Bulgaria’s Euro Adoption & Its Potential Implications

Bulgaria’s plan to adopt the euro and become a member of the eurozone holds far-reaching implications, especially for the economy, political scene, and international relations; the Southeast European nation is looking to improve its economic conditions and become a recognised voice in the European Central Bank (ECB).

Bulgaria and the Euro

Bulgaria’s currency, the Lev (BGN), is pegged to the euro at a rate of 1.95583, a move that has seen the country through several external economic crises and kept inflation low for a long time (although inflation has increased to over 14% now), and has helped its manufacturing industries maintain their production line and profitability. Trading forex (foreign exchange), stocks, and other financial markets in Bulgaria is also possible thanks to BGN’s stability.

The BGN is less recognised and stable than the euro; Bulgarian companies, therefore, incur more costs when engaging in international trade with non-eurozone countries, and the price of imported goods is often high. These challenges are not damning for the country’s economy, but adopting the common European currency brings more benefits to them.

Bulgaria’s decision to adopt the euro is not sudden; it has been expected to do so since 2007, when it joined the European Union but has not actualised the goal. The government has slowed down its moves in adopting the euro but maintains a strong commitment to seeing it through, potentially by 2025. How will this impact forex and the BGN?

The euro/BGN peg will be the first to feel the impact as it will no longer exist. The BGN will diminish in use, typically over a fixed period, until the euro dominates Bulgaria’s local and international trades. The removal of this currency peg means that Bulgaria can devalue its currency and make its exports more competitive.

@Hans from Pixabay

Decreased Borrowing Costs

Bulgaria will lose its control over its monetary policies, as it will adopt the ECB’s policies. Eurozone countries typically enjoy lower borrowing costs, thanks to their financial and economic policies. These would rub off on Bulgaria’s economy, allowing companies and individuals to access less expensive loans and mortgages.

On the other side, the ECB’s monetary policies may not always favour Bulgaria; lower interest rates, for instance, may cause discomfort for some industries while others benefit. Yet, Bulgaria is better off with the euro, according to many experts.

Access to Eurozone Economy

Adopting the euro will also help Bulgaria become more integrated with the eurozone economy, pushing the limits of their EU membership benefits economic-wise. Bulgarians can expect increased trading opportunities with international partners, relaxed laws that aid such trades, and access to larger markets for their industries. The euro’s international credibility will also rub off on Bulgarian companies and consumers, with the potential for increased financial stability.

Potential Economic Boost

Close ties with the eurozone will positively affect the psychological aspect of Bulgaria’s economy, attracting local and foreign investments and generally boosting the economy. As more investors learn about the lower cost of doing business in Sofia and other places and other benefits of less expensive loans, they will be attracted to the Balkan country and contribute to its growth. Bulgaria needs this, as the total gross external debt stands at over 44.4 billion euros, equivalent to 43.9% of the gross domestic product (GDP).

Increased Transparency

Adopting a single currency used in the eurozone means Bulgaria’s companies and individuals will enjoy greater transparency in terms of exchange rates and international transactions. Adopting the euro eliminates confusion and price speculation with other countries in the eurozone. This will translate to more stable prices and lower production costs for companies. The removal of price speculation may affect Bulgaria's foreign currency market in diverse ways; traders must expect a few changes to reflect on the market.

Potential Inflationary Pressure

Although the process of switching from the BGN to the euro is expected to be smooth and seamless, Bulgarian businesses adjusting their prices to the euro may cause temporary price increases, creating short-term inflation across markets. This will affect low-income earners and, unless arrested quickly, could reach the larger economy. Indeed, there are measures by the ECB and Bulgaria’s National Bank to prevent this. Forex traders will be wary of potential short-term volatility as traders adjust their positions on EUR pairs in readiness for Bulgaria’s adoption of the euro. The EUR/BGN exchange rate may also be affected for a short time as the peg is removed.

@moerschy from Pixabay

Potential Challenges With Euro Adoption

There are several conditions that Bulgaria must meet to be accepted into the eurozone. These include low inflation and long-term interest rates, public debt levels, exchange rate stability, etc. The country will need to meet these conditions by 2025 to adopt the euro. The government aims for an assessment in June 2024 to determine its eligibility for eurozone entry, with further evaluations anticipated in the autumn to meet inflation rate requirements. A strong political will is necessary to meet the 2025 target, or Bulgaria may postpone the move until conditions are favourable enough.

Bulgaria and the Euro

Bulgaria’s move to adopt the euro is a major economic event that has had massive impacts on its local industries and economy. The advantages far outweigh the drawbacks; access to larger markets, lower borrowing costs, and access to economic stimulus from the eurozone may help the economy become stronger, combat inflation, and gain Bulgaria more strength among the Balkan countries.

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