Bulgaria’s attempt to use the six-month period during which it held the rotating presidency of the EU to advance its bid to join the euro zone appeared to yield results after EU finance ministers gave a cautious endorsement to the application.
In a statement after the July 12 meeting of the EU, the Eurogroup said that it welcomed “the intention of the Bulgarian authorities to put in place the necessary elements for a successful entry into ERM II”, the exhange rate mechanism sometimes referred to as the euro “waiting room”.
Bulgaria had made a number of commitments in policy areas “of high relevance for a smooth transition to, and participation in, ERM II”, the statement said, such as banking supervision, other financial sector issues and institutional quality and governance.
The implementation of such commitments would be overseen by the European Central Bank (ECB) and the European Commission. “Once they have provided a positive assessment, a decision will be taken by the ERM II parties on the formal application of the Bulgarian authorities for ERM II participation,” the statement said.
Such a decision would be tied directly to the ECB decision on close co-operation, implying that Bulgaria would simultaneously join both ERM II and the EU banking union, created in 2012 in response to the euro zone crisis.
Bulgaria has targeted joining ERM II in July 2019 and the Eurogroup statement said that the ECB “could be expected to conclude” its comprehensive assessment – stress tests of Bulgaria’s banks – within approximately one year after Bulgaria’s formal application.
Bulgarian officials have previously indicated that they were prepared to lodge a formal application for close co-operation with ECB as soon as given green light by the Eurogroup, meaning that it could come as early as July 13.
The Eurogroup also called on Bulgaria to “thoroughly implement the reforms monitored by the Commission under the Cooperation and Verification Mechanism in the areas of judicial reform and the fight against corruption and organised crime in Bulgaria, in light of their importance for the stability and integrity of the financial system.”
The CVM monitoring, to which Bulgaria agreed prior to joining the EU in January 2007, has proven a stumbling block in the way of the country joining the Schengen visa-free travel area (even though it met the technical requirements years ago).
The Financial Times quoted Valdis Dombrovskis, the EU commissioner in charge of the euro, as saying that progress with judicial reform would play an important part in assessing Bulgaria’s readiness to join ERM II, but exiting CVM monitoring was not “a formal precondition”.
Bulgaria meets the macroeconomic criteria for joining the euro zone – on price stability, government debt and long-term interest rates – but falls short with regards to compatibility of legislation and membership in ERM II. Under the terms of its EU accession treaty, Bulgaria is required to adopt the euro, but has no legal deadline to do so.
Before joining the euro zone, a country has to spend at least two years in the ERM II, during which the exchange rate of its currency must not fluctuate by more than 15 per cent versus the euro. In the case of Bulgaria, there would be no fluctuation since it has pegged the lev to the euro since 1999 as part of a strict currency board agreement.
The larger concerns about euro zone membership for Bulgaria have always been political – including its fight against corruption and its financial stability, highlighted by the collapse of its fourth-largest bank by assets in 2014. When allowed to join the euro zone, Bulgaria would also be its poorest member, with per capita GDP of about 7100 euro in 2017.
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