Adopting the Euro, pros and cons- the Bulgarian perspective

Since Bulgarias accession to the European Union in January 2007, the subsequent top priorities of the country have been ad ission to the Euro !one and to the European "onetary Union# $n order the European Union to open its doors for Bulgaria the country has to eet a nu ber of require ents# %he consequences of &oining the European "onetary Board 'E"U( )ould have both positive and negative effects on the Bulgarian econo y as a )hole# %he evaluation criteria for entrance of ne) countries beca e a lot stricter since the crisis in *reece, $reland and +ortugal# "ore precisely the econo ic crisis and recession disclosed the vulnerabilities of the )ea,est Euro countries )hich lead to Euro-one ore alertness fro current e bers concerning future enlarge ents# 'Sa,ali, 20.., p#/(# Using recent studies,

this paper ai s to e0a ine the benefits and dra)bac,s of &oining the E"U# $n order to evaluate ho) desirable the adoption of the Euro currency is the central research question to be addressed in this paper is to )hat e0tent the benefits of &oining E"U out)eigh the dra)bac,s# 1urrently Bulgaria is aintaining a currency board regi e )hich is pegged to the euro# %he adoption of the currency board regi e sho)s Bulgarias deter ination, a political decision, )hich )as ta,en )ith the idea of achieving the countrys long2ter strategic goal of accession into the European Union 'EU( and consequently later into the Econo ic and "onetary Union 'Sa,ali, 20.., p#/(# 3t the o ent the e0change rate ' )hich in this paper is defined as do estic per foreign currency( is .#45 leva to . euro# %he aintenance of the fi0ed e0change rate has been achieved through the buying and selling of foreign currency reserves by an independent authority )ithin the 1entral Ban,# 3ccording to the "aastricht %reaty the convergence criteria that Bulgaria has to are6 .# $nflation rates should be no perfor ing e ber states# ore than .#5 percentage points than the three best eet

2# %he govern ent deficit to *7+ ratio should not e0ceed /8 /# *ross govern ent debt to *7+ ratio should not e0ceed 908

:# 3pplicants should have &oined the E0change2rate European onetary syste currency during the period# 5# %he no inal long2ter interest rate ust not be

echanis

'E;"$$( under the

for t)o consecutive years and should not have devalued its ore than 2 percentage points higher e ber countries '<ipins,a, 200=,

than in the three lo)est inflation pp# 2222=(#

e ber states#

%he idea of this criteria is to ensure price stability for ne)

$n accordance to the "aastricht criteria, the inflation rate of the country should be ,ept lo)er than their current level# %he )ith the onetary union is based on the so called >convergence2 achieving si ilarities bet)een econo ies in )hich the )ea,er econo ies should catch up ore successful ones# Unfortunately, in Bulgaria prices and inco e are a lot lo)er o ent, Bulgaria is at :08 of the uch by tradable goods, than odel# %he odel than in the best perfor ing countries# %his infers that it )ould ta,e not years, but decades to aintain the average inco e as in E"U countries# 3t the ean inco e in EU# %he price inflation )ould be felt not that

by the non2tradable# %he non2tradable goods are about 508 lo)er than in Euro !one '<a bov, 20.0, pp# 527(# %his is in agree ent )ith the Balassa2Sa uelson clai s that )hen productivity for tradables is higher in richer countries, this leads to a higher aggregate price levels in rich countries than in poor ones '+ilbea , 2009, pp#.:.2.:/(# ?evertheless, financial stability is quite i portant for Bulgaria, having in hyperinflation in the end of .449# Entering the "onetary Union )ill a,e Bulgaria ore secure and less ris,y for outer )orld# <ocal ban,s, fir s and the country itself )ould be able to acquire cheaper credits fro foreign countries# @oreign investors )ould have investing their ore trust in the country, )hen considering oney in Bulgaria# Stability and lo) ris, )ould eventually lead to lo)er ind the shoc, of

interest rates# %he day the currency changes to euros, every deposit )ould be converted into euros# %herefore the interest rates should decrease to the appropriate level for loans and deposits in euro# %his )ould be beneficial for the debt2holders and the future loan2see,ers, as this )ould decrease the real value of the debt 'Aostov, 2007, pp# ./2.:(# @urther ore, abandoning the lev, )ould eli inate costs for currency conversion in the Euro -one# %his )ould encourage not only perfect capital European countries# Since Bulgaria has adopted a currency board regi e, the country is already pegged to the Euro and it )ould not have to get used to the lac, of her o)n onetary policy2 countries in the Euro !one follo) the E1B policy# %his has its dra)bac,s as )ell# 3s in the last thirteen obility, but also boost the trade of goods bet)een

years Bulgaria )ill not be able to depreciate its currency, in order to

a,e its e0ports

ore

attractive# %hus it )ould not be able to i prove the situation )ith its current account' 1urrent account B E0ports2 $ ports(# @urther ore, )hen Bulgaria adopts the euro and disposes the currency board regi e, the country )ould not have to aintain a ulti2billion currency reserve# %he Bulgarian ?ational Ban, )ould ,eep and continue to invest a big part of the current currency reserve but the govern ent savings 'around 72= billions( could be used for different purposes# Econo ists clai refor %o su ari-e our findings, that these oney could help for i proving the pension or lo)ering the foreign debt 'Arastev, 2004, pp#./2.4(# eeting the require ents for accession to the E"U and ain

after)ards adopting the euro have their benefits, as )ell as dra)bac,s# So e of the

advantages include lo)ering interest rates, achieving price stability, stable inflation rates and financial security# @urther ore, it )ill boost invest ent2both do estic and foreign, )hich )ill sti ulate the econo y# %his is a crucial aspect considering the current global econo ic crisis# Cn the other hand, because of having a fi0ed e0change rate, Bulgaria abandons the option of influencing output )ith onetary policy# "oreover, the country )ould not be able ain dra)bac,s ost of the citi-ens, to i prove the current account by a devaluation of the currency# Cne of the is the shoc, inflation that )ould occur, )hich )ould be har ful to having in

ind the lo)er inco e and *7+ per capita# $n conclusion, Bulgarias accession to

the Euro !one and European "onetary Union is desirable, but after a certain a ount of ti e, )hen the country has achieved greater stability in ter s of *7+ and inco e# #

Bibliography Sa,ali, 1#, '20..(, >%he challenges of E"U integration under the *lobal econo ic crisis6 the case of Bulgaria <ipins,a, 3#, '200=(, %he "aastricht convergence criteria and opti al onetary policy for the D"U accession countries, Working paper series, No 896 +ilbea , A#, '2009(, $nternational @inance, +algrave "ac illan, pp# .252.:5 Arastev, A#, '2004(, %he Euro in Bulgaria2 advantages and opportunities <a bov, 7#, '20.0(, $s adopting the euro a beneficial strategyE Aostov,$#, '2007(, ;egarding the Unilateral Euroi-ation of Bulgaria, Discussion Papers, 26