EKIP– Expert Club for Economics and Politics A Different Opinion
Amidst the enthusiasm for investigating the irregularities of the previous administration, the caretaker government of Stefan Yanev approved a plan for Bulgaria to join the eurozone. This is a puzzling move, because this plan is largely inherited from the previous government, whose abuses in other areas the current caretaker cabinet appointed by President Radev is particularly eager to investigate. It is strange, however, why the same does not apply to the process of joining the ERM-2 currency mechanism and the Banking Union on the way to adopting the euro, which was extremely opaque and riddled with many signs of corruption and conflicts of interest.
But beyond the details of the process itself, the fundamental question remains. Why should Bulgaria join the eurozone at all? My position, categorically expressed back in 2017, is that Bulgaria should not adopt the euro. This position has not changed because the euro has not changed and is unlikely to change anytime soon - or ever. The eurozone is still a monetary union that suffers from fundamental structural problems leading to the impoverishment of the citizens of the member states that make it up.
Shared resources and the tragedies of their use
In essence, the eurozone is a very special case of the economic phenomenon known as the “ tragedy of the commons.” In economics textbooks, this is how it is defined as a situation in which many users exploit the same resource, which is not maintained by anyone in particular because it is not the exclusive private property of any of these users. The result of such a situation is that each user has an incentive to extract maximum economic value for himself from the resource, while at the same time making no effort to maintain that value in the long run. In short, consumption without investment.
In the field of mathematical modeling of strategic actions, known as “game theory”, this type of tragedy is a form of the so-called “ Prisoner's Dilemma”. This is a situation in which two (or more) parties acting in favor of their own self-interest create a situation that harms their own interest. If we take as an example a typical case in ecology, for example a limited water body, all those who use its water benefit from it being kept clean, unpolluted and not being overexploited so as not to dry up (cases with which Bulgaria also has experience).
The question is how to coordinate this maintenance among the many users of the reservoir? If they are considered separately, the individual interest of each of them is to maximize the drainage of the reservoir for their own purposes, ignoring the effect on the water level and pollution, which leads to the transfer of responsibility for maintenance to the others. However, when each of the users individually does this calculation in his head, it turns out that everyone exploits and no one maintains. Thus, the reservoir quickly becomes polluted and dries up.
The Eurozone as a tragedy of the common good
This simple example illustrates this type of economic tragedy. The problem is purely one of coordination. Someone needs to enforce coordination among the users of the common resource so that everyone not only exploits it but also maintains it. What does this process look like in the eurozone?
The euro is effectively a shared resource between all eurozone member states. It is not a national currency of Germany or France, but a “common” currency that is used by everyone. And so we come to the tragedy of the commons.
The political class of each country in the monetary union has an incentive to use the common currency for its own economic purposes. Some governments - to subsidize imports through the increased purchasing power of the money, thereby exporting inflation to the others. Others - to subsidize exports through the opposite - the decreased purchasing power - thus making the same exports more competitive, which subsequently exports unemployment to the other member countries.
The first are those countries whose national currencies were weaker (cheaper on financial markets) before adopting the euro – countries such as Greece, Italy, Spain, Portugal and (especially politically key) France. The second are countries whose national currencies were stronger before adopting the euro, such as Germany and the Netherlands. Both groups export some economic negative to the others – in one case inflation, and in the other - unemployment. Without too many technical details, these are the main macroeconomic vices of the eurozone, described and analyzed in depth in the book “The Tragedy of the Euro” by Philip Bagus (it is available in Bulgarian, and the English version can be read online at this link ).
This vicious process benefits certain politicians and producers in countries with subsidized exports and certain businesses and especially public procurement contractors in countries with subsidized imports. However, in the long run, the ordinary taxpayer and worker always loses, no matter which country they are from. In one case, they lose purchasing power due to higher inflation, in the other case, they lose jobs due to the lower competitiveness of local exports due to the more expensive currency.
