Adopting the Euro in Bulgaria

(1)

MASTER THESIS

Adopting the Euro in Bulgaria

A way out of the financial

crisis?

Hristian Drensky 1823922

3/25/2013

(2)

2 | P a g e Abstract

This paper investigates the challenges, willingness and readiness of Bulgarian citizens and corporations in Bulgaria to join the Euro zone. A survey among the government bodies, consulting companies and the private sector is conducted in order to get an opinion from the main economic groups of the country regarding the challenges and the opportunities of adopting the euro and whether, at present, this is a solution for improving the economic state of the country. Moreover, having in mind the current situation in Bulgaria as a member of the European Union and its obligation to adopt the Euro as a currency due to its membership the work also investigates whether this would be a way out of the financial crisis in the current turbulent economic time for Europe.

(3)

3 | P a g e Contents

Introduction ... 4

Literature Review... 7

Cost- benefit analysis ... 8

Bulgaria ... 9

Foreign Direct Investment ... 12

Extent of Euroization ... 12

Methodology ... 14

Data Collection ... 15

Data analysis ... 17

Results ... 18

Conclusion and limitations ... 23

Bibliography ... 27

(4)

4 | P a g e Introduction

The Balkan Peninsula in Eastern Europe locates two of the latest EU member states, namely Bulgaria and Romania. They distinctively were tagged as the poorest EU member states, therefore the EU accession brought a lot of hope for their citizens that this would cease after joining and benefiting as being part of the European Union. Although the acceptance to the EU in 2007 promised economic prosperity for the new members, the financial crisis hit soon after that in 2008, and unfortunately, unpleasantly and unexpectedly put Europe in an unstable state. As a result the uniting currency, the euro, which aims at stabilization and securitization of the European market (Grauwe, 2000), started seeming less attractive and more unstable. The economic turmoil in the PIIGS countries (Portugal, Italy, Ireland, Greece and Spain) showed flaws in the currency and its value. Therefore the obligation of every member state to adopt the Euro, as one of the requirements of the Maastricht Treaty, did not seem any more attractive to Bulgaria and Romania, due to its unsecure stand. In the paper, the term euroization will be used interchangeably with the phrase adopting the euro, or euro adoption. Bulgaria, as a member of the EU is under the legal obligation to adopt the euro as soon as it meets the convergence/Maastricht criteria. The Maastricht criteria are a set of requirements that every member state that has joined the European Union, needs to comply with and to fulfill before it can join the Euro zone. These convergence criteria formulated by the

European Commission “are defined as a set of macroeconomic indicators which

measure:

 Price stability, to show inflation is controlled;

 Soundness and sustainability of public finances, through limits on government borrowing and national debt to avoid excessive deficit;

(5)

5 | P a g e

 Long-term interest rates, to assess the durability of the convergence achieved by fulfilling the other criteria.1

In this context, the Treaty of Maastricht responds to five key goals:  strengthen the democratic legitimacy of the institutions;

 improve the effectiveness of the institutions;  establish economic and monetary union;  develop the Community social dimension;

 establish a common foreign and security policy.”2

Every member state should be able to control its monetary policy in order to fulfill the exchange rate stability criterion. Table A1 in the appendix summarizes the most important measures and convergence criteria to join the Euro zone.

Firstly, due to the turbulent economic time still there is a quest for the right moment to adopt the Euro and secondly, history shows several cases of countries that are being part of the European Economic Area but that still have not adopted the Euro as a currency. Moreover, the EU history has some interesting examples like the cases of Sweden and Denmark, which are part of the European Community for more than 10 years, and still have not adopted the Euro. This paper addresses the costs and the benefits of the euro adoption. In addition it will discuss issues regarding the final stage of joining the economic and the monetary union for Bulgaria, namely adopting the euro currency. Based on the conceptual framework and a survey among government bodies, consulting companies and the private sector; it will research whether at the moment, adopting the euro will be the right strategy for Bulgaria to escape from the crisis and to bring prosperity in the economy. In addition the paper investigates whether it is tempting and beneficial for Bulgaria to adopt the euro or to postpone it for a little while. A short

1_{http://ec.europa.eu/economy_finance/euro/adoption/who_can_join/index_en.htm}

(6)

6 | P a g e

comparison will be made with Latvia and Lithuania, because their current state has a lot in common with the situation in Bulgaria. These countries are new EU member states that need to adopt the euro currency as per the Maastricht criteria. In addition the three countries have their currencies pegged to the euro. The cases of other potential Euro zone members will be discussed as well. The case of Slovakia is interesting for observation; because it is an Eastern European country which adopted the Euro on the 1st of January 2009 and this was a period when the financial crisis started affecting the European Union and its economic stability. Scholars argued that it was not a good time for Eastern countries to adopt early the euro at this very moment. (Tsachevsky, 2012)3 They even argued that the adoption is a “bad” idea, because some weaknesses of the euro zone became evident from the crises, especially from the PIIGS countries: –“the countries that joined the euro zone cannot use the exchange rate as a mechanism of correction for some economic imbalance. All the corrections must then base on the market’s movement, the flexibility of goods and services, the markets, and the labour market flexibility. If there is not enough flexibility, this would lead inevitably to a huge pressure on the public budget”, said the Romanian Member of the European Parliament Daniel Daianu for Euractiv.4 Therefore the obligatory step to join the Euro zone for every EU member state according to the Maastricht Treaty looks less attractive and less desirable.

This paper aims to survey the three main economic groups, namely government bodies, the private sector and consulting companies in Bulgaria. A survey is designed with the help of the Public Opinion Euro Barometer. The survey is conducted and its replies will be presented and analyzed in order to get a clear overview of the current economic state of Bulgaria. It is based on the expert opinion of the selected groups and it aims to estimate the attractiveness from the different perspectives to adopt the Euro currency. This brings us to the following research question of this study:

How do the three main economic groups, namely government, private sector and consulting companies perceive the adoption of the euro?”

