Iliya Lingorski: Accession to the eurozone is our priority

Obserwator Finansowy: Our guest is Iliya Lingorski, member of the Governing Council of the Bulgarian National Bank. Thank you very much for accepting our invitation.

Iliya Lingorski: Thank you very much, Marek, for the invitation and special thanks to Governor Glapiński for inviting us to this momentous event and, you know, letting us share this enormous heritage, this richest heritage of Poland and of Europe which is the legacy of Copernicus.

OF: Nice to hear it. I want to ask first about Bulgaria. Let’s start with the headline which was published on the Finance Ministry website: “Bulgaria will not submit a convergence report request to the Commission and the ECB due to the failure to fulfil commitments and lack of conformity with inflation criterion.” Is it really a technical issue or have you changed your mind about the euro?

IL: Well, no. This is indeed a very recent announcement as of Friday last week. Bulgaria and the Institution have absolutely no change of mind about our convergence and adoption of the euro as a national currency and that is since many years ago. Actually, it predates our membership in the European Union because for the last 25 years Bulgaria has operated a currency board regime. That actually was initiated in 1997 and the discussion really at that time was pegging the currency to the dollar or to the Deutsche Mark. And there was the consensus among the policy makers in Bulgaria that regardless of what we have been advised from outside, we need to convince everybody that we need to peg to the Deutsche Mark because the euro was already in the making, so one day the exit of this currency board will be to the euro. So there cannot be a change of mind about that. And Bulgaria is probably specific when it comes to adopting the euro as a national currency compared to other new member countries because the euro is our reserve currency, really.

OF: It’s not a huge difference for you…

IL: Exactly, because for many years of this peg and fixed exchange rate, we have in a way been recipients of monetary policy from the euro area. But also businesses and people, they are used to using this fixed exchange rate to the euro. And also the banking system, especially after we joined ERM II together with joining at the same time the Banking Union. Our supervisory standards, our regulatory standards are fully compliant and fully prepared with what will be once in the Eurozone. But the convergence process actually has two main sides. One of them is the nominal criteria, the Maastricht criteria. You mentioned inflation. For many years Bulgaria has actually been traditionally quite strict in managing public finance and being within the Maastricht criteria. The last couple of years have been different, especially when it comes to inflation. So from all the formal five nominal criteria: price stability, public finance, inflation, particularly inflation is the only open one at present. However, since October last year for the first time after 12 months we see that inflation is on a downturn, so it changes direction. But there is also the legal convergence aspect and perhaps this one is even more important.

OF: Let me stop you about inflation, ok? When will inflation start to fall and when will the inflation criterion for the Euro membership be met?

IL: What is present and what was in the statement of the Minister of Finance is perhaps more important. It’s not that much the inflation criterion, but the legal convergence aspect. Because legal convergence means there are clear commitments made by the government of Bulgaria with regard to passing and adopting legislation which needs to make us legally compliant with the legal framework of the Eurozone. And there are actually four legislative initiatives for bills which need to go Parliament and be adopted before we can be in a position to ask the Commission for a convergence report. This year you have to ask for a convergence report because the regular convergence report is done every two years. However, although the Parliament which was dissolved after the beginning of February voted last year with a nearly constitutional majority in favour of accelerating the process of repairing everything to adopt the euro. The life of that Parliament wasn’t too long, the Parliament didn’t manage to form a governing coalition and form a government cabinet. So it was dissolved a few months after its inception and election. And we have preliminary elections now for 2 April. Being short-lived, the Parliament didn’t pass the necessary legislation. So we are encouraged to hear from the majority of the political forces in their pre-election campaign now that the legislation, which is part of that legal convergence framework for the euro, is their high priority. So we would expect that the next Parliament with priority once it constitutes its committees, will start working on these four bills which need to go through Parliament, which will then give the Minister of Finance the opportunity to request an extraordinary convergence report.

With regard to inflation, it’s a moving target as you know. It is measured against the benchmark, comprised of the inflation levels of the countries with the lowest inflation. The Minister of Finance also mentioned that there could be discussion about it, basically against what the benchmark is set, given the fact that inflation has been extraordinarily not only high but dynamic in the entire European Union and the euro area. But first, let’s make sure all commitments we have made… Inflation is something you cannot really commit to have at a certain level. Especially now, especially when most of it is due to exogenous factors. But what we have committed as a country with regard to adopting legislation, once we have that completed, and if the current trends remain as such, in the next few months, we’ll be seeing inflation continue to be normalised and becoming more moderate and that’s not only in Bulgaria.

