Commission to pour cold water on Bulgaria’s Eurozone ambition

Bulgaria's Finance Minister Vladislav Goranov (R) welcomes President of the European Central Bank (ECB) Mario Draghi (L) during the European Union's (EU) informal meeting of the economic and financial affairs ministers (ECOFIN) at the National Palace of Culture in Sofia, Bulgaria, 27 April 2018. [Vassil Donev/EPA/EFE]

Euro-hopeful Bulgaria does not yet meet the criteria to adopt the single currency, the European Commission will say today (23 May) in an assessment of European Union countries that must one day switch to the euro.

Unlike bigger and richer EU countries that still use their own currency, such as Sweden and Poland, Bulgaria, the EU’s poorest member, is eager to join the euro zone and wants to begin the two-year waiting period in May or June.

Apart from Britain, which will leave the EU next year, and Denmark, which has a permanent exemption from adopting the euro, all EU countries are legally obliged to join the single currency once they meet all the criteria.

“In light of its assessment on legal compatibility and on the fulfilment of the convergence criteria, and taking into account the additional relevant factors, the Commission considers that Bulgaria does not fulfil the conditions for the adoption of the euro,” says the Commission assessment, seen by Reuters, that is to be formally approved on Wednesday.

To adopt the euro, a country has to have low long-term interest rates, inflation, government deficit and debt and a stable exchange rate against the euro. It also has to have an independent central bank and be well-integrated into the euro zone economy.

The Commission will say that Bulgaria meets the criteria of low inflation and sound public finances. But its law on the central bank falls short of requirements for central bank independence and the prohibition of monetary financing.

The bankruptcy in June 2014 of the Corporate Commercial Bank (CCB, also known as Corpbank), the fourth largest in the country, revealed the lack of sufficient and reliable oversight over the banks.

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The European Commission opened an infringement procedure against Bulgaria on Thursday (25 September) following the decision of two failed banks to deny clients access to deposits of up to €100,000, which are guaranteed under EU law.

Nor does the country meet the exchange rate stability criterion, the Commission will say.

The formal requirement is that the Bulgarian lev must spend two years in the Exchange Rate Mechanism II, trading in a band of plus or minus 15% around a central parity rate, during which time appreciation is more welcome than depreciation.

In practice, the lev easily meets this criterion, because it has been pegged to the euro since the euro was created (and before that to the Deutschmark, to the rate 1 lev = 1 DM). Bulgaria intends to formally apply to start its two-year ERM II test by the end of June.

That is causing tensions in the euro zone because once it completes two years in the ERM and changes its central bank law, it will have met all the formal criteria and will have to be accepted.

But many countries in the currency bloc do not want Bulgaria to join anytime soon. They worry about the country’s widespread corruption and how it could affect the stability of Bulgarian banks.

Euro zone officials are therefore pushing for Bulgaria to join the euro zone’s banking union before it applies to start its ERM II stability test. That gives the European Central Bank the chance to address any instability and non-performing loan issues in the country’s banks before allowing Bulgaria to adopt the single currency.

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Bulgarian Prime Minister Boyko Borissov said he apologises for revealing a secret, but that the Bulgarians should know about the main additional condition for the country’s accession to the eurozone.  

Bulgaria has pointed out that under EU law membership in the banking union is neither a criterion for euro membership nor for starting the ERM II stability test. But the decision to admit a country to the ERM II is in the hands of euro zone governments and the European Central Bank.

Senior euro zone officials from the Commission, the ECB and the financial policy-making body of euro zone governments will hold talks in Sofia on ERM II membership on Wednesday.

“People are worried that unless Sofia’s euro adoption is prepared well, Bulgaria could one day become another Greece,” one senior euro zone official said. “The Greek trauma is still fresh in people’s minds and weighs on the perceptions of Bulgarian euro ambitions.”

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