Bolgheria & Croèscia

(… title inspired by this great classic:

which nevertheless got its four and a half million views: credit where credit is due!… )

Dearest followers (and followers), as you know, since yesterday Bolgheria (Bulgaria to its friends) has been called to the last (for now) of the many events to which its tormented history has led over the last fourteen centuries: entry into the single currency. Its entry follows, three years later, that of Croèscia (Croatia to its friends) , which we commented on in due course .

As on that occasion, also on this one the inevitable enthusiasm of the occasion was recorded:

(…and on the other hand, what does she have to say, poor thing?), and the equally ritual catastrophism of the well-known denier Dragoni :

which for the occasion seems to want to deny that Bolghèria will benefit from joining the single currency the same as countries like Greece, Italy and of course Croatia.

Now, I wouldn't dwell too much on the circumstantial optimism: the recognized authority of those who expressed it is enough! Instead, I'd like to devote a little time to the catastrophisms, which were, all things considered, in the minority (the propaganda machine is well-oiled, the dissent machine a bit distracted) and rather extemporaneous :

in particular to make it clear that yes, entry into a dysfunctional monetary union will likely not help Bulgaria any more than it would help anyone else, but no, catastrophe is certainly not around the corner (except as part of a picture in which we would have other concerns anyway).

To understand what I mean, perhaps it would be worthwhile to drink for a moment from the sources of the debate, borrowing a passage from the infamous article in the manifesto :

If prices in X rise faster than in its partners, X exports less and less and imports more and more, running into a balance of payments deficit. X's currency, needed to purchase X's goods, is less in demand and its price falls, that is, X devalues: in this way, its goods become cheaper again, and the imbalance is alleviated. Equal and opposite effects occur in surplus countries, whose currencies become scarce and appreciate. But if X is tied to its partners by a monetary union, the price of the currency cannot restore external equilibrium, and therefore there are two solutions: either X deflates, or its surplus partners inflate. In the Keynesian view, the two mechanisms are complementary: they must be met, because surplus and deficit are two sides of the same coin (you can't have a surplus if no one is in deficit). Cuts in the deficit country must be accompanied by an expansion of demand in the surplus countries. But the prevailing view is asymmetric: the only good inflation is zero inflation, surplus countries are "good," and it's the "bad" countries with deficits that must deflate, converging toward the good. And what if, like the PIGS, they fail? Export revenues decline, and people borrow abroad to finance their imports. The countries with the highest inflation are also those that accumulated the most foreign debt from 1999 to 2007: Greece (+78 GDP points), Portugal (+67), Ireland (+65), and Spain (+62). With debt, interest rates rise, and the spiral begins: people borrow abroad to pay interest abroad, the spread increases, and the crisis begins.

This was our angle of attack at the time on the problems posed by a dysfunctional monetary union: we saw the main limitation in external imbalances, that is, the obstacle to the ability to absorb and compensate, at least in part, with nominal exchange rate depreciations for any real exchange rate appreciations caused by positive inflation differentials versus major trading partners. Over the years, we have enriched this analysis in at least two respects.

The first is that, as we conceptualized in Italy Can Make It :

and the dynamics of German competitive devaluations, now crystal clear and unavoidable after Trump targeted them, confirms this.

So, if I were to write that passage today, perhaps I would write it like this:

If prices in X rise less rapidly than in its partners, X exports more and more and imports less and less, resulting in a balance of payments surplus. X's currency, needed to purchase X's goods, is in greater demand and its price rises, meaning X revalues: in this way, its goods become less convenient, and the imbalance diminishes. Equal and opposite effects occur in countries in deficit, whose currency becomes abundant and depreciates. But if X is tied to its partners by a monetary union, the price of the currency cannot restore external equilibrium, and therefore there are two solutions: either X inflates, or its deficit partners deflate. In the Keynesian view, the two mechanisms are complementary: they must be met, because surplus and deficit are two sides of the same coin (you can't have a surplus if no one is in deficit). Cuts in the deficit country must be accompanied by an expansion of demand in the surplus countries. But the prevailing view is asymmetric: the only good inflation is zero inflation, surplus countries are "good," and it's the "bad" countries with deficits that must deflate, converging toward the good. And what if, like the PIGS, they fail? Export revenues decline, and people borrow abroad to finance their imports. The countries with the highest inflation are also those that accumulated the most foreign debt from 1999 to 2007: Greece (+78 GDP points), Portugal (+67), Ireland (+65), and Spain (+62). With debt, interest rates rise, and the spiral begins: people borrow abroad to pay interest abroad, the spread increases, and the crisis begins.

