Expectedly, the ECB did not admit Bulgaria to the Eurozone

Bulgaria does not meet the inflation criterion and is not ready to join the Eurozone from January 1, 2025. This was expectedly stated by the European Central Bank (ECB) in its regular convergence report, which was published today with a slight delay due to the elections for the new European Parliament.

The ECB is also concerned about the sustainability of the process of reducing inflation in the long term due to the process of catching up with Western European countries. As a problem, the institution also points out Bulgaria's inclusion into the Grey List for money laundering compiled by the global supervisory authority Financial Action Task Force (FATF). The country was placed on that list in October 2023.

According to the Maastricht criteria, the average annual inflation, measured by the Harmonized Index of Consumer Prices, should not be more than 1.5 points above the average value among the three member states with the lowest index. However, the reported index as of May in Bulgaria was about 3.5 points higher, or about 2 points above the permissible limits.

Inflation is expected to continue to decline in the coming months, but in the longer term, there are concerns about the sustainability of inflation convergence in Bulgaria. The catching-up process is likely to result in positive inflation differentials vis-à-vis the euro area since GDP per capita and price levels are still significantly lower in Bulgaria than in the euro area," the ECB points out.

Convergence reports are produced every two years and cover Bulgaria, Poland, Romania, Hungary, Croatia, the Czech Republic and Sweden, all of which are legally obliged to adopt the euro. The reports assess these countries’ readiness in terms of price stability, exchange rate stability, the level of the budget deficit and the size of the main interest rate.

Bulgaria fulfills three of the four numerical criteria for membership, namely: stability of public finances (budget balance and public debt); the exchange rate; and the long-term interest rate.

This is yet another year during which the ECB tells Bulgaria that it does not meet the criteria for the Eurozone. In 2022, the inflation criterion was once again a problem, as it was in 2020. However, in 2020, the Balkan country had not yet entered the so-called "eurozone waiting room", as the Exchange Rate Mechanism (ERM II) is colloquially known.

Bulgaria has made significant progress on its path to joining the Eurozone and has met three of the four criteria. This is a notable achievement in a difficult environment. We expect inflation to decrease in the coming months, which will help meet the inflation benchmark. We will work closely with Bulgaria to support its accession to the Eurozone", said the Executive Vice-President of the European Commission, Valdis Dombrovskis.

The ECB notes that the long-term sustainability of public finances is in question due to a projected increase in the costs of ageing. The ECB emphasizes that Bulgaria must continue to pursue a prudent fiscal policy, improve the quality and efficiency of capital spending, reduce tax collection gaps and its shadow economy, and improve the performance of state-owned enterprises to preserve medium-term fiscal sustainability.

The constatations of the ECB and the European Commission reports were already expected, and for this reason, the country’s Acting Minister of Finance Lyudmila Petkova and her deputy Metodi Metodiev had stated several times that Bulgaria will request an extraordinary convergence report towards the end of the year when according to projections by the Ministry of Finance Bulgaria will meet the criteria. That requested report, according to the officials, will provide Bulgaria with the opportunity to become part of the Eurozone "sometime in 2025".

However, it would be the first member country to join the currency union on a date other than January 1, and according to experts, the more likely date is January 1, 2026, as the European Central Bank needs to see that inflation in Bulgaria holds for a certain period within the permissible limits, as well as due to technical difficulties related to the change of a national currency in the middle of the financial year.

Expectations that Bulgaria will join from 2026 were also expressed by both major rating agencies Fitch and S&P Global.

Bulgaria applied to join the eurozone waiting room in mid-2018. However, the target date for joining the currency union has been postponed several times since then.

Translated by Tzvetozar Vincent Iolov