008, which opened up a huge fiscal deficit and ultimately led to one of the most catastrophic fiscal crises in modern European history. If we adopt the euro, our government will be able to actively monetize its debt by selling euro-denominated government bonds to private banks, which can then use them to obtain loans from the ECB to increase their bank reserves, which in turn allows them to increase the level of lending. Through this mechanism, countries like Greece financed most of their spending before the crisis. Even today, the ECB's monetary policy harms the countries of the Eurozone much more than it helps them, as the EKIP has commented on before.

Entering the Eurozone means increasing the risk of a fiscal crisis

Let us not forget what happened in our country, in Bulgaria, in the 1990s. The hyperinflationary crisis that occurred in 1996 was a consequence of the irresponsible monetary policy of the BNB under the pressure of the then government. The fact that under the conditions of a currency board the BNB cannot grant loans to state institutions and private banks is only a plus, considering the traditional irresponsibility and corruption of our politicians. If we were in the Eurozone, they would be able to take advantage of the cheaper lending sponsored by the ECB in the same way that they take advantage of financing under the European funds – to carry out corruption schemes and benefit politically connected persons at the expense of taxpayers.

As a counterpoint to this argument, we often come across examples of countries like Slovakia, Estonia and Latvia, which, after entering the Eurozone, did not follow in the footsteps of countries like Greece, Spain and Portugal. It is argued that since these countries have so far managed to avoid a deterioration in fiscal discipline, Bulgaria can do it too. But do we really want to take this serious risk and accept the rather optimistic assumption (bordering on phenomenal naivety) that our politicians are more competent than the Greek ones? Are the Bulgarian people ready to bet on this? With their savings? Hardly.

Entry into the Eurozone will mostly benefit the political class

Whatever we say, Bulgarian statesmen are no better than Greek ones. If we look at any study on the quality of Bulgarian institutions, this becomes abundantly clear. For example, in the index of economic freedom prepared every year by the Heritage Foundation, on the indicators "government integrity" and "protection of private property", Bulgaria is much closer to the assessment for Greece than the assessments for countries such as Lithuania, Latvia and Estonia. On these indicators, we are closer to each of the southern European countries, whose incompetent fiscal policy (supported by active monetary policy through the ECB) is leading them into extremely severe economic and banking crises. Not to mention that according to the Transparency International corruption perception index, we are worse than absolutely all countries in the EU, including Greece.

In this context, in the long term, the result of our eventual entry into the Eurozone will most likely not be a richer population and a higher standard of living for all, quite the opposite. The result will be yet another benefit for the political class in Bulgaria at the expense of taxpayers. It is crazy to think that with current levels of corruption we can count on our politicians not to take advantage of the opportunities for abuse of active monetary policy that entry into the Eurozone would provide them. Even if corruption were not so high, the risk is still too great. Why even provide the political class with yet another means by which they can benefit at our expense?

Have we learned nothing from our political history? The more power and resources are concentrated in the hands of our politicians, the worse off we are. Any restriction on their freedom of action, such as a currency board, is only and only a positive for all taxpayers. They are not allowed to print money to finance government spending that benefits only them and their private sector associates at the expense of everyone else. Let us do everything possible to preserve this restriction.

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