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Saving the

Simeon Djankov

May 2013

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Saving the Euro

1. Introduction 2. How the Crisis Moved to Europe 3. The Deauville Blunder 4. Papandreou’s Folly 5. Controversial Origins 6. The Theory behind the Euro 7. Euro Holidays 8. The Northern Euro 9. Eurobonds 10. Devaluation: External or Internal 11. The Stability and Growth Pact 12. Building a Fiscal Union 13. The ECB: Savior of Last Resort 14. The Banking Union 15. Comparison with the United States 16. The BELLs 17. Regulatory Easing 18. Streamlining the Bureaucracy 19. Educating Professionals 20. A Simple Solution for the Euro 21. Final Thoughts

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1. Introduction

In July 2009 I became the finance minister of Bulgaria. The week after, I went to my first Ecofin meeting in . Ecofin is the monthly gathering of the finance ministers of the . Two things made an immediate impression. First, few of my colleagues had economics or finance education – 5 of 26, to be exact. Second, there was little urgency. We had to work around the expansive holiday schedules in Europe, and so my second Ecofin was in late September. By then, the Greek government had gotten mired in corruption accusations and a week later (October 4, 2009) the Karamanlis government resigned.

During the next four years, Ecofin met over 40 times so I had plenty of opportunity to consider the main topic of the moment: saving the euro. There was the constant focus of keeping Greece afloat, and building a common fiscal policy to save the . The remaining agenda varied: saving Hungary, saving Ireland, saving Portugal, punishing Hungary, getting worried about Spain, getting worried about Italy, wondering when France would face up to its banking problems. By the time blew up, we had been in the saving business for too long and this is why Cyprus got the short stick.

There were moments of joy. Estonia adopting the euro in January 2011. “A political decision,” the Estonians would say. “We want to be as far from Russia as possible.” During my last Ecofin, Latvia applied as well. While Cyprus has muddied the waters for small Eurozone members significantly, I hope Latvia gets in. It suffered an 18% drop in output, with the accompanying rise in unemployment, in 2009 and further austerity in 2010 and 2011, to maintain its currency board. So big is their commitment. Leszek Balcerowicz, the father of Eastern European reforms, later compared the BELLs (Bulgaria, Estonia, Latvia and Lithuania) to the PIGS (Portugal, Ireland, Greece and Spain) and concluded that the former have a brighter future since they are prepared to fight for it. The PIGS are not. Exception: Ireland.

There was success at home as well. After recording a 4.4% budget deficit in 2009, due to the previous government’s pre-election spree, Bulgaria reduced the deficit to 2% in 2011 and exited the Excess Deficit Procedure, hand in hand with Germany. That put us firmly in the small group of fiscally-responsible countries. Moody’s raised our credit rating to BB+, the only rating increase in Europe in the past 5 years. The ’s Convergence Report in 2012, said that Bulgaria met all quantitative Maastricht criteria, one of only 3 European Union countries to do so. The remaining step was entry into ERM2, the waiting room to the Eurozone.

The most memorable moment happened in mid-December 2012, when Ecofin agreed to move towards a single bank supervision for the European Union. This was the third meeting called in a span of ten days, the previous one being cancelled because the positions were too far apart. The November meeting had also ended with an impasse. As one minister remarked after that “It was the most relax