Bulgaria Seeks Political Backing to Lock It on Road to Euro

  • Finance minister sees benefits for all from EU expansion east
  • Goranov says 2017 GDP growth forecast may be raised to 3.9%

A decade after joining the European Union, Bulgaria is stepping up its lobbying efforts to switch to the euro, part of an expansion by the bloc that could help stabilize the volatile Balkan region.

The former communist country will ask euro-area politicians to back its bid to join the ERM-2 exchange-rate mechanism, the precursor to adopting the common currency, Finance Minister Vladislav Goranov said in an interview. EU enlargement into the western Balkans would benefit everyone by calming ethnic tensions and stemming westward migration, he said Monday.

“I trust euro-area expansion is also a political process,” Goranov, 40, said in his office in Sofia, the capital. “Europe must be bigger and more united to stay competitive, to overcome global challenges coming from Asia, Russia, Latin America. Integration should continue at a quick pace.”

The Black Sea nation of 7 million people is pushing its bid to bind itself to the euro region at a time when the wider EU is still reeling from shocks including the Greek debt crisis, a surge in refugees and, most recently, Brexit. Five of the currency union’s existing members are from the former Eastern Bloc. The Balkan region endured a spate of bloody conflicts following the breakup of Yugoslavia.

Bulgaria already meets the EU’s public-debt and fiscal requirements for joining ERM-2. Its currency, the lev, is pegged to the euro under a currency board system imposed 20 years ago in the wake of a banking crisis.

Living Standards

While the economy is expanding and the government may raise this year’s growth forecast to 3.9 percent from 3 percent, Goranov frets that living standards haven’t improved sufficiently to meet ERM-2 obligations.

Prime Minister Boyko Borissov’s third government in eight years took office this month, pledging to end political upheaval that’s brought a spate of elections and held back investment. His country, which relies on low taxes and cheap production costs to retain manufacturers, remains the bloc’s poorest.

The government hasn’t set a time frame for its ERM-2 application and “will apply when we know we’re ready and won’t be rejected,” said Goranov, who’s serving his second stint as finance minister under Borissov.

While a potential distraction for EU expansion, Brexit won’t affect Bulgaria’s trade much because bilateral volumes are low, according to Goranov. But he warns that subsidies will probably fall.

“It’s unlikely that net donors will raise their contribution to keep the level of subsidies to poorer countries unchanged,” he said. “Nevertheless, Bulgaria will insist on keeping the aid portfolio unchanged. The fewer economic disparities there are on the continent, the better for all.”

And Bulgaria is better equipped to deal with any funding issues. Goranov says fiscal reserves are ample, with no need to borrow abroad this year and probably in 2018. A plan to raise pensions and wages won’t burden the budget because revenue collection can be improved and the deficit narrowed, while the banking system has recovered from a crisis in 2014, he said.

“I expect banks to be more active,” Goranov said. “There’s potential for credit growth, but it should be linked with growth of economic activity and entrepreneurship. It shouldn’t be cause for a real-estate bubble.”

The yield on Bulgaria’s euro-denominated bonds due 2024 fell 4 basis points to an all-time low of 1.356 percent at 5:15 p.m. in Sofia, data compiled by Bloomberg showed.

    Before it's here, it's on the Bloomberg Terminal.