By Andrew MacDowall

From The Financial Times

Bulgaria's decision to freeze its bid for euro membership comes as little surprise and is likely to have little immediate effect. But it highlights the waning appeal of joining the eurozone – as well as Bulgaria's relative fiscal strength and the benefits of its existing currency arrangement.

In an interview with the Wall Street Journal earlier this month, Prime Minister Boyko Borisov and Finance Minister Simeon Djankov said that Bulgaria's plans to adopt the euro would be put on hold indefinitely, due to the risks involved.

"Right now, I don't see any benefits of entering the eurozone, only costs," Djankov told the paper.

Euro membership has long been a goal for the Balkan country, and Borisov reaffirmed the ambition in 2010, setting a target date of 2013.

This was widely seen as optimistic at the time. The country is not even a part of ERM II, the precursor to euro membership, despite having had a fixed exchange rate with the euro since its launch. Prior to that, Bulgaria was in a currency board arrangement with the Deutschmark since 1997.

Now, Bulgaria has distanced itself from the euro, rather than the eurozone keeping the EU's poorest country at arm's length. Unlike several of its neighbours (most famously Greece), it has broadly maintained an austere fiscal course over recent years. Indeed, it meets all the criteria for euro membership. The government's austerity programme reduced the deficit to 2.1 per cent of GDP last year; debt stands at 17.5 per cent of GDP, one of the lowest levels in Europe. The past few years' economic travails have dragged down inflation (previously the only area in which Bulgaria was not meeting eurozone requirements), which the EU expects to average 2.6 per cent this year.

According to Djankov, the government is unwilling to imperil this by adopting the euro at a time of uncertainty, particularly as the cash-strapped but fiscally prudent country does not wish to end up subsidising the incautious long-term eurozone members.

While putting the euro project on the back burner for the time being, membership remains a long-term goal, though it is unclear how long that term will be.

"Do not be confused – Bulgaria still wants the euro, it just does not want to pay the price for joining the club," says Nadejda Dafinkicheva, head of research and corporate finance at Sofia-based First Financial Brokerage House. "Now that price is not only too high, but too unfair for budget-disciplined countries such as ours. Also, as currently the future of the eurozone is not clear, applying to enter would seem to be rather lacking in common sense."

For the time being, Dafinkicheva agrees with Djankov that the currency board provides Bulgaria with almost the best of both worlds: stability without some of the costs and risks of eurozone membership, though as she notes, it gives the country limited control over its own monetary arrangements.

"The name of the currency board game for Bulgaria is only one – macro stability," she said. "It has proved a very wise and long-lasting solution for a number of structural economic problems and has introduced discipline in monetary policy. The fixed rate also implies lower country risk premium for Bulgaria as there is no currency risk component."

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