End of an Era: Bulgaria’s 28 Years Under the Currency Board and the Road to the Euro

On July 1, Bulgaria marks the final anniversary of its currency board arrangement, a system in place for 28 years that is set to conclude with the country’s anticipated entry into the eurozone on January 1, 2026, BGNES reported. This transition will mark the completion of Bulgaria’s long path toward deeper European integration, underscoring a major milestone in the nation’s economic history.

The currency board was introduced on July 1, 1997, when the Bulgarian lev was pegged to the German mark at a fixed rate of 1,000 levs per mark. With Germany’s adoption of the euro on January 1, 1999, the lev’s exchange rate adjusted accordingly to 1.95583 leva per euro, mirroring the official conversion rate between the mark and the euro. This rate was further cemented following the lev’s redenomination in July 1999. The fixed peg was reaffirmed when Bulgaria joined the Exchange Rate Mechanism (ERM II) on July 10, 2020, signaling the country’s closer ties to the eurozone framework.

The currency board has been a pillar of financial stability for Bulgaria, underpinning economic growth and shielding the country from the severe crises that plagued the early 1990s and mid-1990s transition period. Notably, the turbulent winter of 1996-1997, known as the “Videnov Winter,” marked a period of acute economic hardship. Under Prime Minister Zhan Videnov’s government, attempts to simultaneously safeguard employment, service foreign debt, and control the lev’s exchange rate spiraled into rampant inflation, currency devaluation, and a collapse in living standards. This economic collapse ignited widespread protests and ultimately toppled the government.

The currency board was born out of necessity, after Bulgaria’s mounting public finance challenges forced it to seek International Monetary Fund (IMF) assistance. The IMF agreed to provide loans only on the condition that Bulgaria establish a currency board, a proposal implemented swiftly by the caretaker government under Prime Minister Stefan Sofianski in 1997. The arrangement introduced strict rules to ensure price stability, a vital precondition for sustainable economic development.

Uniquely, Bulgaria’s currency board guarantees full coverage for the issuance of banknotes, coins, and deposits - covering both government deposits and commercial bank reserves - strictly limiting reserve money issuance to the amount of foreign exchange reserves held. This system enforces a discipline on monetary policy far beyond merely fixing the exchange rate. Before the currency board, the Bulgarian National Bank (BNB) lacked independence, frequently refinancing commercial banks without oversight and directly financing the government’s budget deficit. The currency board eliminated these practices, granting autonomy to the BNB, prohibiting central bank loans to the government, and setting stringent criteria for commercial bank financing based on solvency and collateral quality.

Over nearly three decades, this monetary regime has proved among Bulgaria’s most effective economic policies, fostering confidence and stability even amid regional and global financial upheavals. Despite this, the lev’s peg to the euro has limited Bulgaria’s full access to the benefits of the single European currency, as it remains outside the eurozone.

As Bulgaria prepares to adopt the euro at the start of 2026, the country stands at a crossroads. Transitioning to the euro will open new avenues for investment, economic integration, and growth within the European Union, but also requires adjustments in fiscal policies and economic governance to meet eurozone criteria. This step is expected to reduce currency risk, lower transaction costs, and strengthen Bulgaria’s position in international markets.

While the currency board has served Bulgaria well, the upcoming adoption of the euro marks a new chapter - one that promises both opportunities and challenges. Economists suggest that joining the eurozone could enhance economic resilience and investor confidence but will demand vigilant fiscal management and reforms to maintain competitiveness.

Ultimately, the end of the currency board era symbolizes Bulgaria’s evolution from a post-communist transition economy to a fully integrated member of the European monetary system, closing a significant chapter in the country’s economic journey.