As it pursued EU membership in the early 2000s, Sofia began debating about its eventual accession to the Eurozone. And, to be truthful, the number of experts and politicians who are at least somewhat hesitant is not small. Moreover, no country has adopted the common currency since 2015, when Lithuania scrapped its currency after its Baltic neighbours. Against the background of Brexit and the pandemic-induced, double-dip recession, it is hard to imagine the stall ending right now. Yet, Bulgaria has a standing commitment to adopt the common European currency affirmed in the 2007 Accession Treaty. Hence, many say that the country remains in the Eurozone’s waiting room without a clear path to get out.
The National Plan for the Introduction of the Euro
But with its National Plan for the Introduction of the Euro (NPIE), Bulgaria is trying to flip the table. According to the document, Bulgarians will go through only one month of adjustments before being unable to use the Lev. This means that the Euro and the Lev will both be legal tenders in the country for a mere month. The only help for consumer will be the use of double-currency price tags for five more months.
According to this tight schedule, Bulgaria would need to consolidate its public finances in the next biennium. In fact, before a country can adopt the common currency it ought to stick to a few strict macroeocomic criteria. In particular, the candidate needs to prove that its currency is stable and its public finances sound. Fortunately for Bulgaria, exchange rates are not a concern thanks to the peculiar currency board it adopted in 1997. However, even a brief look at the remaining four requirements makes it clear how hard joining the Eurozone will be.
Inflation: Soon to become a challenge again
Foremost, one of the hardest criteria for a country like Bulgaria to meet is that relating to inflation. Intuitively, given that inflation measure the change in prices across an economy, there is a simple reason behind this benchmark. In fact, allowing a country where prices increase too fast to join may destabilise its peers and weaken the Euro. Historically, Bulgaria has had lower inflation rates than its western Balkan neighbours which are mostly out of the EU. Nevertheless, prices have been fluctuating quite strongly since the late 1980 until the hyperinflationary crisis of winter 1996–1997.
In technical terms, the country’s 12-months average inflation rate (year-on-year) should be contained under the so-called reference value. Namely, the reference value equals the average of three smallest inflation rates amongst EU countries plus 1.5 percentage points. Significantly, using data for March 2021, Bulgaria offshoots the target by a mere 0.066%. Nonetheless, the pandemic-induced crisis has skewed these calculations slightly giving the impression of a downwards convergence amongst EU countries. In fact, the collapse in both supply and, especially, demand has caused a reduction in inflation across the board. Moreover, the inequality of the post-crisis rebound – a so-called k-shaped recovery – is creating a new gap. In fact, now Bulgaria meets the criteria comfortably, as its 12-month average inflation is 0.13% lower than the reference threshold.
However, other EU governments will soon phase out fiscal supports and their economies should absorb the ongoing inflation spike. Thus, the structural differences between the economy of Bulgaria and its weaknesses will most likely prevail in the near future. As a matter of fact, before the pandemic, Bulgaria’s inflation exceeded the threshold by 0.67%. Therefore, one should expect Sofia’s difficulty in recovering from the crisis to recrudesce in persistent inflation overshooting.
Budget deficit: A heredity of the pandemic
Another, perhaps better-known, ‘convergence criteria’ deals with budget deficits and surpluses, or more specifically to their ratio to GDP. In simpler words, a government incurs into a budget deficit when its expenses are higher than its income streams. Hence, the State has to cover the missing amount by means other than fiscal revenues. Most often, Bulgarian government have been withdrawing money from the “fiscal reserve” — essentially past savings. In addition, Bulgaria also asks for money on the international markets by emitting various types of public bonds. Obviously, when revenues are bigger than expenses the budget registers a surplus. In the last two decades, thanks to its rapid-growing economy Bulgaria has managed to respect this target (Chart 2).
In order to adopt the euro, a country’s government deficit/surplus relative GDP should not exceed 3% in the previous year. Moreover, the European Commission’s published forecasts for GDP deficit/surplus should also be under 3%. Generally speaking, the EU has interpreted these rules strictly, thus considering figures “slightly above the limit” as unacceptable.
Historical data show that Bulgaria’s budget deficit-to-GDP ratio has been constantly in the acceptable range between 2009 and 2019. Apparently, this suggests that Bulgaria should have no particular problem in managing to meet this requirement. But the pandemic-induced recession has changed this simple fact dramatically. In fact, the latest data for 2020 show a deficit around -3.4% — which is still better than the Eurozone’s -7.4%. And all forecasts suggest that the stat of Bulgarian public finances’ health is only going to worsen.
