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Victoria Mindova

Tight fiscal consolidation, heavy taxes and chaotically implemented structural reforms have led Greece to the brink of final failure. On Monday, the board of eurozone finance ministers must decide whether Europe will give the second bailout to the country and under what conditions. The government and the supervisory Troika of the European Commission, the European Central Bank and the International Monetary Fund have acknowledged that the first recovery plan contained a wrong combination of measures that have worsened the situation. Now, a second mission from the Group of Socialists and Democrats in the European Parliament, which is seeking to provide an alternative to the economic growth, is going to help. The mission involves the Bulgarian Member of the European Parliament and former Foreign Minister Ivaylo Kalfin, who was also a candidate at the last presidential election in Bulgaria.

In a conversation with Victoria Mindova, Kalfin presented his vision for the necessary reforms, stressing that the new programme should be based on economic growth and employment, rather than solely on cost cuts.

How was the idea of the alternative troika born?

We currently have a supervisory Troika of the European Commission, the European Central Bank and the International Monetary Fund, which is working with Greece. We see that all that it requires from Greece has two main flaws. The first is that the recovery programme is mainly related to cost reduction, which is clearly necessary for the country.

The problem is that in the last two years, costs were reduced by 20% but the economy has shrunk by 18%. In this situation, it is crucial to combine fiscal stabilization with measures to stimulate the economy and to create jobs. This is the first thing that is obviously missing from the approach chosen by the European Union to date.

The second flaw is the lack of public support, which is due to the lack of clarity about the processes. You can see how painful at a political level, it is for state governments and leaders to decide on the granting of the aid and loans to Greece. Moreover, the Troika requires commitments from Greece, which it would be unlikely to require from any other country, and it always says that this is the penultimate and that there will be a new portion of measures with the new tranche after three months. Undoubtedly, Greece will face more austerity measures, but they cannot be implemented without public support.

How can the Bulgarian experience of the transition period be useful in resolving the Greek crisis?

This is not about the Bulgarian experience. Apparently, it can only show that there is no way to avoid austerity measures. The point is that they should not only be applied to reduce fiscal parameters. They should provide the basis for attracting investment in Greece, because, as we now see, there is no investor willing to spend even a euro in this environment.

Greece does not have to leave the eurozone and return to the drachma to attract investment. This will mean a huge devaluation and just falling overboard. What should be done is to seek opportunities to raise capital. The European Union can do more and attract private investors, which will happen when the recovery programme in Greece finds enough public support. I do not know whether this is the Bulgarian experience, but these are the necessary conditions for rescuing the country.

All agree that Greece needs investment. However, the fact that the country is entering its fifth year of recession and unemployment has reached 20% cannot be ignored What do you think are the immediate measures that should be implemented?

The problem lies precisely in the fact that for many years, Greece was consuming much more than what it was producing. It was attracting many more investments, which suddenly withdrew from the country. This means that they must be replaced by its own capacity and production, which clearly its economy has not built.

No measure would work without Greece’s developed economic base. It does not matter how costs are cut and how many people are fired.  Greece cannot emerge from this situation if the economy does not work and starts producing. This is a slow process. A longer-term recovery prospect should be scheduled, all forms of foreign aid should be found as well as a way to stimulate economic growth. The way followed so far cannot continue.

There are signs from Brussels suggesting a wave against Greece remaining in the eurozone. Do you think there is a real chance of excluding Greece from the monetary union?
 
The situation is extremely serious and all options are possible now. I would like to emphasize that leaving the euro is not a good scenario for the development of the crisis. The return to the drachma means that Greece would significantly devalue its currency, and with it - people's income, deposits, savings, price of properties, etc. Actually, Greece will have no economic benefit from this development.

By the end of 2010 with the deterioration of the situation in Greece, direct private investments in Bulgaria have dropped by over 70%. What are the consequences of the Greek crisis on the Bulgarian economy?

I would not relate the decreased investment in Bulgaria to the Greek crisis only. Instead I think that many Greek companies are shifting to register in Bulgaria, which does not necessarily mean import of capital in the country, i.e. it is not of particular significance.

It is important to understand that we are not interested in the Greek economy going down. Firstly, because Greece is one of the largest foreign economic partners of the country. Secondly, because there is a very strong presence of Greek banks in Bulgaria. Of course, with one exception, they are registered as Bulgarian financial institutions, but they are the branches of Greek ones. However, they meet the very stringent requirements of the Bulgarian National Bank. Any problems in the economy and in the banking sector of Greece would affect Bulgaria. We should not forget that there are many Greek companies and investors in our country, which is extremely important for us. The majority of them are subsidiaries of major Greek corporations.

The conclusion is that Greece’s economic instability will not have a positive impact on Bulgaria. Quite the contrary. The question is how deeply it can affect us.

In this context, what are the threats to the Bulgarian financial system in the event that Greece defaults and leaves the eurozone? (35% of the Bulgarian banking sector is held by Greek banks).

Only Alpha Bank Bulgaria is a branch of a Greek bank. All other banks are subsidiaries, but registered under the Bulgarian legislation, which means that their capital adequacy and bank supervision are subject to the rules imposed by the Bulgarian National Bank. In any case, by looking at the banking sector in Bulgaria, we will see that there is significant funding in the form of private debt. This means that over the years, they have received loans from parent banks, which were transferred to Bulgaria to be invested in various projects. In recent years, the debt has been repaid and in case of problems in the parent bank, its property in Bulgaria would be jeopardized. This does not necessarily apply to all Bulgarian banks, but I think the process should be considered with caution.

Let us go back to our initial subject on the alternatives for Greece and the proposals the second troika is ready to give in order to restore economic stability in the country. What do you think is the right package of measures?

I will not go into details before the official report is released, but we will visit Athens between 5 and 6 March. We will hold a series of meetings with representatives of various institutions, political parties and social partners. We will seek their views and those of economists who have something to say on the problems of Greece. Our report will be ready about a month after this visit. I am not saying that we should expect any miracles, but it is obvious that the current restructuring programme in Greece needs to be adjusted.