EKIP– Expert Club for Economics and Politics A Different Opinion
Author: Stefan Raychev Antonov
By submitting the draft budget for 2025 from the regular cabinet of Rosen Zhelyazkov, a second consecutive finance minister sacrifices his reputation and allows himself to look ridiculous in the eyes of the professional community. In the name of Bulgaria adopting the euro, Temenuzhka Petkova offered an even more absurd explanation of how the state will increase its revenues by 18 billion leva, just so as not to lag behind by more than six billion compared to the increase in expenses, which is also 18 billion leva. Thus, Bulgaria will seemingly meet at least the indicator for stable public finances.
The European Commission and the European Central Bank must convince themselves that despite five years of budget deficits, at the threshold of three percent of GDP, they should still allow us to replace the lev with the euro.
It is obvious that the government has not done enough to sound convincing. They offer the legends of additional revenues, which are the melted down pillars of Simeon Dyankov since 2009, which ended in failure and a decision to update the 2010 budget since April. They also advocate changes to the Corporate Income Tax Act, which would give the NRA a legal basis to collect (and perhaps even demand) donations from business in order to reduce the deficit.
Bulgaria is currently in a situation it has never been in in the seven years since Finance Minister Vladislav Goranov announced in January 2018 that our country would work towards an accelerated introduction of the euro. In practice, for the first time since then, the fulfillment of the low inflation criterion, although not achieved, can be acknowledged if only one of the three countries with the lowest cost of living is removed. At the same time, last year's budget deficit can be presented within three percent of gross domestic product, even on an accrual basis. Experts at the Ministry of Finance have found a way to take advantage of the constraints in the ESA 2010 accounting standard. All that remains is for someone at Eurostat to look at them favorably and confirm them.
The agenda for the Eurogroup meeting on February 17th gave first place to the Bulgarian aspiration to abandon our lev and replace it with the euro. The sign is very important and positive, considering that we were last at the top of the agenda in July 2020, when they decided to admit us into the waiting room of the eurozone. The willingness of the Euro leaders to give us a chance was there. Yes, a chance. They are ready to examine our preparedness, but they expect us to do our homework. The task could be significantly easier if the fiscal rule for budget deficit is relaxed again and the countries in the European Union, just like during the COVID-19 pandemic, will be allowed to run deficits above three percent of their gross domestic product. The condition is that the additional spending is related to defense and increasing defense capacity.
All the optimism that may soon erupt among supporters of the eurozone, however, will be much more proof of why Bulgaria should not enter the eurozone and that the monetary union has never learned its lessons.
We risk entering an unreformed monetary union undeservedly and unprepared.
Even GERB representatives do not deny the dire fiscal situation. More importantly, they are trying to convince us that a line has been crossed, beyond which there is no question of compromise with the budget, but of the creation of a new culture of fiscal waste.
In his interview with journalist Yavor Dachkov, broadcast on Martin Karbovski’s YouTube channel, former Finance Minister Vladislav Goranov identified July 3, 2020, as the beginning of the political crisis in Bulgaria [1]. This is the day Bulgaria achieved official approval to join the ERM2 exchange rate mechanism, also known as the “euro area waiting room,” and the European Banking Union. Just minutes after the news of the banking union waiting room was announced at a briefing at the Council of Ministers, protesters against Borisov greeted President Rumen Radev, who raised his clenched fist.
Thus, first of all, GERB demonstrated in the summer of 2020 what demoralization is, when with the budget update they undertook unnecessary and excessive fiscal loosening. It was financed with two international bond loans for a total of seven billion leva. Withdrawn in September 2020, in two tranches, they went down in history as the first of the subsequent series in economic history of deficits caused by entirely current non-interest expenses, which were financed with long-term external loans. In this particular case, with the issue of 30-year debt.
The turn was prepared by replacing Finance Minister Vladislav Goranov, who was the most serious advocate of budget restraint in GERB and an opponent of differentiating VAT rates for different goods. He was replaced by Kiril Ananiev, who was not publicly opposed by Borisov.
