Bulgaria's Finance Minister Simeon Djankov has confirmed that the country will apply early next year to join the exchange-rate mechanism, the two-year currency stability test prior to euro adoption, and seek to switch to the common currency in 2013.

“We are going to apply to the ERM-2 as soon as possible, within a few months,” Djankov said in Brussels in an interview for Bloomberg agency.. “To do that, we need to show Europe and the world that we can have the best fiscal discipline, the best fiscal outcome for 2009 in all of the European Union.”

Bulgaria initially planned to apply to join the exchange-rate mechanism in November, but delayed it till February at the earliest, after all member states submit their convergence programs, which contains the mid-term goals of the fiscal policy.

Simeon Djankov, a World Bank economist, hopes to offset a possible reluctance to admit Bulgaria into the ERM, stemming from the global crisis, by garnishing the application with a targeted balanced 2010 budget, the smallest 2009 deficit in the EU and laws overhauling the inefficient health-care and social-security systems.

Joining the exchange-rate mechanism would bring Bulgaria closer to the umbrella of the euro region and the protection of the European Central Bank and is conditional on whether the new government will succeed to restore Brussels trust.

The lev is already linked to the euro in a currency board that keeps the Bulgarian currency at 1.9558 to the euro. Joining the exchange-rate mechanism may allow the lev to fluctuate by as much as 15 % around a central band, though the central bank has said it will leave the lev tightly pegged to the euro through the duration of the two years.

Bulgaria's entry in the eurozone, initially scheduled for 2010, has been set back as it is conditional on continued fiscal prudence and lower inflation.

From the start of the ERM-2 process, “we’re giving ourselves about four years. By the end of our mandate we should be able to be in the euro zone or close to it. So it will be 2013,” Djanikov said.

Djankov said he is optimistic that Bulgaria’s economy will recover after shrinking 4.9% in the second quarter as investment and demand waned. It will keep contracting until the fourth quarter of next year, while Latvia and Lithuania will exit their recessions one quarter earlier, the European Commission said on Nov. 3.

“Bulgaria will exit the crisis on par with the rest of eastern Europe, or perhaps earlier because we don’t have fiscal imbalances and didn’t have to increase taxes,” Djankov said. “We have a fiscal policy that allows us to rebound quicker than most.”

Bulgaria has the lowest personal and corporate income tax in the EU at 10%.

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