The issue of the national currency cannot be resolved behind closed doors

Interview of Stoyan Panchev with the newspaper "Trud":

The early parliamentary elections were marked by lackluster interest and minimal surprises in the results. No party won outright. No potential coalition was given enough room for action. Slavi Trifonov’s party presented a draft cabinet, thus leaving potential partners in a stalemate – most of the protest parties are tired of elections (the others – too), but they are not getting anything from the government. At the same time, many processes in the country are ongoing and waiting for their development, such as membership in the Eurozone. We talk about these issues with one of the prominent young economists – Stoyan Panchev.

- The special elections roughly repeated the results of the previous regular ones. What is your reading on the subject, Mr. Panchev?

We saw a repetition of the situation, with one difference – the so-called “systemic parties” lost a non-trivial number of voters, although in percentage terms they retain relative influence in the next National Assembly. I am concerned that in such a situation we could easily get a dilution of political responsibility.

- Slavi Trifonov presented his cabinet, which is quite colorful in terms of personalities, but it cannot be denied that it contains proven professionals. As an economist, how do you assess the nomination of Mr. Lyubomir Datsov as Minister of Economy and of Prime Minister Nikolay Vassilev, who also has such a profile?

I have had the pleasure of communicating and debating on various topics with both of them and it is more than clear that these are prepared people with their biographies. We have many points of agreement with Mr. Vassilev, for example, when it comes to topics related to state-owned enterprises and fiscal policy, but on the issue of the euro I am closer to his older and more skeptical position, expressed in his wonderful 2014 book "Menu for Reformers", than to the current one for a quick replacement of the lev and the board with the single currency.

- What are the economic problems facing the country's new government?

The problems are many. We all know about the cases related to the spending of public funds, those of Bulgarian and European taxpayers. At the same time, after the last budget we have a new opening of the deficit in the pension system, we have a started but unfinished conversation about the financing of health – increasingly large items in state spending. The world is coming out of a long deflationary cycle and entering a new inflationary one, which is already noticeable by the average consumer in the prices of some essential goods and household bills. How a small open economy like ours will react to this change will be a complex question. I will not even open the topic of the problems that may arise with the expected transition to a “green” energy system.

- One of the points in the economic program of "There is such a people" is the privatization of the Bulgarian Development Bank through the stock exchange. Does this seem reasonable to you?

I think it's reasonable. But it was also mentioned that a strategic investor will be sought for 51%, which is also an important part of the plan.

- Is this an assessment of the failure of the BDB idea or a new policy?

The idea of the BDB failed as intended, so the change is good, regardless of whether the reason for it is explicitly stated. By the way, my colleagues and I have written to the ECB to ask what their opinion is on the BDB case - after all, we have been in the Banking Union for 9-10 months now. They are already responsible primarily from Frankfurt, the BNB is something of a subcontractor.

- Isn't it right to have at least one state bank?

No. The fewer state-owned companies, the less corruption. Imagine, for example, if we didn't have a currency board and politicians had access to the foreign exchange reserve of the BNB, would you be calm?

- Will there be continuity on the euro-lev topic?

Unfortunately, we see continuity with the line of the GEBR-Patrioti cabinet. This is something that continues to worry me. We have seen from the revelations of the caretaker government that behind the "European" garb there may be processes that are very dangerous for the well-being of Bulgarians. The case here is the same, but so far we have not heard a serious comment.

- Don't you think that the topic of the euro is somehow not discussed much. Yes, we know that we might enter the Eurozone, but that's it. There is no explanatory campaign, no advertising, no discussions. Why is this happening?

In an interview with Vladislav Panev from "Democratic Bulgaria", journalist Miroliuba Benatova quite rightly called the country's entry into the Eurozone and the rejection of the lev as the national currency a "taboo" topic. It's not that economists don't discuss the pros and cons of such a move, including on the pages of the publication that your readers are currently holding (or perhaps scrolling through), but somehow politicians tend to remain silent and give half-hearted answers when someone asks them about it.

At the same time, during indefinite intervals of complete silence, faceless interdepartmental groups emerge from the depths of the Ministry of Finance and the Bulgarian National Bank to say that the euro is coming in two or three years and, voila, here is the plan for how the transition from the 140-year-old national to the younger international currency will take place.

The effect is strikingly similar to that of the case of Slavi Trifonov's interview in the French "Le Monde" - how come a common European state and why should we chase Orban out of the EU. Did we miss something, didn't we sing patriotic songs the day before yesterday and celebrate liberation and independence with enviable pathos?

To maintain this state of taboo, which, however, quickly leads to radical changes in the lifestyle of each of us, it is necessary to build a streamlined system of communication mythologies that lull public attention but allow those interested to pursue their goal of abolishing the lev and the currency board.

