Банкеръ Daily


Bulgaria is likely to get “yes” for ERM II despite Borisov's feints

The increased public debate on the adoption of the euro and the BGN exchange rate in the ERM II mechanism increased the risk of further delays in the process, announced the Fitch rating agency on Friday (February 21). However, experts believe that Bulgaria and the European institutions remain committed to the country's accession to the so-called “eurozone waiting room”. Fitch expects "positive decision" on Bulgaria's admission to ERM II in the second quarter of 2020. Their prediction is that we will get the "green light”  most likely in July and this could pave the way for the introduction of the euro in the country in 2023 year at the earliest.

European Commission Vice President Valdis Dombrovskis announced after meeting with Prime Minister Boyko Borisov on Friday that the current exchange rate level at which the lev is pegged to the euro is certain to a high extent to remain the same after our country joins ERM II.

"The time we are talking about is July, not April. Until then, Bulgarian banks have to monitor their capital assets very carefully so that there are no further obstacles, "the Prime Minister added.

A day earlier, Dombrovskis announced that he had been informed by Finance Minister Vladislav Goranov that Bulgaria was likely to join the ERM II a few months later than the originally announced deadline - the end of April.

At the beginning of the week, the Prime Minister announced in his typical enigmatic style, that he practically leaves on ice Bulgaria's longstanding attempts to join the currency exchange mechanism ERM II, known as the  "eurozone waiting room". This happens in a moment of high tension on the subject and also in the final phase of our negotiations with the Eurogroup, the European Central Bank and the European Commission. Among other things, the Prime Minister's arguments seem rather vague, which raises many questions.

The exact Borissov’s words were that the ruling coalition would not "force the entry" in ERM II until there was absolute consensus in society. The Prime Minister explained that there is no country that has adopted the euro and has become worse but at the same time noted that the Bulgarian citizens have concerns about the cost of living. In his words, people will every day be convinced of the benefits of joining the so-called  “eurozone waiting room”.

Asked if this means that the deadline for our adoption - April 30, conditionally set by Finance Minister Vladislav Goranov, will not be met, Borisov answered ambiguously: "It doesn't mean anything. We talk to people every day, we convince ... When we are ready and people have realized, then we will move on and enter the waiting room."

Recently, tensions over Bulgaria's accession to ERM II have sharpened as a result of the changes to the BNB Act, made  on the sly. The situation has been heated with the allegations that through the technical, at first sight, amendments to the law it will be able to exert pressure on the lev, while our country is part of the currency exchange mechanism.

Finance Minister Vladislav Goranov and BNB Governor Dimitar Radev are adamant that there are no risks to the currency board and the BGN-EUR exchange rate. Similar opinions are also heard from Brussels. Some financiers even argue that the editorial changes to the BNB law requested by the ECB and the European Commission mean that our country has received a specific date for its accession to the mechanism.

That is why Prime Minister Borisov's sudden launch of a public consensus on the topic has left us dumbfounded.

Versions were launched that there were signals from the European institutions to abandon the intention, although the world financial organizations are looking with a friendly eye at our potential membership of the euro area. For example, in its latest report on Bulgaria, the International Monetary Fund points out that accession to the European Banking Union should lead to further strengthening the resilience of the financial system.

Experts stress that it will happen after successful recapitalization of both banks, identified in the ECB's comprehensive review, which is still pending. After joining the Banking Union (as a non-euro area country), significant institutions will come under the direct supervision of the ECB, as Bulgaria will join both the Single Supervisory Mechanism and the Single Restructuring Mechanism. In the process of preparing for entry into Monetary Mechanism II and the Banking Union, progress has been made on other financial sector reforms that the IMF supports, including strengthening the anti-money laundering framework and supervision of the non-banking financial sector.

The extremely active in recent times American economist Prof. Steve Hanke, who became famous over the years in Bulgaria as  the "father of the currency board in BG", is on the opposite opinion. Hanke argues that Bulgaria could follow Greece's fate if it adopted the euro. According to him, the lev is a better option for our country. "Remember Greece? They went through a huge fiscal problem. The same would probably happen in Bulgaria if you accepted the euro", he predicted, although Bulgaria has eight times lower debt than Greece as a percentage of GDP.

So far, Prime Minister Borisov's hesitations for ERM II have been explained by the upcoming parliamenatry elections in 2021. It is more than clear that there can be no absolute consensus on the euro. This was not the case for our EU and NATO membership either and also for the introduction of the currency board- they all have been the right decisions, viewed through the prism of time.

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