(7)

7 | P a g e

The outcomes of this thesis would be interesting and beneficial for several economic groups. The most significant group would be the government of Bulgaria, the European Commission (EC) and the European Central Bank (ECB), as executive bodies of the European Union, since they are the governing bodies that take decisions about the future course of the policy regarding the adoption of the Euro currency and the proper moment for that. Another fundamental group encompasses the current and potential investors. An eventual adoption of the Euro at this stage will make Bulgaria less attractive for investors, because labor might become more expensive which in turn might affect the FDI expenditures negatively. The importance and the insights this paper will bring would be with the most up-to-date information, which will present the current economic state of Bulgaria.

The rest of the paper will continue with a literature review, methodology section and a conclusion. The literature review section will provide a theoretical framework, to serve as the backbone of the paper. In addition the current economic environment in Bulgaria will be analyzed in detail. Moreover it will present the extent of euroization and a comparison with the Euro area will be made of how it copes with the financial crisis. The subsequent part, the methodology, will present the methods used to gather the data and to design the survey. In addition, the answers from the survey will be presented and interpreted. A comparison will be provided between the three economic groups surveyed, showing commonalities and differences. Finally a conclusion will point out the main implications from the paper, the limitations of the paper will be presented and topics for further research will be provided.

Literature Review

(8)

8 | P a g e

Cost- benefit analysis

This part will discuss the costs and the benefits of adopting the euro currency. For the past decade the implementation of the euro has revealed a lot of benefits for the countries that have adopted it. A common currency facilitates trade between countries mainly by eliminating the transaction costs of the exchange rate fluctuations. This creates a stable business environment for the whole economies of the Euro area countries (Chabot, 1999) (Grauwe, 2000). In addition benefits appear by travelling. The costs of exchanging currencies and paying commissions are eliminated (Ganev, 2010). Moreover the business opportunities for the corporations increase, because the financial markets become more stable and reliable, due to the control and regulations exercised by the European commission (Artis et al., 2000). When a uniform currency is used the financial markets are more integrated which increases competition. This leads to lower costs of the consumer goods therefore the customer benefits from a common currency being able to make informed and better choices at lower costs (Grauwe, 2000). However europeization comes at a cost. Citizens may lose sense of sovereignty because of abandoning the national currency (Ramos, 2011). A common currency misses the national specificity; respectively the institutions and the individuals need time to adjust, this period of adjustment is an economic shock for the country (Cenuse, 2010) (Grauwe, 2000). Moreover, Goerres et al. (2008) identify that the Eastern European countries marked by the post-communism need longer adjustment period to join the Economic Monetary Union (EMU). This raises the issue of picking the proper timing in order to decrease the effect of economic shock. Another important aspect when adopting the common currency

identified by Paul De Grauwe (2000) in his book “Economics of European Union”

(9)

9 | P a g e

country (Ramos, 2011) and attract more international investors. Therefore the issues of inflation, the short- and the long term benefit from the euro adoption, the proper timing to euroization and the sovereignty are addressed in the survey (see the Appendix). That way the three selected groups can reflect upon the main issues identified by scholars to be crucial when a country faces the stage of euroization. Respectively the interpretation of the results from the three targeted groups would reveal how the three parts of the economy representing the government, the private sector and the consulting company perceive the adoption of the common European currency considering their different stance to the economy and whether their opinion overlaps or differs significantly among each other.

The remaining part of the literature review presents and analyzes the current macroeconomic environment in Bulgaria.

Bulgaria

Bulgaria is one of the oldest states in Southeastern Europe, which despite historical challenges has managed to sustain and build history, culture and customs influenced by the Balkan specifics, and the Byzantine and Ottoman empires. This has formed a very peculiar and distinctive synthesis between European, Mediterranean and Near East

religions and civilizations. Bulgaria’s political scenery up until 1990 has been determined

(10)

10 | P a g e

to stabilize and it is forecasted to keep the same trend for the year 2013, whereas the Euro area trends are very negative and are following a downward path.

After two years of negative GDP annual growth rate, Bulgaria evidenced a slow recovery of 0.4% in 2010, which was followed with 1.7% growth in 2011 and a slowdown in the last year 0.5% (2012). Standard & Poor’s Rating Services presented a positive GDP growth forecast for 2013 of about 1.7% and an average of 2.0% for the period 2013-2015.5 They base their expectations on the signs of slow recovery of the demand, both the domestic and foreign demand. In addition the fiscal policy of Bulgaria has managed to keep the debt stock low and to decrease the deficit levels. However, Bulgaria needs to improve the absorption of EU funds, especially because as the French Senate commented: “The difficulty of absorption of EU funds of Bulgaria and Romania brings to mind that in the reconstruction of a state, everything goes upfront: it is because the rule of law is not achieved that the administrative and judiciary mechanisms remain unreliable, and that the funds are poorly absorbed. And while they are poorly absorbed, they don’t bring the expected results”.6 Mr. Tsachevsky (2012) argues in his report about the

Europeanization of Bulgaria that the slow absorption of EU funds hampers Bulgaria’s

way to adopting the euro. However he points the benefit of receiving funds since year 2007 and the economic benefits of these funds in the regional development (see Table A2 in the Appendix). Although the GDP growth of Bulgaria is positive, according to experts, if it is below 3% it cannot sustain the employment rate. Figures A5 and A6 show that the unemployment rate for the Bulgaria drastically increases from 2008 and a similar trend is observed for the Euro area. The unemployment rates both in Bulgaria and in the European area almost doubled since 2009 from 6% to close to 12% by the end of 2012. It can be noticed from Figure A4 in the appendix, where more detailed information about all the EU members is provided. One may observe that the only countries that show healthy economic expansion are the potential Euro zone members (Lithuania, Latvia and Poland) and the lastly joined countries, Estonia and Slovakia. This could be a sign that the recent euro adoption might be beneficial for the new adopters. According to a survey from Moody’s, Bulgaria has the second lowest budget deficit in Eastern Europe after

