Princes and Paupers

Can you believe that one of the poorest countries in the European Union is being accused of getting rich too quickly?

That’s what’s happened to Bulgaria. Oli Rehn, vice president and economic affairs chief of the European Commission, has put the country on the so-called gray list for macroeconomic imbalance. Between 2008 and 2010, labor costs (salaries and insurance) went up by 27.8 percent, well above what the EU considers a reasonable 12 percent rate of increase.

The numbers are not in doubt. In the post-communist boom time before the crisis, Bulgaria had several good years. Foreign investment mounted, construction flourished. Estates were sold to Brits buying second homes in the countryside. Families bought plasma TV’s and new refrigerators. Sofia’s streets suddenly became crowded with the emerging middle class’s impressive fleet of cars.

Of course, this prosperity influenced macroeconomics. The current account deficit grew, credit for the private sector ballooned, inflation kicked in – and labor costs followed suit.

I suppose if we judge by the numbers alone, Rehn has a point.

The Bulgarian Finance Ministry doesn’t see it that way. It notes that lately the country’s current account deficit has declined – from 23.1 percent of GDP in 2008 to 8.9 percent for 2009 to just 1.3 percent for 2010, tracking closely with the advance of the financial crisis. What’s more, the ministry says, the current account for 2011 will show a surplus, amounting to 1.8 percent of GDP.

While the Finance Ministry argued about numbers, some Bulgarian commentators went straight to outrage. “Some … in Brussels forget that besides the relative numbers, there are also absolute ones,” wrote Svetoslav Terziev in the Sega (Now) newspaper. “The average monthly salary in Bulgaria is 350 euros and Oli Rehn’s is 22,122.”

In Brussels’ world, the former is imbalanced, because it does not follow the new EU rules for labor-costs growth. The latter, though, is perfectly balanced, because it does: it has increased slowly, according to EU regulations. Most ordinary humans would wonder at this logic. Everybody can see who is the prince here, and who the pauper.

After all, most Bulgarians would ask, didn’t we join the EU to get rich quickly? Wasn’t it the reason we made painful concessions and sacrifices? And now someone in Brussels is asking, “Why so fast?”

But then, for many ordinary Bulgarians it was not fast at all. They see recent years as just the latest links in a long chain of suffering. Forty-five years of communism, 20 years of transition, and three years of crisis are too much for a normal lifetime. For most, the bonanza is still beyond the hills.

Bulgaria has always tightened its belt. It has been fiscally disciplined and financially sound, obeying every International Monetary Fund instruction and aiming for a stable budget. For many years it had a fiscal surplus while others were growing fiscal deficits. But all that improved most Bulgarians’ living standards only modestly.

The macroeconomics were great, the microeconomics less so. Bulgarians grew tired of hearing, “Hold on! Wait another day! It will get better! Your country’s budget is great.” They wanted to enjoy a great family budget. And suddenly someone is saying that even the meager boom they enjoyed was “imbalanced” and “gray.” Some Bulgarian journalists went so far as to call this cynicism.

Yet there is some merit to the Brussels argument. The Bulgarian boom, small though it was, was based partially on one condition that was frowned upon in parts of Old Europe: low taxes. With one of Europe’s lowest rates, a flat 10 percent, Bulgaria attracted companies from the West for outsourcing – a term that became a metaphor for the decline of Western industrial power and a curse in the speeches of politicians all over the richer world.

Some in the West argue that a chunk of their high tax bills goes to poorer, Eastern countries like Bulgaria in the form of EU funds, allowing the recipients to lower their taxes and lure companies. We lose money, we lose business, and we lose jobs, they say. Should a country be allowed an effective double subsidy during a crisis? And why should we pay for it?

That is the argument behind the urge for “tax harmonization” in the so-called European fiscal pact. Understandably, Bulgaria has its own view on that point. It wants to preserve its low taxes, although it supports the pact as a whole.

Which reasoning is more convincing? That probably depends on which side of the debate you fall on, but the mere fact that we are having such a debate shows that something is rotten.

Obviously, European solidarity is not in fashion. The prince cannot understand the pauper, especially these days.