Joining Euro to Have Positive Impact on Bulgaria's Economy - Experts

Opinions | January 19, 2015, Monday // 11:01|  views

Photo by EPA/BGNES

Economists and financial experts in Bulgaria have described the country's decision to renew Eurozone membership negotiations as a step in the right direction.

This follows last week's announcement of Finance Minister Vladislav Goranov that Bulgaria is eyeing a restart of euro talks, with a prospect to join the Eurozone's "waiting room", or the Exchange Rate Mechanism II, by 2018. Sofia had abandoned its plans in 2012, under Finance Minister Simeon Djankov, who took the office in the previous government of PM Boyko Borisov.

Gancho Ganev, an economist, is confident Bulgaria's move could bring about benefits on the macro-economic side and help the country emerge from its ongoing stagnation.

But Ganev told the Bulgarian National Radio that, even if Bulgaria is capable of joining the ERM II, "the problem is when we will be getting out after reports from the European Central bank and the European Commission."

In his view, Sofia is generally complying with economic criteria at the moment, but the developments at Corporate Commercial Bank (KTB), which is undergoing insolvency proceedings following a huge bank run last year, and the Bulgarian National Bank (BNB), often accused of inaction with regard to KTB and allegedly failing to exert its oversight functions, would cause further delays in accession negotiations.

Countries have to spend at least two years in the ERM II, a mechanism limiting currency fluctuations, before adopting the single currency.

Ganev proposed that Bulgaria simultaneously hold negotiations on joining both the euro and the banking union.

Kolyo Paramov, a financial expert, believes the euro should "mandatorily be adopted at the end of 2017 or at the beginning of 2018," as this would "trigger a number of economic effects we have to secure."

"The effect we will achieve by introducing the euro has many sides. Currently we don't have at disposal the money supply to make a standard out of a better way of living in Bulgaria. We are stuck within the currency board and are strictly keeping to its conditions and requirements. If we had entered the Eurozone, we would have had disparate money supply and lending would have been carried out quite differently, since interest rates would have been at least half as high. This is what the adoption of the euro is aimed at," Paramov told private national station NOVA TV.

Paramov, formerly a lawmaker from the Bulgarian Socialist Party (BSP), has also been Chief Inspector of the Bulgarian National Bank between 1995 and 1998, at the time when the currency board was introduced following a huge economic and financial crisis.

His colleague Emil Harsev, however, believes citizens will not feel any substantial difference when Bulgaria adopts the single currency.

Harsev at the same time agreed with his colleague about the negative impact of Bulgaria's currency board on the financial system.

"The currency board system we have is dangerous to the banks in the country, since we do not have a lender of last resort. If we had a central bank that could provide refinancing, as the European Central Bank does, Corporate Commercial Bank would still be functioning. Banks in Bulgaria have been left on their own," Harsev opines.

Abandoning the lev (BGN) to switch to the euro would also suggest ending the currency board system of 1997, which results in very strictly determined functions of the BNB (which cannot provide loans to the government or set target rates), a 100% backing of the currency in circulation by the foreign exchange reserves of the central bank, and various other features. After 1997, the lev's exchange rate was pegged to that of the Deutsche Mark (DEM, and later to the euro, after Germany adopted the single currency in 2002) at a fixed exchange rate.

If Bulgaria introduces the euro, the system would have to be revised, as the ECB administers the euro's monetary policy.

The single-currency area now comprises a total of nineteen countries, after Lithuania started making payments only in euro on January 15, abolishing the litas (LTL).

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Tags: euro, Eurozone, ERM II, Vladislav Goranov, Kolyo Paramov, BNB, KTB, Corporate Commercial Bank, Gancho Ganchev, Emil Harsev


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