5

http://www.novinite.com/view_news.php?id=146761

(11)

11 | P a g e

Estonia, which is just 3.2%, whereas Hungary is with the highest (19%) among the 11 Eastern countries (Hungary, the Czech Republic, Slovakia, Turkey, Romania, Poland, Slovenia, Lithuania, Latvia, Bulgaria and Estonia) (see Figure A11 in the Appendix).7 Considering the region’s economic output, GDP growth and the regulated government expenditures, the total borrowing needs are expected to decrease to Euro 184 Billion.8 This leads to a positive perspective for the debt crisis risk for the Euro area. On the other hand a report of one of the biggest audit companies in the world, PricewaterhouseCoopers, ranked Bulgaria in the top five most vulnerable countries to the ongoing debt crises in the Central and Eastern European region, after Latvia, Slovenia, Belarus and Hungary.9 Therefore the economy will largely rely upon Bulgaria’s foreign policy; however the outlook is not very promising. According to a forecast by the London

based Capital Economist Ltd. “Bulgaria's economy will stagnate this year before

(12)

12 | P a g e

travelling within the EU, but also because of the better life and job opportunities Western Europe has to offer.

Foreign Direct Investment

According to preliminary data of the Bulgarian National Bank (BNB) “the foreign direct

investment in Bulgaria in the period January - November 2012 amounted to EUR 1399.4 million (3.5% of GDP), compared to EUR 1215.8 million (3.2% of GDP) for January - November 2011”.13 “The attracted Equity Capital (acquisition/disposal of shares and equities in cash and contributions in kind by non-residents in/from the capital and reserves of Bulgarian enterprises and receipts/payments from/for real estate deals in the country) for January - November 2012 amounted to EUR 833.5 million, including EUR 28.2 million from privatization deals”.14 From Figure A9 one may conclude that the business confidence in Bulgaria is slightly recovering, mimicking to a great extent the business environment in the European Union. Although the Corporate Income Tax Law system of Bulgaria offers very favorable tax conditions to corporations - with the lowest corporate tax of only 10%.15 However this does not lead to a better business environment according to Figure A10, where it can be noticed that the Euro area follows the same trend of slowly reviving business confidence. On the other hand, a CEE banking study for Bulgaria shows that the annual increase of deposits has gone up drastically since 2009 (see Table A3) and at the end of January 2012 “the total amount of deposits of citizens hit a record-high BGN 32.3 Billion at the end of January 2012, marking an annual increase by 14.37%”.16 The deposits are predominantly in the local currency due to favorable interest rates compared to the euro currency. This fact shows that Bulgarians still consider Bulgarian investing opportunities as low and they believe that the banking system offers safer options for their money.

(13)

13 | P a g e

(14)

14 | P a g e

comprehensive picture is formed about the present state of the country, surveying the three main internal factors of the economy about the best future actions regarding the adoption of the Euro. In addition it will be surveyed whether Euro adoption will bring prosperity in the Bulgarian economy and be a way out of the crisis, or not.

According to Table A4 and the Convergence report, only Bulgaria and Sweden fulfill 3 out of the 4 criteria towards the Euro currency convergence and the Maastricht Treaty.17 However, along with Czech Republic, Hungary and Lithuania, they do not have yet a target date for the euro adoption.18 On the other hand Romania, which does not yet fulfill any of the criteria is planned to adopt the euro on the 1st of January 2015. Bulgaria still needs to join the ERM II, which aims to limit the currency fluctuation. Yet, this step is already effectively made, since the Euro and the Bulgarian Lev are pegged pair of currencies and are under fixed exchange rate terms. However, a minimum of two years being part of this formal EU mechanism is a necessary step before joining the Euro zone. In a Wall Street Journal interview in September 2012, Finance Minister Simeon Djankov expressed a firm position on the Bulgarian Government regarding the Euro adoption:

“Right now, I don't see any benefits of entering the euro zone, only costs”.19

In addition the main point that prevents Bulgaria from applying for euro adoption is pointed as the problems with the corruption (Tsachevsky, 2012).

The next section will deal with the methodology part of the paper. It discusses the challenges and the methods used to gather the literature for this paper. Moreover, the resources used to design the survey questions are presented.

Methodology

(15)

15 | P a g e

currency, along with the strategies to improving the Bulgarian economy and tackling the financial crisis. In addition the 23 countries that have already adopted the Euro will be researched. The paper investigates four macroeconomic indicators, namely GDP annual growth rate, inflation rate, FDI and unemployment rate before and after the crisis (Mathilda, 2010), which in the case of Bulgaria almost coincides with its accession to the European Union. These indicators provide a relatively realistic overview of the main changes in an economy. In addition, a survey was conducted, which encompasses the three main drivers of the economy, namely the banks, the government and the private sector. The survey as said above has been designed with the help of the Public Opinion Euro barometer. This barometer asks the citizens of the potential euro adopting countries various questions regarding how they perceive the euro adoption, and whether they support it or not. This barometer aims at the general public opinion and provides very general and robust information about what the wide public thinks about and the euroization. On the other hand the survey conducted for this paper focused solely on professional opinion based on experience and deep knowledge and understanding of the uniform currency and the European Union. The selected groups, namely the government bodies, the private sector representatives and KPMG play significant role on the political and economical scenery; basically they are the decision takers about the future course of Bulgaria. Therefore, the results from the survey provide an informed and realistic picture of the current state of the Bulgarian economy and whether it should or not adopt the euro during this period marked by instability and insecurity. Hence the outlook of deep significance when reaching these three groups will enable a complete picture to be formed about the current state of Bulgaria and its future opportunities as a member of the Euro zone.

Data Collection

(16)

16 | P a g e

for adoption of the Euro and other respective information necessary for the thesis. In addition journals and previous studies on euroization were investigated. For the second part of this paper, the survey, mainly face-to-face contact was used, since this enables higher response rate and clarification of the questions to prevent from possible misunderstandings. The survey was distributed to consulting companies (Deloitte, KPMG, and PricewaterhouseCoopers) and to the Government (represented by the Bulgarian Development Bank, the Ministry of Finance and the Ministry of Internal Affairs). The third group that was investigated was the private sector, which included both local and multinational companies from various industries operating in the areas: financial markets, auditing, consulting, accounting and manufacturing.

