Poor man of Europe

Al­low­ing Bul­garia to be a mem­ber of the euro club has the mak­ings of an eco­nomic disas­ter

The Daily Telegraph - Business - - Front Page - Matthew Lynn

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

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