Inflation ‘biggest test’ for Sofia

Bulgaria’s central bank chief said yesterday that meeting an inflation test will be the country’s biggest challenge in joining the euro, and criticized an EU assessment which rejected Lithuania’s entry bid as very bureaucratic. Bank Governor Ivan Iskrov also reiterated that Bulgaria aims to join the ERM-2 currency mechanism, a testing ground for euro hopefuls, shortly after its planned European Union entry in 2007 and possibly in the first quarter of next year. Bulgaria, which operates a currency board regime pegging the lev to the euro, meets all eurozone entry criteria except on inflation which stood at 8.2 percent yearly in June. «Operating under a currency board arrangement, the central bank has no direct control of inflation rates in the country. Practically, this particular criterion will be the biggest challenge for us,» Iskrov said in remarks prepared for delivery to a conference in Athens. «Unfortunately Lithuania’s assessment published… in May this year suggested that the expected flexibility would not be demonstrated,» he said in the speech at the Greek central bank. «A very bureaucratic approach has been used, neglecting the fact that each economy is affected by a large number of internal and external influences.» Iskrov said Bulgaria had hoped the European Central Bank and the EU’s executive would use a more flexible approach. «Considering the strongly restrictive inflation criterion and the uncertainties about determining its level we expected that the ECB and the European Commission would show greater flexibility in assessing the compliance with this criterion,» he said. The European Commission and the ECB said Lithuania failed to meet the inflation limit, one of five economic tests for eurozone membership, after it missed the goal by 0.07 percentage points and had to delay its euro entry bid until 2008. This sparked an outcry among many euro candidates, who said the inflation benchmark was flawed and should either be changed or the ECB and the European Commission should allow more flexibility in its interpretation. To pass the price stability test a country has to have average annual inflation no higher than the average of the three EU members with the lowest inflation plus 1.5 percentage points. «With 25 (EU) member states it is very likely that we would have countries, the so-called ‘best performers’ with rates of inflation close to zero because of cyclic or other specific for those countries reasons,» Iskrov said. (Reuters)