Public debt: The upcoming test
The third convergence criterium is strictly related to the second as it regards public debt and its ratio to GDP. In order to understand this link, one can imagine debt as a result of the accumulation of deficits over time. In fact, saving or ‘reserves’ may help cover for deficit for some time when it is necessary. But running massive deficits for many years will lead to the depletion of all savings. Thus, prolonged deficits will eventually create an enormous pile of debt in the same way surpluses lead to savings. Since Bulgaria mostly had a balanced budget, it also boasted a small debt over the last decades (Chart 3).
Adoption of the Euro is contingent on a country’s debt-to-GDP ratio being below the 60% limit as a general rule. Still, there can be exceptions in particular cases it the ratio has “sufficiently diminished and [is …] approaching the reference value at a satisfactory pace”. Clearly, the data show that for Bulgaria it will be hard to miss on the debt-to-GDP target anytime soon. In fact, this indicator has been constantly in the acceptable range between 2009 and 2020. Nevertheless, as indicated in the previous paragraphs, the pandemic-induced recession has worsened the country’s publica finances significantly. If anything, Bulgaria is already on the verge of asking the markets for several billion euros in loans in 2021. Thus, if the deficit does not get under control soon and GDP growth does not restart, the debt will rise.
Relatedly, if the debt grows Bulgaria may also face rising interest rates. But, to join the Eurozone, a country’s 10-year security should pay no more than the EU’s reference value. Predictably to determine this rate the EU follows the same procedure it applies for the inflation benchmark. Thus, Bulgaria may miss on the fifth convergence criterium as a result of an increasing debt. Though this scenario is still unlikely looking at the data (Chart 4).
Beyond the numbers: The domestic and international political consequences
In a word the macroeconomic obstacles to Bulgaria’s adoption of the Euro are not only numerous, but predominantly pressing. But fixing the economy – which is easier said that done – is not enough. Embracing such a fundamental change requires leaving the institutional trench war in which Bulgaria is still stuck behind.
On this regard, it is foundational that the Coordination Council for Preparation of the Republic of Bulgaria for Eurozone Membership which prepared the NPIE sat under the joint chairmanship of the Governor of the Bulgarian National Bank (BNB), Dimitar Radev, and the caretaker Minister of Finance, Asen Vassilev. Considering that the current cabinet and the BNB have previously been on the odds this is a rather good sign. In fact, by means of Radev’s presence, the BNB signalled its practical, immediate availability to move forward with the NPIE.
However, this agreement amongst technocratic elites and part of the political establishment is not enough for the Euro’s successful adoption. After all, few countries that joined the Eurozone on the spur of a similar consensus have fared well. On the contrary, the country needs to build a sincere, nation-wide agreement on the acceptability of the connected, painful sacrifices. Otherwise, as other weaker economies that joined the Eurozone without educating their populaces beforehand, Bulgaria risks suffering massive setbacks. Nevertheless, it is in the EU’s best interest to help Bulgarian authorities in forging this nation-wide consensus. After long years of failures, delays and internal fragmentation, Bulgaria’s adoption of the Euro may finally revert the tide. Not least, such an achievement has the potentiality to restore other Balkan countries’ confidence in the EU. Therefore, one may dream of Bulgaria joining the Eurozone as resuscitating commitment to and reviving the drive towards enlargement. However, if Bulgaria
Free-Market Capitalism and Climate Crisis
Free market capitalism is an economic system that has brought about tremendous economic growth and prosperity in many countries around the world. However, it has also spawned a number of problems, one of which is the climate crisis. The climate crisis is a global problem caused by the emission of greenhouse gases, primarily carbon dioxide, into the atmosphere. These externalities are chiefly a consequence of day to day human activities, such as the burning of fossil fuels, deforestation, and conventional agriculture. The climate crisis is leading to rise in temperatures, sea levels, and more erratic weather patterns-The floods in Pakistan and depleting cedars of Lebanon are vivid instances for these phenomena, which are having a devastating impact on the planet.
One of the main reasons that free market capitalism has contributed to the climate crisis is that it prioritizes short-term economic growth over long-term environmental sustainability. Under capitalism, companies are primarily motivated by profit and are not required to internalize the costs of their pollution. This means that they are able to pollute without having to pay for the damage that they are causing. Additionally, the capitalist system is based on the idea of unlimited growth, which is not sustainable in the long-term. As long as there is an infinite demand for goods and services, companies will continue to produce them, leading to ever-increasing levels of pollution and resource depletion.
