On the Road With Angela’s Unlikely Angels, the Bulgarians

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By Marc Champion

The road north of Sofia hasn't changed since I crashed and destroyed a rental car there more than 20 years ago, rushing to see protesters torch the Bulgarian Communist Party headquarters.

Passing through (more slowly this time) on a two-week road-trip from Istanbul to London, I even recognized a missing chunk of concrete on the bridge over the Danube that was still forcing cars to stop and inch across the gap after all those years.

Yet a lot has changed. Bulgarians are surprising themselves with how their economy has -- for the first time they can remember -- proven tougher than many others faced with powerful headwinds in the global economy and a collapse of foreign investment.

Nothing about the country's democratic transition since 1989 has been easy. Governments came and went, but power was held by ex-secret service thugs who turned Bulgaria into a mafia state. These men bled the country's assets dry, contributing to serial economic crises. No sooner did Bulgaria join the European Union in 2007, than officials in Brussels froze development aid due to corruption. The country remains the poorest of the 27 in the EU.

The current prime minister, Boiko Borissov, was once a bodyguard to Bulgaria's long-serving Communist Party leader, Todor Zhivkov. Then he was bodyguard to the country's prime minister and ex-king, Simeon Saxe-Coburg-Gotha. He also spent time as a senior interior ministry official, a firefighter and the coach of the national karate team. He's a bull of a man, who won election in 2009 on a pledge to fight corruption and get that European aid money back.

So no one's been more taken aback by their economy's resilience in the face of the latest financial crisis than Bulgarians themselves. By the time disaster struck in 2008, the country had already been on an austerity diet for more than 15 years. Government debt peaked above 100 percent of GDP in 1997, a year when profligate spending helped push average inflation above 1,000 percent. By 2008, public debt had gone down to 14 percent of GDP. Until this month, the government hadn't issued a bond to borrow money from international markets in 11 years.

Given Europe's economic climate, the result of the July 3 bond sale was astounding: Bulgaria sold 950 million euros ($1.2 billion) of five-year Eurobonds with a yield of 4.4 percent. The auction was oversubscribed by a factor of five. Italy's, Spain's and even rock-solid Poland's five-year bonds have been trading at higher yields than that.

Because of all those years of austerity, Bulgaria was able to get away with pumping some money into the economy when the crisis first struck. Between 2008 and 2009, the government increased spending to turn a budget surplus into a deficit, with a fiscal adjustment worth more than 6 percent of GDP. It's hard to say what would have happened without that stimulus, but the economy shrank for a year by around 5 percent, before returning to mildly positive territory -- so an average recession for Europe.

Borissov's new government then decided to tighten up. Finance Minister Simeon Djankov, a former World Bank official, has now halved the deficit to a respectable 2 percent of GDP, while public debt remains low at 16 percent of GDP. How many countries can say that?

Bulgaria still has a lot of troubles, including chronic corruption, terrible demographics and overly strong trade unions. "Employing someone in Bulgaria's a heavier commitment than marriage," said Georgi Ganev, a smart -- and funny -- economist I visited at Sofia's Centre for Liberal Strategies, while stopping in the capital. The cafés on the sidewalks of Sofia's central Vitosha Boulevard were bustling and charming, but Bulgaria has too many corner casinos to be healthy and fewer signs of development than elsewhere in central and eastern Europe. All those years of enforced austerity came at a real cost.

What the country has going for it, though, is modesty. Wages are low and therefore competitive. The government lives within its means. The experience of the last 20 years has turned many Bulgarian politicians and economists into fans of German Chancellor Angela Merkel's tough love policies for Europe. Merkel, returning the favor, has singled out Bulgaria as a star pupil.

"The message is clear -- these kinds of deficits cannot be sustainable," said Ganev, referring to Bulgaria's past excesses and the present debt piles of countries from Greece to Belgium. "Even if the ECB starts pumping like Bernanke, the European problem is lack of competitiveness," and stimulus efforts would therefore fail to restore sustainable growth, he said.

That's a view you hear a lot in Eastern Europe: The U.S. can maybe get away with printing money to stimulate growth because it's competitive enough to have a chance of turning that stimulus into productivity and won't be punished by bond markets as it has the world's reserve currency. But Europe can't do the same. Excepting Germany, Europe isn't competitive enough, and not even the Germans have the U.S. dollar.

No one has neat solutions to offer. But if you're Bulgarian, you know one thing: Non-austerity didn't work for you.

(Marc Champion is a member of the Bloomberg View editorial board. This is the second in a series of posts chronicling his trip across Europe, from Istanbul to London. Read his first post on Greece's highways and finances. Follow him on Twitter.)

-0- Jul/18/2012 20:42 GMT