Bulgaria’s Euro Accession Dream Stumbles as Virus Spreads

(Bloomberg) -- Bulgaria’s plan to join the euro area hit a road block, with the central bank saying the coronavirus crisis had rendered targets to integrate deeper this year “unrealistic.”

It’s the latest setback in efforts of the bloc’s poorest member to join both the ERM-2, known as the waiting room for the euro area, and the euro-area’s banking union by July.

It also underscores the challenges facing both poorer EU members that are trying to deepen their integration with the West and richer countries struggling to reform the world’s largest trading bloc amid almost non-stop economic and political turmoil.

“A delay to 2021 won’t be fatal,” central bank Governor Dimitar Radev told the private Nova TV channel on Monday.

Prime Minister Boyko Borissov’s government has pursued euro entry since 2016 to boost living standards in a country where output per capita is at about half of the European Union average. Despite concerns by richer countries that letting less-developed peers join may weaken the currency alliance, Bulgaria has run balanced budgets for years and has one of the lowest debt piles.

Another country vying to join is Croatia. The official overseeing euro-adoption plans, Zvonimir Savic, said that Zagreb is still aiming to fulfill its ERM-2 obligations by May as planned, but the virus was posing a challenge.

“We are working to fulfill our plans and meet the deadline,” he said by phone. “But this new situation could make their timely completion more difficult.”

Bulgaria’s banks have undergone assessments by the European Central Bank, and two are working to fulfill gaps in capital. That progress now faces a challenge as the EU prepares for a recession triggered by the virus.

“This doesn’t mean that the work in this direction should stop,” Radev said, adding that remaining outside the euro area limits Bulgaria’s options to react to the crisis. “We’ll probably feel this stronger as the crisis unfolds, but also afterward, when the consequences have to be overcome.”

Bulgaria has operated a currency board with a lev-euro peg since the end of a banking and hyperinflation crisis in 1997, limiting its options for monetary response. The central bank urged financial institutions last week to capitalize all of last year’s profits and to reduce their foreign exposure. It will create a framework to let them delay loan payments, Radev said.

The government will propose a budget revision this week to allow for the state to borrow “billions,” up from a previous cap of 2.2 billion lev ($1.25 billion), Finance Minister Vladislav Goranov said late Sunday. It plans to pay employers 60% of the wages of workers that would otherwise be dismissed, a measure estimated to cost 1 billion lev. The Finance Ministry didn’t answer emailed questions by Bloomberg.

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