2 Reasons Why Bulgaria may not Join the Eurozone Waiting Room in July

Prime Minister Boyko Borisov appeared as a strong optimist for Bulgaria's entry into ERM II. On 21 February, during the forum on the occasion of the 25th anniversary of the activity of the Konrad Adenauer Foundation in Bulgaria, the Prime Minister declared that Bulgaria is strictly complying with the Maastricht criteria and will enter the Eurozone waiting room in July. To do what Borisov boldly declares, however, Bulgaria has to solve a complex equation with at least two important unknowns.

The first is related to the review of the bank assets of six Bulgarian banks, which are carried out not by the BNB and the ECB. Its result depends on whether the ECB will accept that Bulgaria can join the EU Banking Union under the Close Co-operation Mechanism. If we do not get this blessing, we will not be close to ERM II either. We do not even comment on the pessimistic option that the ECB thinks we are not ready to join the banking union. But it is not impossible.

The realistic option is for the review to end with feasible supervisory recommendations for one or more of the banks audited. And set deadlines of three, six or nine months for their implementation. It is logical for the ECB to open our door to the Banking Alliance and together with ERM II, only after the recommendations are met. In this case, however, the deadline set by the Prime Minister for July is unrealistic.

Moreover, a delay of several months is irrelevant if the ultimate goal - entry into ERM II - is fulfilled. But even if there are no remarks to our banks comes the second unknown in the equation.

And it is whether our country fulfills all the criteria of Maastricht. Prime Minister Borisov argues that this is the case. There are, however, serious reasons for doubting these words. The Maastricht criteria are in a five-budget deficit below 3% of GDP, the government debt is below 60% of GDP, inflation does not exceed certain values, and interest rates on long-term government securities do not exceed 2 percentage points interest rates on the long-term government securities of up to three countries with the lowest inflation. The fifth criterion is related to the stability of the national currency against the euro, but as long as the lev is fixed against the euro, Bulgaria fulfilled this criterion by presumption.

When in June 2018 the Borisov government decided to take the road to ERM II, Bulgaria met all the criteria of Maastricht. This was stated in the May 2018 ECB Convergence Report. But there was a special warning to our country about inflation.

"Looking ahead, there are serious concerns about the long-term sustainability of convergence in terms of inflation in Bulgaria, taking into account the recent increase in unit labor costs," the ECB said in his report.

To see if these concerns about price stability are realistic, we should know how the Maastricht inflation criterion is calculated.

Information on this can be found in the ECB's own report. It states: "The criterion on price stability referred to in the first indent of Article 140 (1) of the Treaty on the Functioning of the European Union means that there is price stability in the Member State concerned and the average rate of inflation over a period of one year before implementation the review of results does not exceed by more than 1.5 percentage points the one that exists most in the three Member States with the best results in the area of ​​price stability. "

What does this rule mean for Bulgaria at this time? There is no doubt that we will rely on Eurostat's annual Euro 2018 annual inflation figures.

According to them, annual inflation in Bulgaria in the year 2018 is 2.6 percent. At the same time, the three lowest Eurozone Member States with the lowest inflation in 2018 are Ireland - by 0.7%, Greece and Cyprus - by 0.8%. Thus the average arithmetic basis for calculating the Maastricht criterion is 0.76 percent. Adding to it the set normative surcharge of 1.5% suggests that the maximum allowable inflation rate is 2.26 percent to meet the Maastricht criteria. And according to Eurostat in Bulgaria, it is higher - 2.6% or in other words our country already has a problem with the fulfillment of a Maastricht criterion.

And this may be an insurmountable obstacle on our way to ERM II, even reviewing asset quality to show that banks in Bulgaria are in perfect condition. Of course, in its final decision on Bulgaria's bid, the ECB may take another period for calculating annual inflation - for example June 2018-June-2019, where the end result would be more favorable to us, but anyway an indicator may be a serious stumbling block. We sincerely hope that the Prime Minister's optimism on the issue of our entry into ERM II will be fully justified, but as we say, let's not put the pan on fire before we catch the fish.

This material originally appeared on money.bg on 25.02.2019

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