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Greece’s mistakes in the euro area. What are the prospects for Bulgaria?

Currently, the Republic of Bulgaria is awaiting its accession to the so-called “euro
area” (euro area/euro system), which raises a number of questions and concerns for all
citizens and representatives of the business sector. Therefore, this article aims to focus on the
transition period and the introduction of the euro in Bulgaria’s neighbouring country with a
severely affected economy – Greece. The aim of this analysis is to prepare the representatives
of the business sector, but also ordinary people, and to let them know what they could expect
in case of the introduction of the euro in Bulgaria.

The euro was officially introduced in Greece on 01.01.2001, but the so-called
“transition period”, typical of any country where one currency is replaced by another, lasted
from 02.01.2001 to 31.12.2001. During this period, the euro was a currency in the so-called
“scriptural form” (“not in cash”, but in the form of cheque payments and money transfers
through banks) and not a physical currency (which it became on 31.12.2001). During the
transitional period, Greece’s monetary policy was conducted and planned in euro, the
accounts of Greek credit institutions with the central bank of the State (Bank of Greece) were
denominated in euros and all transactions in the interbank money market were carried out in

At the same time, however, operations related to the fiscal policy of the state during
the transition period were conducted in the Greek currency (drachma), although some of the
most important and key government accounts were presented not only in Drachma but also in

According to the website of the Central Bank of Greece 1, the frontloading of the euro
banknotes and cents started in September-December 2001. In order to ensure the smooth
functioning of the market in the first days of 2002, the Governing Council of the European
Central Bank (ECB) decided to authorise the frontloading of euro banknotes and cents to
credit institutions and retailers. The Bank of Greece, for its part, started supplying the
country’s commercial banks with cents from 1 September and with banknotes from 1
October, with the banks starting to be supplied with cents earlier, as their transport is more
difficult due to their greater volume and weight compared to banknotes.

From 01 November 2001, commercial banks, to which the Greek central bank has
provided euro banknotes and coins, started recharging retailers with cents, and with low-
denomination euro banknotes (€5 and €10) from 01 December. From the same date, retailers
can receive so-called euro cent packs (euro coin packs 2 ) worth between €111 and €300.
Banks and retailers are taking on the task of not putting euro notes and coins into circulation
before 1 January 20023.
Outside the dates for the start of the replenishment of commercial banks and retailers
with euro notes and cents, the National Cash Changeover Plan4, starting on December 17,
provides the public with so-called starter packs containing 45 cents for all denominations
worth 5,000 drachmas (€14.67).

The problems in Greece regarding the adoption of the euro are in several directions.
First of all, in order to enter the Eurozone in 2001, Greece’s budget deficit had to be
below the threshold (3% of GDP) set by the Maastricht Treaty of February 7, 1992. However,
in 2009 it was discovered that the country had been hiding deficits from the European
authorities, using credit default swaps sold to it in 2002-2006 by Goldman Sachs. Greece, therefore, faced a deficit of 12% of GDP and fell into financial ruin.

Second, ordinary consumers have been misled about the benefits of the euro, which
has ultimately had an upward effect on the prices of goods and services. In the initial
period after the introduction of the euro, Greek consumers were under the impression that
their standard of living would improve significantly, as their country was already using the
same currency as other developed European countries such as Germany, France, and Italy. The
adoption of the euro by developed economic countries is the reason why in 2001 the approval
rate for the adoption of the new currency by Greeks was over 80%.

Some economists at the time argued5 that “the euro-drachma exchange rate (one euro
to three hundred and forty-two drachmas) would create problems for low-income Greeks, as
prices of goods would rise. In fact, this was because of the 342 drachmas that existed before
2001 had considerable value, whereas a euro coin corresponding to these 342 drachmas
automatically seemed like something “cheap and easy”.

The quoted article points out an interesting fact, which would be very relevant in an
economic situation of a country like Bulgaria, namely that “The Greek who bought coffee
for 100 drachmas in 2000 found it at half a euro on 1.01.2001 because the seller decided
that it was stupid to set the price of his coffee at 0.32 euro corresponding to 100 drachmas.
However, this was the case for all products, which led to a price explosion in everyday
products, something which significantly reduced people’s disposable income as wages
remained unchanged. Many were selling coffee for one euro, which meant a 250% increase.”

The most serious problems in Greece, however, were not only caused by the rise in
prices in the way described above but were caused by the fact that the Greek economy was
not able to compete with the main economies of the developed Western European countries
within one market. Perhaps Greece saw the solution to its problems in the face of the
international markets, which allowed it to borrow as much as it wanted as a country, and at
very low interest rates.

There is evidence that Greece as a country took cheap loans guaranteed by the
Eurozone and the banks took cheap loans from the European Central Bank (ECB) guaranteed
by the Greek state and all of them channelled these finances to businesses.
In the first years after the introduction of the euro in Greece, the productivity of the
Greek economy declined as everyone preferred to borrow, whether it was business or
individual consumers.

The lesson from everything that has happened in Greece is that a country in the
eurozone cannot afford to devalue its currency as Greece did in the era of the drachma6. For
Bulgaria to be ready for the euro area, the country’s GDP should be increased and inflation rates should be significantly reduced. If the country can meet the Maastricht Treaty criteria on
its own without external borrowing (unlike Greece), a smoother transition to the euro could
be ensured. The challenges for the government and business, in this case, would be related to
the elimination of possible speculation on prices and their artificial increase under the pretext
of high inflation or the conversion of the lev into euro.

In conclusion, the euro area, in the view of various economists7, has significant
weaknesses as a monetary union. This is due to the lack of economic and social equilibrium
between EU member states, including the euro system. In addition, the EU does not have a
sufficient “federal” budget to be able to absorb some of the asymmetries in the economies and
finances of the member states. It remains to be seen in the future whether the ECB will be
able to act as a ‘rescuer of last resort’ for Member States that are in economic and financial
deadlock, like Greece, and for countries like Bulgaria, where the crisis, given the global and
European conjuncture, is likely to continue to deepen.

1 History of the euro – Historical review (
2 There again
3 There again
4 There again
5 What Greece gained and lost from the euro – Trud (
6 There again

7 Euro Area Participation and the Greek Economy: the first twenty years | Greece@LSE