The crux of the problem – the imposition of rules
At its core, the problem is one of coordination. In theory, supranational institutions such as the European Central Bank (ECB), the European Commission (EC) and other institutions of the European Union (EU) and the eurozone in particular, should coordinate the various member states of the monetary union - through rules that ensure that the vicious and multidirectional exploitation of the common resource (the currency) does not occur, which causes serious harm to the well-being of citizens throughout the eurozone.
In theory, a similar function is served by fiscal rules, including the so-called “Maastricht criteria,” which impose certain requirements for joining the eurozone. These criteria were originally devised precisely to limit the process described above and to protect against the tragedy of the commons. In fact, even at a theoretical level, there are some problems with them – they are far more effective in limiting one type of vicious effects of the tragedy than the other. But it is pointless to go into these theoretical details in view of the fact that no one complies with these criteria anyway and no one seriously tries to enforce them. Many eurozone member states have in fact not complied with them since the monetary union existed or even before that, which completely renders their initial application as criteria for membership meaningless.
At the moment, these criteria are not officially respected by the European institutions due to the COVID-19 pandemic, which sounds like a joke to any careful observer of economic developments in the eurozone since it existed. How do you stop applying something that you have never applied? The most famous of the notorious criteria relate to fiscal policy and concern the level of government debt as a % of GDP (no more than 60%) and the level of annual budget deficit as a % of GDP (no more than 3%).
From collective irresponsibility to collective impoverishment
France has exceeded the level of public debt as a % of GDP since 2002. It has only met the requirement for a maximum budget deficit in four of the last 20 years. Italy has never met the requirement for a public debt level, even if we go back to the early 1990s, which calls into question how it was accepted into the eurozone in the first place. The same applies to Belgium. This shows that from the very beginning no one had any intention of seriously implementing these criteria. The most striking case is that of Greece, which, in addition to the requirement for public debt, did not meet the budget deficit requirement at the date of its accession in 2001.
What is the point of having written rules if no one follows them? And even more so if no one enforces them? The European institutions are far more fond of granting “temporary” exceptions to the rules, which last for years after the crises that caused the exceptions have subsided. In the last two years, there has even been talk of loosening these rules. In any case, the necessary coordination is not being enforced. And so the citizens of the eurozone continue to suffer the effects of the tragedy of the common currency.
Is there any hope of changing this situation? Everyone can judge for themselves. But 20 years after its creation, the situation in the eurozone is as follows: the inequality in economic development between the southern (like Italy) and northern countries (like Germany) has only deepened. Countries like Italy today have lower levels of GDP per capita than before the adoption of the euro. Greece went through the worst and longest economic crisis in its history and continues to suffer from chronic unemployment of over 15%.
Where is the euro going and where do we want to go?
Political tensions between the southern and northern member states are extremely high, as was seen last year when the idea of issuing common debt was discussed. The economic crises led to the emergence and popularization of many Eurosceptic parties throughout the eurozone. Instead of convergence in development and harmony in politics, the euro has caused exactly the opposite for the countries that adopted it.
The vicious effects of the tragedy of the commons are deepening more and more, and the ever-increasing risk of a severe crisis and even the collapse of the monetary union is only mitigated by the ECB’s incessant money printing. Printing for which all taxpayers in the eurozone pay with a loss of value in their wages and savings. At this point, the ECB’s balance sheet is equivalent to 63% of the GDP of the entire eurozone. It seems inevitable that this percentage will reach and exceed 100.
This is the inevitable trajectory of the Eurozone's vicious structure. Bulgaria is indirectly affected by this tragedy, at least because the lev is pegged to the euro and because it is part of the wider European Union family. But do we want to be directly affected? Should we put our heads in the sand and, bidding farewell to our monetary sovereignty, adopt a common currency that is doomed in every structural respect? The answer, I hope, is no. And before a caretaker or regular government makes such decisions, it is good that not only it, but also its citizens are aware of the risks.