The survey consists of 17 questions. It begins with 3 introductory questions about the age and the occupation, and the sex of the surveyed person, which will give a basic picture of the interviewed persons and a comparison them between based on this comparison will set grounds for the discussion section. The remaining part of the questionnaire has 14 questions, which includes various types of answers, using Likert scale, open and closed questions, aiming to get a deeper versatile insight of the opinion of the surveyed persons. The number of questions was restricted to 17 so that the survey is more user-friendly; to fit it on a double page so that it requires roughly 10 minutes getting it filled in. The survey questions were designed with the help of the Public Opinion Barometer released by the European Commission polling the New EU Member states about their opinion regarding the euro adoption.20 The survey aimed at 100 responses. In order to get them, assuming a response rate of a 40%, about 250 people were targeted. Since there are three surveyed groups, 1/3 is the desired response rate for each one of them. In order to reach representatives from the selected groups, (indirect) personal connections showed to be useful. During the summer of 2012, the researcher worked in the Bulgarian Development Bank (BDB) which is 100% government owned and under the direct supervision of the Bulgarian National Bank (BNB). During this internship, he was able to establish very good connections with both Banks since some of the people who worked in the BDB used to work in BNB. Moreover, family members have strong connections within the

(17)

17 | P a g e

Ministry of Internal Affairs and the Ministry of Finance. Targeting the Ministry of Finance, the Ministry of Internal Affairs and the BDB aims to gather the opinion of the government represented by these three institutions. In addition, the researcher had a meeting with employees from KPMG, who also participated in the survey, since KPMG "can provide an informed perspective on issues faced by the global business community" (KPMG, 2012). For the private sector and other banks the researcher contacted people, based on connections of family and friends who work in various sectors of the economy, both public and private. These efforts managed to gather 73 survey responses. Unfortunately using this kind of survey - limited only to 17 questions- has its traps of failing to encompass all the important and relevant data.

Data analysis

(18)

18 | P a g e

on a local and a multinational level. The results from the survey are analyzed via histograms allowing comparisons between the groups.

Results

The expected results hide some traps. A delicate issue with this paper is the timing. Since the researched topic is an ongoing problem, this means that the point in time the answers are taken will not necessary represent the reality by the time the paper is written. Besides that the topic barely could get a unilateral response, therefore I find that surveying different economic groups will present interesting results and maybe new unexpected viewpoints will be manifested. However, as a member of the EU, Bulgaria will most likely anyway adopt the Euro, the question is just when. In the upcoming paragraphs, the survey questions/answers will be analyzed. The survey and the histograms for every question are available in the Appendix.

The introductory questions aimed to form a picture of the people who were interviewed and who participated in the survey. It can be observed that the Government sector and the Private sector proportion of male and female respondents are almost equal. The same equality can be observed for the proportion of people younger than an older than 39 in these two groups. However at KPMG only one woman was interviewed and the rest were men (8), all below the age of 39. Luckily, people from all management levels were reached, which enabled to get various perspectives both from employees and the upper management levels (see Introductory questions 1-3 in the Appendix).

(19)

19 | P a g e

However, more than 70% of the same groups of people believe that adopting the Euro would not be a solution for surviving the financial crisis in Bulgaria. (see question 2 from the Main questions in the Appendix). There are many factors that logically lead to this conclusion. The Euro has destabilized countries like Spain, Portugal, Italy and namely

Greece as Bulgaria’s neighboring country and most evident example. This brings mistrust

and instills insecurity in the unstable euro itself and the volatile state of the European Union.

To the question whether the adoption of the Euro would benefit Bulgaria and its citizens in the short term, the majority (more than 75%) of the representatives from the three groups answered negatively, whereas if in the long term a benefit would be evident, a positive trend was observed (see question 3 and 4 from the Main questions in the Appendix). History has shown that every country after adopting the euro needs some time to adapt and during this time mostly price inflation is observed and the transformation is not as smooth as expected (Grauwe, 2000). Moreover, one might argue that since Bulgaria has a fixed exchange rate with the Euro and considering the fact that it has fulfilled the price stability criterion and the criterion on the convergence of long-term interest rates, consumer goods price inflation might have a minor effect.

As to question 5 from the survey (see question 5 from the Main questions in the Appendix), asking whether the euro will bring prosperity to the Bulgarian economy, the participants provide mixed answers. Some consider question 5 to be very similar to the previous 2 questions. Although the Bulgarian economy can be prospering in terms of growing GDP, more foreign direct investments and attracting EU funds this does not imply better life for the Bulgarian citizens. The tendency here shows more negativity towards the Euro and the related benefits. This is not a surprising issue. Bulgaria has become very attractive for Romanian and Greek both companies and citizens due to the low taxes since 2010. The foreign companies are very tempted and attracted by the 10% corporate tax rate, which is the lowest in the European Union, for which Bulgaria is

considered a “tax heaven” of Europe. In addition the car license and insurance taxes are

(20)

20 | P a g e

restrictions due to the EU policies. However, this does not directly benefit the Bulgarian citizen. Meanwhile the bureaucracy is still very rigid.

The next question from the survey asks whether one should expect price increase after Bulgaria adopts the Euro (see question 6 from the Main questions in the Appendix). This question was somewhat unclear. To many participants it was ambiguous which prices were asked about. Moreover, the phrasing of the question provoked a rather positive answer, which the statistic indeed shows for the three groups, as more than 70% of all

groups answered with “Yes”. According to De Grauwe (2000) indeed when a country

joins the eurozone might experience inflation, however, taking into consideration the fixed exchange rate terms between the Bulgarian national currency and the euro this effect is expected to be minimized as the answers of the next question suggest.

