Bulgaria's Eurozone Ambitions by 2025: Addressing Inflation and Economic Alignment

Finance | May 21, 2024, Tuesday // 11:49|  views

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Bulgaria’s prospects for joining the euro in 2025 have been bolstered by a cooling annual inflation rate, which dropped to the eurozone average of 2.4% in April, marking its first dip below 3% since the summer of 2021, according to statements from the country's finance ministry to Euractiv Bulgaria.

The ministry affirmed a strong political commitment from Sofia to align with Eurozone standards, indicating a possibility of meeting the price stability criterion before the end of 2024. Plans include submitting additional convergent reports upon fulfilling this criterion, with a request for an autumn review this year to assess Bulgaria’s readiness for Eurozone integration.

Recent data from the National Statistical Institute (NSI) underscores Bulgaria’s ongoing trend of declining inflation, with expectations for the next convergence report on Eurozone readiness due in June 2024. Should the inflation criterion remain unmet, Bulgaria has the option to request another report three months later, potentially aligning with summer months when inflation traditionally diminishes.

Bulgaria currently satisfies other key criteria for Eurozone membership, boasting minimal public debt at 23.1% of GDP and a budget deficit well below 3%. European Commission projections anticipate GDP growth of 1.9% in 2024 and 2.9% in 2025, with deficits expected to remain at 2.8% and 2.9% respectively.

EU Economic Affairs Commissioner Paolo Gentiloni expressed confidence in Bulgaria’s Eurozone accession process during a visit to Sofia, emphasizing parity with Croatia and highlighting the eurozone's anticipation of Bulgaria’s integration as its 21st member.

Financial expert Rumen Galabinov notes that macroeconomic indicators signal Bulgaria's alignment with Eurozone criteria by mid-2024, with inflation being the sole remaining concern that could potentially be addressed with timely interventions.

In April 2024, Bulgaria experienced a decline in annual inflation to 2.5%, marking the first instance since the summer of 2021 that it fell below the 3% threshold. This assessment is based on Eurostat's harmonized index of consumer prices, used for comparative analysis within the EU. Following nearly three years of surpassing the EU average, Bulgaria's annual inflation rate now trails slightly behind the EU average of 2.6%. With a significant portion of commodity groups reporting negative monthly inflation, it appears that the prolonged period of elevated inflation in Bulgaria has come to an end.

However, while the recent drop in annual inflation aligns with the evaluation period for the euro adoption criterion, it does not guarantee Bulgaria's compliance. There are two primary reasons for this, which have been widely discussed in recent months.

Firstly, the criterion evaluates average annual inflation over a 12-month period rather than focusing solely on the most recent month. Bulgaria's average annual inflation for the period May 2023 to April 2024 stands at 5.5%, compared to the EU average of 4.3%. Given the elevated inflation levels observed in the first half of this period, it will take several months for the average to decrease to the 2-3% range.

Secondly, the criterion is not benchmarked against the EU average but against the three EU countries with the lowest inflation rates. As of April 2024, these countries are Denmark (1.2%), Belgium (1.7%), and Finland (2.2%). By averaging these rates and adding 1.5 percentage points, the inflation criterion is calculated at 3.2%, significantly lower than Bulgaria's reported average annual inflation of 5.5%.

While there is a gradual improvement in Bulgaria's inflation trajectory, meeting the criterion remains challenging. Even if inflation levels decrease in the coming months, achieving parity with the benchmark set by Lithuania, Denmark, and Finland will require sustained low inflation rates around 2%. However, political instability, rising wages and pensions, expanding budgets, and inconsistent policies may complicate efforts to maintain inflation within the required range.

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Tags: euro, Bulgaria, Eurozone, inflation

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