1. Implications of EU accession for Bulgarian Economy and perspectives for Korea-Bulgaria economic cooperation Sofia, UWDE, 3 May, 2007 Bulgaria's Monetary Policy Dilemmas and Challenges Following the EU-Accession Ivanka Petkova, PhD Economic Policy Institute

2. 1. EMU-Membership Frame

3. 1. 1 EMU-Membership Frame (Bulgaria and Romania) Bulgaria (and Romania): obligation to adopt the Euro; no opting-out, no requirement on the concrete schedule Pre-requisites: meeting the Maastricht convergence criteria, stay of minimum two years in ERM2, agreement on an entry exchange rate level

4. 1. 1 EMU-Membership Frame (Bulgaria and Romania) Entering EU simultaneously, but different starting points to join the EMU BulgariaRomania Bulgaria (CBA), Estonia (CBA), Lithuania (CBA), Latvia (peg basket) Hungary (a wide band to the Euro, IT), Czech Republic, Slovakia (managed float, IT), Poland (float, IT)

5. 1. 1 EMU-Membership Frame (Bulgaria and Romania) different monetary policies and prospects for EMU-membership: Bulgaria: ERM2 Mechanism: to be used to fully prepare to Euro-adoption Bulgaria: is meeting the Maastricht criteria, except of the inflation criteria

6. Bulgaria and Romania (cont.)

9. 1. 2. Bulgaria‘s Room of Maneuver Inflation criterion Price competitiveness Budget criterion The challenge of co-financing of EU-transfers How long in the ERM2 Fixing the central parity ( albeit a 15% oscillation band is allowed on each side)

10. Real Effective Exchange Rate Dynamics

11. 2. Bulgaria’s Major Dilemmas and Challenges

12. 2.1 The Choice between Growth and Monetary and Financial Stability Growth, competitiveness and/or imposed monetary stability; Experience of the current EMU-members

13. 2.2 Vulnerability of Exports

14. 2.3 Financing of Trade Deficit and CAD;

15. 2.4 Role of FDI

16. 2.4 Role of FDI (cont.) New priorities of attracting FDI under the conditions of EU-membership

17. Conclusion Growth, competitiveness and monetary policy constrained by the convergence criteria During the ERM2 period : non-existent capital controls; limited ER flexibility IR higher than in the Eurozone

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