SUMMARY REPORT Roumen Avramov Centre for Liberal Strategies, Sofia

1. Economic and Political Challenges of Acceding to the Euro areaOSI Sofia - European Policy Initiative (EuPI)7 December 2009 SUMMARY REPORT Roumen Avramov Centre for Liberal Strategies, Sofia

2. THE PROJECT • Nine Eastern European Countries (exc. Slovakia) • The Summary Report – Goals and Preparation • Not an academic survey • Messages to the Bulgarian public from a Bulgarian perspective – to provide a realistic framework; contribution to the informed public debate • A report in times of crisis – cut-off date: 20 May 2009 • The Project as a whole - ToR, Summary Report, Country Reports, Appendixwww.eupi.eu

3. JOINING THE EUROZONE – THE MODEL • Philosophy • Nominal and real convergence • The mechanics of the Monetary Union • The support – foreign investments • Good times – before the crisis • After the crisis – the reverse side of the coin • Imported crisis; imported growth • The basic assumption – the Euro will be introduced in a reasonable future. Shortcomings • Tensions between nominal and real dimensions in a heterogeneous EU • A field for ambiguity and compromises – a wider room for political considerations

4. NATIONAL GOALS AND STRATEGIES FOR THE ADOPTION OF THE EURO / BEFORE THE CRISIS (I) FLOATING EXCHANGE RATES • Assumptions and Realities • Assumption: remnants of monetary autonomy are beneficial • Reality – the effective monetary independence is strongly limited • Integrated financial market – Different regulators (ECB, National CB) – Limited local financial tools • Strategy – avoiding hard commitments; caution • Impossible isolation – the gravitational force of procedures and conditionality

5. NATIONAL GOALS AND STRATEGIES FOR THE ADOPTION OF THE EURO / BEFORE THE CRISIS (II) FIXED EXCHANGE RATES • Abandoning monetary sovereignty - de facto (not institutionally) are part of the monetary union • Strategy – to join as soon as possible ERM II; minimal stay into ERMII; exit from CBA to the Euro area • Compatibility test – convincing the European institutions (1999-2003) • Reality – inflation; weak quasi-monetary instruments to regulate credit flows; lack of fiscal discipline or uncoordinated policies in some countries

6. NATIONAL GOALS AND STRATEGIES FOR THE ADOPTION OF THE EURO / BEFORE THE CRISIS (IІІ) • ERMII / ЕUROschedule • ERMIIentry – one single failure (Bulgaria) • ERMIIexit – reformulation • On the eve of the crisis – shift in the expectations; less ambitious, more fuzzy goals

7. NATIONAL GOALS AND STRATEGIES FOR THE ADOPTION OF THE EURO / AFTER THE CRISIS (I) • Similar impact or the crisis across Eastern Europe • Assets from the last decade turn into liabilities • Efforts/Outcomes • „Floaters” – ineffectiveness of „independent” monetary policies • „Fixers” – seeking guaranties against devaluation in a strongly euroized background • New policies towards the Euro – general rush to speed up accession • „Floaters” – abandoning the passive stance • „Fixers” – struggling with skepticism about sustainability of the parities

8. NATIONAL GOALS AND STRATEGIES FOR THE ADOPTION OF THE EURO / AFTER THE CRISIS (II) • The Euro as a moving target • Short-term stabilization goals displace long-term concerns (the Euro) • Hampering the fulfillment of nominal criteria;complicating policy making; misty time horizons • Optimism from late 2008 fading out • Autumn of 2008 – the missed opportunity to accelerate Euro accession?

9. EURO ADOPTION- INSTITUTIONAL AND POLICY ENVIRONMENT (I) • Adopting the Euro – more than technicalities • A game with multiple actors – “soft” acceleration/deceleration of key decisions • A variety of cases – the unique statute of Bulgaria • First critical threshold - ERM II. A delicate point • ECB - veto power • Missing formal criteria • Why did Bulgaria fail? • Tacit blockage of ERM II entry without written rules and open refusal • Politics, economics, ECB, culture, reputation, priorities, coordination • A current Bulgarian dilemma: is fiscal virtue sufficient to join ERM II?

