At the start of Bulgaria’s EU Presidency, Finance Minister Vladislav Goranov announced that by June Bulgaria should apply for admission to ERM 2, popularly called the eurozone ‘waiting room’. His initiative was judged to be too ambitious, but it was accepted positively.
Now Prime Minister Boyko Borissov has poured cold water on the plan, announcing that the country cannot meet all the conditions by June.
On Thursday (26 April), Borissov disclosed that a condition had been imposed on the country for acceding to ERM2, namely joining the Banking Union. He apologised to the European Central Bank and the eurozone leaders for publicly announcing this detail of the talks but said that Bulgarian society should know what the government is doing.
The prime minister said talks were currently focused on the EU’s insistence that Bulgaria first joins the Banking Union and the ERM2 only after. The Bulgarian position is that it should enter ERM2 first, and “the next day” the country would file an application for the Banking Union. The government adds that the country will become part of the Banking Union when it joins the eurozone, not earlier.
The five official conditions for adopting the euro are the levels of public debt, inflation, budget deficits, interest rates and ERM2 membership. Bulgaria meets these conditions, and therefore its membership in ERM2 should be a formality. The problem for the country is that there are two unofficial conditions that will be hard to meet.
The difficult conditions
Through the Banking Union, the European Central Bank has the right to directly control the three largest banks in the country, but it can also check the smaller ones. The largest banks in the country are the Italian Unicredit Bulbank, DSK (owned by the Hungarian OTP) and Bulgarian FIBANK, which has had serious problems in recent years and had to be bailed by the state.
The second condition is the so-called economic convergence. The main problem facing Bulgaria is the convergence of the living standards with that of the eurozone countries. Nominal GDP per capita in the country was about $8,600 in 2017, around 25% of the EU average.
Things are better if the GDP is considered through purchasing power parity (PPP), which primarily measures the standard of living. By this indicator, Bulgarian GDP is just over $22,000 per person or about 53-55% of the EU average. One of the main, albeit unofficial criteria, is that the candidate meets at least 70% of the EU average for this indicator. Bulgaria needs at least another five or seven years of good economic growth to meet this requirement.
Reportedly, Sofia has negotiated with EU Vice-President for the Euro, Valdis Dombrovskis, to be given a roadmap to help its efforts to meet all the criteria for eurozone membership. The Commission has no formal role in the process but has promised political support for Bulgaria if it fulfils the criteria. The roadmap will contain specific deadlines.
Rare political unity
Bulgaria’s eurozone candidacy has prompted a rare display of unity in the country’s political circles. Borissov made his statement at a conference in Sofia, organised by the leader of the Party of European Socialists (PES), Sergey Stanishev (a former prime minister and former leader of the Bulgarian Socialist Party) and the centre-right MEP Eva Maydell (formerly Eva Paunova). Stanishev is also part of the circles that favour a rapid adoption of the euro.
Earlier this week, EU Economic and Monetary Affairs Commissioner Pierre Moscovici welcomed Bulgaria’s enthusiasm for the euro but reminded them of the convergence criteria. Speaking to Dnevnik website, he explained it was important to have formal but also real alignment with the euro countries, in order to be well prepared.
‘We work with Brussels’
“Together with the European Commission, we are currently working on preparing the euro area application documents [the application for ERM2], to file them, to receive a roadmap, as we have agreed with European Commission Vice-President Valdis Dombrovskis. Of the criteria, we have completely met four out of five, and the fifth is formal,” Borissov said.
Responding to a question why Bulgaria is giving up the ERM2 application this year, Borissov explained that the European institutions do not like to be given deadlines.
“Life there is running more slowly,” Borissov said, adding: “I am not so optimistic that within 2-3 months this will happen. I am optimistic that within a year we can be successful because the attitudes are now more about dividing Europe than removing barriers”.
According to Borissov, European societies are still afraid to allow Bulgaria to move closer to joining the euro. “The fears after the Greek crisis and the huge debts that countries in the south have are fueling fears among Europeans. In the roadmap, there are deadlines and criteria – what they expect from us, first to join the Banking Union and then the “waiting room” of the euro area”, Borissov said.
The biggest fears are in Germany, which assumed the lion’s share in the Greek bailout. Official circles in Germany know that Bulgaria now respects fiscal discipline, but are not sure that this will continue after it adopts the euro. The main doubt is about the role of the Bulgarian institutions, which must ensure stability.
The Bulgarian Central Bank suffered a loss of confidence over the bankruptcy of the Corporate Commercial Bank, and the deputy governor at that time has even been charged for not having maintained control of the bank’s business.
‘Historic window of opportunity’
“There are issues on which it is important to have united positions. If, for the future of Europe, the eurozone, Bulgaria’s membership in Schengen, we are not united, we will not be successful”, Stanishev said. According to him, there was now a “historic window of opportunity” which Bulgaria should use, because in his words the price of non-entry into the eurozone would be enormous.
“We share the understanding that the time has come for Bulgaria to take concrete steps to enter the eurozone,” Stanishev said, adding: “If we now miss the momentum of taking the first step, we risk delaying this process indefinitely.”
For his part, Goranov has criticised the “hypocritical” attitude of the European leaders, which put additional conditions to Bulgaria for joining the euro area. “If European leaders were sincere in their intentions, such unwritten criteria should not be used,” he said.