Event

Eurozone finance ministers have endorsed Bulgaria’s request to join the Eurozone’s banking union and agreed on a planning of the required further steps to eventually become a new member of the Eurozone. Sofia intends to join the banking union and ERM-2 exchange rate system (the lev is currently pegged to the euro) by July 2019. The ECB is expected to make an assessment one year later.

Impact on country risk

This is good news for Sofia which had been hoping for this approval after Bulgaria’s first EU presidency that has just ended in June. Indeed, Bulgaria comfortably meets the Maastricht criteria (sane public finances, low inflation, etc.) and wants to move forward in the process of adopting the euro. Looking ahead, however, the euro membership timeline is still uncertain. The membership will not come about before 2022 as every country stays within the ERM-2 mechanism for at least two years. Furthermore, it will also depend on Bulgaria’s performances within the banking union and ERM-2 system. Sofia is required to build up a sounder banking sector after it suffered from past weaknesses and troubles. Another political obstacle in the eyes of current Eurozone members remains the high level of corruption in Bulgaria which does not push them to favour a hasty euro membership. Bulgaria has thus made a first step towards the euro but the process of joining it promises to be longer than for previous new members. The Greek experience, Latvia’s latest banking crisis and the wave of populism and Eurosceptic feelings within the EU explain the lack of enthusiasm and stricter entry conditions.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com