Bulgaria's government has the political will to complete its plan to adopt the euro, Prime Minister Boyko Borissov stated confidently in late January. Judging by his tone, chances are high that later this year the country will enter the exchange rate mechanism ERM II - the preparatory phase for joining the euro area.
As a prerequisite, six banks in Bulgaria are undertaking an asset quality review and a stress test conducted by the European Central Bank (ECB) in order to establish close cooperation on banking supervision with the regulator and join the EU's Banking Union. Results are due to come in July but so far the signs from abroad are encouraging - the European Commission has said that everything is going "according to plan". Even the German media, which traditionally have a very sceptical take on new euro area entries, have recently gone quiet regarding Bulgaria.
Not so fast
Even though optimism has been reinvigorated, a happy ending is still not guaranteed. Bulgaria is the first country applying to join the euro area that is required to first enter the Banking Union, so it is difficult to say how the process will unfold.
The ECB is currently conducting an assessment of the top three banks by assets in Bulgaria - UniCredit Bulbank, part of Italy's UniCredit Group, DSK Bank of Hungary's OTP Group and United Bulgarian Bank owned by Belgium's KBC, plus the three biggest domestically-owned lenders - First Investment Bank (Fibank), Central Cooperative Bank and Investbank. The assessment is expected to shed more light not only on the most significant institutions but also on those most suspected of hiding skeletons in the closet.
In addition, Bulgaria's government and central bank have committed to implement reforms in several areas in the financial sector. For example, Bulgaria has promised to further develop the macroprudential framework - to set more regulatory measures covering the whole financial system rather than separate institutions.
Another example is Sofia's promise to improve the management of state-owned enterprises regularly reporting losses that are covered by all taxpayers. The most obvious example of such loss-makers are companies in the energy sector. Currently, a team of the Organization for Economic Cooperation and Development (another club Bulgaria is taking steps to join) is reviewing their activities.
Progress on delivering on these commitments will be a factor when deciding the country's future accession to ERM II.
The year of the euro
According to European Commissioner in charge of the euro and social dialogue Valdis Dombrovskis, if everything goes according to plan, Sofia can expect a decision regarding accession to the euro area in the third quarter of the year. This would be within the mandate of the current members of the European Commission, which is an important detail given their support for Bulgaria's bid.
Theoretically, if the Bulgarian lev joins ERM II this year, it could be replaced by the euro on 1 January 2023 at the earliest. However, taking into account other countries' experience in moving from ERM II to the euro area, the stay in the "euro's waiting room" could be a lot longer. For example, Latvia had to wait a decade, with the global financial crisis being a big factor.
Overall, the preparations for entry into the euro area and the Banking Union may prove more beneficial than the accession itself. The related requirements to improve governance and regulations would create a better business environment in general.
Bulgaria's government has the political will to complete its plan to adopt the euro, Prime Minister Boyko Borissov stated confidently in late January. Judging by his tone, chances are high that later this year the country will enter the exchange rate mechanism ERM II - the preparatory phase for joining the euro area.
As a prerequisite, six banks in Bulgaria are undertaking an asset quality review and a stress test conducted by the European Central Bank (ECB) in order to establish close cooperation on banking supervision with the regulator and join the EU's Banking Union. Results are due to come in July but so far the signs from abroad are encouraging - the European Commission has said that everything is going "according to plan". Even the German media, which traditionally have a very sceptical take on new euro area entries, have recently gone quiet regarding Bulgaria.
