(C) Inflation of 2-3% … Great … Wait, Wait, Wait

The inflation slowdown and the economic crisis are exogenous to the Bulgarian economy. It is not a result of government or central bank policy, but the financial and the liquidity crisis in the European banking sector, which in turn owns the financial institutions in Bulgaria. Well hypothetically this slowdown seems to help Bulgaria meet the Maastricht criteria…

Wait, Wait, Wait a minute…
Let’s not forget that the inflation criterion is not an absolute one, but relative to the best three inflation performers in the Eurozone. The negative economic developments in the Euroarea have already suppressed the inflation. January 2009 data shows slump to just 1.1 % points, which quickly drives us away from the inflation target.

On the other side, I do expect serious challenges in the 2009 and 2010 budget balance, leave alone any surplus, thus the fiscal stability could easily be derailed. Moreover, in case the crisis deepens further and the business struggles extend to defaults, amid lack of fresh funding … solid government borrowing I see on the horizon. Having pretty low government-debt-to-GDP ratio at this moment, exceeding the 60% barrier (art. 121 (1)) seems unlikely at this stage.

Since the inflationary easing is influenced by financing constraints, one needs to seek direct economic consequences within these factors. The most severely blown will be the labor market, which is dependent on the consumption and investments. In an emerging economy with extremely low labor and capital productivity, lack of any R&D, the drying up of the capital inflow will be crucial for the inefficient productions and services and will cause high levels of unemployment. Shall this coincide with a right-wing political and social policy, there will be an unemployment multiplication by laying off a multitude of hollow, inefficient administrative and social programs employment and will cause havoc on the labor market.

I would be more than happy if the economy seizes all the opportunities the crisis might offer, such as take necessary steps to improve labor force qualification, increase productivity and efficiency, via adequate and modern human capital investments.