Welcome to the first post in 2010! After having my blog (WordPress 2.8) hacked, I am happy to be reporting online again. I feel sorry for the poor soul that took the time to bring this website down for a couple of days, yet nevertheless I feel somewhat honored by the attention that I am receiving.
I would first like to comment on a Wall Street Journal article from Jan, 12th. I hold the concerns of Bulgaria’s prime minister Boyko Borisov that public debt surges in Greece (and to a lesser extent elsewhere in Old Europe) would have repercussions for Bulgaria’s euro-zone for very well grounded. The realistic achievement of a balanced budget in 2010 would be a huge success amidst a pile-up of political and public policy disappointments of the government led by Borisov. This success alone may however not suffice for a euro-zone membership. I am a big proponent of an early euro-zone entry, but still, the overall costs of integrating Bulgaria at this time may be higher than expected. The EU/ECB will have to carefully sort out whether the benefits for the added stability in Bulgaria would outweight midterm costs and lead to stability loss for the euro-zone as a whole.
Below I am posting an excerpt from a seminar paper that I wrote as an undergraduate which dealt with Bulgaria’s currency board on the way to the euro-zone:
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Mundell (1961) et al formulated labor mobility, the degree of openness and economy diversification as the basic requirements for participation in a single currency area. [..] According to his analysis single currency areas rely on similar levels of price stability where a single monetary policy would theoretically suffice for all. His work had helped lead to the creation of the Euro, which according to him is “a great step forward” and “a catalyst for international monetary reform”. However, some of the requirements for a single currency area to work (such as the common U.S. Dollar for all 50 states) that Mundell has postulated such as labor mobility and indirectly language barriers and housing markets flexibility do not yet fully apply for the newest EU-members such as Bulgaria. Hence, even in basic theory, notwithstanding all common sense reasons and the positive public opinion to join the EMU, some contra-arguments exist in regard of the ability of the newly joined the EU “immature” Bulgarian economy to fight asymmetric shocks. Still, there is an overwhelming amount of positive effects that make the adopting of the single European currency unambiguously attractive, especially in a credit crisis with inherent refinancing problems.
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Summarized in theory, benefits of euro-zone integration include the elimination of exchange transaction costs and exchange rate volatility, removal of payment obstacles to trade, prevention of competitive devaluation and speculation, prevention of extremely high interest rates that hinder economic growth when countering a currency speculation attack. [..]
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I remember that in April 2009 the Financial Times quoted a non-disclosed IMF report, urging for unilateral euroization because “to countries in the EU, euroization offers the largest benefits in terms of resolving the foreign currency debt overhang, removing uncertainty and restoring confidence”. This assessment certainly still holds true and I hope that the severe public spending slashes actually do help put Bulgaria in ERMII soon enough.
Talking about spending cuts, I fully support Simeon Djankov’s actions for many reasons. Bulgaria’s economy has to be painfully restructured to rely much less on government spending — government projects, orders and the like. Apart from infrastructure projects the government should not be the main contractor and provider of business that companies are on the lookout for. And yes, taxes are low but I can’t help but quote Milton Friedman here that “if you receive more revenue by cutting taxes, you aren’t cutting taxes enough”. Thus, if Djankov is cutting spending while keeping taxes low — well, he can’t do much wrong. The whole polemic of an ultra large intra-company indebtedness that circulates in the media in Bulgaria is in my opinion overrated and things will eventually settle back to normal.
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