Bulgarians turn against euro

By bne IntelliNews September 8, 2011

Branimir Kondov in Sofia -

Public support for the adoption of the euro has fallen in Bulgaria, unsurprising given that the bailouts of the Eurozone's most indebted members come at a time when household incomes in this poorest state of the EU are failing to keep pace with spending and unemployment is soaring.

While those in favour of abandoning the Bulgarian lev for the euro outnumbered opponents at the outset of the global economic crisis in 2008-2009, by July of this year the number in favour was just 25% of those polled, while 52% were against it and 24% undecided, according to a poll conducted by the Open Society Institute in Sofia, a liberal think-tank,

The poll also shows the appeal of a switchover to the euro has rapidly dwindled since February when 34% voiced support for the idea while 45% opposed it. Opposition to entering the Eurozone was even stronger at nearly 57% in July when people were asked whether they would support the adoption of the euro if Bulgaria should share the burden of bailing out indebted, yet much richer members of the Eurozone. "The setting up of a rescue fund into which all Eurozone members will have to contribute considerable amounts of money is a kind of entry fee for new members. Moreover, it is inexplicable why poor countries should contribute for the rescue of rich ones, and at a cost that is disproportionately greater as a percentage of their GDP," Georgi Angelov, chief economist of the Open Society Institute, writes in the latest issue of its publication Politiki. "Poor countries are being made to act as if they are rich ones, and at the same time, in the public perception, the euro turns into a source of obligations from a source of stability."

Reversal of fortunes

EU finance ministers in March agreed to set up a permanent €700bn bailout fund called the European Stability Mechanism (ESM) that is expected to go into force in 2013 and replace the temporary €440bn European Financial Stability Facility. Bulgaria supported the creation of the ESM that foresees considerable financial burden borne by all members of the Eurozone, with the poorest countries having to pay most because of the ESM calculation formula based on the population and GDP of each country, says Angelov.

Bulgaria, which had the second lowest government debt/GDP ratio in the EU after Estonia last year, would have to commit around €3bn to the ESM if it joins the Eurozone, provided all other EU members remain in the bloc at that time, Finance Minister Simeon Dyankov said, making it clear that this potential contribution figure is far from final.

Bulgaria's GDP per capita in 2010 expressed in purchasing power standards (PPS) was the lowest in the bloc at 43% of the EU average, according to preliminary estimates by Eurostat. The biggest country in Central and Eastern Europe, Poland, was the fifth from the bottom at 62% of the EU average GDP per capita, while the Czech Republic was somewhat better off at 80% of the EU average in the wealth table. In comparison, indebted Greece's GDP per capita was 89% of the EU average, while in Spain and Italy the indicator was around the EU average.

Membership of the euro had been a priority for the countries that joined the EU in 2004 and 2007, with the single currency regarded as a strong guarantee against fiscal imprudence and a stable anchor of economic policy. However, wary of the need to pay for someone else's wasteful spending, the centre-right government in Sofia, which had declared accession to the Eurozone was one of its top priorities when it took office two years ago, has shelved the idea until after the Eurozone puts its own house in order and resolves the debt crisis. Bulgaria had planned to start negotiations this autumn on entering the ERM-2 mechanism, the Eurozone's waiting room where candidates stay for two years preparing for membership, but will now delay the talks "until the general picture is clearer," Dyankov told Reuters in July.

Certainly, the problems in the Eurozone come at a bad time for Bulgaria's population at large. In Bulgaria, the average quarterly total income per household member in the second quarter of 2011 was BGN940 or €480, 3.8% up on the year but just a fraction of the income in rich EU member states, according to official Bulgarian statistics. To make things worse, total expenditure per household member rose faster, increasing by yearly 8.2% to BGN870 in the second quarter of 2011, with spending on food and housing (energy, fuel and water) accounting for 49.5% of total, way above the EU average.

In yet another drawback, Bulgaria's unemployment rate rose to 11.5% in the first quarter of 2011, up from 10% a year earlier, the second highest increase in EU27 after Greece, Eurostat said. Unemployment in Bulgaria was 11.4% in June 2011, compared with 10.1% in June 2010.

Despite the turmoil in the eurozone, Nadya Yorgova, Director of "Economic Programmes and Projects" in the Economic Policy Institute, a local NGO, said in a research paper that, "in the medium- and long-term perspective the positive sides of joining the euro area are definitely outweighing the possible negative ones."

Currency risk now associated with Bulgaria, which keeps interest rates on lev credits higher than rates in the eurozone, will drop, which will be beneficial for the real economy and households. Lower lending rates will help attract fresh foreign direct investment and will will boost economic activity. The rise in consumer prices resulting from the switchover to the euro, which took place in almost all the countries that have entered the eurozone so far, will be a one-off event but its disadvantages will be considerably more predictable than inflation fueled by the rise in global oil prices, Yorgova said.

Bulgaria, pursuing tight fiscal policies backed by its currency board system that pegs the lev at a fixed exchange rate to the euro, managed to slash its consolidated budget deficit to BGN720.5m, or 1.0% of projected GDP as of end-July, from BGN1.23bn, or 1.7% of GDP a year earlier. It targets fiscal deficit equivalent to 2.5% of GDP this year, but Dyankov has said the figure could come closer to 2%.

Also on the bright side was a rise in half-year exports that increased by 40.3% on the year to BGN18.8bn with exports to EU countries rising 43.4% to BGN11.58 bn. The country's GDP grew by 1.9% on the year in the second quarter driven by strong exports, according to a seasonally adjusted flash estimate of the national statistics office. The government expects 3.6% economic growth this year.

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