The accession of Bulgaria into the ERM II has been pushed back in time, despite the fact that the Government announced it as a first-rate priority. Signals from European institutions indicate continuation of the policy of delay.

The financial problems of Greece have been used as an excuse for perpetual postponement. These are not novelties, as in 2007 Bulgaria’s accession was delayed again, this time with arguments related to the emerging sub-prime mortgage crisis.

Immediately after coming to power at the end of July 2009, the Bulgarian Government announced that entering the Exchange Rate Mechanism II (ERM II) was a major priority. As a part of the accession procedure to the euro zone, the ERM II is mandatory for every candidate for the euro adoption.

Each candidate country should spend at least two years in the ERM II to prove that it meets the criteria for membership in the euro zone – the so-called Maastricht criteria.

The initial goal of the Government was to submit its application documents for membership in the ERM II in November 2009. This did not happen and the motion was postponed.

The explanation provided by Deputy Prime Minister Simeon Dyankov was that Brussels requested to see first the regular convergence programme of Bulgaria before contemplating the country’s application for entering the ERM II. Binding the ERM II to the regular convergence programme was most probably a bureaucratic move to delay the process.

After the convergence programme was submitted at the end of January 2010, it needs to make its way through European bureaucratic procedures. The programme may get delays but most probably it would be approved in a few months time, which would open the door to the ERM II. Unofficially, however, there have been hints about a new postponement. Prime Minister Boiko Borissov said in mid-February 2010 that the euro zone remains goal number one, but it will not be reached for the next two to three years – because the EU is distraught by Greece’s problems.

This comes despite the fact that the Prime Minister did not mention anything about potential delay in the ERM II; it seems that the signals from the EU suggest that this was the case. The problems of Greece are used as an excuse.

Greece has serious fiscal problems (it is not a coincidence that the words "Greece" and "default" are increasingly often used together in one phrase).
Greece is a member of the euro zone - hence the euro zone has a serious problem. And as long as the euro zone has internal problems like the one in Greece or similar countries, it does not want to commit to further enlargement. This is the standard argument.

But the situation is much more complex than that. Greece has not kept fiscal discipline for years, has piled up a huge public debt and has an exceptionally high budget deficit. At the same time, Bulgaria, for more than a decade, has had a prudent fiscal policy; its public debt is among the lowest in the EU; it has had budget surpluses for years and even in the crisis has managed to keep its budget deficit low.

Greece is the bad example in the EU in relation to fiscal policy – Bulgaria is the good one (together with Estonia). To help Greece while punishing Bulgaria would amount to stimulating imprudent policies and punishing prudent ones. To punish Bulgaria because of the problems of Greece,  and to help Greece despite its imprudence, breaches the principles of common sense as well as the principles of the EU. What is more – Greece was admitted to the euro zone without even meeting the Maastricht criteria (the public debt of Greece was and continues to be much higher than the required limit).

Bulgaria – together with Estonia - are opposite cases. They are the only countries in the EU, which meet the requirements of the Growth and Stability Pact and despite that they are not euro zone members. Bulgaria is not even admitted to the doorway of the euro zone – the ERM II.

The current situation of postponing the entry of Bulgaria into the ERM II is, in a sense, a continuation of similar developments at the end of 2007 and the beginning of 2008. Bulgaria at the time had almost entered the ERM II, but the European Central Bank brought to a halt the process, arguing that high inflation and the high current account deficit make the country risky.

Time proved the ECB arguments wrong – in contrast to other countries in the region, Bulgaria has passed the deep financial crisis of 2008 and 2009 without the need of external help – by the IMF or other institutions. The current account deficit and inflation decreased in a normal manner, without putting at risk economic stability.

Options for Bulgaria
Bulgaria faces two scenarios now. The first option is to announce a firm intention to submit application for entering the ERM II. Deputy Prime Minister Dyankov announced at the beginning of March 2010 that Bulgaria will submit documents for entering the ERM II in June 2010. This behaviour may be strengthened to a great extent by the expected entry of Estonia in the euro zone in the next few months.

If Estonia is accepted in the euro zone then it will be very difficult to deny entry of Bulgaria to the ERM II – as economically and fiscally the country looks better than Estonia (the budget deficit of Bulgaria is the lowest in the EU, the economic slump is among the least severe in the region).

Postponing the entry of Bulgaria into the ERM II in 2007 and 2009 actually adds to the arguments of Bulgaria. Time has proven that Bulgaria can cope without external aid and keep financial discipline in good years as well as in the deep financial and economic crisis. The arguments that Bulgaria should stay outside because its membership in the euro zone would increase the risk sound increasingly ungrounded. Even the problems of Greece enhance Bulgaria’s position as it becomes clearer that Bulgaria is different from its neighbours and that the prudent policy of Bulgaria stands out against the backdrop of Greece or Romania.

In 2008, Bulgaria could have delayed the ratification of the Lisbon Treaty until the country had joined the ERM II. The government at the time did not dare to confront the EU in the belief that if they demonstrate good will and ratify the Lisbon Treaty (which no one in Bulgaria actually has read) it would receive the desired membership. Just the opposite happened when, after the ratification of the Lisbon Treaty, Bulgaria’s entry into the ERM II was frozen. The current Bulgarian Government would hardly make the same mistake.

The other option is a new postponement. This option is not excluded, bearing in mind in particular the words of Prime Minister Borissov that the big countries are not exactly prone to enlargement of the euro zone at the time of the Greek crisis. On the other hand, the postponement cannot last much longer – because entry into the ERM II is a major priority of the Government and an endless delay will have a negative effect as on the Government as a whole but it will affect even more its reform wing, which is engaged in accession to the ERM II.

The best option for Bulgaria is to prevent more delays and get a clear deadline for entering the ERM II in the framework of the next six months. If this does not happen, it is highly probable that the position will harden. If a possible membership application to the ERM II is to be rejected, it will likely not harm the country that much.

What can the EU do?
The European Union can insist on a new delay of entry of Bulgaria in the ERM II or reject the application, in case Bulgaria submits documents anyway. This will not bring benefits to either the EU or Bulgaria. Supporting Greece and neglecting Bulgaria can have negative effects on the support for reforms in Bulgaria and other countries. If those keeping fiscal discipline are punished and those who are imprudent, like Greece, are supported then the stimuli for keeping fiscal discipline will be diminished.

There is also the issue over the future for the euro zone if it continues to support those who do not abide by the rules and punishes the prudent.

On the other hand, the entry of Bulgaria in the ERM II will provide a clear answer that prudence is rewarded in the EU. In addition to that, the binding of entry into the ERM II and the euro zone with concrete reforms (business environment, pension system and the institutions) could assist the development of Bulgaria, especially if these reforms are rewarded with faster accession to the euro zone. The aspiration of Bulgaria to enter the euro zone is the most effective leverage of the EU for influencing the country and encouraging reforms.

The loss of this mechanism by endlessly postponing the ERM II enlargement will not help the EU in any way but rather create euroscepticism among Bulgarian citizens. If that happens, Bulgaria may never become a member of the euro zone.


This policy brief series is a product of the European Policies Initiative (EuPI) within the project "Euro Monitor – Monitoring the process of accession of the EU member from Central and Eastern Europe to the euro zone".
The views expressed herein are those of the author(s) and do not necessarily reflect the position of the Open Society Institute – Sofia. Georgi Angelov is senior economist with the Open Society Institute – Sofia.