The ‘Sofia’ criteria for the euro zone

Written by on June 19, 2012 in Business, Perspectives - No comments

The European Central Bank (ECB) published its Convergence Report (2012), in which it evaluates the progress of the members states that have committed themselves to joining the euro by following the convergence criteria, better known as the “Maastricht” criteria.

At this point in time, Bulgaria has passed the requirements for deficit, debt, inflation and long-term interest rates, but this does not mean automatically that the road to the euro is open. What is more important, the question on whether Bulgaria even wants to undertake this journey is still open for debate.

The official challenges to adopt the euro are well known: it is not certain that Bulgaria covers all the criteria in a persistent, sustainable manner (especially the one on inflation), Bulgarian law does not comply with all the requirements for central bank independence, and Bulgaria is yet to join the so-called Exchange Rate Mechanism II (ERM II), where we have to stay for at least two years.

We also have to add to these challenges the lack of clear, transparent and automatic rules for entering the ERM II, meaning in practice, that even passing all the requirements does not necessarily result in immediate access to ERM II. In other words, with or without the criteria, to get into the euro zone, you first must be approved and welcomed by the euro “hosts”.

These questions have been extensively discussed from the very moment we joined the EU in 2007, but now there is another issue on the agenda – does Bulgaria want to be in the euro zone? Just as the euro zone can prolong our accession indefinitely, so can we do it on our side. In fact, this shall not be done furtively – we can establish our own criteria that the euro zone has to cover, in order for us to join it. Using the Maastricht example, these criteria can be called the “Sofia” criteria.

These criteria are not some kind of misguided whim – they stem from the very commitments we undertook in 2007. We promised to join a club with a clear set of harsh rules and it is precisely because of these rules that we are still not inside and are being monitored. However, it is also our responsibility to make sure that the members of this club do not break their own rules.

If they can do whatever pleases them, then our commitments also should be put under question – it is just like making a commitment to dine in a restaurant for non-smokers (having to prove that you are a non-smoker), but being told at the entrance that actually everyone inside is smoking cigars. The least you can say (if not leave) is that you will enter only once everyone has put out their cigars.

What are the “Sofia” criteria which the “euro” countries must meet in order for Bulgaria to stay true to its agreement?

Government deficit in the euro zone should be below three per cent of gross domestic product (GDP). Additionally, the three countries with the worst government deficit shall be closely monitored – the rules of the euro zone are not mandatory on average, but for every separate country.

Public debt in euro zone should be below 60 per cent of GDP – again the three economies with the biggest public debt shall be closely monitored.

Inflation below two per cent – that’s the primary objective of the ECB, but lately the tolerance to higher inflation has been widening.

The independence of the ECB is to be guaranteed.

No taxpayer burdens and debt solidarity as a result of accepting the euro – including payments to stability funds and issuing of joint eurobonds.

These are the main criteria that we should monitor closely and which actually show whether our commitment is valid. We’ve never promised to join something that does not respect these criteria. At present, the euro zone really does not meet these criteria, as the table below shows.

The data shows that the euro zone doesn’t keep with its own requirements and Bulgaria is free to decide about its membership, without following the 2007 agreements. Even if the euro zone complies with the requirements for budget deficit, inflation, public debt and respecting the independence of the ECB, the big question of debt solidarity and tax responsibilities remains open.

In conclusion, the “Sofia” criteria must be observed carefully since they show whether accepting the euro is advantageous for Bulgaria or not. They are not an absolute, just like the Maastricht criteria for joining the euro zone are not, but should not to be ignored nevertheless.

‘Sofia’ criteriaCurrent status
Euro zone budget deficit*, % of GDP-3.0%-4.1%
Euro zone public debt**, % of GDP60%87.2%
Euro zone inflation***, %2.0%2.6%
ECB independenceYesYes (under surveillance)
Taxpayer burdens and debt solidarityNoYes/No (under surveillance)

* Eurostat data for 2011 – see here. Countries with the largest budget deficit are Ireland (-13.1%), Greece (-9.1%) and Spain (-8.5%)
** Eurostat data for 2011 – see here. Countries with the largest public debt are Greece (165.3%), Italy (120.1%) and Ireland (108.2%)
*** Eurostat data for April, 2012 – see here.

This article originally appeared in the weekly bulletin of the Institute for Market Economics and can be found here.

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About the Author

Petar Ganev is a senior researcher with the Institute for Market Economics think-tank in Sofia.