EU Debt Crisis Imperils Bulgaria's Euro-Zone Bid

Prime Minister Boyko Borisov, center, wields a hammer to strike a new coin during his visit last month to the Bulgarian National Bank in Sofia. Photo by BGNES

By Joe Parkinson

Wall Street Journal

Bulgaria, the newest and poorest member of the European Union, is emerging as a fiscal model for a number of EU countries struggling to fend off debt crises.

Despite Bulgaria's budgetary rigor, other EU members' swelling debt burdens may end up foiling Sofia's aspirations to join the euro in three years.

Bulgaria joined the EU in 2007 and posted the smallest budget deficit among the 27 member states last year, according to the finance ministry. It is expected to be the only EU nation to balance its budget in 2010.

The country pegs its currency, the lev, to the euro, and has a currency board that forces the government to hew to tight fiscal policy. Officials in Sofia have frozen government wages and pensions, mothballed costly state investment projects, raised taxes on tobacco and slashed government spending by 15%. The result is a full-year deficit of less than 500 million lev (0 million), or 0.8% of gross domestic product.

Prime Minister Boyko Borisov, who has drawn international accolades for cutting spending while maintaining high levels of public support, says he fears Bulgaria's fiscal performance won't guarantee entry to the 16-nation euro zone.

"I am afraid that the debt crisis in newer euro-zone countries will negatively affect us," he said. "We hope that the authorities respect the admission criteria as we've worked hard to get here."

In a thinly veiled reference to Greece, which has struggled to persuade investors that it can cut its budget deficit from more than 13% of GDP toward the EU's 3% ceiling, Mr. Borisov said he is making progress in persuading European leaders that his government would be fiscally disciplined "now and in the future."

Bulgaria is eager to adopt the euro in order to boost confidence and foreign investment.

Still, the country must meet a number of criteria covering currency stability, public-sector debt, interest rates and inflation. The application also needs approval from euro-zone heads of government and European Central Bank President Jean-Claude Trichet.

Bulgaria's economic progress could see it leapfrog longtime euro aspirants, such as Romania and Hungary, where sharp downturns have required bailouts from the International Monetary Fund. Sofia isn't currently receiving IMF assistance, and doesn't plan to seek help from the fund this year, Mr. Borisov said.

In the race to the euro, Bulgaria also could outpace Poland, where policy makers have been cautious about entering the currency club. That could raise eyebrows in Brussels and other European capitals where Bulgaria remains synonymous with corruption and organized crime.

Economists say Bulgaria's economic and fiscal management has made it a role model for other countries in Europe.

Spearheading the austerity drive is Prime Minister Borisov, a former karate champion who says his government will formally apply to join the euro zone by the end of January, setting it on course to adopt the currency in 2013.

"We have everything in order and we're ready to start the road to the euro zone by the end of the month," says Mr. Borisov. "It is now the first foreign-policy priority of my government."

The currency board, in place since an economic crisis in 1997 led to hyperinflation and the lev's collapse, compels Bulgarian policy makers to preside over a tight fiscal policy to guard against speculative attacks. But the current government's decision to bear down on spending and balance the budget contrasts with other Baltic states, where deficits are widening, despite currency pegs or oversight.

Bulgaria's growth forecast for this year has increased to 0.2%, from minus 2%. Credit-ratings agency Standard & Poor's has upgraded the country's outlook from negative to stable at BBB -- two notches above investment grade.

Mr. Borisov also is relying on his finance minister, Simeon Djankov, to step in. Mr. Djankov, a former World Bank economist, said that fiscal credibility is "nonnegotiable" to navigate Bulgaria's entry into the euro zone.

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