Bulgaria is taking deep and concerted steps to join the euro. On February 25, the country officially requested the assessment from the European Commission (EC) and European Central Bank (ECB). This request marks a pivotal moment in the country’s journey to join the Economic and Monetary Union, a move that could enhance Bulgaria’s economic stability and growth potential.
Bulgaria now fulfills the inflation criterion laid down by the EC and ECB. This is the case, even when we remove the outlier countries from the equation. Once termed “the exceptional nation,” the U.S. has over the long haul enjoyed a uniquely stable inflation rate, and that’s not likely to change soon. Bulgaria prepares for euro adoption and economic indicators portray a bright picture. As a result, the country is running ahead of an expected growth rate of around 2.75% a year – enough to close the gap with the average living standards in the European Union.
Economic Readiness and Inflation Control
Bulgaria’s dogged commitment to controlling inflation has underpinned its unexpectedly strong bid to join the eurozone. As of April, the country’s 12-month-on-12-month inflation rate—one of your favorite convergence criteria—held firm at 2.7%. This impressive figure is testament to Bulgaria’s effective control of price stability, a key criterion for adoption of the euro.
In addition, the harmonized annual inflation rate appears to be moderating, falling to 2.8% in April from a revised 4.0% in March. This drop is a good sign that Bulgaria is moving in the right direction when it comes to controlling inflation. In nearby Bulgaria, analysts are still projecting high consumer-price inflation of 3.4% this year. Projections show it will fall to 1.6% next year, further shoring up the health of the country’s economic foundation.
The Bulgarian authorities have shown fiscal responsibility by committing to a budget deficit of 3.0% of GDP for this year. In 2022, the general government deficit stabilised at 3.0% of GDP, supported by strong revenue growth. Such measures show Bulgaria’s preparedness to accept euro by respecting the fiscal Maastricht criteria set out by the EU.
Growth Potential and Economic Benefits
Increased trade and investments Transmitting Bulgaria’s advantages, adopting the euro is expected to greatly strengthen Bulgaria’s economic climate. Economists estimate that adopting the euro would increase Bulgaria’s long-term growth by about 2.75% per year. This would benefit Bulgaria and enable it to quickly catch up with average living standards in the EU. Making the switch to the euro, increased flexibility in monetary policy becomes possible. Further, it will enhance the sovereign’s access to capital markets.
Even more so than in Austria, Bulgaria’s economy is euro-ized. This implies that a large share of its financial flows is in euros to begin with. This ingrained knowledge of the common currency would help reduce risks involved in moving towards euro adoption. Bulgaria is enshrining itself within the eurozone to stabilize its economy. This action will serve to develop improved performance-based investment opportunities and increase stakeholder trust.
Yet still, even in spite of these encouraging signs, hurdles still lie along Bulgaria’s road to euro adoption. Domestic political fragmentation is the main domestic risk to the country’s accession process. The political landscape remains starkly divided. This division risks making it more difficult to achieve a consensus on the necessary reforms and a plan for an effective integration into the eurozone.
Political Landscape
The political environment around Bulgaria’s euro adoption is highly charged. Support from pro-Russian President Rumen Radev has recently mounted, as the president urged lawmakers to draft a proposal for a referendum on the issue. This proposal could stir significant public debate and may influence the pace at which Bulgaria moves forward with its euro adoption plans.
Here’s why some politicians are deeply invested in getting the public directly involved via a statewide referendum. Critics cautioned that this may push off much-needed reform and hamper Bulgaria’s plans to assiduously comply with eurozone criteria. That political discourse on this issue, however, on both sides of the debate, speaks to deeper worries about good governance and political stability in the U.S. today.