site.btaAdopting Euro Is Next Logical Step for Bulgaria, Says Ireland's Central Bank Director Alan Ahearne

Adopting Euro Is Next Logical Step for Bulgaria, Says Ireland's Central Bank Director Alan Ahearne


Sofia, May 15 (Metodi Yordanov of BTA) - Moving to the euro is
the next logical next step for Bulgaria, Director of the Central
Bank of Ireland and Head of Economics at the National
University of Ireland, Galway, Professor Alan Ahearne, says in a
BTA interview. Professor Ahearne argues that given that
Bulgaria has had a rigid monetary regime for 18 years, that it
is able to adjust and has gotten used to adjusting to shocks
without the use of the exchange rate, by taking the next step
and adopting the euro, Bulgaria should be able to enjoy some of
the benefits arising from it.

Ireland's Experience

Asked about which business sectors in Ireland pull the economy
forward, Professor Ahearne notes that several are strong and
expanding. Agrifood and agriculture are doing well and Ireland
has a good reputation for high-quality food of which it is able
to export quite a lot. Lately it has been exporting more to
China for example, where there is an appetite for Irish food.
Ireland is also strong in the information technology, computer
technology and software, particularly with the US multinationals
located in Ireland who are using it as a platform to export
their products and services to the rest of Europe. Medical
technologies and medical devices are another branch in which
Ireland is good. The pharmaceutical and chemical industries are
big in Ireland, again dominated by US multinationals who have
their European subsidiaries and in some cases European
headquarters there. Then there is tourism, which Ireland has
always been good at. Lately there has been a lot more British
and American tourists coming to Ireland because of the weaker
euro, because they get a lot more for their sterling or dollar,
he explains.

According to Ahearne, the best thing a government can do to
foster economic growth is to concentrate its efforts on creating
an environment that is as business-friendly and helpful as
possible. It is not possible for the government to pick sectors
and businesses that are going to survive or grow. It is really a
case of trying to create an environment that is as flexible and
business-friendly as possible, and then the private sector
should be able to grow in it.

Asked what steps his government has taken to nurture this
environment, the economist says that the most important recent
step was putting the public finances back in order, because
businesses are not going to invest if they are worried about the
solvency of the state or if they think that the public finances
are on an unsustainable path. So the most important thing is
that the businesses are confident that the Irish state itself,
its own finances are in reasonably good shape. The second thing
was to make sure that Ireland has a banking sector that can
provide the credits that businesses, particularly SMEs, need as
they grow. Now that they are beginning to grow again, they need
to borrow money to invest and to expand. Therefore, it is
important that the banks are in a position to be able to lend.

Commenting the interaction between business and education,
Ahearne says that it is quite common for universities to work in
collaboration with industries on research and development.

Lessons from Brain Drain

Asked to explain how Ireland has managed to address the so
called brain drain from the 1980s, Ahearne says that there was
a huge outward migration back then as the economy was in dire
shape. People went through secondary school and universities and
then immediately migrated, he says. But what happened when the
Irish economy began to grow rapidly in the mid-1990s, is that
many of these immigrants returned back to Ireland. There is
evidence and there have been studies to show that
when these people returned, their wages were higher on average
than those of the Irish who had stayed. So they had obviously
developed human capital abroad and
skills which they brought back. That knowledge and those skills
were valued by businesses in Ireland and they were able to earn
a premium. Particularly that human
capital that they brought back was a very important asset for
the Irish economy as it provided know-how and knowledge from
abroad, he notes. However, it did
require the economy to obviously recover first, because people
are not going to move back unless they are confident that they
can have jobs.

Bulgaria's Adopting the Euro

Asked to comment US economist Steve Hanke's recent advise to
Bulgaria not to join the Eurozone and when it would be a good
time for this country to adopt the euro, Ahearne says that in
order to adopt the euro an economy needs to be flexible enough
and able to sustain that flexibility. "I think there are
countries in the EU that are not agile or flexible enough, they
have structural problems - say in their labour markets or in
some of their product markets. And because of that inflexibility
they need to have their own exchange rate and they need every
now and then to devalue the exchange rate so it can follow their
own interest rate. But when I look at Bulgaria, the test I
think is that Bulgaria has had a rigid monetary regime for 18
years now and it has had a
currency board. And a currency board is not something that every
country would
be able to work with. We've seen currency boards collapse in
some countries,
because those countries were not flexible enough, they were not
able to adjust
to shocks. It seems to me that Bulgaria is able to adjust, it
has gotten used to adjusting to shocks, domestically in the
economy, without the use of the exchange rate. Therefore, I
don't think that the move to the euro is a big step for
Bulgaria, in the sense that you already have a rigidly fixed
link with the euro and it's simply a logical next step. The
Bulgarian labour and product markets have shown to be flexible
enough over the last nearly two decades, that it can adjust
within the currency union. Therefore, by going to the next step
you should be able to enjoy some of the benefits of being a
member of the Eurozone," he says.

Greek Fears

The possible fears from Bulgaria's joining the Eurozone, after
what happened with Greece are another topic Ahearne was asked
about. According to him, Bulgaria is relatively small and it
will not be bringing a very large economy into the Eurozone. The
issue is whether the economy has shown flexibility and agility
in the past, so that it looks like a good candidate for the
Eurozone, and that is something Bulgaria has already done. The
rules for getting into the Eurozone usually involve being member
of the European Exchange Rate Mechanism (ERM) and having a
stable exchange rate for several years and that is a test in a
way of whether the economy is able to adjust
without the exchange rate moving. Bulgaria has been doing that
for 18 years, Ahearne said.

Commenting a potential Greek bankruptcy and the impact this
would have on the Balkans, given the fact that many Greek banks
are significant players in the region, Professor Ahearne
believes this depends on how closely integrated with
headquarters the Greek banks operating in these countries are,
or if they are in a way ringfenced and protected. "I am not an
expert on Bulgarian economy, but from what I
understand, the Greek banks operating here have a wall of
protection built around
them and safety nets put underneath them. These are
subsidiaries, they have
their own capital and liquidity here. So, although they are
Greek banks, those
safety measures I think have been put in place and that should
be helpful.
There is a worry that if Greece leaves the euro or if starts
printing its own new
currency and has dual currencies and there is a run on the banks
in Greece,
people in Bulgaria might see that on their TV screens and then
they will worry about
their money on deposit in the Greek banks. But I think it looks
like the
authorities here have put in place lots of steps to insulate the
Greek banks
operating here from whatever troubles they may have back in
Greece."