Question 7 asks whether the adoption of the Euro will cause inflation rate to increase, considering the fact the Bulgarian Lev is pegged to the euro (see question 7 from Main questions in the Appendix). As we can observe from the histograms the three groups almost unanimously support this view. The main reason for this is that since the two currency pairs are fixed they cannot balance the differences between the purchasing power with fluctuations in the exchange rate; therefore people believe it will react in an increased inflation rate.

Question 8 and question 13 are very much related (see question 8 and 13 from the Main questions in the Appendix). They ask about the desired date to join the Euro zone. One can observe that the three groups are still not ready to adopt the Euro and do not see that the coming 2/3 years are the right timing. Most answers show a desired period to be after year 2015. However since Bulgaria is one of the “Member States with a derogation”

(21)

21 | P a g e

The first of the questions to be basically answered on a Likert scale was (see question 9 from the Main questions in the Appendix), asks about how Bulgaria copes with the financial crises. We can see a clear distinction between the groups. The government and the private sector assess it more negatively, whereas KPMG employees take a more neutral position. This could be explained by the increasing unemployment rates and the stagnation in the salaries, reflected by significant increase in prices. This leads to a decreasing purchasing power of the Bulgarian citizens and high insecurity for the workplace.

The subsequent questions show similar tendencies (see question 10 and 11 from the Main questions in the Appendix). The government officials had a very negative expectation about the consequences for the Bulgarian economy after the Euro adoption, on the other hand KPMG has a somewhat positive forecast and the private sector remains in the middle. As discussed above when dealing with question 3, the short term effects from the euroization are expected to be negative, which partly explains the negative answers of the government officials. However, the forecast of the KPMG representatives shows a positive attitude towards the euroization, which is explained by the expectations of greater stability by the European Union, faster economic growth and more efficient allocation of resources.

(22)

22 | P a g e

The last question of the survey consists of 4 statements with which one can agree, disagree or remain neutral (see question 14 from the Main questions in the Appendix).

The first of the four statements states that “The replacement of the Bulgarian Lev by the euro will cause you personally a lot of inconvenience”. From the histogram of the

answers to this question, one gets the impression that it was widely misunderstood. One would expect a complete support of the answers of the KPMG respondents that using the euro would actually be very convenient. It would facilitate the Bulgarian trade and supposedly travelling within the Euro zone will become less expensive for Bulgarians. However, the other two groups have given almost equal vote for all the available answers and a single conclusion could not be drawn therefore. The answers to the second

statement, namely “You are concerned about abusive price setting, meaning sudden price

increase, during the changeover” also surprised. It is evidenced that -in the past years- for example the big food chains (like Lidl) or Ikea have even cheaper prices for instance in Germany than in Bulgaria. Ikea experienced to some extent the same effect as it had in China couple of years ago (Wei, 2007)21. It penetrated the market with the motto of cheap and affordable goods with a proper quality that you build yourself; however this model did not worked well as it is one of the most expensive Ikea in Europe (see Table A5 from the Appendix). Therefore one may believe that prices would not be severely affected when we adopt the euro as discussed above in the interpretation of questions 6 and 7 from the survey. The third statement “Adopting the euro will mean that Bulgaria will lose over its economic policy” was hotly debated that due to the currency board and the EU regulations Bulgaria does not have its own economic policy, but merely a policy regulated by the EU needs rather its own, mainly due to two facts namely: i) Bulgaria as a member of the European Union needs to comply with the regulation posed by the EU; ii) since Bulgaria is in a currency board and the fixed exchange rate terms do not allow the exchange rate to fluctuate and to balance out any economic imbalances (Feige et al., 2002). However, although the EU imposes substantial amount of regulation on the member states, still the specificities of the economy expects tailored approach and many researchers argue that the Maastricht criteria created for the advanced economies are not suitable for the Eastern EU members (Singer, 2006). The last statement “Adopting the

(23)

23 | P a g e

euro will mean that Bulgaria will lose a part of its identity” brought very contradicting

opinions from the different groups and within the groups. No single answer was strongly supported. This could be simply explained by the twisted mentality of the Bulgarian nation. Bulgarians tend to be very individualistic and heedless of uniting as a nation. However, the current state of the country mimics the historical events of 1996 when the whole nation stood up against the government and like now Bulgaria remained with a temporary elected government and turbulent and very uncertain both economic and political environment.

Conclusion and limitations

(24)

24 | P a g e

the inflation is not expected to be severe. Given the desperation, the results from the barometer suggest that both the short and the long term effects of adopting the euro would bring benefits for the Bulgarian citizens. Whereas all the targeted groups by the survey, as discussed above, are prepared for the short term costs that will arise from the cultural and economic shock caused by adopting the new currency. Nevertheless a positive unanimity in the opinion is that in the long term Bulgaria will benefit from adopting the euro. Lastly, but not least the problem of cultural identification with the national currency is touched upon both the barometer and the survey. This question already provided very contradicting answers within the targeted groups from the questionnaire; therefore it is very difficult to generalize it. Nonetheless, a national currency is a symbol of a culture and losing this symbol would inevitably lead to losing a part of the identity of the culture.

Despite Bulgaria being one of the two poorest EU countries, many opportunities have been revealed after the EU accession. However as David Cameron emphasized in his EU speech 22 this year that the EU should be more focused on the economic relationships, free markets, and free trade: the single market. However, a single currency is not something that is needed at this moment. Bulgaria will be better off in the near future to keep its national currency (Bulgarian Lev). Moreover it should maintain its competitive position in terms of attracting foreign direct investments due to its significant geopolitical location - a bridge to the Asian world, with the agricultural land and other sectoral opportunities – competitive to the rest of Europe with the absorption of the EU subsidies. In addition the cheap labor, the cheap land and property market, and low corporate taxes (10% flat rate) combined with the financial subsidies provided by the EU Funds and respective stricter regulation of the Bulgarian market form an unusual mix of country specificities. This brings Bulgaria on the European map as a country with an attractive business climate and numerous investing opportunities. Another crucial benefit is that the Bulgarian Lev is pegged to the Euro, which keeps a fixed exchange rate between the two currencies and facilitates the free trade between Europe and Bulgaria. Therefore from that

point of view Bulgaria “adopted” the euro. Still there is difference in bank savings –

(25)

25 | P a g e

interest rates for deposits, respectively credits in Bulgarian Lev differ from rates in Euro. This fact makes savings in the national currency more favorable for Bulgarian citizens – advantage that will disappear after the adoption of the Euro currency.