- What myths do you see in the dormant public attention?

The first myth is that everything is already decided. Eurozone fans want us to think that there is nothing more to be done, since the lev is in ERM 2, so from now on we will just let the bureaucrats in the institutions act and one Monday we will wake up with different money. Look, you asked me the question too, as if the topic is how, not when or even if.

The idea is to circumvent two key missing pieces of the puzzle when talking about political and economic change of this magnitude. First, the lack of a genuine expert debate based on official research from institutions such as the Ministry of Finance and the Bulgarian National Bank. And second, any democratic sanction.

The general public is being told that we should only talk about how exactly to adopt the euro. You see, the topic is now purely technical, administrative, there is no need to discuss the substance. In fact, Bulgaria ranks among Romania and Cyprus as the only three countries in the EU that have not had a referendum either on joining the Union or on abolishing the national currency. In other words, those steps in the political process that could legitimize a radical move such as changing the monetary system have been skipped.

- Doesn't this lack of communication put this process at risk? What do the studies show?

Sociology from various sources shows that over half of Bulgarians are against the abolition of the lev in favor of the euro, with less than 20% in favor. Even more of our compatriots want a referendum on the issue. Let it not be that before long we are all sitting around wondering how and when we became part of the United States of Europe, without understanding. More importantly, nothing prevents us from taking a step back, holding both a public debate and a national referendum – the Danish krone has been in ERM 2 for over 20 years. As long as the board is working, we have no problem being like the Danes.

- What are the other myths?

The second myth is that we must adopt the euro immediately. This is usually justified by the treaty we signed when the country entered the European Union. In fact, however, the EU Membership Treaty requires member states (except Denmark, which negotiated an exception to this clause) to adopt the euro, but each country retains the sovereign right to determine the appropriate moment when its citizens and economy would receive real benefits from the single European currency. For example, more developed than us and providing a higher standard of living for their citizens, countries such as Sweden, the Czech Republic, Poland and Hungary, consistently exercise this sovereign right.

- The important question is whether politicians realize that Bulgaria has this right?

Fortunately, many of the political forces with good results in the recent elections are beginning to realize that such haste is not justified, including by any international contractual relations. There is no reason to “run into a burning building,” as the Deputy Governor of the Bulgarian National Bank, Kalin Hristov, said in 2011.

Those who are more intelligent than us will remember that the current governor, Dimitar Radev, said in 2015 that entry into the Banking Union should not happen before full membership in the Eurozone, and rightly so. Where was he last year when exactly this happened – the BNB entered into close cooperation with the ECB without us being in the Eurozone? What necessitated such haste? Who and how decided that right now was the time for such a drastic change? All questions that remain hidden behind this second myth that we are urgently fulfilling our contractual obligation.

- Will prices increase or remain the same after adopting the euro? This is what worries people the most.

Yes, this is the third myth: prices will not rise because of the euro. A particularly bold statement, given the fact that the European Central Bank recently completed the revision of its monetary policy and in the released document we read several worrying conclusions. To begin with, the ECB admits that the statistical index used so far does not reflect the real levels of price increases well. In practice, over the years we have seen underestimated data compared to the real appreciation in the eurozone.

Moreover, the central bankers in Frankfurt are officially raising their inflation target from “close to but below” 2% to 2% – in other words, an even looser policy to maintain price stability. Adding to this the definition of the time horizon over which this inflation target is set, namely “medium term”, we can conclude that the ECB could allow significantly higher prices in the coming years with the expectation of balancing with smaller inflation spikes thereafter, achieving the target purely arithmetically. In other words, we now have an institutional carte blanche for more expensive food, energy and imported goods.

In fact, it was in Trud that Dimitar Chobanov described the worst macro scenario for Bulgaria, in case we continue with the hasty entry into the Eurozone. This is the situation in Slovakia, which, although a more developed economy than Bulgaria, does not realize significant benefits from its membership in the Eurozone. The two problems for the Slovaks are faster price growth combined with weak economic growth.

It is good to place these considerations in the context of the ending global deflationary cycle – caused by the opening of trade and outsourcing with China and India, the restructuring of the economies in the former Eastern Bloc and the development of information technologies. The new situation will be defined by trade wars with China, post-Covid closures and intensive money printing by central banks – i.e. a new wave of inflation. And all this without even touching on the issue of the effect of currency revaluation, which is always greater in countries with a significant gray sector and inefficient administration… like Bulgaria.

- What is the right move for the ruling party, whoever they are, after the elections?

The issue of the national currency cannot be resolved behind closed doors. If we are going to abandon the 140-year-old lev and the 25-year-old currency board, it must be done legitimately, democratically, and with eyes open to the consequences.

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