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Analysis | Why Bulgaria will struggle to adopt the euro in 2024

Remark

Bulgaria plans to adopt the euro in 2024, further integrating it into the European Union’s financial system to raise living standards in the bloc’s poorest member state. Together with Croatia, Bulgaria joined an exchange rate mechanism in preparation in 2020. But it lagged behind Croatia, which became the 20th member of the eurozone this year. And even Bulgaria’s less ambitious timetable is in jeopardy, as political instability complicates progress towards removing the remaining hurdles.

1. Why does Bulgaria want to join the euro?

Shortly after joining the EU in 2007, Bulgaria started working towards euro membership as required by the accession treaty. But three years later, it put that on hold amid the European sovereign debt crisis, which nearly bankrupted neighboring Greece and some other eurozone countries. In a renewed push since 2016, the government in Sofia has said adopting the single currency will help the Balkan country avoid being sidelined in the bloc’s decision-making process and further integrate its export-oriented economy.

2. What is the economic logic?

Since a hyperinflation crisis in the 1990s, Bulgaria has operated under a currency board arrangement that pegs the lev to the euro. With little room for independent monetary policy, the country is dependent on the decisions of the European Central Bank. The government and central bank have argued that the introduction of the euro will lower transaction costs and interest rates and improve Bulgaria’s creditworthiness, making it more attractive to investors. It will also help the tourism industry, which contributes more than 12% of the country’s economic output, in part by eliminating the need for currency exchange for many visitors.

3. Are there opposing viewpoints?

The idea has been met with skepticism from some political parties, including the Russia-Friendly Socialists, who have pushed for further cost-benefit analyzes before setting a final date. The Nationalist Revival Party, which is also pro-Russian, has called for a referendum on the issue, claiming Bulgaria is giving away too much sovereignty. In addition, some analysts, including a central bank deputy governor, have warned of the euro area’s structural problems and the high indebtedness of some of its members, and have criticized some of the ECB’s past policies.

4. What is the public mood?

An opinion poll in November showed that only a third of Bulgarians supported the introduction of the single currency. More than two-thirds say they are afraid it will lead to higher prices. Several hundred people gathered in Sofia in early December for a protest against the euro organized by the Revival party. Such doubts are not unusual for new members: in Latvia, for example, half of the population was against the switch when the country joined the euro in 2014.

5. What has Bulgaria done to prepare?

Bulgaria is recognized as the most corrupt state in the EU in a Transparency International ranking and has faced a lot of skepticism from other euro countries – especially after the Greek debt crisis and money laundering scandals involving banks in the Baltic states exposed the risks of admitting new members to the EU. club. Following a domestic banking crisis in 2014, Bulgaria has strengthened its financial supervision in order to join the EU’s banking union along with the exchange rate mechanism known as ERM-2. Lawmakers also updated the legal framework for the Bulgarian central bank after the ECB pointed out a list of shortcomings. For years, Bulgaria has kept its budget deficit and debt levels well within EU requirements.

6. What still needs to be done?

The country must pass three bills related to insolvency, money laundering and insurance. However, an ongoing political crisis is hampering the process as Bulgaria heads towards its fifth general election in less than two years. In addition, it may be difficult to meet inflation criteria, with Finance Minister Rositsa Velkova calling the requirement the “only serious challenge” in an interview published in late January.

7. What are the odds?

With a tight schedule and growing political divisions, Bulgaria faces an uphill battle, despite an overwhelming parliamentary majority backing the euro. President Rumen Radev, running as an independent candidate, has seen six attempts to form a government fail since July 2022; He has scheduled an emergency vote for April 2. Central bank governor Dimitar Radev has warned that the country needs a stable government to show clear political commitment. To meet the target date of January 1, 2024, Bulgaria must ask the ECB for a report on its preparedness “by the beginning of spring at the latest,” Velkova said, but it will only do so when it is ready. said. Authorities will need several months to prepare for the actual rollout of the new currency.

8. Who else wants to join the Eurozone?

Romania has expressed interest, although it no longer has an official target date. While all EU member states are obliged to join the eurozone, Poland, the Czech Republic and Hungary are hesitant to take formal steps. Sweden and Denmark – which obtained an opt-out before the currency came into effect – are also not budging.

–With assistance from Peter Laca, Andra Timu and Aaron Eglitis.

More stories like this are available at bloomberg.com

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