We have observed that some countries aim at fast euroization, however other postpone it for a very long - maybe indefinite time like Sweden and Denmark. Given the conducted interviews and the questionnaire results within major economic groups, a conclusion could be drawn that Bulgaria is far from adopting the euro. Moreover, if a referendum like in Sweden is conducted now, the researcher firmly believes that the majority of the Bulgarians will vote against the euro adoption, given the unstable situation within the European member states. Therefore at this moment adoption of the euro would not be a way out of the crisis.

Further research is needed because the European and the world economy are now facing a lot of ongoing changes, therefore the state of the euro will remain a hot topic in the coming years. In addition, some countries are even proposing the creation of a parallel currency to the euro so that the countries can slowly leave the euro which is not very promising for the stability of the European Union. After all, the uniting currency of the European Union still has not shown its long-term benefits. “When the governor of the central bank of the UK (the Bank of England) was asked whether it would be good for

the British to adopt the euro, he said, in effect: „Give me 200 years first and then I’ll tell you’” (Krivošík, 2011).

Limitations

(26)

26 | P a g e

(27)

27 | P a g e Bibliography

BNB. (2007). Agreement between the Council of Ministers and the Bulgarian National Bankon the Introduction of the Euro in the Republic of Bulgaria. Sofia: Bulgarian National Bank. Chabot, N. C. (1999). Understanding the euro. New York: McGraw-Hill.

Christoph Duenwald, N. G. (2005). Too Much of a Good Thing? Credit Booms in Transition Economies: The Cases of Bulgaria, Romania, and Ukraine. International Monetary Fund , 33. Commission, E. (2007). One Currency for One Europe: The Road to Euro. Brussels: European Commission.

Dimova, R. (2008, May). The impact of labour reallocation and competitive pressure on TFP growth: firm-level evidence from crisis and transition ridden Bulgaria. International Review of Applied Economics , 22 (3), pp. 312-338.

Dobrinsky, R. (2000). The Transition crisis in Bulgaria. Cambridge Journal of Economics , 581-602. Edgar L. Feige, J. W. (2002). Dollarization and Euroization in Transition Countries: Currency Substitution, Asset Substituion, Network Externalities and Irreversibility. New York: Fordham International Conference .

Ganev, G. (2010). Costs and Benefits of Euro Adoption in Bulgaria. Sofia: Finess Seventh Framework Programme.

Goerres, M. S. (2008). Adopting the Euro in Post-Communist Countries: An Analysis of the Attitudes toward the Signle Currency. Cologne: Institute for the Study of Societies. Grauwe, P. D. (2000). Economics of Monetary Union. Oxford: Oxford University Press. Gulde, A.-M. (1999). The Role of the Currency Board in Bulgaria's Stabilization. Finance & Development , 4.

KPMG. (n.d.). Retrieved 10 03, 2012, from KPMG Bulgaria: http://www.kpmg.com/bg/en/pages/default.aspx

Krivošík, M. H. , May 6 . Has the euro been worth it? Retrieved 12 20, 2012, from http://www.presseurop.eu: http://www.presseurop.eu/en/content/article/656711-has-euro-been-worth-it

Mathilda, B. (2010). The preferred exchange rate regime for Curacao's new constitutional status. Groningen: University of Groningen.

(28)

28 | P a g e

Michael Artis, E. H. (2000). The euro. A challenge and opportunity for financial markets. London: Routledge.

Philippe Karam, D. L. (2008). The Macroeconomic Costs and Benefits of Adopting the Euro. IFM Staff Papers.

Ramos, J. L. (2011). The benefits and disadvantages adopting the Euro. Helium.

Sandra Dvorsky, T. S. (2007). Euroization in Central, Eastern and Southeastern Europe - First Results from the New OeNB Euro Survey.

Singer, M. (2006, October 2). Impacts expected after the adoption of the euro: dangers and opportunities. Retrieved 11 16, 2012, from Czech National Bank:

http://www.cnb.cz/miranda2/export/sites/www.cnb.cz/en/public/media_service/conferences/s peeches/download/singer_20061002_introduction_euro.pdf

Slovakia, N. B. (2006). The Effects of Euro Adoption on the Slovak Economy. NBS Research Department.

Tsachevsky, V. (2012). Five years of Bulgaria's membership into the European Union - the slow absorption of EU funds slackens Bulgaria's europeanization. Pan-European Institute.

(29)

(30)

30 | P a g e

Figure A 1

(31)

31 | P a g e

Figure A 3

Figure A 4

(32)

32 | P a g e

Figure A 5

Figure A 6

(33)

(34)

34 | P a g e

Figure A 10

Figure A 11

(35)

35 | P a g e Table A 1 What is measured: Price stability Sound public finances Sustainable public finances Durability of convergence Exchange rate stability How it is measured: Consumer price inflation rate Government deficit as % of GDP Government debt as % of GDP Long-term interest rate Deviation from a central rate Convergence criteria: Not more than 1.5 percentage points above the rate of the three best performing Member States Reference value: not more than 3% Reference value: not more than 60%

(36)

