Photographer: Chris Ratcliffe

Wealth Chasm Is Toughest Obstacle for Latest Euro Hopeful

Bulgaria ticks all the EU’s boxes to eventually swap the lev for the common currency, but its status as the bloc's poorest nation could hold it back

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The latest country eyeing a switch to the euro has a cast-iron case for joining the currency club. Well, almost.

Bulgaria wants to enter the ERM-2 exchange-rate mechanism, the precursor to adopting the euro, and ticks all of the European Union’s boxes to eventually swap the lev for the common currency. Prime Minister Boyko Borissov even won influential support from German Chancellor Angela Merkel and French President Emmanuel Macron during a lobbying tour of Europe this month.

There’s just one hitch. A decade after becoming an EU member, it’s still its poorest nation, with output per capita less than half the bloc’s average. And while that's not an official condition for pushing ahead with adoption, officials do also look at the wealth gap when assessing the viability of welcoming another economy to the fold.

Some poorer countries, such as Greece and Spain, lost competitiveness after joining the euro and struggled to restore it without their own currencies in the wake of the 2008 crash. Eastern European nations including Poland and the Czech Republic, which held onto the zloty and the koruna, fared better post-crisis.

“Bulgaria’s low income levels are probably the key barrier,” said Liam Carson, an analyst covering emerging Europe at Capital Economics Ltd. in London. “Aside from this, the economics suggests that Bulgaria could be a relatively strong candidate to enter.”

Targeting a more prominent role in EU decision-making, Borissov has made joining the euro a priority and may capitalize on renewed enthusiasm for European integration since Macron’s election triumph. His Black Sea nation meets the EU’s convergence criteria, boasting the group’s third-lowest government debt, a small budget deficit, manageable inflation and a currency that’s been pegged to the euro for two decades. It has $26.7 billion of foreign reserves.

While it does still lag behind richer peers, purchasing power is growing. Last year’s 5.1 percent jump in retail spending will probably be repeated in 2017, market-research firm GfK predicts.

But the catch-up could take time. While most countries expect to spend a couple of years in the euro waiting room, there’s no limit on how long they can linger. After starting preparations to join the single currency in 1999, Danish voters rejected it the following year. The government has been content to remain in ERM-2 ever since. 

“Look at Denmark,” said Ciprian Dascalu, chief economist at ING Bank NV in Bucharest. “Bulgaria can stay much longer than the normal two years.”

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