The election victory of "We Continue the Change" opened up a new approach to the budget. It cannot be called a philosophy, because philosophy is an attitude towards a given issue, in which the subject who dictates the attitude preserves his health. Assen Vassilev's view was that budget revenues should cover only fixed expenses, and everything else, including investments, can be financed with borrowed money. He stated this personally in an interview with "Capital" in 2022, just before the war in Ukraine broke out:
The policy that we are pursuing has several red lines. One red line is related to the fact that our conditional fixed expenses certainly should not be more than our income. And if we look at what we spend on pensions, on schools, etc. compared to our income, we are in a surplus of 1.7%. That is, the deficit is a function of how much we decide to invest as national funds. [2]
This nonsense was repeated by Asen Vassilev in one of his speeches in the National Assembly this year in the disputes with the Minister of Finance Temenuzhka Petkova. The consequence of imposing this logic as the basis of fiscal policy is expressed in 20 billion leva of loans withdrawn after the withdrawal of GERB from power and Kiril Ananiev from public finances. It turns out that the only source of state investment can be loans, because current expenses must fully cover the state's revenues.
What happens to interest expenses? Can they be included among the payments that are covered by revenues, or should targeted loans be taken out for them as well? Vassilev does not find it necessary to consider this issue, much less comment on it.
However obvious the bankruptcy of the fiscal concepts that "Continuing the Change" implemented, it was neither exposed nor condemned in a categorical manner. The media environment also failed in this task, after degrading for more than a decade and a half, exposed to the temptations of foreign aid, passing through foundations such as "America for Bulgaria", or European funds, the purpose of which the Bulgarian authorities distort, granting them in exchange for uncritical and praise.
Even if we don't dream of a Bulgarian Walter Cronkite, who in 1968 showed with his reports that the Vietnam War would not be won (a reality whose recognition the authorities in Washington postponed for seven years and at the cost of hundreds of thousands of victims), how did not a single television station dare to look at how the national debt is developing, to see how, when and why budget deficits accumulate and to ask the question which scientific publications and studies legitimize such a turn in fiscal policy. What did they achieve? Did they solve any problem? Was it worth solving?
The graph below shows all the external loans that Bulgaria has taken out this century, excluding those from the deal with the restructuring of the external debt, by Milen Velchev and his team in 2002. The orange columns of the graph show how the state debt has changed year by year over the past two decades. It is clearly visible when it has decreased. Including during the GERB government. The blue columns show the withdrawals of external loans. From them it can be indicated that in 2012 it was a matter of refinancing an old loan. The peak in 2014 is related to the bankruptcy of the Corporate Commercial Bank and is a one-time phenomenon. The Borisov 2 cabinet allows itself only one withdrawal of an external loan in 2016, which is in the year after the repayment of external debt and predetermined by liquidity needs. The remaining withdrawals, concentrated after 2020 (the year of Covid-19), show the new worldview imposed with the advent of "We continue the change" (data source is the Ministry of Finance).
The forecasts in the macro framework for the withdrawn draft budget indicate that next year Bulgaria will pay 2.1 billion leva for interest. This money is more than everything Bulgaria spends on culture and sports combined. It is equal to the costs of justice. It is comparable to half of the costs of defense.
After the media's abdication of pointing out the disastrous policy of "We Continue the Change", yes, supported by GERB and DPS, but still initiated by "We Continue the Change", today GERB itself, with the necessary dose of dusting their heads with ashes, is launching the story about the harmful fiscal policy of their opponents.
They are doing it carefully, however, because they have not yet decided what their real priority is. To completely debunk Assen Vassilev or to enter the eurozone. A failure of this year's push to adopt the euro could prove to be Vassilev's fault, as could the deficits he has incurred in recent years. After all, the concerns of the European Commission and the European Central Bank that our fiscal policy is unsustainable date back to last year's convergence report, and Vassilev cannot hide behind excuses like that he was a minister until April 2024 and everything after that is the responsibility of others.
For their part, the PP and especially the coalition partners Democratic Bulgaria, are aware of the difficult situation they have brought Bulgaria to, but they are trying in every way to avoid responsibility. They feel that GERB is facing a dilemma – whether to hide the truth about the 2024 budget in order to enter the eurozone, or to point to Vassilev and them as the reason for the failure. Therefore, with the aggressive communication strategy of the PP and especially the coalition partners Democratic Bulgaria, they are preemptively flooding the field with information and using all channels to accuse the new rulers of not wanting Bulgaria to introduce the euro. In fact, they are only confusing the audience.