Another pressing issue that free market capitalism is recently going through is that it does not take into account the externalities of economic activities. Externalities are the unintended consequences of economic activities, such as pollution and climate change. Under capitalism, companies are not required to pay for the externalities of their activities, which means that they are able to continue polluting without having to pay for the damage that they are causing. In her book “This Changes Everything: Capitalism vs Climate” Naomi Klein argues that the current system of capitalism is inherently incompatible with the urgent action needed to address the Climate crisis.
To address the climate crisis, it is necessary to put checks and balances over the free market capitalism and/or make a way towards a more sustainable economic system. This can be done through a number of different effective policies, such as:
Carbon pricing: This can be done through a carbon tax or a cap-and-trade system, which would make companies pay for the carbon emissions that they are producing. In the article “The Conservative Case for Carbon Dividends” authors suggest that revenue-neutral carbon tax is the most efficient and effective way to reduce the carbon emissions.
Increasing renewable energy investments: an increment in the investments in clean energy technologies, such as solar and wind power, can result in the reduction in the use of fossil fuels.
Regulating pollution: Governments can regulate pollution to limit the amount of greenhouse gases that are emitted into the atmosphere.
Encouraging sustainable practices: Governments can encourage sustainable practices, such as recycling and conservation, to reduce the use of resources.
It is remarkable that evolving Capitalism can be harnessed to address the climate change. The private sector has the resources and innovation to develop and implement new technologies and sustainable practices, but they need the right incentives and regulations to do so. Finding the balance between economic growth and environmental protection must be a priority for capitalists.
The free market capitalism has been the driving force behind global economic growth, but at the same time, it has contributed to the ongoing climate crisis. The solution to this problem is not to reject capitalism, but rather to reform it to the societies’ suitable demands. Government should consider providing a level playing field so as to make the probable transition from fossil-based energy systems to Green energy technologies possible. The capitalists should not consider short-termism over long term environmental sustainability. Government intervention to put a price on carbon emissions, invest in renewable energy, regulate pollution, and encourage sustainable practices is necessary to avoid the worst impacts of the climate crisis and build a sustainable future for all. However, here is the catch: Is achieving net-zero-carbon emissions by mid-century a probable target? The answer is quite uncertain, however it is critical point to strive for in the face of escalating Climate Crisis.
Egypt’s “Too Big to Fail” Theory Once Again at Test
Authors: Reem Mansour & Mohamed A. Fouad
In the wake of 2022 FED’s hawkish monetary policy, the Arab world’s most populous nation, Egypt, saw an exodus of about USD20bn of foreign capital. A feat that exerted pressure on the value of its pound against the dollar slashing it by almost half. This led to USD12bn trade backlog accumulating in Egypt’s ports by December 2022.
Meanwhile, amidst foreign debt nearing USD170bn, inflation soaring to double digits, and a chronic balance of payment deficit, Egypt became structurally unfit to sustain global shocks; the country saw its foreign debt mounting to 35% of GDP, causing the financing gap to hover at USD20billion.
While it may seem all gloom and doom, friends from the GCC rushed to inject funds in the “too big to fail” country, sparing it, an arguably, ill-fate that was well reflected in its Eurobond yields spreads and credit default swaps, a measure that assesses a sovereign default risk.
For the same reason in early 2023, the IMF sealed a deal worth of USD3bn, with the government, which unlocked an extra USD14bn sources of financing from multilateral institutions, and GCC sovereign funds, to fill in a hefty portion of the annual foreign exchange gap, albeit a considerable amount averaging USD6bn per annum is yet to be sourced from portfolio investments.
With the IMF stepping in, the Egyptian government agreed on a structural reform program that requires a flexible exchange rate regime, where the Egyptian pound is set to trade within daily boundaries against the US dollar, rationalize government spending, especially in projects that require foreign currency; and most importantly the program entails stake-sales in publicly owned assets, paving the way for the private sector to play a bigger role in the economy.
In due course, through its sovereign fund, Egypt planned initial offerings for shares in companies worth about USD5-USD6bn, and expanded the sale of its shares in local banks and government holdings to Gulf investment funds.
Through the limited period of execution of these reforms, the EGP hit a high of 32 against the greenback, and an inflow of portfolio investments amounting to USD1bn took place, according to the Central Bank of Egypt.
