Economic and Political Challenges of Acceding to the Euro area BULGARIA Georgi Angelov, OSI-Sofia

1990s: Dollar rules  Currency structure of export, 1999  Unofficial dollarization of economy, especially

Currency board: Choice of currency  USD or DM?  Strategic decision – Deutschemark (to be changed to Euro when introduced) ‏  willingness of Bulgaria to enter and integrate with the EU and Euroarea (as early as 1997) ‏

Currency board  currency board - step toward entry in the euro area  the entry into the euro area - the only exit strategy from the currency board

Negotiations with the EU Chapter 11 “Economic and Monetary Union”  membership in the EMU as early as possible  Priority of the government

Negotiations with the EU Agreement between the Council of Ministers and the Bulgarian National Bank on the introduction of the Euro in the Republic of Bulgaria, 25 November 2004  “strategy for the fastest possible accession”  Maintain balanced budget

Budget Balance, % of GDP More than balanced budget

Government Debt, % of GDP Well within criteria for years

Long-term interest rates  Most Maastricht criteria fulfilled even before ERMII

Euro preference Share of Euro deposits in banks increasing

Inflation  Inflation since 2007

Budget balance 2009, by month

ECB fears  ECB was worried because of the current account deficit and inflation in Bulgaria  Risk of adjustment  Unofficial criteria for ERMII?  Bulgaria – not in ERMII

Current Account, by month  ECB fears rejected by reality

Official Reserves  Bulgaria survived the financial crisis  No support from ECB, Federal Reserve – unlike West Europe

Why Bulgaria should be allowed to enter ERMII?  Bulgaria survived with no external help – no risk for Eurozone  ECB warries proven imaginary  Bulgaria fulfils criteria even before ERMII entry

The only country Frankfurter Allgemeine Zeitung,  EC: In 2010 only one country in EU will fulfill the Stability and Growth Pact requirements. Bulgaria.

If delayed?  Violation of treaty  In 10 years the willingness to enter Euro may disapper (new Sweden, UK?) ‏  People will not like to abandon lev  Unilateral euroization?

Options  Big bang enlargement of Eurozone  Free ERMII entry and reform in criteria (inflation) ‏  Unilateral Euroization  Stay out