But to summarize again, the is no change of mind. In fact, there should be even more motivation among the institutions now to speed up all the efforts. On the side of the Bulgarian National Bank, we’re very much charged with the technical aspect and responsibilities. And they are enormous, actually. Much, much work needs to be done, but we have created the necessary internal organisation and reporting processes. We’re well equipped to push harder on the pedals, as Governor Radev would say. So we could be fully prepared, as well as the banking system, to be fully prepared with all the technical aspects and all the logistical aspects and with everything which needs to be there in place. So, you know, the euro coins, the euro notes, the payment systems and all which is related to operating within the euro system is there. For us it will be a big opportunity as a country and as a national bank because it will be normalising our monetary regime. It will be a natural exit from our currency board arrangement. And it will bring us back, it will build our institutional capacity to return to conducting monetary policy, not as an independent country and economy, but as part of this shared responsibility and shared sovereignty of conducting the monetary policy for the entire euro area.

OF: You’ve totally convinced me that it’s only an legal issue. I have no further questions about that. But you mentioned inflation. How much of Bulgarian inflation is due to the energy shock of the war in Ukraine and how much is due to pegging your currency and your interest rates to the Eurozone?

IL: Well indeed, particularly for a small and open economy like the Bulgarian economy, in the last 18 months the main inflation drivers have been exogenous factors – supply side shocks, commodity price shocks, as a result of the uncertainty, the war in Ukraine. That filters and trickles down through the economy very quickly and rapidly. In the years prior particularly to the pandemics or given inflation for years was low, slightly above what the inflation was in the euro area. But the euro area for a number of years had a too prolonged period of too low inflation. The fundamental factors, some of them are disinflationary. However, we are also now, like other economies in Europe, experiencing very tight labour markets, and our economic convergence also goes hand in hand with the convergence of the incomes. So that income convergence combined with a tight labour market has a lot more to do with inflationary pressures than any effects resulting from the peg and, you know, importing monetary policy effects from outside. However, again as a result of this currency board regime for many years Bulgaria has been outstandingly disciplined in its public finance management. You can’t operate successfully a currency board over two decades unless you have this culture of macroeconomic discipline and fiscal restraint. So particularly at times like these we need to be quite vigilant and also very careful about achieving synergetic synchronism between the fiscal and monetary policy. The direction of the monetary policy is clear. I mean, the financial conditions are tightening and rates are going up and there is no doubt that this is a dominant process in the foreseeable future and midterm horizon.

So the remaining part of the equation is where fiscal policy will go in the next few years. And I would very much hope that our good habits of being fiscally disciplined will have a positive impact because they also act as disinflationary if we maintain that fiscal discipline. Contrary to many expectations, last year was a good example. Although we had a caretaker government for about half of the year and there was a political uncertainty, we managed to finish the fiscal 2022 within the Maastricht criterion for the public finances. Our budget deficit, on a crude basis, was below 3 per cent: 2,9, and on a cash basis it was even below 1 per cent. So it tells us that actually it is doable, it is possible and it is what actually has given us this macroeconomic stability which for years has been also the foundation for growth and for opportunities for growth. Where we will have fundamental challenges is, on one side, the demographic dynamics and conditions but also what needs to be done is to bring back structural reforms, bring back investment, both foreign and domestic as well. This is much more in the domain of elected officials in government, so it is not up to the central bank to advise, to direct that process. But there has to be consensus in society that to advance and converge and catch up with the more developed economies, we need to address the structural issues with structural reforms as well as attend to those fundamental challenges which we need to turn into opportunities as Professor Peebles noticed during the conference.

OF: Now let’s move beyond Bulgaria. When do you think inflation in the Eurozone can reach the two-percent target?

IL: Well, during the conference it was, very stimulating in a way. Last night we had this wonderful panel with Governor Glapiński and the other members of the Governing Councils and Deputy Governors of central banks across Europe. And the conversation at some point was about this narrative about transitory inflation which initially some central banks and analysts subscribed to. The Bulgarian National bank actually wasn’t part of that dialogue because in our experience we actually have been, let’s say, very careful when it comes to adopting such a narrative. But it is not about who was right, who was wrong, because one of the fellow discussants pointed out: “Well, look at it. There were Nobel Prize laureates on one side of the argument and there were many Nobel Prize laureates on the other side of the argument.” So it is one of those questions which really needs a crystal ball.

However, it is much more important what the direction is and the direction of central banks, the leading central banks – the Federal Reserve, the European Central Bank, is quite clear now. And it’s clearly forward guided that they will be moving towards their inflation target with tightening monetary policy. However, Bianchi and Melosi last year published a fantastic paper which was presented at the Jackson Hall Conference, about the importance of synchronising monetary policy with fiscal policy. Because if fiscal policy goes in the opposite direction of what the goal and the target of monetary policy is, with the current instrumentarium, monetary policy will not be able to compensate for the fiscal inflation which could be created through loose fiscal policy, opposing the goal and the target of the monetary policy. That is quite important to be always borne in mind and it’s particularly important and appreciated in countries like Bulgaria, where in a currency board regime we have abandoned monetary policy liberty. We actually haven’t had it for 25 years now. So then you focus your efforts on bringing fiscal policy in line with what your goals are, about issues related usually to subject matter which is traditionally appreciated and targeted through monetary policy channels. So, our experience is such that combined with our very positive experience in building a resilient banking sector that should not be forgotten as well at challenging times like this. The health of your banking sector matters a lot because it becomes a source of resilience of your entire economy. So we will be a country and an economy bringing into the euro area when we join this culture of fiscal discipline and the importance of synchronising fiscal policy with monetary policy so they pull in the right direction together with central banks being independent.

