Банкеръ Weekly


Bulgaria Gets Promised Waiting Room, not Eurozone

After his visit to the Lithuanian capital Vilnius on January 14 on the occasion of the introduction of the euro in that EU Member State, Finance Minister Vladislav Goranov announced that Bulgaria will apply for entry to the Eurozone. Later he realized that he was talking about the exchange rate mechanism ERM 2, better known as "the waiting room for euro". Finance Minister made his statement after talks with decision-makers in the European Commission and the ECB. These are the two institutions that actually decide when a country may become a candidate for the euro area and when it can actually enter it.

However, it is clear that the inclusion of a country in the ERM-2 does not mean that two years later, it will automatically be accepted into the family of countries that use the euro as their national currency. An example of this is Slovakia, which remained in the mechanism for four years ago, Estonia – for seven, Latvia - for nine and Lithuania spent in the ERM 2 nearly a decade until on 1 January 2015 it was allowed to introduce the euro as their currency. However, some commentators believe that the Baltic states have been accepted in the euro area to be further "emancipated" from the growing foreign pressure on Russia. And it is logical that after the northern flank of Europe and NATO seems more secure, now the same agenda may happen to the south, and mostly - to Bulgaria. The motives are also present - a small country with a relatively good financial indicators which cannot pose a risk to pan-European financial system. Moreover, opening the door to the ERM 2 will be accompanied by the inevitable demands for reforms, which for years did not happen. To reach the strategic goal - the Eurozone membership the country will need to take some steps it  never ventured to do before. For this purpose, Vladislav Goranov admitted that Bulgaria will ask the 19 countries of the eurozone for a roadmap for reforms to be carried out before it may join them.

What the roadmap will contain can be predicted now. Sofia will be required to maintain a sustainable fiscal policy, reform its pension system, education, labour market, administrative and judiciary systems. It will have to prove that the country has a sustainable macroeconomic risk-free economy. And all this will have to reflect on the gross domestic product per capita, and then to levels that are not less than 60% of the EU average. Just for comparison, in 2013 GDP per capita of Bulgaria, according to Eurostat, was 5,500 euros, while in the EU this indicator was 25,700 euro. In the euro area they do not let the poor.

Requirement for certain levels of GDP per capita are not recorded in the official documents for the admission of a country in the Eurozone family. In fact, reform requirements are not present in these documents, either. If one sticks strictly to the agreed criteria, they are those of Maastricht. Namely: inflation, average interest rate on the debt, the amount of budget deficit and external debt to GDP, as well as stability of the exchange rate. But this is only on paper.

The convergence report of the European Central Bank for 2013 shows that the country has fulfilled all the five Maastricht requirements, and in spite of this it has not been permitted to enter in ERM 2. One reason is that the performance of the country is dubbed not sustainable – i.e. it has not proven it can permanently keep them, and this was clearly demonstrated in 2014. Another reason is that Bulgaria has conducted a series of reforms to ensure the reduction of its fiscal and economic imbalances. The report of the ECB recalls that during the growth period, the deficit of the trade balance of the country as well as its inflation rate reached double digits.


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