10. EURO ADOPTION- INSTITUTIONAL AND POLICY ENVIRONMENT (II) • Second critical threshold – the Euro. Flexible and “soft” positions • The quantities and the quality– formal criteria • Ambiguity; Double standards ? • ECB’s institutional interest • ECB without veto power • Adequate coordination as a requisite for success

11. POLITICAL ECONOMY OF EURO ADOPTION / BEFORE THE CRISIS • The Euro schedule - rarely in the political debate • Sub-optimal Economic/Political compromises • The European institutional players – regulating the Euro accession • The changing position of Europe – stable legal framework, shifting policies, interpretative nuances

12. POLITICAL ECONOMY OF EURO ADOPTION / AFTER THE CRISIS • The concentric monetary structure of Europe – Euro area; ERM II; outside ERM II • Rules; ad hocmeasures; case by case approach • First reactions to the crisis • The stabilization packages’ competition • Thinking how to accelerate the adoption of the Euro • The IMF engagement – complicating the institutional context • Communication policies – the forecasts’ war • Form the side of the incumbents – risks and priorities • A „siege” mood

13. PERSPECTIVES (І) • Recapitulating the outlook • Growing appeal of the Euro area outside /Reluctance inside / Problematic criteria • Restrictive policies needed – undermining the public support for the Euro • Uncertainty /Need for balanced decisions • A propitious environment for new ideas, policies, procedures – activating the debate on the perspectives

14. PERSPECTIVES (ІІ): THE DEBATES • Main vectors • Changing the existing nominal criteria • Old criticisms and new proposals • The speed - „fast track” to the Euro • Shortening/EliminatingERM II • Unilateral euroization – fashion; emerging from the intellectual underground; debating without taboos • A natural CBA exit from a catastrophic currency crisis BUT • In any scenario – serious economic and political liabilities of unilateral decisions • Sustainability of the monetary regimes outside the Euro area

15. PERSPECTIVES (ІІІ) : ECONOMIC AND LEGAL LOGIC • Common (economic) sense • Firm rejection by the European institutions of all the proposals for changes in the criteria or for fast track procedures • Legal, political and economic arguments • Unilateral euroization – incompatibility with the Treaty • The World is not ideal - „Realpolitik” as the only game in town inside the EU • The “Rostowski case“ –a case in sociology of science • Economic theory versus Decision-makers’ position • The pragmatic institutional point of view overrides economic considerations • From the East European side – greater prudence; rejecting extravaganza • Conformism and rationality

16. PERSPECTIVES (ІІІ) : ECONOMIC AND LEGAL LOGIC • The current situation – the probability for any reshaping of the established procedures is nil • Even in chaotic periods not everything is permitted • Manipulating the public opinion – biasing and harmful effects • Room for maneuvering • Capturing the adequate moment • Negotiating skills as an intangible asset • The image’s price

17. PERSPECTIVES (ІV) : CHANGING THE MONETARY REGIME • The future change of the monetary regime of the countries outside the Euro area – economically and legally unavoidable • The crisis outlines better the economic rationale • “Floaters”– two thresholds ahead • “Fixers” – a single threshold ahead • The most committed to a smooth and rapid exit from a temporary and imitative regime • The crisis does not legitimate any monetary regime – both of them are vulnerable • The advantage of the “fixers” – used to monetary union-like policies; a softer transition

18. PERSPECTIVES (ІV) : CHANGING THE MONETARY REGIME • The key point – shortening the transitory arrangements before adopting the Euro • The floaters and the fixers outside the Euro area operate half-tinted arrangements • Opportunity costs to stay out outweigh the benefits and increase the price of preserving the existing arrangements • The indefinite extension – harmful for the countries in, for those that are still out and for the common currency itself • Nowadays the enlargement prospective seems more unclear than ever • In any event – the candidate countries have to start envisaging in a sober mood their life inside the Euro area