Let's say that from the words "in the Keynesian vision" onward, I see no particular need for intervention. The point is that today I would subvert the whiny narrative of little Italy needing to devalue, because we've realized that things are a little different: it's little Germany that, to stay afloat, needed at the very least not to revalue, but in effect (and the history of the euro's very early years was eloquent on this) to devalue, that is, to engage in currency dumping whenever other types of dumping (wage, energy, etc.) failed to assist it. In short, what further undermined the system was its hegemon's inability to sit at the table without stacking the deck, but I mention this only to make a point.

The second aspect is that with the passage of time and the advancement of scientific literature (and also our knowledge of the previous literature, and even our modest contributions to the advancement of knowledge), we have greatly expanded the list of dysfunctional mechanisms triggered by joining a dysfunctional monetary union. Not only is there a distortion of competitiveness, which translates into a balance of payments crisis and then a race to the bottom in wages, but there are also allocative distortions in the capital market (interest rates below the equilibrium value incentivize borrowing and thus foster various forms of capital misallocation, one of which—but not the only one!—takes the form of real estate bubbles, with negative effects on productivity ) and in the labor market (if the competitive disadvantage is compensated for with wage-cutting policies, as even Draghi has now admitted, distortions in labor allocation ensue, for example with a shift toward less capital-intensive techniques, with further negative effects on productivity).

All these ramified aspects are addressed among others in this working paper by a/simmetrie , in this paper from the Journal of Economic Policy Reform , where you can find endless reading suggestions (it is a vast, consolidated and noble lineage literature) and if you prefer to listen rather than read in my speech at #goofy13:

With these two observations, I'd like to return to the point: if we refer to the conceptual framework from which this blog began, which, however stylized, remains valid, does Bulgaria have anything to fear in the immediate future from abandoning exchange rate flexibility, and in particular, is it plausible that it will explode "in a few days," as the "thunderstruck" claimed above?

Looking at the data, we note that in recent years the exchange rate of the Bulgarian leu has indeed experienced fluctuations of a certain intensity:

with a moderate tendency towards depreciation since the global financial crisis (I emphasize that this exchange rate is quoted as uncertain for certain, so an increase corresponds to a devaluation: more units of national currency are needed for one unit of foreign currency). One could therefore argue that giving up this flexibility comes at a cost. However, the more erudite will remember, or the more attentive to detail will note, that:

The exchange rate of the Bulgarian currency against the dollar moves exactly like the exchange rate of the German currency against the dollar! This is because, as I reminded you at the time (always here , but also later when discussing the seven-speed Europe ), although not a eurozone country like Montenegro, Bulgaria has long been in the de facto euro, having inherited in 1999 the currency board with the mark established in 1997 (similarly to what Bosnia and Herzegovina did in 1995 ). This means not only that its exchange rate against the euro has been irrevocably fixed since the beginning of our wonderful adventure in the world of non-optimal currency areas:

But also that its central bank effectively has no margin for autonomy, because in a currency board, the central bank can issue currency only if it holds a sufficient amount of the country's foreign currency peg in its official reserves to guarantee immediate and unlimited convertibility of the national currency into foreign currency. In short, the Bulgarian central bank could issue one leu (in fact, almost two!) only if it held one euro in its official reserves. Therefore, yesterday in Bulgaria nothing changed, neither in terms of the exchange rate nor in terms of the ability to conduct its own monetary policy.

