The expectations that Bulgaria will be welcomed with open arms into the eurozone, which needs to affirm its attractiveness to new members after the last nine crisis-ridden years, might turn unfounded.
Bulgaria's path towards the eurozone will become clearer at the beginning of April. A KQ source in the Bulgarian government has confirmed that the authorities expect to receive a roadmap from the European Central Bank (ECB) that will prescribe in more detail what Sofia needs to do in order to gain access to the Exchange Rate Mechanism 2 (ERM 2), the so-called training grounds of the eurozone.
The roadmap, however, will be provided only a month before the publishing of the biannual ECB and European Commission assessment on the readiness of the aspiring countries in May. This is a very short period for the Bulgarian authorities to show some progress on the recommendations and influence the ECB's assessment.
A new push from Bulgaria
Eurozone membership is regarded in Bulgaria as a seal of approval for Bulgaria's macroeconomic performance, but most importantly, for the quality of the country's institutions. Bulgaria probed the ground for a eurozone entry in 2009 but the effort was put on hold as the global economic crisis struck.
The present government hasn't hidden its hope that the ongoing Bulgarian presidency of the Council of the EU will help promote Sofia's case. The Minister of Finance, Vladislav Goranov, said in January that the government plans to apply in June for entry into the ERM 2.
Bulgarian government efforts were supported by the European Commission and its president, Jean-Claude Juncker, who said in November previous year: "Bulgaria is ready for the euro and if it applies, I will fully support it." French president Emmanuel Macron, whose country is a key member of the eurozone, also voiced his support for Bulgaria's entry.
Bulgaria broadly fulfills the convergence criteria: long-term inflation rate and interest rate converging with the eurozone average, low level of public debt and budget deficit, which gives the government munitions to lobby hard the EU institutions and member states.
The improvements in the macro-economic situation of Bulgaria also boost Sofia's bid to enter the ERM 2. In its last economic assessment, published in March, the European Commission removed Bulgaria from the groups of countries with excessive macro-economic disbalances.
Over the past month, however, the previous enthusiasm of several government ministers has turned into a deafening silence.
A meeting on Latvia, instead on Bulgaria
The change in the mood is probably a result of the European Central Bank less-than-positive reaction. The Bulgarian case was discussed in the governing council of the Frankfurt-based institution in early February. A spokesperson for ECB refused to comment for KQ on the agenda of the meeting, but several sources say Bulgaria was on the discussion table.
In theory, the ECB has no formal right to block a possible Bulgarian application for the ERM 2. It is the European Commission that recommends whether or not to accept a new member state. However, the ECB will need to start the negotiations at the technical level, a procedure used by the central bank to stave off applicants.
Unfortunately for Bulgaria, the February meeting of the ECB governing council coincided with the decision to shut down Latvia's ABLV Bank accused of massive money laundering activities.
Even though the case has nothing to do with Bulgaria, it evoked memories of the country's 2014 banking crisis when the fourth biggest lender, Corporate Commercial Bank (Corpbank) went bankrupt. As in Latvia, the demise of Corpbank was a result of weak oversight by the national central bank.
In Latvia, central bank governor Ilmars Rimsevics faces criminal charges. In Bulgaria, central bank chief Ivan Iskrov resigned shortly before his term ended in 2015, while his deputy Tzvetan Gunev is under investigation for criminal negligence.
In February, following the ECB meeting, Bloomberg quoted two anonymous officials familiar with the discussions as saying Bulgarian banks are the key weakness in its prospective bid to join the euro.
In 2016, Bulgaria's central bank carried out stress tests of the country's banking system that consists of 22 banks and five branches of foreign lenders and concluded that it is stable. Nevertheless, both the European Commission and the International Monetary Fund concluded that two banks, including the third-largest lender, First Investment Bank, needed to replenish capital buffers. At the same time Bulgari's bankin system still leads in terms of non-performing loans ratio among the EU member states.
The institutions, stupid
"There's no connection between the events in Latvia and Bulgaria's ERM application," the Bulgarian central bank wrote in an e-mail in response to a request for comment from Bloomberg in February.
The quality of the institutions has always been the main impediment to Bulgaria's entry into the ERM 2. In May 2017 ECB executive board member Peter Praet said during a conference in Sofia that Bulgaria's formal compliance with convergence criteria "looks quite good," though "we've been insisting in all analyses very much about institutional capacity, institutional building."
Another close watcher, Guntram Wolf, director of Brussels-based think-tank Bruegel, also stressed the institutional quality: "Many remember that Greece displayed discipline and good behavior. After entering the eurozone, political discipline disappeared, and borrowing rose sharply. The most important thing for Bulgaria is to prove that the political discipline and the solid fiscal policy that it is currently demonstrating will continue in the future."
The much more hawkish stance of the German press is a clear indicator that Bulgaria has not won over the public opinion of the eurozone's leader. For example, in anticipation of the discussions on Bulgaria at ECB, the influential Frankfurter Allgemeine Zeitung published an opinion piece, in which it warned against Bulgaria's entry into the eurozone and accused the European Commission president Jean-Claude Juncker of running his own agenda, which is not in line with the interests of the member states.
The receiving of the roadmap will most probably be presented as a success of the Bulgarian government. On the one hand it is, because until recently the ECB refused to say what the benchmarks to assess Bulgaria's readiness are, apart from the formal convergence criteria. On the other, however, it will postpone again Bulgaria's application to enter the ERM 2.