Without reforms there is no urgent exit from the crisis, according to Gheorghi Stoev
euinside, February 12, 2010
The Bulgarian government approved on the 27th of January 2010 the Convergence programme of Bulgaria for the period 2009-2012. The programme is being updated each year and is presented to the European Commission which, on its hand, in April publishes separate Convergence report. The programme consists of forecasts for the development of the Bulgarian economy in the context of its convergence with the other economies in the EU. In the programme the government also makes commitments for reforms which will help this process of convergence. Almost immediately after the approval of the programme, the deputy prime minister and minister of finance Simeon Dyankov started a tour of all euro area member states to gather support for Bulgaria's quick accession to the ERM II whose main purpose is to prepare the country to introduce the single currency - the euro.
The Convergence Programme and the euro were the two most discussed issues in the last few months since the government of Boyko Borisov took power. The first - because of the crisis and the expectations of a recent recovery of Bulgarian economy. And the second - because of the serious ambitions of the cabinet to push the nation in ERM II. On these two issues euinside spoke to the managing associate in Industry Watch Bulgaria Gheorghi Stoev:
euinside: Isn't the Convergence Programme too optimistic?
GHEORGHI STOEV: In the short-term - no. Because in the short-term, I mean the horizon of this government, the budget could be balanced by serious spending cuts, as it happened in 2009. Basically, one of the approaches is to cut spending, which is of course, worth praising and the other approach is to make an attempt to increase revenues with short-term measures. Short-term in this regard means that this year we can increase revenues a little bit from, let's say customs, but next year this cannot happen. So, my response is - for a short-term period of 2-3 years - yes, but for a longer term, maybe the assessment that this is an optimistic scenario for the public finances and the economy, is the right one. I mean that the hidden risks in the heavy budget spheres like pensions, healthcare and education, are still not solved.
euinside: The minister of finance Simeon Dyankov is already presenting the programme in euro area member states with the idea to gather support for the fast accession of Bulgaria to the ERM II. But to what extent this programme can guarantee a stable presence in the exchange-rate mechanism and, possibly, against repetition of what happened to Greece and other countries?
GHEORGHI STOEV: In principle - it doesn't. This is not a political engagement. This is, I would say, a document more in the field of forecasts and of positive thinking rather than in the field of promises for actions and respective commitments these actions to happen. We should make a clear distinction between these 2 things: membership to the eurozone as a process of integration is rather a political decision, because, as you may know, Bulgaria has fulfilled most of the macro economic formal criteria to enter the ERM II. Now what remains to be done is to gather political support from the big member of the European Central Bank. This is, before everything, a matter of political shuttles and political horse trading than a matter of macro economic policy.
euinside: This, indeed, is a matter of shuttles but the people in question - who will give their assessment - will they watch what signals are coming from Bulgaria - I mean the frequent change of positions of the government on all important issues, the frequent change and speculations about how will be an economic adviser of the prime minister, what economic policy the government will chose?
GHEORGHI STOEV: I don't want to sound as an advocate of the government because I am not affiliated in any way with it so, please, do not take my words in the wrong way. What actually is happening is looking for the approval of countries which, from a budgetary point of view, are performing far worse than Bulgaria. This is why getting their support will not be difficult. France could always support Bulgaria because it will say - at the moment Bulgaria's fiscal situation is much better, the budget deficit is lower and the debt is lower, the perspectives for next year are also more hopefully than for France, Germany, Italy, not to mention Greece, Ireland and Spain.
So, as you can see, I am not praising the minister of finance, but the simple comparison with other financial ministers puts him in a positive perspective. I don't want to involve myself with explanations of why new names were brought up, related to the macro economic policy, I simply suggest that this is an internal party problem which I don't quite understand. I presume this has something to do with a mini-political crisis or not that mini right now which the PRs of the premier are trying to solve.
euinside: You said that Simeon Dyankov looks much better compared to other colleagues of his, but there are analysts who claim the opposite - that because of bad performing countries Simeon Dyankov will not be well accepted. In other words, there would be a stronger caution for accession of new countries?
GHEORGHI STOEV: Yes, of the Bulgarian government does not succeed in distinguishing Bulgaria from other small and problematic member of the eurozone. We have members who are performing excellently like Slovakia (a new member) and, by the way, a very good example that the euro area accession does not necessarily bring new inflation as some opponents of eurozone claim. Slovakia is also a good example because it is very similar to Bulgaria - of course with a lot more capital, with higher productivity but still quite similar. It successfully introduced the euro and is moving ahead.
It would be a mistake Bulgaria to be associated with other, smaller countries in the region - Greece is a bad example from the euro area nations but is not the only one. Romania is another bad example outside the eurozone. The government will be successful in this process if it manages to clearly make our country distinct from nations with problems because, indeed on macro economic level they are fundamentally different. And whether this difference (to present Bulgaria as doing great in the region) will be politically legitimized is something the government should do.
euinside: The Convergence programme again relies on export for economic growth, which means that we will continue to be an export-oriented economy. Now in Davos a large part of the discussions were that the export economies should reconsider their policies so as to avoid repetition of such crises. It is possible and should Bulgaria start thinking of stimulating in some way the internal demand?
GHEORGHI STOEV: I am not a supporter of the thesis that demand is a driver of economic growth. I have always thought that investments is what characterizes the fast economic dynamics and not the simple spending for consumer goods. Of course, always when we have a fast growth we have a fast demand because when you produce then you spend your income and you consume. But the colleagues who claim that consumption is a source of growth I think upturn the cause and effect upside down. I think that you have to have economic growth so that you can talk about demand because you can't have buying capabilities before you have produced the income. If you can't buy, there is no demand.
So, I have always stated that the current crisis is more a crisis of contracted investments rather than a crisis of demand. And in fact, we will notice the recovery when we see a recovery of investments. I see in the programme of the government that it foresees investments growth of 10.6% in 2009 which I consider optimistic but the growth for 2010 is 9% which is good. I think that is this happens we can talk about a beginning of recovery in 2010. However, my personal opinion is that another scenario is possible - not such a significant investments' growth and a period of low level of investment dynamics. After all Bulgaria is almost entirely dependent on external capital - just a small economy - and there is now way to quickly enrich with capital from internal savings - we just don't have them.
I am not sure that in the current insecurity around the world the investors would decide to pour capital in a country like Bulgaria. Of course, the government can and should do more to improve the image of the business environment and to give a signal that here this is a good place to make money. But if no reforms happen, and the first months this government showed it is not willing to make reforms, we can hardly talk about any dramatic growth of investments this year. I am just not convinced that global economy will recovery this fast. I'd say this again, let us not excuse ourselves with the crisis - a large part of the possibilities lie inside Bulgaria but the capital should come from the outside and should be attracted with proper signals.
euinside: And probably not with campaigns, lobbying etc?
GHEORGHI STOEV: Campaigns and lobbying could remain on the level of ministers and the people that need convincing - central bankers, those who have to be convinced to support Bulgaria's accession in Europe. But on a business level, investors, entrepreneurs signals are needed that here their money are secure, that the taxes are low, that labour is qualified and that can easily be found if someone would need to build a new factory.