Bulgaria could break the euro. EU leaders will only have themselves to blame

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20 hours ago

Its inflation was in double digits only a couple of years ago. It has had seven elections over the last two years. Corruption is endemic and it has few major industries. Bulgaria is hardly anyone's idea of a stable economy. But, hey, never mind any of that. The European Central Bank (ECB) has had a great idea. Let's merge its currency with that of Germany, Belgium and France. What could possibly go wrong?
Well, quite a lot, as it happens. As Greece showed 15 years ago, hustling a country into the eurozone before it is ready can bring the entire currency crashing down. The euro survived the Greek crisis, just about – but that doesn't mean it will necessarily survive Bulgaria.
It certainly marks another major step forward for the euro. On Wednesday, both Brussels and the ECB confirmed that Bulgaria had finally met all the criteria for joining the euro. The formal decision is expected in July and the replacement of the lev will take place on Jan 1 next year.
We can expect a ponderous speech from Ursula von der Leyen, the European Commission president, about how the European family is expanding. There'll be some grand claims from Christine Lagarde,the ECB president (assuming she hasn't quit to run Davos instead by then) about how the euro is finally taking its place on the world stage. And there'll be some fireworks as well, as the old currency is quietly buried and the new notes and coins are introduced.
Of course, on one level that will be a victory for the single currency. Bulgaria will be the 21st nation to adopt the euro, and the fact that new countries keep joining is certainly a sign of its strength, even if the really successful economies in central Europe, such as the rapidly growing Poland, show absolutely no interest in having anything to do with it. And initially it won't actually make a huge difference to the economy. The lev is already tied to the euro by a currency board, meaning it can neither appreciate or devalue.
The trouble is, it is very hard to see how Bulgaria can be seen as part of a natural currency zone with Germany and France. One problem is that many of the electorate don't seem to want the euro very much. There was a rally in Sofia last weekend protesting against the decision, and the country's independent president Rumen Radev has already proposed a referendum on the issue, a demand criticised by the government as 'sabotage'.
You might hope for a bit more of a settled consensus on an issue as important as adopting a new currency. Still, leaving aside that point, it is the fundamental economics that are more worrying.
To start with, Bulgaria is one of the poorest countries in the EU, with a GDP per capita of $15,800 (£11,700) according to World Bank data, compared with $54,000 in Germany and $44,000 in France. It is not exactly a minor gap to put it mildly. It has continually missed its inflation targets, with the rate hitting 16pc as recently as 2022. And it has bitterly divided politics, with a bewildering succession of elections, having had eight prime ministers since 2020, if we include caretaker administrations.
Even worse, it is not as if Bulgaria even has a great record of paying back its creditors. For much of the post-war period it was of course part of the Soviet bloc, but before that, it defaulted on its debts in 1915 and 1932. Admittedly, that is a better record than Greece, which has defaulted on its debts six times over the last couple of hundred years, but for much of the 19th century Bulgaria was part of the Ottoman Empire which was hardly known for its financial stability either.
Over any reasonable time frame, it does not look like a very good bet for bond investors. Likewise, the lev has been through four incarnations since Bulgaria became an independent country, with the latest re-denomination in 1999, when one new lev replaced 1,000 of the old ones. Again, it is not a currency that has been a great place to store your life savings.
Fifteen years have now passed since the Greek financial crisis erupted, rocking the eurozone, which is probably long enough for most of its main lessons to have been forgotten. It had multiple causes, but the nub of it was this. Greece was hustled into the zone before it was ready and before its economy had merged with its more developed neighbours, encouraging its politicians to borrow recklessly in a currency that was as good as Germany's and running up debts that turned out not to be sustainable.
Eventually, the whole house of cards came crashing down, threatening the stability of the banking system right across the continent. It triggered a cascading series of crises that caught up Italy, Spain, Portugal and Ireland from which it took years to recover and forced the ECB to launch a bailout that everyone had assumed was ruled out by the treaties.
In reality, Bulgaria is Greece on roller skates. Sure, the zone managed to recover from the Greek crisis, and has put itself back on a firmer financial footing. But it was a long hard slog, a decade was lost, and Greece suffered the worst collapse in output of any developed nation since the Great Depression of the 1930s. The zone may get lucky and Bulgaria may integrate seamlessly into the wider European financial system.
And yet the blunt truth is this. Admitting Bulgaria into the zone is a very big risk, and a decision that has been made on purely political grounds. It may well end up crashing the system all over again – and the leaders of the zone will only have themselves to blame.
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