Bulgaria risks angering the European Central Bank

Bulgaria and the Euro

Bulgaria risks angering the European Central Bank

Postby Miguel.mateo on 12 Dec 2008, 12:00

Alex Bivol, Sofia Echo

Bulgaria now risks angering the European Central Bank with talk of unilaterally adopting the euro

For more than a decade, the currency board arrangement in Bulgaria has been cited as the biggest factor for economic stability in the country by pegging the local currency, the lev, first to the German mark and then to the euro.

Despite sporadic debate in recent years, caused by half-hearted attempts to question the continued existence of the currency board, the wide support for the arrangement never wavered. But as the Bulgarian economy becomes increasingly mired in its second economic crisis since the fall of communism, this time not one of its own making as was the case in 1996/97, an increasing number of voices are saying that the board is not good enough anymore. To eliminate currency risks and prop investor confidence even more, Bulgaria should adopt the euro as either the secondary or the primary means of payment.

First voiced by the Confederation of Employers and Industrialists in Bulgaria (CEIBG), one of the biggest employer associations in the country, the proposal has since been backed by two Cabinet ministers – Bulgarian Socialist Party’s Petar Dimitrov, the Minister of the Economy and Energy, and State Administration Minister Nikolai Vassilev, a senior member of Simeon Saxe-Coburg’s National Movement for Stability and Progress.

Finance Minister Plamen Oresharski is in the opposite camp, promptly countering Dimitrov’s enthusiasm at a round table attended by the two ministers, saying it was a “sensitive issue” and that adopting the euro without the explicit consent of the European Central Bank (ECB) would bring no advantages, but plenty of disadvantages. Bulgarian National Bank (BNB) governor Ivan Iskrov has said that the central bank would not abandon its current strategy for joining the euro area, which envisions sticking with the currency board and the lev pegged to the euro at the current exchange rate of 1.95583 euro for one lev.

Prime Minister Sergei Stanishev is yet to take sides, instead criticising the European Union for delaying Bulgaria’s admission into the ERM II mechanism, the eurozone’s waiting room, which is widely seen as a mere formality because there is no possibility of the exchange rate fluctuating by more than 15 per cent, the main requirement of the ERM II, when the lev is already pegged to the euro. “When it comes to meeting the Maastricht criteria [for adopting the euro], Bulgaria is already doing much better than some countries in the eurozone,” Stanishev said at a meeting with labour unions and employers, before crediting Government policies for the credit crunch’s muted impact on the Bulgarian economy so far.

“Why won’t the EU see that Bulgaria does not cause problems?” Stanishev said, a question that local media have interpreted as a swipe at Germany, which has long opposed Bulgaria joining the ERM II before it meets all other four criteria – fiscal deficit, Government debt, key interest rates and inflation. The only criterion Bulgaria is behind on is inflation, with the year-on-year figure at end-October being 10.9 per cent, more than double the requirement that it should be no more than 1.5 percentage points higher than the average recorded in the three EU member states with the lowest inflation.

But even when inflation was lower, some voices in Bulgaria criticised the European Commission and ECB for sticking so rigidly to this requirement. Economists have argued that being the poorest EU member state, Bulgaria had the most catching up to do and that high inflation was the consequence of the price convergence process, rather than poor economic policy.

Lukewarm support

Macroeconomists greeted the latest ideas to unilaterally adopt the euro with little enthusiasm. The general consensus is that BNB can easily afford the technical implementation of the move, since its hard cash reserves are more than triple the amount of leva in circulation, and it would not have any problems buying the required amount of euro bills and coins necessary to make the euro legal tender in the country. However, they pointed out that it was still expensive, compared to the option of an ECB-backed switch to the euro, in which the ECB would provide the same amount of bills and coins at no cost.

Ultimately, it was unnecessary because the euro was already Bulgaria’s second currency, Open Society Institute senior economist Georgi Angelov wrote in his blog ikonomika.org. The process was well advanced – the common European currency was the preferred currency used when signing contracts, more than half of all bank deposits and assets were denominated in euro, as well as more than 70 per cent of all new loans, he wrote.

The real price would be antagonising the EU institutions, already angry with Bulgaria over Sofia’s flagging fight against corruption and organised crime, which prompted the EC to strip Bulgaria of 220 million euro in pre-accession aid funds at end-November. “The EU made it clear back in 2000 that unilateral adoption of the euro by a member state was against the spirit of the EU treaties. In 2003, the ban was made even more categorical, when unilateral adoption of the euro was called a breach of those treaties. Such a move would be seen as an attempt to bypass the existing rules and breach the principle of equal treatment for all eurozone candidates,” Roumen Avramov, the programme director of the Centre for Liberal Strategies think-tank and a former member of the BNB board, wrote in an op-ed piece in Kapital weekly.
User avatar
Miguel.mateo
500 Posts
500 Posts
 
Posts: 530
Joined: 05 Aug 2008, 15:51
Location: Japan

Re: Bulgaria risks angering the European Central Bank

Postby theeuro on 13 Dec 2008, 03:06

Miguel.mateo wrote:This is long but quite interesting. Although low in probabilities of happening, it seems like Bulgaria can join the Eurozone fast but at an expensive cost for them.
MdV
The Euro Information Website and Forum Administrator
User avatar
theeuro
Site Admin
 
Posts: 590
Joined: 04 Aug 2008, 22:43


Return to Bulgaria

Who is online

Users browsing this forum: No registered users and 1 guest