The situation in this sense is closely analogous to that of Croèscia (Croatia): there too we had said that the Croatian kuna had not shown any tendency towards depreciation like the zloty or towards appreciation like the Czech koruna, and had remained substantially stable against the euro, so the further restriction resulting from fixing the exchange rate would not cause any particular trauma (and so it was).

So, in a few days nothing will happen: Argentine scenarios, as an immediate trigger of the Frenkel cycle, described here in the Cambridge Journal of Economics (downloadable here ), told in the Romanzo di centro e di periferia , and applied to the Eurozone crisis in Unhappy families are all alike :

were not plausible for Croatia and are even less so for Bolgheria (Bulgaria).

Does this mean everything is okay?

No, of course it doesn't mean that.

I would also like to make two observations here.

The first is that even in our case, although joining the euro was not a great idea for us, the damage became explicitly visible much later, around 2010 (thirteen years after the peg to the ECU in 1997), and this despite the fact that in the meantime Italy had maintained a positive inflation differential with respect to the Eurozone, with a corresponding deterioration in its real exchange rate:

( I hope the graph is clear: you can see the Italian and Eurozone inflation rates, the cumulative differential, which is growing because in that period Italian inflation was higher than average, and the real exchange rate, correlated with the cumulative differential, because when domestic prices rise more than foreign ones the exchange rate appreciates .)

and therefore its current account balance of payments and its foreign debt. It took the shock of late 2008 for the system to seize up, forcing us into deflationary policies that brought our inflation rate below average, reducing the cumulative differential and restoring competitiveness with the depreciation of the real exchange rate:

What this very brief review (hopefully comprehensible to noobs) wants to remind us is that the problems of a rigid system (a glass bumper) may not manifest themselves until the shock arrives! But (and this is my point) we know a shock is in the air, because the OECD tells us so . There's nothing deterministic about it; we don't know the date or the time, but the fact is that even if Bulgaria were to experience less tension than us, more accustomed to such a connection, it might still have less time before testing the advantages of the system's rigidity.

The second observation is that Bulgaria is in fact in a situation somewhat similar to that of Italy before the global financial crisis. Its inflation rate, historically very high despite the currency board :

It has remained above average even in recent times:

(we, on the other hand, are decidedly below average, and in fact we are depreciating in real terms, that is, recovering competitiveness), and this is being reflected in competitiveness, that is, in the real exchange rate, which naturally had been appreciating drastically during the times of double-digit inflation:

(indicating a dramatic loss of competitiveness) and is now appreciating again, corresponding to the divergence of the Bulgarian inflation rate from the European average:

Croatia, for example, has managed to remain glued to Germany, which is also losing competitiveness (its real exchange rate has increased by around 10% since 2015, despite the nominal devaluation of the euro against the dollar!), while Bulgaria has lost 20% of its competitiveness since 2015 (its real exchange rate has appreciated by 20%).

Now, as you should know, by a strange irony of fate, on the very day I opened this blog to say that these were the imbalances to be monitored (i.e., those of foreign and private debt), rather than those of public finances, the European Union equipped itself with a macroeconomic surveillance framework substantially in line with the blog's theses (which did not prevent various local zero-titles from considering this blog "heretical"), specifying it in REGULATION (EU) No. 1176/2011 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 November 2011 on the prevention and correction of macroeconomic imbalances . This is the famous MIP (Macroeconomic Imbalances Procedure) that we have practiced many times (for more information, follow the MIP tag in the tagcloud). The indicators are these:

And it could certainly be interesting to look at the situation in Bolgheria and also in Croèscia, especially since the latter has been in the euro area for a while, which allows us to assess whether entry into the euro is favoring its convergence towards the other member countries (as our friend Spennacchiotto's endogenous OCA theory would suggest), or whether it is instead favoring divergence. So let's review these indicators, perhaps also trying to identify their meaning within the Frenkel cycle theory.

