Bulgaria is ready to adopt the euro as of next year

Event

On 4 June, the European Commission (EC) and the European Central Bank (ECB) concluded that Bulgaria is ready to enter the eurozone as soon as January 2026. The next steps into the euro adoption process involve the Council of the EU taking the final decision, following an expected approval from the Finance Ministers (on 8 July) and the European Council, and after the European Parliament and ECB have delivered their opinions.

This conclusion came as Bulgaria now fulfils the requirements for euro adoption, among which the convergence criteria that cover currency exchange rates, public finances, price stability and long-term interest rates. Additional factors, including balance of payments developments, the integration of markets and the institutional environment were also deemed satisfactory.

Bulgaria pegged its currency, the lev, to the euro at the start of the monetary union in 1999, even prior to joining the European Union in 2007. The requirement of fixing the currency to the euro for at least two years was therefore not an issue. Neither was the public finances-related criteria, since Bulgaria has a low level of debt, at 24.1% of its annual economic output in 2024, which is well below the 60% threshold set in the economic criteria for eurozone membership. And, the public deficit stood at 3% of GDP last year, fulfilling the criteria. The inflation-related requisite was the latest to be achieved, with the criteria of inflation dropping below the benchmark of 2.8%, or no more than 1.5% higher than the average of the three lowest eurozone members, being only fulfilled last month. The convergence reports from the EC and the ECB also found that Bulgaria’s long-term interest rate of 3.9% over the reference period was below the benchmark of 5.1%.

Even though there were concerns regarding perceived corruption and money laundering in Bulgaria, the EC and the ECB noted that progress has been made in these areas.

Impact

Bulgaria’s relatively open economy and the peg of the lev to the euro since 1999 have made it highly synchronised with the euro area and have supported its entry into the monetary union while preserving it against adverse shocks. Other features of the Bulgarian economy have helped the country adjust to shocks, including its fairly flexible and efficient labour market, with low unemployment rates and a low public debt, the second-lowest ratio to GDP in the EU. In spite of this, Bulgaria was quite severely hit by the impact of the war in Ukraine through energy inflation, its proximity to the conflict and Bulgaria’s involvement in defence supplies.

Weak institutions and governance, including perceived corruption, government effectiveness, frequent changes in regulations and biased public procurements, remain a persistent issue affecting the business environment. The Perception Corruption Index from Transparency International ranked Bulgaria at the 76th place out of 180 in 2024, the lowest of all EU countries but Hungary. Bulgaria also faces structural weaknesses like a demographic decline, poor infrastructure and a significant income gap compared to the rest of the EU. But severe political instability (seven parliamentary elections in the past four years) makes needed reforms difficult to implement and the current ruling coalition, formed last January, is very fragile, accused of complacency towards corruption, and might not last through the full mandate.

The adoption of the euro by Bulgaria should bring the country various advantages, most importantly in terms of higher investor attractiveness, heightened price stability and maintenance of low interest rates. This will help continue to support growth, which is expected to remain sustained this year. Low unemployment rates, rising real incomes and domestic credit growth will boost private consumption. Public sector investment is also expected to rise with the rollout of blocked EU funds. Export growth will slow due to weak external demand and elevated global trade policy uncertainty (even though the reliance on the US market is very limited), while strong consumption and investment will drive imports, widening the current account deficit.

But the eurozone membership, as a result of which Bulgaria will delegate its monetary and exchange rate policy to the ECB, will also allow the ECB to play its role as a lender of last resort to the domestic banking sector, in case of a confidence crisis. Transfer risk will consequently be significantly mitigated and Credendo’s MLT political risk rating should be upgraded once the country definitively joins the euro area.

Analyst: Florence Thiéry – f.thiery@credendo.com