Simultaneously, Citibank International, cited a possible near end of the devaluation of the Egyptian pound against the US dollar. Also, in a report to investors, Standard Chartered recommended to buy Egyptian treasury bills, and pointed to the return of portfolio flows to the local debt market in the early days of January, 2023. Likewise, Fitch indicated the ability of the Egyptian banking sector to face the repercussions of the depreciation of the pound, and that the compulsory reserve ratios within Egyptian banks are able to withstand any declines in the value of the pound because they are supported by healthy internal flows of capital.
While things seem to be poised for a recovery, the long term prospects may lack sustainability. The Egyptian government needs to accelerate its plans to shift gears towards a real operational economy capable of withstanding shocks and dealing with any global challenges. Egypt, however has implicitly held the narrative that the country is ‘too big to fail”. This is largely true to the country’s geopolitical relevance, but even this has its limitations when the price to bail far outweighs the price to fail.
Former President George W. Bush’s administration popularized the “too big to fail” (TBTF) doctrine notably during the 2008 financial crisis. The Bush administration often used the term to describe why it stepped in to bail out some financial companies to avert worldwide economic collapse.
In his book “The Myth of Too Big To Fail” Imad Moosa presented arguments against using public fund to bail out failing financial institutions. He ultimately argued that a failing financial institution should be allowed to fail without fearing an apocalyptic outcome. For countries, the TBTF theory comes under considerable challenge.
In August 1982, Mexico was not able to service its external debt obligations, marking the start of the debt crisis. After years of accumulating external debt, rising world interest rates, the worldwide recession and sudden devaluations of the peso caused the external debt bill to rise sharply, which ultimately caused a default.
After six years of economic reform in Russia, privatization and macroeconomic stabilization had experienced some limited success. Yet in August 1998, after recording its first year of positive economic growth since the fall of the Soviet Union, Russia was forced to default on its sovereign debt, devalue the ruble, and declare a suspension of payments by commercial banks to foreign creditors.
In Egypt, although the country remains to face a number of challenges, signs remain relatively less worrying than 2022, as global sentiment suggests that leverage will be provided in the short-term at least. Egypt’s diversified economy, size and relative regional clout may very well spare the country the fate of Lebanon. However, if reforms do not happen fast enough, the TBTF shield may become completely depleted.
Hence, in order to avoid an economic fallout scenario a full fledged support to the private sector’s local manufacturing activity and tourism is a must. Effective policies geared towards competitiveness are mandatory, and tax & export oriented concessions are required to unleash the private sector’s maximum potential and shift Egypt into gear.
Sanctions and the Confiscation of Russian Property. The First Experience
After the start of the special military operation in Ukraine, Western countries froze the assets of the Russian public and private sector entities which had been hit by blocking financial sanctions. At the same time, the possibility that these assets could be confiscated and liquidated so that the funds could be transferred to Ukraine was discussed. So far, only Canada has such a legal mechanism. It will also be the first country to implement the idea of confiscation in practice. How does the new mechanism work, what is the essence of the first confiscation, and what consequences can we expect from the new practice in the future?
Loss of control over assets in countries that impose sanctions against certain individuals has long been a common phenomenon. The mechanism of blocking sanctions has been widely used for several decades by US authorities. A similar methodology has been adopted by the EU, Switzerland, Canada, Australia, New Zealand, Japan and some other countries. Russia and China may also resort to these tactics, although Moscow and Beijing rarely use them. In the hands of Western countries, blocking sanctions, however, have become a frequent occurrence. Along with the ban on financial transactions with individuals and legal entities named in the lists of blocked persons, such sanctions also imply the freezing of the assets of persons in the jurisdiction of the initiating countries. In other words, having fallen under blocking sanctions, a person or organisation loses the ability to use their bank accounts, real estate and any other property. Since February 2022, Western countries have blocked more than 1,500 Russian individuals in this way. If you add subsidiary structures to them, their number will be even greater. The volume of the property of these persons frozen abroad is colossal. It includes at least 300 billion dollars in gold and foreign exchange reserves.
This is not counting the assets of high net worth Russian individuals worth $30 billion or more which have been blocked by the G7 countries. However, the freezing of property does not mean its confiscation. Although the blocked person cannot dispose of his assets, it formally remains his property. At some point, the sanctions may be lifted, and access to property restored. In practice, restrictive measures can be in place for years, but theoretically, the possibility of recovering assets still remains.
