Bulgaria is planning to transition from the leva (BGN) to the euro (EUR) in just over a year as part of its strategy to enter the Eurozone. While the exact date remains uncertain, the implications of this shift are clear. The newly adopted euro law outlines the process and addresses potential consequences of further delaying Eurozone membership.
Under the proposed changes, if a person's current salary is 1,500 leva, it will convert to approximately 766.94 euros once Bulgaria joins the Eurozone. Prices will similarly be halved. The specifics of this transition are detailed in the Law on the Introduction of the Euro, which was passed by the National Assembly in early August and subsequently published in the State Gazette.
The primary barrier to adopting the euro is the country's high inflation rate. Bulgaria entered the exchange rate mechanism (ERM II) alongside Croatia in 2021, which is essentially a preparatory phase for Eurozone membership. While Croatia successfully adopted the euro in January 2023, Bulgaria has postponed its target date to 2024 and then again to 2025. Recent forecasts suggest that the timeline may shift to 2026 due to ongoing political instability.
According to the new law, once the euro is introduced in Bulgaria, all bank accounts will be automatically converted from BGN to EUR at no cost. From that date forward, withdrawals from ATMs and payments of salaries, pensions, and other benefits will occur in euros. The conversion will divide the BGN amount by the fixed exchange rate of 1.95583, with the resulting figure rounded to two decimal places.
Cash savings can be exchanged without fees at designated locations, including the Bulgarian National Bank (BNB), all commercial banks, and Bulgarian Post branches. This fee-free exchange will last for the first six months after the euro’s introduction, with no time limit for transactions at the BNB. For larger amounts, banks may require advance notice, while Bulgarian Post branches will have specific limits on daily exchanges.
After the euro's introduction, interest rates on existing loans will not exceed their previous levels. For more than a year, prices will need to be displayed in both euros and leva, starting one month after the country receives approval to join the Eurozone. Consumers will only have one month to pay in leva after the euro is officially adopted.
Bulgaria's potential entry into the Eurozone has been a topic of discussion for several years. Following its acceptance into ERM II and the banking union in 2021, Bulgaria was expected to adopt the euro alongside Croatia. However, due to inflation concerns, this plan has faced delays. While no specific duration exists for countries to remain in ERM II before joining the Eurozone, past experiences suggest that Lithuania's decade-long wait is not the standard for Bulgaria.
Initially, January 1, 2025, was considered a target date for adoption, but officials are now indicating a more realistic timeframe of July 1, 2025. Nevertheless, some forecasts point to early 2026 as a more likely scenario, particularly given the current political landscape.
In June, reports from the European Commission and the European Central Bank revealed that Bulgaria meets all Eurozone membership criteria except for inflation. According to the Maastricht criteria, the country's inflation rate should not exceed the average of the three lowest inflation Eurozone countries by more than 1.5%. With an average inflation rate of 5.1% for the year ending May 2024, Bulgaria is 1% above the acceptable threshold.
The government aims to address this inflation benchmark by late 2024 or early 2025, after which it plans to request a new evaluation for Eurozone entry. Delaying this transition could have significant repercussions. In late 2023, the international rating agency Standard and Poor's raised Bulgaria's outlook from stable to positive, reflecting increased confidence in its prospects for joining the Eurozone.
Adopting the euro offers several advantages, including improved trade and tourism relations with other euro-using countries. Additionally, a better credit rating would lead to lower borrowing costs for consumers and a reduced risk of economic crises due to enhanced oversight in the Eurozone.
On the other hand, adopting the euro could disadvantage Bulgaria by limiting its control over monetary policy, making it more vulnerable to economic fluctuations in other Eurozone countries. The transition may also lead to inflation as businesses round up prices, while the associated adjustment costs for businesses and consumers could strain the economy. Additionally, public resistance to the change might pose political challenges.