Bulgaria changes legislation to join euro ‘waiting room’

The historic building of the Bulgarian parliament in Sofia and the cathedral Alexander Nevski in the background. [Georgi Gotev]

Bulgaria’s parliament adopted on Thursday (6 February) changes to the country’s central bank law so as to allow its accession to the “waiting room” of the eurozone.

Since 1999, Bulgaria has operated an IMF-led currency board arrangement that pegs its lev to the euro at a fixed rate of 1.95583.

The Balkan country would seek to join the ERM2 Exchange Rate Mechanism — known as the “waiting room” to the eurozone — at this same rate as soon as April, Finance Minister Vladislav Goranov has said.

Once in, however, ERM2 rules require Bulgaria’s central bank to allow currency fluctuations of up to 15% above or below the central rate.

Parliament voted on Thursday to allow the central bank to now operate on that basis.

As long as Bulgaria is in ERM2, the central lev-euro rate would be negotiated with the European Central Bank, the eurozone member states and Denmark, the changes read.

The EU’s poorest member state would need to spend at least two years in the mechanism before it is allowed to join the eurozone.

“This obligatory text lifts the last obstacle to Bulgaria’s entry into the euro ‘waiting room’ in end-April,” economist Petar Ganev of the Sofia-based Institute for Market Economy said.

Last month, International Monetary Fund head, Bulgaria’s Kristalina Georgieva, said the country’s accession to the euro “by 2023 is entirely possible”.

Contradictory interpretations of the legal amendments had sparked speculation about a possible devaluation of the lev before euro adoption.

Bulgarians still have bitter memories of the country’s worst banking and financial crisis in 1996-1997 when 14 banks went bankrupt and inflation soared to 300%.

The IMF-led currency board and the fixed rate helped the country control that hyper-inflation and maintain one of the lowest debt ratios in the EU of 19.9% of GDP at end-2019.

In order to reassure Bulgarians, parliament adopted last week a resolution saying that it would only allow euro accession at the current rate of 1.95583 leva.

EURACTIV asked the Commission if there was an absolute necessity that Bulgaria leaves the currency board before joining the euro.

A spokesperson reminded that this was not the first time that countries with a fixed exchange rate join ERM2 and adopt the euro, and that the Baltics were are a good example.

Indeed, Estonia and Lithuania had currency boards before joining the euro, and the rate of their currencies was not changed during the ERM2 period.

“Participation in ERM2 will maintain the substance of the Bulgarian currency board. As from the moment Bulgaria applies to and participates in ERM2, a (central) rate between the euro and the lev will be fixed under the ERM2 framework. This fixed rate between the lev and the euro could be, and is even likely, to be the same as the current rate of the existing currency board”, said the Commission in a written answer.

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