After the start of the special military operation (SMO), calls began to be heard in Western countries to confiscate frozen property and transfer it to Ukraine. Confiscation mechanisms have existed before. For example, property could be confiscated by a court order as part of the criminal prosecution of violators of the sanctions legislation. However, such mechanisms are clearly not suitable for the mass confiscation of property. Blocking sanctions are a political decision that do not require the level of proof of guilt that is required in the criminal process. To put it bluntly, the hundreds of Russian officials or entrepreneurs put on blocking lists for supporting the SMO did not commit criminal offenses for which their property could be subject to confiscation. The sanctions have spurred the search for such crimes in the form of money laundering or other illegal operations. But the amount of funds raised in this way would be a tiny fraction of the value of the frozen assets. To implement the idea of confiscation of the frozen assets of sanctioned persons and the subsequent transfer of the proceeds for them, Ukraine needed a different mechanism.
Canada was the first country to implement such a mechanism. The 2022 revision of the Special Economic Measures Act gives Canadian authorities the executive power to order the seizure of property located in Canada which is owned by a foreign government or any person or entity from that country, as well as any citizen of the given country who is not a resident of Canada (article 4 (1)). The reason for the application of such measures may be “a gross violation of international peace and security, which has caused or may cause a serious international crisis” (Article 4 (1.1.)). The final decision on confiscation must be made by a judge, to whom a relevant representative of the executive branch sends a corresponding petition (Article 5.3). Furthermore, the executive authorities, at their own discretion, may decide to transfer the proceeds from the confiscated property in favour of a foreign state that has suffered as a result of actions to violate peace and security, in favour of restoring peace and security, as well as in favour of victims of violations of peace and security, or victims of violations of human rights law or anti-corruption laws (art. 5.6).
The first target of the new legal mechanism will be the Canadian asset of Roman Abramovich’s Granite Capital Holding Ltd. The value of the asset, according to a statement by Canadian authorities, is $26 million.
Roman Abramovich is on the Canadian Blocked List, i. e. his property is already frozen, and transactions are prohibited. Now the property of the Russian businessman will be confiscated and, with a high degree of probability, ownership will be transferred to Ukraine. This is a relatively small asset (from the standpoint of state property), but the procedure itself can be worked out. Further confiscations may be more extensive.
The Canadian experience can be copied by other Western countries. In the US, work on such a mechanism was announced back in April 2022. although it has not yet been adopted at the legislative level. In the EU, such a mechanism is also not finally fixed in the regulatory legal acts of the Union, although Art. 15 of Regulation 269/2014 obliges Member States to develop, inter alia, rules on the confiscation of assets obtained as a result of violations of the sanctions regime. The very concept of violations can be interpreted broadly. So, for example, Art. 9 of the said Regulation obliges blocked Russian persons to report to the authorities of the EU countries within six weeks after blocking about their assets. Violation of this requirement can be regarded as a circumvention of blocking sanctions.
There are several consequences of the Canadian authorities’ initiative.
First, it becomes clear that the confiscation rule is not dormant. Its use is possible and is a risk. This is a serious signal to those Russians and Russian companies that have not yet come under sanctions, but own property in the West. It can be not only frozen, but also confiscated. This risk will inevitably be taken into account by investors and owners from other countries, which could potentially be the target of increased Western sanctions in the future. Among them are China, Saudi Arabia, Turkey, and others. It is unlikely that the confiscation of Russian property will lead to an outflow of assets of these countries and their citizens from Canada and other Western jurisdictions. But the signal itself will be taken into account.
Second, the Russian side is very likely to take retaliatory measures. Western companies are rapidly withdrawing their assets from Russia. The representation of Canadian business in the Russian Federation was small even before the start of the operation in Ukraine. If the practice of confiscation becomes widespread, then the Russian side can roll it out in relation against the remaining Western businesses. However, so far, Moscow has been extremely hesitant to freeze Western property. While the US, EU and other Western countries have actively blocked Russians and their assets, Russia has mainly responded with visa sanctions. The confiscation could overwhelm Moscow’s patience and make the retaliatory practice more proportionate.
Finally, the practice of confiscation modifies the very Western idea of sanctions. It currently implies, among other things, that the “behavioural change” of sanctioned persons would result in the lifting of sanctions and the return of property. The freezing mechanism was combined with this idea. However, the confiscation mechanism contradicts it. Sanctions now become exclusively a mechanism for causing damage.
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