OF: You’ll change the Eurozone for the better?

IL: We can only bring our experience. But our experience is such that even when it’s socially challenging you have to explain and communicate well why fiscal discipline is good for you. You don’t do it for the sake of the Maastricht criteria. You do it for the sake of the economy, because it’s good for you, it’s good for the people and it will open up opportunities in the future. It will inspire more confidence among investors and among everybody who is a player in the economic activity. But also we can bring in our very positive institutional and practical experience in banking supervision and in building a resilient banking sector. Our banking sector is capitalised at levels higher than what is the average for the Eurozone in the European Union. We have very good experience with building the necessary counter-cyclical buffers, and we also have very flexible participants in these sectors who have adapted very well, particularly during the Covid pandemic. And the banking sector remains a source of stability and part of the solution when the shocks had to be absorbed in the economy.

OF: And lastly, I want to ask about artificial intelligence which, I know, is your area of interest. So, you’re probably a fantastic person to ask whether the development of the ChatGPT by Microsoft or Bard by Google will only affect the stock prices of these companies or could it also have some macroeconomic consequences in the future?

IL: Well, for real, many years ago my research was optimisation techniques using certain artificial intelligence algorithms, particularly the genetic and evolutionary algorithms and the fuzzy logic. But that was so long ago that the last thing I could claim is any expertise in the field. My Dean at the faculty of economics and business administration at the Sofia University recently posted a joke which was, I’m quoting from my memory, “Students don’t think you’re too smart by using ChatGPT for writing your essays. We are already using it for marking them.” So, the opportunities are always very exciting and probably way beyond what we can imagine today and that’s happened with the introduction of many technologies and bright-vision inter-fields like economics or finance.

In fact, we should never forget that Copernicus made an amazing contribution to the theory of money and to fundamental theories which later became probably more popularised, like the Gresham law. However, a polymath like Copernicus, such a visionary in many fields… We all know about the heliocentric system, but in fact his contribution to economics and the theory of money was no less fundamental and important as of today. There would be, I think, a lot more discussion about artificial intelligence and how it is applied and used in finance. Actually, a lot’s already happened. I speak constantly to former colleagues on the fixed-income trading side in the city, in New York. For years, they tell me very little and in very niche areas is done by us. Most of it is done already by algorithms when it comes to daily management of positions and trading on the capital market. So the technology has already found its way and it will be developing quite rapidly in the future. A lot of discussion would be there about the moral and legal aspects about it again.

OF: Does it mean massive layoffs of people who will lose against ChatGPT?

IL: I’m not sure whether it will be ChatGPT, but you’re bringing us to a discussion and research which was actually started some years ago with an enormous contribution by Professor Acemoglu. Acemoglu actually studied very carefully how technology after World War II contributed to job creation when it was replacing old jobs. And we have seen that actually technology has been disinflationary over the last 40 years, as per his research as well. Because the replacement rate and the rate of creating new opportunities have been such that, in fact, technology has been replacing more jobs than it was creating as new opportunities. Well, how it will be just in the future, it is not so easy to predict. Of course, many jobs probably will not become obsolete. We have seen that throughout history; however, they will need a lot fewer people to do them. We’ve seen that in industry, we’ve seen that particularly in agriculture and, perhaps, we’ll see it in industry. There have been researchers and academics who have written about the end of industry. That doesn’t mean industry disappears. That actually means it’s not going to contribute to full employment, like agriculture is not anymore, when for centuries and centuries agriculture was probably employing 30 to 40 per cent of the population of the world. So, that is inevitable.

The question really is about how we adjust to the new realities in such way that the welfare of nations and the welfare of people is increased in parallel with the development of technology. Because the technology has the potential to replace certain jobs and there are certain jobs which technology can probably do alone more precisely than manual workers. However, a lot is always related to the new opportunities which technology creates and we have seen that particularly in the developed economies over the last seven, eight years, especially during the pandemic and after the pandemic with changing behavioural patterns and attitudes to life and work. We actually have a problem with a very tight labour market rather than with replacing jobs. So the disinflationary aspect and factors of technology are currently, in the short term at least, not working to a level to which they can disinflate the current pressure which comes particularly through the labour market channel. So again, without having a crystal ball, I tried like Erasmus teaches us, to be always optimistic, because that is the only realistic position. If you think you can or you think you cannot, you are always right – that’s not me again, that’s Henry Ford.

The interview was conducted on 20 February 2023.