Bulgaria May Apply for Euro Entry Mechanism in 2011, Says Finance Minister
By Vesselin Zhelev
Bulgaria plans to apply for the single currency entry mechanism, ERM II, late next year, the country's finance minister Simeon Djankov has told WAZ.EUobserver in an exclusive interview.
The former World Bank economist is a strong believer that the euro has a bright future, and says countries that are not in the eurozone should be able to opt into a future permanent EU financial rescue mechanism.
WAZ.EUobserver: The euro area is going through a tough period. Its future might be at stake, according to the worst forecasts. Why is Bulgaria so eager to join right now? Isn't it safer to stay out for the time being?
Simeon Djankov: The euro has sufficient backing by the member states as well as by the European Central Bank, so it is only going to get stronger as a currency after this crisis. Crises typically show where problems lie.
There are some problems with the institutions around the euro. These problems are being fixed. So the euro is going to continue as a strong currency in the future.
Since Bulgaria has for a long time tied its currency to the euro, we want the full benefit of euro adoption; by having euro notes in our hands, we'll reduce our interest rates by two to three percentage points. Another benefit is that we won't need to keep fiscal reserves and can use them for investment projects instead. We are firmly committed to enter the ERM II and the euro as soon as possible.
WAZ: What does has Bulgaria have to do macroeconomically?
SD: We have the second lowest debt to GDP [ratio] in the EU. The next important goal we have to achieve is a deficit below three percent of the GDP. Last week we voted a deficit of 2.5 percent for 2011. Now we need to show our own people and the Europeans that we can achieve that.
Depending on just how the first two or three months of 2011 go, and if we show that we progress towards a deficit below three percent, I think we have enough to start on our way to ERM II and eventually to the eurozone, depending on what changes of the institutions are needed in the eurozone itself.
WAZ: What is the realistic timetable for Bulgaria to join the ERM II?
SD: This very much depends on what happens in the eurozone during this period. It will take us 2011 to do our homework. So that towards the end of 2011 we can show that we are below the deficit target and only then we can come to Brussels and say, "See, we've done our part so now we'd like to start the process".
WAZ: Bulgaria plans to return to international bond markets next year, after a decade of cutting down its external public debt. Why?
SD: It's not obvious that that would happen actually in 2011. Currently we have enough fiscal reserves to go for the whole of 2011 without going to the international bond markets. In the end of this year we'll have enough reserve to cover the whole of the projected budget deficit for 2011. After that it depends whether we need resources for some particular policies but that would be rather a policy decision than a fiscal need.
WAZ: Should the European permanent crisis resolution mechanism be confined to the euro area or extended over the whole of the EU?
SD: I think that for eurozone countries it should be mandatory but for the other member states there should be the possibility of voluntarily opting in. I think Bulgaria has an interest to opt in. We've seen this and last year that some non-euro members, namely Romania and Hungary, needed help and the eurozone reacted.
WAZ: Are you in favour of automatic sanctions for those countries that do not abide by EU financial rules?
SD: I am in favour of automatic sanctions because any other sort of sanctions will be subject to lots of debates, time would be lost and, once there's this uncertainty, then somehow the sanctions lose their strength, their purpose.
WAZ: You are very critical of the idea of equalising corporate tax rates in the EU. Why?
SD: From an economic point of view it's a really bad idea. I am confident it is not going to pass, because there are a number of countries that strongly oppose it. A large part of Europe already has a common monetary policy with the introduction of the euro.
Bulgaria's currency is pegged to the euro and from that perspective our monetary policy is also dictated by Frankfurt and is not made in Sofia. You cannot also fix a major part of the fiscal policy because then the national governments are left without any instruments to operate during surprises like external crises.
If you don't have flexible policies, this is where the crisis is propagated and comes much faster and stays much longer. And how do we know what the right rate is? From most economists' point of view lower tax rates are the right ones. Then why don't we fix the corporate tax rate of the whole of Europe at 10 percent, like it is in Bulgaria?
WAZ: What do you think of the proposals to increase EU own resources by introducing some sort of European levy?
SD: I am against it. This is another way of imposing part of a common tax policy and I think, for many reasons, European countries should at least have distinct tax policies for the next decade or two.
WAZ: The World Bank, the International Monetary Fund and the European Commission have been much more conservative than you in their economic forecasts for Bulgaria for the next year. They project annual economic growth of between two and 2.6 percent, whereas the Bulgarian government projects 3.6 percent. What do you base your optimism on?
SD: Just that we know more than they do, since they have to look at 190 countries around the world. Our forecast is a lot more detailed. The international institutions are always more conservative than any country's government.
Whatever the growth is, the question is can you fulfil the revenue part of the budget? We have not calculated it on 3.6 percent growth. We've been conservative and even if growth is two percent or one percent the revenues will still be fulfilled.
WAZ: What sort of growth structure do you expect? Which sectors will be its 'engines'?
SD: The sources of growth, not only in 2011 but for the next five to 10 years in Bulgaria, will be significantly different from those before the crisis. It's going to be primarily export-oriented sectors – industry in particular.
This year, for example, the pharmaceutical industry has done extremely well. It more than doubled its export growth. The software industry has more than doubled its export growth. The glass industry has grown nearly 200 percent. Agricultural production and exports are also increasing.
As Bulgaria is now entering into the highest subsidies from the European Union, we also expect higher returns in that sector. And, of course, the heavy investment in infrastructure is going to be a significantly larger engine of growth for Bulgaria in the next five to 10 years.
WAZ: Nearly 70 percent of Bulgaria's external trade used to be with the EU. What are the country's main export markets now, given that recovery in the EU and particularly in the eurozone is fragile?
SD: About two-thirds of the export growth this year has come from non-EU markets such as the Middle East, which was traditional for Bulgaria 15-20 years ago. We have also seen nearly 80 percent growth in exports to other traditional export markets like India, Pakistan, east Asia, Vietnam. There has been a lot of growth in Russia, Ukraine and some interesting patterns of markets opening for Bulgarian exporters in Latin America.
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