This summer brought news out of Bulgaria that is relevant not just to the Balkan state, but to every European Union member that has not negotiated a permanent opt-out from the euro. Talks about Bulgaria joining the euro area ended with the country ‘voluntarily’ accepting, at least on paper, a humiliating list of conditions that would see it, and other prospective euro adopters, assume a large proportion of costs for the single currency before knowing when or even whether it will be accepted into the bloc. No government with any shred of dignity could accept the terms.
Since 1997 the Bulgarian lev has been fixed – first to the Deutsche mark and then to the euro – under a currency board arrangement. This means Bulgaria does not have a sovereign monetary policy but passively accepts Frankfurt’s monetary stance. Consequently, it has neither monetary autonomy nor a seat at the table where monetary policy decisions are made. The same was true of Estonia and Lithuania before they adopted the euro in 2011 and 2015, respectively.
On paper, there is nothing to stop Bulgaria from joining the euro area. Unlike many current members, Bulgaria is comfortably compliant with the key Maastricht criteria on government finance and interest rates. There remains a formal requirement of a stay in the exchange rate mechanism (ERM II) to demonstrate the stability of its currency against the euro for at least two years. That will not be an issue for a country whose currency has been completely fixed against the euro since the latter came into being.
Bulgaria’s problem is that many technocrats and policy-makers simply do not want it in the euro area, at least not for the foreseeable future. However, since Bulgaria is compliant with the Maastricht criteria, new conditions must be concocted. This is where ERM II comes in: to participate, the country needs the consent of the European Central Bank and the euro area members plus Denmark (the only non-euro area country in ERM II despite, paradoxically, having an opt-out). Therefore, Bulgaria has long been told, unofficially, that it should not even try to enter this euro anteroom.
But then came 2018 and, with it, Bulgaria’s first presidency of the Council of the EU. Moreover, Commission President Jean-Claude Juncker began to say publicly that the euro is meant to be the currency of the EU as a whole. With this in mind, and to great fanfare, Bulgaria declared its intention to enter ERM II this year.
However, subsequent talks concluded with a degrading and unprecedented list of requirements that Bulgaria must ‘voluntarily’ meet to participate in ERM II only in 2019. The country pledged to give up supervision of key banks and join the banking union, to pay into the European Stability Mechanism, and to allow the ECB to perform a thorough assessment and audit of its financial sector. That Bulgaria was forced to make these commitments as a condition for joining ERM II also enabled its opponents to find more reasons for the future for why the country is still not ready for full euro area membership.
What is most intriguing for non-members of the euro area and non-members of ERM II (such as the Czech Republic, Poland, Sweden, Romania and others) is the sentence at the end of the statement issued by the euro area finance ministers on 12 July. In the interests of ‘equal treatment’, the ministers expect any country wishing to participate in ERM II to voluntarily take on the same commitments as were issued to Bulgaria. Bulgaria’s years-long push to adopt the euro therefore means all other candidate countries will have to relinquish supervision of banks and cover the ESM’s costs many years before potentially joining the euro area proper.
From the perspective of a country like the Czech Republic, the consequence of Bulgaria’s experience is that it is hard to imagine any government with reasonable self-regard even considering embarking on the path towards the euro. The costs were already high, but after this summer they are practically prohibitive.
Mojmír Hampl is Vice-Governor of the Czech National Bank and Member of the European Union’s Economic and Financial Committee.