Bulgaria Is Testing the Ground for Euro Area Accession
Adelina Marini, 21 October 2016
Bulgaria is cautiously preparing to join the euro area. This was confirmed by Prime Minister Boyko Borissov after it became evident last week from his letter to European Commission President Jean-Claude Juncker (Luxembourg, EPP) that there are ongoing negotiations. In the letter, which euinside got its hands on, PM Borissov expresses gratitude for the European solidarity demonstrated in dealing with the migrant crisis. In the end of the text, however, it says that joint efforts will continue on the Cooperation and Verification Mechanism (CVM), the accession to Schengen, and “the ongoing negotiations for joining to the Eurozone”. According to the European Commission, however, there is currently not a single state of those outside the currency club, but which have committed by treaty to join when they fulfil the criteria, to have officially announced plans to start preparing for membership.
Neither of them – Bulgaria, The Czech Republic, Croatia, Hungary, Poland, Romania, or Sweden – is in the exchange rate mechanism (ERMII), the so called euro area waiting room. The European Central Bank (ECB) refused comment, but pointed us at the reply of governor Mario Draghi to MEP Jonas Fernández (Socialists&Democrats, Spain) of June 17, 2015. The accession procedures are listed in detail in this reply, also reminding that a key element of the accession process is economic convergence. It also recalls that entering the euro area’s waiting room requires the approval of all finance ministers from the euro area and the ECB.
Bulgaria is currently in consultations with the key members of the euro area, announced PM Borissov before the start of the October EU summit in Brussels. In his words, there are ongoing talks with Germany, France, the ECB, and the European Commission. “This is one topic they do not like to have too much talk and noise about, because we have fulfilled the requirements, but a political decision is required after all. And if you start boasting too much about what you are going to do, it will not happen. This is why we are having these negotiations”, explained the prime minister. He added that Finance Minister Vladislav Goranov already visited France on this subject and also has a scheduled meeting with German Finance Minister Wolfgang Schäuble. According to Mr Borissov, entering the euro area waiting room would be very beneficial for Bulgaria, because interest rates on loans will drop and the Lev will be guaranteed even firmer.
The EC published this year its Convergence Report, which is done every two years, unless a country requests to start the process of joining the euro area. At that point a separate report is done for it. The regular document shows that Bulgaria does not yet fulfil all accession criteria, although all are doable and in short terms at that, provided there is political will to do so. The most serious problems concern legal consistency. The report further demands more changes in the law for the Bulgarian National Bank (BNB), so that it gets fully harmonised with the ECB statute. Several points in the Bulgarian law are problematic to the EC. The first one is that the BNB Governor and his deputies can be removed from their posts for reasons not in line with the ECB statute.
An amendment is required in article 44 of the BNB Law, guaranteeing the independence of the Governing Council of the BNB from political influence by the government or other institutions. What worries the European Commission is that the BNB Law states that when forming the general guidelines of monetary policy, the BNB and the Council of Ministers should inform each other. This procedure allows for meddling by the government in the monetary policy of the BNB, says the document. There are also problems in Article 45 (paragraphs 1 and 2), which concern allowing credits and guarantees to the government, municipalities, governmental and municipal institutions, organisations and enterprises. The EC insists that the amendment introduces the word “direct” aid to such institutions, for the purchase of public debt at the secondary markets is not prohibited. This is exactly the mechanism, by which the ECB currently implements its monetary policy with the so called “non-standard” monetary policy.
Bulgaria meets the inflation criteria and is expected to continue to do so in the long run. With regards to price stability it is doing well also. Regarding convergence, the level of consumer prices in Bulgaria was at 47% of the euro area average in 2014. In the long term, the EC sees considerable potential for even greater convergence, adding to the process of catching up by the Bulgarian economy. Bulgaria's income level was at about 44% of the euro area average in Purchasing Power Standard terms in 2014. In fiscal terms, Bulgaria is doing well too and is even overly cautious. Even the KTB crisis effect has already subsided.
The sector where Bulgaria is not doing so well, and it is an important part of the assessment on readiness to start an accession process, is the business environment. According to the report, Bulgaria is generally doing worse than most euro area member states in international ratings. The difference with the currency club average is far greater according to the Global Competitiveness Report of the World Economic Forum, than on the World Bank's Ease of Doing Business indicator. There was, however, deterioration registered in 2015 on the second indicator as well. Public administration in general is performing poorly, according to the World Bank's Worldwide Governance Indicators.
The banking sector generally is in a very good shape. Average capital adequacy is considerably higher than the euro area average – in September of 2015 it was almost 22%. The share of non-performing loans, however, remains considerably higher than currency club average – 13% at end September of last year. By contrast, profitability of banks is considerably higher than in the euro area, which Mario Draghi often points out as a serious problem for the economic revival in the euro area..
The prime minister stated that at this stage there is no set date for the start of the process. The European Commission underlined that setting targets and linking them to dates could help catalyse reforms, but they have to be credible and backed by specific commitments. The last country to join the euro area was Lithuania. It introduced the common currency on January 1st of 2015. Thus the number of members of the currency club member states has become 19. There are currently no appetites for euro area enlargement due to the debt crisis, which caused serious fractures between member states. ECB President Mario Draghi also hinted about restraint in future expansions last year. Plans have been discussed for several years of deepening the integration of the currency club, but there are no great appetites for that either due to the decision of Great Britain to leave the Union, the upcoming elections in France and Germany next year and the ever growing Euroscepticism.
Translated by Stanimir Stoev