If you want to hear his speech on the Banking conference, organized by Capital, click here
(starts at 2:08:00)
Welcome to Sofia!
Y: It is nice to be here finally at the age of 60.
It is never too late; there are lots of things to talk about, but I'll try to narrow them down to focus on current issues in Bulgaria. The eurozone is a big concern now in Bulgaria. Bulgaria is about to join and should have already joined it some time ago. But we delayed it and the current date is somewhere in 2023/2024 - if the current government is to be believed. You're a famous critic of the eurozone - to put it mildly - so If it depended on you, and if you were in the Bulgarian government - what would you be doing in the current climate about the eurozone?
Do not do it. It is a mistake. A big one. Having your own currency is like having an insurance policy on your car. You pay for it, a premium, and you think it's a waste of money and you don't really appreciate it until an accident occurs. It's the same with your own currency. There's no doubt that the Bulgarian government has for many years been trying to keep the fixed exchange rate lev/euro (with the currency board).
People have famously been led to believe that once you have a fixed exchange rate to the euro, you might as well have the euro itself because of the high risk premium and high interest rate for borrowing. So why pay this? Well, it's your insurance policy.
Imagine what would happen once you join the eurozone. There is going to be a lot more risk- taking by Bulgarians and others, as well as - all things being equal - a flood of money into Bulgaria, for example from banks such as Deutsche Bank that have excess liquidity and no idea what to do with this money because Germans do not want to borrow and corporations are in surplus, households the same, so there is a glut of money in the financial system.
Taking into consideration the interrogation risk and once Bulgaria has the euro and money comes in like in Greece, you will have bubbles, a false sense of growth as a result and if/when a financial crisis hits, either in Bulgaria or outside, or in Wall Street, suddenly the easy money will flood out of the country and the bubbles will burst and then you will be in serious trouble.
Yes, but some of the economists will argue this has already happened: Bulgaria has a fixed rate, it survived the 2008 crisis, the easy money flowed out, FDI stopped and real estate bubbles blew up. If having this exchange rate is a given, why not drop it and join the eurozone ?
Because it will flow back in. Once you join the Euro there will be a steady flood of money from German and French banks to your banks. Then your banks will lend money which is going to create asset price inflation and bubbles. Once these bubbles burst, you will be in serious trouble, effectively creating an economic problem for yourselves. You will lose your capacity.
Getting into the Eurozone is effectively losing a huge shock absorber that you only need when there is a pothole in the road. But there will always be potholes. And the probability of encountering one increases when you enter the eurozone. So giving up your currency will be like removing the shock absorbers and driving into the potholes - it's not a very clever idea.
Doubtless, a lot of powerful interests in Bulgaria - as in Greece - are pushing for Eurozone accession because they want assets to be priced in euros. They don't want Bulgarian currency but at the same time the majority of Bulgarians will not benefit from this. In any case, I am not against a common currency - but we do not have a banking union. There is one only in name but not in substance. So your own banks will have to supply the positive insurance and you will not have any protection whatsoever and there is a possibility of a one-off devaluation.
If we had a proper banking union and a fiscal union - then I would be all for it. I want a common currency, I am a federalist. I want a federal Europe, but we don't have one. To pretend we have one just because of the monetary union - it is committing a great hubris against basic economic principles.
First of all, do you not think the eurozone has changed at all? Why? Second, the banking union exists, you say it doesn't, but do the further steps strengthen it?
This is the gradualist thesis - that we are moving, but not fast enough. In fact, we're moving in the wrong direction very fast. A lot of things have changed since Greece went bankrupt. The Eurozone authorities, who I know very well, show a fantastic capacity to change everything but nothing really changes. It is a great paradox and I will explain why.
When Greece went bankrupt, the first thing Angela Merkel said to our Papandreou-led government was something quite absurd: "We're not allowing you to go bankrupt, but you cannot get a loan and we're not going to give you interest rate relief. Imagine if the Leman brothers had been told this in 2008. Merkel had to take this back and give a loan a little later obviously. So the first thing they did was a bail-out clause which became a reserve. That is a simple machine for permanent bankruptcy concealment, not for correcting it.
Imagine if, in 2008, the state of Nevada did have access to the FDC and the federal treasury and to food stamps - it could be a complete disaster, like in Greece. How would the state of Nevada have been helped if the US had created a 'mini-IMF'- lending money to Nevada on the condition of strict austerity and giving money, loans, to bail out their banks without the capacity to make money?
First they gave the bailout to Greece, some of us predicted it would spread to Ireland and Portugal and it did.