It is kept silent that the possible entry into the eurozone in 2026 will also be an indulgence for all the deficits and all the indebtedness to which Asen Vassilev and "We Continue the Change" have exposed Bulgaria in the last four years. It does not matter whether we are for or against replacing the lev with the euro. There are irrevocable facts that stand behind the seemingly good fiscal indicators that we boast about to the Eurogroup:
- decapitalization of Bulgarian Energy Holding, by withdrawing hundreds of millions that should have been used for investments.
- transfer of three billion leva of current expenses from 2023 to 2024 on the principle of "do not issue an invoice if you do not want to pay VAT and wait for us to pay you."
The embellishment of the 2024 budget in Lyudmila Petkova's draft budget was even bolder:
- the unpaid expenses, with and without issued invoices, amount to three and a half billion leva.
- the VAT not refunded on time is 800 million leva.
- the mining industry was forced to pay its taxes in advance on this year's still unrealized profit.
- the banking sector will do the same to avoid taxation of excess profits. And it will transfer it to consumers in the form of bank fees.
Today, the legend is that we will collect 18 billion leva more, with the collection rate of tax and social security revenues jumping by four percentage points compared to the level of 29% maintained in the last 10 years. The explanation for how this will happen lies in Simeon Dyankov's melted foundations from 2009. Back then, there should have been improved risk analysis and cooperation between the National Revenue Agency and customs. In the end, it all ended with an admission of failure and the need to update the 2020 budget in May. Such forecasts should convince the European Commission and the European Central Bank that despite five years of budget deficits, on the verge of the three percent threshold of GDP, they should still allow us to replace the leva with the euro.
A few things are certain. The European Central Bank has its own review of the press from Bulgaria. As has the European Commission and the Eurogroup. There is no way they have not followed all the budget nonsense in the last six months. If after all this their reports at the end of spring are positive, one conclusion will be forced upon them.
Bulgaria is being subjected to a political compromise that has never been applied to any other country. Usually, the commitment to favorable treatment is given about 15 to 18 months before the eventual date of joining the monetary union. In Bulgaria's case, this would mean giving us encouragement last summer and telling us to request an extraordinary convergence report this spring, because on its basis they will accept us in January next year. The very encouragement now, just 10 months before the eventual date, would signal an unusual rush and would again be a sign that politics is taking precedence over expert assessments of our preparedness.
The possible admission of Bulgaria into the monetary union in the current state of its economy and public finances will turn us and the eurozone itself into an example of everything vicious, which in principle every country with stable public finances and a banking system and with a clear assessment of its economic interest should avoid. A country with chronic budget deficits, in non-fulfillment of the inflation criterion, enters the over-indebted eurozone precisely when it cannot avoid an excessive deficit in its budget, which will put it in violation of the rules of the union from the first year of membership in it.
Undoubtedly, in the short term this will be a lifeline for our political class, and for public finances. A certain date for the adoption of the euro will inspire optimism and confidence in the participants of the capital markets in the West, and they will be willing to lend Bulgaria this year, and in a record loan amount, which has never been drawn before and which will be larger than the entire state debt at the end of the good years before the global financial crisis. The draft budget for this year alone envisages new loans of up to 16.9 billion leva.
As analysts at the Bulgarian National Bank warned in their study on the benefits and risks of adopting the euro, it is possible that both an individual country and the eurozone as a whole could fall into the hypothesis of the so-called “fiscal supremacy.” In this case, the stupidity of the finance ministries and their fiscal policies is so significant that it forces central banks to support them, because the fallout would be even more catastrophic.
For example, if a government has a large deficit and seeks to finance it on a market basis through the banking system. But because the deficit is so large, commercial banks immediately pledge the purchased bonds to their central bank, and the central bank must undertake monetary expansion and provide credit, because otherwise the country itself may go bankrupt.
In practice, we will give up the biggest advantage of the currency board – the ban on the BNB lending to the government, directly or indirectly, by lending to the banking system against government debt. With our entry into the eurozone, this common practice for the eurozone will become inherent in our country as well. For the first time since 1996.
[1] https://www.youtube.com/watch?v=Esb8_l9uzmY
[2] https://www.minfin.bg/bg/media/11696