Fasten your seatbelts, we're off…

…and we're off to a flying start, in the sense that, as expected given the progressive appreciation of the real exchange rate, Bulgaria's current account balance is gradually deteriorating. Not that Croatia is doing much better, having further widened its foreign deficit since joining in 2023. We're currently balanced (the data stops at 2024), but the fact that we've regained price competitiveness suggests an improvement for us (incidentally, the MIP indicator considers the three-term moving average of the current account balance, a balance that in our case was affected by the near-disaster Draghi wrought in 2022 with energy supplies at impossible prices, but it's rebounding.

while the same cannot be said for the two new entrants). The worsening of the current account balance is the characteristic symptom of the fourth stage of the Frenkel cycle.

Nevertheless:

Both Bulgaria and Croatia are recovering from a negative net foreign position, which in Croatia's case was below the alarm threshold of -35% until 2021. This result is somewhat counterintuitive, given the deterioration in the foreign balance, but let's take it as a given and rejoice for our Bulgarian brothers (and sisters). I recall that when the crisis erupted in our country, the ratio between net foreign position and GDP was -18%, thus more favorable than Croatia's current one.

The perplexity increases when we see that with respect to the cause of the imbalances (which we put first, but the dashboard puts after), the situation is this:

that is, both Bolghèria and Croèscia are out, with two significant clarifications: that Bolghèria is heavily out, and that Croèscia has been out since it entered the iùro (which therefore hasn't done it much good so far). Also note the tendency for Germany to appreciate (loss of competitiveness) and ours to depreciate (gain of competitiveness).

Another interesting indicator is this:

Interesting primarily from a cultural anthropological perspective, because its meaning and asymmetry encapsulate and express better than anything else the profound stupidity of German mercantilist thinking. Stupid thinking can only give rise to a stupid indicator, and we are here to comment on it. For example, Bulgaria's stellar performance in 2022, with a 17% increase in its share of exports to industrialized countries, means that Bulgaria has gone from accounting for 0.28% to 0.33% of these exports—that is, as they say in Rome, from a dick to a dick and a can. Partially similar considerations also apply to our friend Croèscia. Presenting percentage changes on indicators with such negligible values ​​is indeed foolish, but it's enough to know. The indicator for countries with more significant figures is more informative, and here we see the German disaster (the collapse of their gross exports, resulting in a significant and growing decline in their market share compared to industrialized countries) and the Italian "resistance." To give you some numbers, Germany's market share went from 11.17% in 2020 to 9.94% in 2024, while Italy's went from 3.96% in 2020 to 3.97% in 2024. You can well understand the dull, dark terror that permeates the Berlin bunker…

But let's feast our eyes on a great classic, which in fact should be placed first, because it is a cause of the real exchange rate which in turn causes trade and foreign finance imbalances:

And indeed, this indicator is off the charts in all the countries where the exchange rate is appreciating, while it's within the legal limits (9%) here. Note the irony: the Democratic Party (PD) criticizes us for not increasing wages, but this is obviously a hoax, with the aggravating factor that if we had increased them more, we'd be on their beloved "Europe's wish list ." In short, this indicator doesn't add much, except that in Croatia, joining the euro has definitely represented a significant divergence from the recommended thresholds, and in Bulgaria, we're way, way off the charts. Competitiveness isn't expected to improve any time soon (and I'm therefore curious to see if the net international position will continue to improve).

Then there's the only variable that idiots care about:

But that's why it doesn't interest us, and so I won't waste much time commenting on it. We know our situation and it's improving; Bulgaria's is similar to Ireland's in 2007, for example (but in the latter case, the foreign debt was off the charts).

The interesting things start later, starting with household debt:

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This is a machine translation of a post (in Italian) written by Alberto Bagnai and published on Goofynomics at the URL https://goofynomics.blogspot.com/2026/01/bolgheria-croescia.html on Fri, 02 Jan 2026 21:39:00 +0000. Some rights reserved under CC BY-NC-ND 3.0 license.