The EU ended up creating some other mechanisms. However, the rescue fund was meaningless for a country like Italy with its huge debt. So they had a choice - either stop printing money and basically going against the charter or go further and create The European Stability mechanism which ended up being irrelevant. The last thing you need when you go bankrupt are more loans. Even with zero interest. You need debt restructuring. Or you need real Eurobonds that Europeanize debt.
Look at what happened when the pandemic hit. It was clear that the whole thing would blow up with large national debts. Greek national debt is 215 per cent. And there were 14 or 15 European leaders who asked for a Euro bond and additional Covid debt to be Europeanized. Merkel said "no". They created a recovery fund which is macro-economically irrelevant. But at the same time she is rolling over an unsustainable debt of most eurozone member states by essentially taking money from poor Germans and giving it to rich Greeks.
Yet this tool contradicts the thesis - which you develop in your book "The weak suffer what they must" - that the Bundesbank controls Europe secretly ...
In fact, in the book, I accused the French of wanting German money to continue their hegemony.
...Basically arguing that the Germans want to punish the French
This is not really my theory, but what the former finance minister Schaible told me. The French wanted German money to expand
The recovery fund is a fork in the road in that, essentially, it's the first time that Europe has tried collectively to collaborate on something. What is your perspective on this?
Yes, it is a change. But you are still defending the gradualist hypothesis. You say it's important to put your foot in the door to open it. No, I'm saying what happened was that they shut the whole door.
Look at the new German government. They have one great promise, to never again do it. This is a one-time thing that will not happen again.
It is indeed a Eurobond, but too small in size and made in such a way that the Austrians, the Dutch and the Germans said it will never happen again. What you are saying is that we're moving slowly in the right direction, I'm saying we're making great leaps in the wrong direction.
Because the idea of Eurobonds is dead. Precisely because of the way it was made.
Since 2002 I have been defending the idea of a European green bond. I am talking 5% EU GDP to go directly to the green energy union- by looking at what different countries are good at in terms of renewable energy and funding it directly, I do not want European money to go to the Greek government. By giving it to the government, it will end up going to the oligarchs. The Dutch and Germans will now see that these types of transfers will be the end of the idea of a single fiscal union.
What is the right direction then?
The European Central Bank is the only serious institution that can issue the bond with it, not the European Commission- this is not a serious institution.
A lot of people in Brussels will be mad at this statement..
What can I do? They do not pay me enough to lie. The European Central Government is the only financial institution that is dependable. If I were a Chinese or a Bulgarian investor and there was a bond issued by the ECB, I would buy it immediately. And we are not going to have a situation in which member states are backing up the bond, now this is commissioned - oh God! - by Greece.
Essentially everything is back in Germany's hands - once they turn down the idea of a joint euro bond which they will do.
Whereas the alternative is an ECB bond that would sell at negative interest rates immediately and the new debt would then not fall on the states like Spain, Italy and Greece. And EIB, that already has issued their bonds, imagine if they were to fund the green energy union we need. By giving the right to put 500 billion euros a year in bonds in the next 5 years in order to fund this big green transition.
All Lagarde will have to say is that she stands behind these bonds on the secondary bonds market. There will be no need to do anything, because they will sell out immediately. And this will be great for the energy market and incredibly progressive - create more jobs with a high multiplier accelerator. And you can do it now, by current laws and regulations.
What is the obstacle then?
The political will. I have some theories why it is not there. One of which elaborates on what one of Merkel's top advisors told me. He said that she would never do such a thing and I asked "why"?
He replied that every time the German chancellor walks into a room with the French president, the French president keeps quiet because France is a structurally deficit country - the opposite of Germany.
And If, tomorrow, the euro goes and we revert to our national currencies, there will be a flood of money going in Germany and out of France. If you are the French president you keep your mouth shut at the end of the day.
The moment we do in Europe what I suggest or create a federation, this ends. Germany can't leave the euro.
Not that Germany wants to leave the euro - Germany is the greatest beneficiary - but in her handbag there is a 'get out of jail card' which countries like Greece, deficit countries, do not have. And that gives her asymmetric power.
Do you believe that there is a 'left wave' in Europe now?
I am a leftist and I do not see it. We, the leftists, are pathetic. We try to find secret things that are not there. Depends what you mean by Left - Olaf Scholz is even more right wing than Merkel. If you look at his attitude as a mayor of Hamburg, his behavior towards migrants and the banking sector, which sheltered from proper scrutiny and covered corruption, I cannot see the left here. Who else is part of that wave?
The winners in the Bulgarian elections, for example, the party called 'We Continue the Change'- they claim their ideology is 'left ideas with right measures'
I remember that situation was happening in Greece as well. I was part of a government that said this. At the end it is not what you declare, but what happens. I really do not follow what governments use as labels. What matters is what people actually do.
