Karl-Heinz Paqué: Bulgaria is not making progress but regressing

The Chairman of the Friedrich Naumann Foundation for Freedom (FNF) in an interview for "Capital" Newspaper
Prof. Paque
Prof. Karl-Heinz Paqué at an interview for "Capital" newspaper © "Capital" Newspaper, Bulgaria

Prof. Dr. Karl-Heinz Paqué teaches economics and has held senior positions first at the Kiel Institute for the World Economy and then at the Otto-von-Guericke-University of Magdeburg. His political career began in 2002 when he was elected member of the Saxony-Anhalt Parliament, followed by an appointment as Minister of Finance of the same province. In 2017, he was elected Vice-President of the Liberal International and since 2018 he has served as Chairman of the Board of Directors of the Friedrich Naumann Foundation for Freedom.

The interview first appeared in "Capital" newspaper in Bulgarian, done by Svetlomira Gyurova

What is the risk of a populist wave in the forthcoming European Parliament election in May? And what is at stake in the election?

This election is immensely important. It is not simply another European Parliament election. It will be the most decisive vote in a long time to come. There are several reasons for this. The first is the rise of populism in Europe, which presents a threat to all we have achieved in recent decades. Secondly, the EU is currently going through a series of turbulent events. There’s Brexit and the continuing lack of clarity as to whether, how and when it will happen. The oddball coalition of right- and left-wing populists in Italy—a founding member of the EU—also bears mentioning. Last but not least, the most disconcerting development: the situation in Poland and Hungary. These two countries have nationalist governments in power that pose a clear threat to the rule of law, media freedom and, in the case of Hungary, freedom of science and research. In addition, particularly in Eastern Europe, but not only there, there are issues relating to widespread, pervasive corruption that remain unresolved. In Spain, there is a separatist movement at work that nearly succeeded at breaking up the country. Wherever we look, we see major problems. The forthcoming election is important for all these reasons.

Against this backdrop, what are the most pressing challenges for the EU at present?

There are two main risks. The first is that the EU may deviate from its liberal course, which is at the heart of its philosophy ever since it was founded. The second risk stems from the frictions within the Union, which may cause it to ultimately lose its global influence and standing. At the moment, the EU faces not only internal but also external challenges. Look at Donald Trump and the protectionism and aggressive unilateralism he preaches. Look at China, which doesn’t resemble a market economy in the slightest but maintains a system of State capitalism that must not be tolerated in the global trade order. We need a reform of the global trade order and that reform is only possible if Europe is united and transatlantic frictions are brought under control.

Is a working union between European liberals possible? How do groupings such as the Estonian Reform Party and the Bulgarian Movement for Rights and Freedoms, a stark symbol of corruption, coexist within the same political family?

All party families in the EU are heterogeneous. This is inevitable as each country has its unique political traditions. Despite the rise of populists, liberalism is not in crisis. We, liberals, continue to win new friends, for example the Citizens Party (Ciudadanos) in Spain or Emmanuel Macron’s movement in France, which is very close to liberal ideas. In other words, liberalism is far from dead, it has simply gone through several years that were fraught with adversity.

I agree that the Alliance of Liberals and Democrats in Europe (ALDE) should be thinking about which political parties may stay with us in the long term. This decision is always a matter of compromise between two considerations—whether you believe you can influence the development of a given political party or whether you are looking for new movements in a country. In the case of Bulgaria, we at the Friedrich Naumann Foundation have co-operated with the youth organisation of the Movement for Rights and Freedoms for a number of years and not with the actual political party. We have taken the necessary steps, but this will be a more difficult task for ALDE. We have the same situation in Romania, where we severed our association with the liberal party, which is linked to corruption scandals but is still a member of ALDE.

The Bulgarian economy has strong ties to the German economy. How worrying is the current slowdown of economic growth in Germany?

You can look at it from a short-term and a long-term perspective. In the short-term, the current developments look like a normal cyclical slowdown. The Germany economy has been growing steadily for years, tax revenue has been continually increasing while unemployment has been decreasing. The problem, which makes us liberals strongly critical of the ‘big coalition’, is that it continues to indulge in a nap, totally oblivious of the major challenges facing the German economy. The first one is demographic. In the next fifteen years, when the baby boom generation eventually retires, the German workforce will shrink significantly, as nearly 5 million well-educated people will leave the labour market. Many of them are engineers who contribute immensely to high productivity. In order to cope, we need a migration law, a more flexible retirement system, a better start-up culture. Germany has serious long-term structural problems. The current slowdown may thus be an interlude to a more general slowdown in the next 15 years to come. This is why we, liberals, insist that we desperately need a new wave of reforms while the government lead by Chancellor Angela Merkel has simply missed the time to act.

The European Central Bank (ECB) has indicated that it will hit the brakes on interest rate hikes and its plan to withdraw stimulus. When can we expect interest rates to increase? And does the ECB have any firing power left, should another crisis strike?

I believe that low interest rates will remain a feature of our life for a long time to come. This is a fundamental change—it is not a phenomenon rooted in monetary policy but rather in the deeper layers of the real economy. The supply of capital has been on the increase on account of the demographic changes which are motivating people to save more. And on the capital demand side, there’s an abundance of new capital-saving technologies. We thus need less capital against the backdrop of increased supply. This translates into lower interest rates in the long term.

Central banks are unable to raise interest rates because this entails a risk of a deep recession or depression. Interest rates are thus doomed to remain low. What is interesting, is that this does not mean inflation. We have won the battle against inflation and live in a relatively stable macroeconomic climate.

This, of course, has a drawback. The firing power of central banks has been reduced because it’s impossible to lower interest rates any further when they are already close to zero. This is why my ‘solution’, as a liberal economist, is to do all we can to increase the profitability of investment by appropriate reforms in order to stimulate an investment boom that can then push rates slightly upwards.

Bulgaria has applied to join the Exchange Rate Mechanism (ERM II) and the Banking Union. What, in your opinion, are the country’s prospects of joining the ERM II by the summer, as planned, and then the Eurozone? What will the benefits be and do you see any risks?

There is a long series of reforms that Bulgaria must undertake. There is a general feeling that as regards the rule of law and fight against corruption, Bulgaria is not making progress but regressing. The same applies to Romania, albeit with some differences.

Membership of the banking union will bring benefits but these will depend on Bulgarian banks being in good shape prior to entry. In the long-term it is very important for Bulgaria to leave the current temporary slump behind. Joining the EU was accompanied by a great deal of enthusiasm and many promises but there has been stagnation in recent years. The country will have to embark on a path to reform once more, meaning it will have to reform its institutions, including its banks.

When this has been achieved, the EU will be ready to take the next steps, which includes admission into the Eurozone one day. But we should not forget that the EU has itself just emerged from a period of major challenges stemming from the debt crisis in recent years. And that the general mood can be described as pragmatic-conservative—so let us not promise too much and burden existing or recently established institutions such as the banking union with potentially problematic candidates. Several more years of macroeconomic stability and decent growth in the Eurozone are needed, as well as reforms in Bulgaria and other candidate countries, before we can start thinking about enlargement. This does not mean closing the door but, equally, the door should not be opened unconditionally either. There must be conditions and this is exactly where the situation in Bulgaria is at present.

An interview of Svetlomira Gyurova for  the Bulgarian Newspaper "Capital"