36 | P a g e

Table A 3

Volume of deposits and loans 2008 2009 2010 2011 2012

Annual increase of deposits (in %) 8.8 3.3 8.5 11.7 8.4

Annual increase of loans (in %) 32.9 3.9 1.7 1.7 3.1

Loans to deposits ratio (in %) 123.2 123.9 116.2 105.8 100.5

Source: CEE Banking Study 2012, focus on Bulgaria by UniCredit Bulabnk

Table A 4

Convergence report 2012

Criteria to

Euroisation Bulgaria

Czech

Republic Latvia Lithuania Hungary Poland Romania Sweden

Criterion on price stability Fulfills Does not fulfill Does not fulfill Does not fulfill Does not fulfill Does not fulfill Does not fulfill Fulfills Criterion on public finances Fulfills Does not fulfill Does not fulfill Does not fulfill Does not fulfill Does not fulfill Does not fulfill Fulfills The exchange rate

criterion

Does not fulfill

Does not

fulfill Fulfills Fulfills

Does not fulfill Does not fulfill Does not fulfill Does not fulfill Criterion on the convergence of long-term interest

rates Fulfills Fulfills Fulfills Fulfills

Does not

fulfill Fulfills

Does not

fulfill Fulfills

(37)

37 | P a g e

Table A 5

Rank Cheapest IKEA Prices Highest IKEA PPP Rate Affordability

#1 Poland Singapore United States (No VAT)

#2 Slovakia Norway Singapore

#3 United States United States Norway

#4 Germany Switzerland Netherlands

#5 Czech Republic Netherlands Austria

#6 Netherlands Austria Denmark

#7 Belgium Australia Germany

#8 Spain Sweden Switzerland

#9 Denmark Canada Belgium

#10 Romania Denmark Canada

#11 Portugal Ireland Ireland

#12 Italy Finland Finland

#13 Austria Iceland Sweden

#14 France Germany France

#15 Hungary Belgium United Kingdom

#16 China United Kingdom Spain

#17 Bulgaria France Iceland

#18 Finland Japan Italy

#19 Ireland Spain Czech Republic

#20 Canada Italy Cyprus

#21 Turkey Cyprus Australia

#22 Switzerland Greece Slovakia

#23 United Kingdom Czech Republic Japan

#24 Greece Slovakia Greece

#25 Cyprus Portugal Poland

#26 Sweden Poland Portugal

#27 Norway Hungary Hungary

#28 Iceland Russia Turkey

#29 Singapore Turkey Bulgaria

#30 Russia Bulgaria Russia

#31 Japan Romania Romania

#32 Dominican Republic Dominican Republic China

#33 Australia China Dominican Republic

(38)

38 | P a g e

Survey Questions

This questionnaire is about the financial crisis, the euro and the Bulgarian economy. The information you supply will remain anonymous. Thank you for completing this questionnaire.

Introductory questions 1. Age

a) 18 – 39 b) 39 – 65 2. Sex

a) Male b) Female

3. What is your current occupation? a) Lower management

b) Middle management c) Upper management Main Questions

1. Do you think Bulgaria benefits from being an EU member during the financial crisis? a) Yes

b) No

c) Cannot assess

Remarks:……….

2. Do you believe adopting the euro is a way out of the financial crisis for Bulgaria? a) Yes

b) No

c) Cannot assess

Remarks:……….

3. Do you think adopting the euro will benefit Bulgaria and its citizens in the short term? a) Yes

b) No

c) Cannot assess

Remarks:……….

4. Do you think adopting the euro will benefit Bulgaria and its citizens in the long term? a) Yes

b) No

(39)

39 | P a g e

Remarks:……….

5. Do you think that adopting the euro will bring prosperity to the Bulgarian economy? a) Yes

b) No

c) Cannot assess

Remarks:……….

6. In the other countries which adopted the euro was observed an increase in the prices, do you think the same effect will be observed in Bulgaria?

a) Yes b) No

c) Cannot assess

Remarks:………

7. Considering the fact that the Bulgarian Lev is pegged to the euro, do you think that the adoption of the Euro will increase the inflation rate?

a) Yes b) No

c) Cannot Assess

Remarks:………

8. When would you like the euro to become Bulgaria’s national currency? a) As soon as possible

b) After a certain time c) As late as possible

d) Don’t know

9. How do you think Bulgaria copes with the financial crises?

Very Bad Very Good

1 2 3 4 5

Remarks:………

10. Do you think the introduction of the euro would rather have positive or negative consequences for the Bulgarian economy?

Negative Positive

-2 -1 0 1 2

(40)

40 | P a g e

11. Generally speaking, are you personally more in favour or against the idea of introducing the euro in Bulgaria?

Against In favour

-2 -1 0 1 2

Remarks:………

12. Do you think the introduction of the euro has had positive or negative consequences in those countries that are using the euro already?

Negative Positive

-2 -1 0 1 2

Remarks:………

13. When, in which year do you think the euro will be introduced in Bulgaria?

………

14. Could you tell me for each of the following statements if you agree or disagree…? Totally

Disagree DK/NA

Totatlly Agree The replacement of the

Bulgarian lev by the euro will cause you personally a lot of

inconvenience

-2 -1 0 1 2

You are concerned about abusive price setting during the

changeover

-2 -1 0 1 2

Adopting the euro will mean that Bulgaria will lose over its

economic policy

-2 -1 0 1 2

Adopting the euro will mean that Bulgaria will lose a part of

its identity

(41)

41 | P a g e

Introductory questions 1. Age:

Government Intro 1

KPMG Intro 1

Private sector Intro 1

2. Sex:

Government Intro 2

50% 50%

Age between 18 - 39 Age between 39 - 65

53% 47%

Age between 18 - 39 Age between 39 - 65 100%

0%

(42)

42 | P a g e

KPMG Intro 2

3. What is your current occupation? Government Intro 3 38% 63% Male Female 89% 11% Male Female 53% 48% Male Female 52% 39% 9%

(43)

43 | P a g e

KPMG Intro 3

Main questions

1. Do you think Bulgaria benefits from being an EU member during the financial crisis?

Government 1

78% 11%

11%

Lower management Middle management Upper management

52% 25%

23%

Lower management Middle management Upper management

Yes No Cannot assess

0.65

0.26

(44)