So, for instance, in Britain the leader of the Labour Party, Sir Keir Starmer, is more left wing than Boris Johnson. If anything, Johnson is doing things Starmer would not do in favor of the working class, not to mention that this is a tragedy for us Leftists.
What about the divide between Eastern and Western Europe? The Greeks have always been kind of 'away' from the mentality of being part of the Eastern Europe and the Balkans. Do you believe that there is still a divide?
Us, Greeks and Eastern Europeans, we share a trait. Collectively, we are seen as the vital space - what we have to offer the western powers is markets and labor markets, as well as a place for a demand for their money.
People ask me why did Berlin accept Greece in the economic union and in the euro: what did Greece have - a little olive oil and oranges? We're corrupt, poor.
The answer is not the labor force because it already migrated to Germany in the 1950s. Essentially, Greeks, with other groups like Italians, Yugoslavs and Turks, built Germany.
What we did have, was no debt. In 1980 the public debt of Greece was 35% and private debt was 0%. Even in 2000, when Greece entered the Eurozone, Greeks did not even have credit cards, no mortgages, and nobody owed money to the bank. Even if you have asked for a loan, you would not get it.
What we brought to the table is that we did not owe money and we had property; we were a dream, the perfect partners for Western banks.
In the case of Eastern Europe, the countries of the Eurozone found factories there. If you think about the expansion of Volkswagen and Audi into Eastern Europe, they took over the Eastern European factories like Skoda, while importing huge human capital, well-educated Bulgarians, Romanians who, for instance, moved to Germany.
A colleague of mine in the Humboldt university did a study and estimated that this human capital would cost around 200 billion. The amount of the expertise that came to Germany cost 200 billion to eastern countries.
An enormous аmount.The countries of the East received a lot of money from structured funds, but that money usually ends as aggregate demand back to Western companies or worse, to oligarchic circles that perpetuate a very imbalanced market.
I'm not, by any means, against the union and the common market. Alexander Hamilton said once when he became the US treasurer that "we need a common debt because the common bond is what creates the common ethos of the union" and he was completely right. This insistence on not having a European bond or a political union is what is keeping us apart.
The two schools of thought, the gradualists and mine, were captured beautifully by Francois Mitterand whose ideology was essentially "step by step to reach the union". But we should not forget that Nicholas Kalder, an economist, was telling the Europeans that a monetary union is not a political union because eventually the monetary practices will raise tensions and this will prevent the political union.
Yes, but the EU is still standing, still here and doing its thing. Do you not think it is doing the job?
You just reminded me of a discussion I had in Moscow in 1984 with the Communist Party and they were saying the same thing. And I remember what I was saying to them, that "an unsustainable system can be sustained for a very long time".
Do you say that the EU is going to fall apart?
It is already falling apart. It is already fragmented, borders again forming all over the place, national debts are concentrated in the nations' national banks.
Let's not forget about Brexit which is the result of ridiculous policies in Brussels and Frankfurt. It has nothing to do with Brexiteers - Britain has always had Brexiteers and Eurosceptics. It would have not happened were it not for the ridiculous policies of the European Central Bank. In 2011, there was a British system practicing expansionary contracts and this, mixed with EU regulations, resulted in 3 million Europeans going to England and all this stoked the fuel of Nigel Farage.
But it will be an exaggeration to say that Brexit is a success, right?
I did not say it was a success, but when the Union is following the wrong policies by European standards, it is causing a fragmentation. It is the idiocy of Brussels' policies that caused it. And also the Brits have a strong affinity towards parliamentarianism, while continental Europe does not.
I remember that you qualify your new book 'Another now' in which companies can operate outside a strongly controlled environment of state control. Can you specify what you mean because in Bulgaria we just came out of such an environment?
The supposed clash between markets on one hand and the state is a fantasy. In the UK, without the state there are no markets.
The greatest impediment to freedom and prosperity is concentrated power, either market or state power. Concentrated power in the hands of Jeff Bezos or a Greek oligarchy is detrimental to our capacity to breathe, to be creative. Similarly, I do not want to live in a Communist regime like the one you had here in Bulgaria. I know that if I lived in Bulgaria in the 1970s or 1980s, I would have been in the Gulag.
But how can markets function, without the state and without the oligarchs? For me, the answer is to have businesses that are the result of the legal framework of their property and ownership rights - small or medium sized. Imagine a situation in which people from a company, even if they do not have the same income, have power according to their peers' assessment. It is not the state, or the market, but peer assessments that are in charge. I was working in a US company that actually worked that way successfully. So, I try to imagine a world in which companies operate in that way and add social mechanisms of social worthiness in order to be sure that the company is not damaging the community somehow. I am not a fan of elections for the same reason and because even the ones in Ancient Greece were always controlled and rigged. I like the lotteries much more!