ECONOMY

EU source says Bulgaria may join ERM-2 before summer

BRUSSELS – European Union newcomer Bulgaria might join the Exchange Rate Mechanism 2, the two-year currency stability test before an EU country adopts the euro, ahead of the summer, an EU source said. An EU member since January 1, Bulgaria has long said it wanted quickly to join the ERM-2 as a necessary step for adopting the single euro currency in 2010 as targeted by Sofia. Last week Bulgaria’s Deputy Finance Minister Georgi Kadiev said his country, the poorest of the 27-nation bloc, wanted to enter the ERM-2 between March and June. «There are contacts between Bulgaria and the (European) Commission regarding ERM-2 entry,» the source, who asked not to be identified, said. «A March entry date seems much too quick, but before the summer – it is possible.» EU members Estonia, Lithuania and Slovenia joined the ERM-2, which locks a currency exchange rate against the euro in a 15 percent band on either side of a parity rate, only two months after entering the EU. But preparations for their ERM-2 membership had began long before EU entry, the source said. If Bulgaria enters the ERM-2 in mid-year and its lev unit is stable in the band, it would clear in mid-2009 one of the hurdles to adopt the single currency now used by 13 countries. Inflation major hurdle But it would also need to bring down its average annual inflation, which last year was the highest in the EU at 7.3 percent. The euro-entry inflation ceiling in December was 2.9 percent. Sofia sees inflation falling to 3 percent in 2008. The source said that before the Bulgarian currency entered the ERM-2, the Commission and EU ministers first needed to examine the country’s stability and convergence program. That would happen over the next few months. Entering the ERM-2 follows negotiations between the EU, the country and the European Central Bank on the parity rate – the level at which its currency will be fixed to the euro. Bulgaria has a currency board pegging the lev to the euro and has declared it would not use the 15 percent band when its unit enters the ERM-2, but would keep the currency firmly fixed to the euro. Other euro-entry hurdles include having a budget deficit of below 3 percent of gross domestic product and debt below 60 percent – both easily met by Bulgaria, which runs one of Europe’s tightest fiscal policies. But a possible source of concern could be its large current-account deficit. Current-account balances are not a specific criterion for eurozone entry but are still scrutinized by the Commission when assessing a country’s euro readiness. Bulgaria, where the economy expands by around 6 percent annually, expects a current account gap of 14.1 percent for 2006 and forecasts the deficit will diminish only to around 12.4 percent in 2009. If it joins in mid-year, Bulgaria would become the eighth EU country in the ERM-2. The others are Estonia, Lithuania, Latvia, Cyprus, Malta, Slovakia and Denmark. Romania, which like Bulgaria joined the EU at the start of this year, is aiming for ERM-2 membership in 2012.