Poor man of Europe
Allowing Bulgaria to be a member of the euro club has the makings of an economic disaster
Its banking system is a mess. Italy is heading back into a fresh debt crisis. The German courts are fighting the legitimacy of the European Central Bank, and it is struggling to agree on a way of pooling its debts. Oh, and in case anyone hadn’t noticed, there has been a bug going around that seems to have affected the economy in a not entirely positive way. But, hey, don’t worry about any of that. The eurozone has come up with the perfect solution for all its problems. It is bringing Bulgaria on board.
Last week Bulgaria and Croatia were admitted to the Exchange Rate Mechanism, the waiting room for membership of the single currency. They will join the banking union and align their currencies with the euro. Seriously? Bulgaria? It is one of the poorest and most rackety countries in Europe. In truth, it is Greece on steroids. We are now about to witness a flood of hot money pouring into the country, a quick boom and then an almighty crash that will test the currency to its limits. If anyone needed proof that the euro is a political project that has long since separated itself from any form of economic sense then this is surely it.
When the Greek crisis erupted in 2011, followed by bailouts for Portugal and Ireland, all the talk was of countries leaving the euro. In fairness, however, it has only expanded since then. The three Baltic states have since signed up, with Estonia adopting the currency in 2011, Latvia in 2013 and Lithuania in 2015. Now it looks like welcoming a couple more countries into the fold. Croatia and Bulgaria have signed up for the ERM II, a system for managing currency fluctuations in preparation for membership. Christine Lagarde, the president of the ECB, tweeted out her congratulations, arguing that the currency “is part of our shared identity”. From October, both countries will be part of the banking union, with financial supervision handed over to the ECB, and if all goes well both will be inside the euro in a couple of years.
The trouble is, that is a big if. Just like Estonia, and Latvia, you can make a case for Croatia. It is a relatively small, well-run economy (although it is worth noting that there were huge banking scandals in the Baltic countries after they joined the single currency). But Bulgaria? Let’s pause for a moment and take a look at some of the numbers. Its GDP per capita is just $9,200 (£7,290), less than half that of Greece, a third of Italy’s, and a fifth of Germany’s. Transparency International ranked it as the most corrupt country in the European Union, and placed it 71st out of
180 countries it monitors (and there are seriously dodgy little places on that list) while the Rule of Law index put it on the same ranking as Russia.
Bulgaria’s stock market is so poorly developed that MSCI demoted it from its “frontier markets index” to a standalone ranking: it hasn’t even been allowed alongside countries such as Morocco or Bangladesh (the standalone section include countries such as Zimbabwe, Panama and Palestine, which are not exactly famous for their financial stability). It is effectively a tax haven, with a 10pc personal and corporate rate, which might be great for building an emerging economy, but that is also going to attract a lot of hot money once its banks adopt the euro, and come under the supervision of the ECB. In what possible universe could anyone think it was a good idea for Bulgaria to join a monetary union with Germany and the Netherlands? Or for it to join a banking union with France or Spain? You don’t exactly need a crystal ball to work out how this script is going to unfold. We saw it all in Greece after it joined the euro in 2001, and to a lesser extent in Cyprus and Portugal. There is a boom, as investors decide it is financially solid for the first time. The government starts to borrow a ton of money with its newly secure bonds, and private companies borrow even more wildly. A bubble builds up and then finally it all collapses amid a sea of red ink, and the ECB has to step in with a bailout.
In Greece, GDP per capita went from $12,500 when it joined the euro to $31,000 per capita in 2008, then slumped all the way back down to $20,000 as it endured the deepest recession since economic records began. Bulgaria starts from a lower base, has an even more speculative economy and is joining at a time when the ECB is printing money like crazy. It is going to be much, much worse than the Greek crisis. Of that there can be no question.
True, membership of the euro is not yet a done deal. It still has to meet the convergence criteria and the can may yet be kicked down the road by a few more years. That said, once a country joins the ERM it is set on the path to euro and, even without full membership, alignment is effectively the same thing in terms of its macroeconomic impact. It is the fixed currency and banking union that are important in redirecting the flows of money.
In truth, signing up Bulgaria means another eurozone crisis is now inevitable, and one that will make the tragic Greek saga look like a minor hiccup in comparison. Sadly that won’t stop it. The euro remains a political currency and nothing is allowed to get in the way of its expansion. Over the next few years a handful of Bulgarians will get very rich and so will a few bankers who shovel money in their direction. But it is an economic disaster in the making. And it is a powerful reminder that the EU and the ECB ignore all economic logic and drive forward with integration regardless of the damage it will inevitably do.
‘Another eurozone crisis is inevitable. One that will make the tragic Greek saga look like a minor hiccup’
A market in Sofia, Bulgaria’s capital. Its GDP per capita at $9,200 is half that of Greece