44 | P a g e

KPMG 1

Private sector 1

2. Do you believe adopting the euro is a way out of the financial crisis for Bulgaria?

Government 2

1.00

-

-Yes No Cannot assess

0.72

0.28

0.11

0.04

0.79

(45)

45 | P a g e

KPMG 2

3. Do you think adopting the euro will benefit Bulgaria and its citizens in the short term?

Government 3

KPMG 3

-1.00

0.18

0.73

0.08

0.79

0.13

0.22

0.78

(46)

-46 | P a g e

4. Do you think adopting the euro will benefit Bulgaria and its citizens in the long term?

Government 4

KPMG 4

0.13

0.87

0.05

0.38 0.38

0.25

0.78

(47)

47 | P a g e

5. Do you think that adopting the euro will bring prosperity to the Bulgarian economy?

Government 5

KPMG 5

0.61

0.33 _0.27

0.29

0.58

0.13

0.22 0.22

0.56

0.30

0.48

(48)

48 | P a g e

6. In the other countries which adopted the euro was observed an increase in the prices, do you think the same

effect will be observed in Bulgaria? Government 6

KPMG 6

7. Considering the fact that the Bulgarian lev is pegged to the euro, do you think that the adoption of the Euro

will increase the inflation rate? Government 7

0.92

- 0.08

0.71

0.10

0.89

- 0.11

0.63

(49)

49 | P a g e

KPMG 7

8. When would you like the euro to become Bulgaria’s national currency? Government 8

0.89

- 0.11

(50)

50 | P a g e

KPMG 8

9. How do you think Bulgaria copes with the financial crises?

Government 9 KPMG 9 As soon as possible After a certain time As late as possible Don't know 0.10 0.46 0.33 0.10

1 Very Bad 2 3 4 5 Very

Good 0.26 0.30 0.39

0.04

-1 Very Bad 2 3 4 5 Very

(51)

-51 | P a g e

10. Do you think the introduction of the euro would rather have positive or negative consequences for the

Bulgarian economy? Government 10

KPMG 10

1 Very Bad 2 3 4 5 Very Good

0.12

0.35 _0.33

0.12

0.02

-2 Negative -1 minus one 0 Neutral 1 plus one 2 Positive 0.26

0.17 0.22

0.35

--2 Negative -1 minus one 0 Neutral 1 plus one 2 Positive

-0.33

(52)

52 | P a g e

11. Generally speaking, are you personally more in favour or against the idea of introducing the euro in

Bulgaria? Government 11

KPMG 11

-2 Negative -1 minus one 0 Neutral 1 plus one 2 Positive 0.05

0.43

0.16

0.32

0.08

-2 Against -1 minus one 0 Neutral 1 plus one 2 In favour 0.38

0.13 _0.08

0.38

0.04

-2 Against -1 minus one 0 Neutral 1 plus one 2 In favour

-0.22

0.11

(53)

53 | P a g e

12. Do you think the introduction of the euro has had positive or negative consequences in those countries that

are using the euro already? Government 12

KPMG 12

-2 Against -1 minus one 0 Neutral 1 plus one 2 In favour 0.12 0.29 0.15 0.35 0.26 -2 Negative -1 minus one

0 Neutral 1 plus one 2 Positive 0.17 0.25

0.29 0.29

--2 Negative -1 minus one

0 Neutral 1 plus one 2 Positive

- 0.11

0.33 0.44

(54)

54 | P a g e

13. When, in which year do you think the euro will be introduced in Bulgaria?

Government 13

KPMG 13

-2 Negative -1 minus one

0 Neutral 1 plus one 2 Positive 0.04

0.30

0.21 0.26

0.02

Year 2015 Year 2016 Year 2017 Year 2018 Year 2020 Year 2030 0.33 0.33

0.17

-0.17

(55)

-55 | P a g e

14.Could you tell me for each of the following statements if you agree or disagree…?

a) The replacement of the Bulgarian lev by the euro will cause you personally a lot of inconvenience

Government 14

KPMG 14

Year 2015 Year 2016 Year 2017 Year 2018 Year 2020 Year 2030 0.23 0.32 0.27 0.09 _0.05 _0.05 -2 Totally Disagree -1 minus one

0 DK/NA 1 plus one 2 Totally Agree 0.13 0.22 0.22 0.22 0.22 -2 Totally Disagree -1 minus one

0 DK/NA 1 plus one 2 Totally Agree 0.44 0.44 0.11 _- --2 Totally Disagree -1 minus one

0 DK/NA 1 plus one 2 Totally Agree

(56)

56 | P a g e

b) You are concerned about abusive price setting during the changeover Government 15

KPMG 15

-2 Totally Disagree

-1 minus one 0 DK/NA 1 plus one 2 Totally Agree - 0.04 -0.50 _0.46 -2 Totally Disagree -1 minus one

0.11 0.11 0.11

0.33 0.33

-2 Totally Disagree

-1 minus one 0 DK/NA 1 plus one 2 Totally Agree

- 0.11

0.25

0.44

(57)

57 | P a g e

c) Adopting the euro will mean that Bulgaria will lose over its economic policy Government 16

KPMG 16

d) Adopting the euro will mean that Bulgaria will lose a part of its identity Government 17

-2 Totally Disagree

-1 minus one 0 DK/NA 1 plus one 2 Totally Agree 0.08 0.25 0.33 _0.21 0.13 -2 Totally Disagree

-1 minus one 0 DK/NA 1 plus one 2 Totally Agree 0.22 0.22 0.11 0.22 0.22 -2 Totally Disagree

-1 minus one 0 DK/NA 1 plus one 2 Totally Agree 0.12 0.24 0.18 0.22 0.04 -2 Totally Disagree -1 minus one

0.21 _0.17 0.25

(58)

58 | P a g e

KPMG 17

-2 Totally Disagree

-1 minus one 0 DK/NA 1 plus one 2 Totally Agree 0.22 0.33 -0.44 --2 Totally Disagree

-1 minus one 0 DK/NA 1 plus one 2 Totally Agree

0.30 _0.27

0.08

0.30