Bulgaria is not prepared to introduce the euro on January 1, 2025, as it fails to meet one of the four criteria for eurozone entry—the inflation level. This was highlighted in a report by the European Commission, adopted on Wednesday.

A spokesperson for the European Commission stated that while Bulgaria currently does not meet all the criteria for joining the eurozone, the Commission remains constructive in its collaboration with Bulgaria and welcomes its ambition to continue striving for the euro once all criteria are met. Bulgaria can request an extraordinary evaluation report once it believes it has met all the necessary conditions, though there is no current entry date.

Acting Finance Minister Lyudmila Petkova indicated last week that an extraordinary assessment might be requested towards the end of the year.

In the report, the European Commission finds that Bulgaria meets the requirements for budget deficit, exchange rate stability, and interest rates. Additionally, it reports that Bulgarian legislation is compatible with EU law concerning the euro.

The primary issue is inflation. The report indicates that Bulgaria's average monthly inflation over the last 12 months was 5.1%. The eurozone criteria stipulate that inflation should not exceed 1.5% above that of the three best-performing eurozone countries, which currently is 4.1%. Thus, Bulgaria's inflation exceeds this by 1%.

The report predicts that Bulgaria's inflation will remain higher in the coming months but may align closer to the required level by late 2024 or early 2025. It notes that Bulgaria's inflation has been significantly higher than the eurozone average over the past two years, with an annual inflation rate of 10.9%, outpacing the eurozone by 4%.

The European Commission expects a significant slowdown in Bulgaria's inflation rate in 2024 but warns about wage increases and the elimination of reduced VAT in the restaurant industry, which could drive prices up again. The medium-term inflation outlook will depend on managing price expectations, productivity-wage relationships, and the functionality of product and service markets.

The report suggests that Bulgaria can improve its economy by implementing its Recovery and Resilience Plan, particularly reforms related to transitioning from fossil fuels to clean energy sources and improving energy efficiency. However, it highlights significant delays in implementing the plan, with increasing risks that it will not be realized by 2026.

The criteria for euro adoption include maintaining inflation rates no more than 1.5 percentage points above the three best-performing member states, budget stability, exchange rate stability, and long-term interest rates not exceeding two percentage points above the rate in the three member states with the best price stability.

The European Commission states that Bulgaria meets the remaining euro adoption requirements. It finds Bulgaria's fiscal framework sound but notes complications in public investment management and shortcomings in planning state finances. Despite a rise in interest rates in 2022, Bulgaria's rates remain 1.5% below the benchmark. The exchange rate of the lev, tied to the euro through the currency board, is stable.

The Commission also considered factors like the balance of payments, labor market integration, and financial market integration in its assessment, noting the need to monitor housing price growth, which is estimated to be overvalued by around 8%.

The European Commission's report also evaluates the readiness of the Czech Republic, Poland, Hungary, Romania, and Sweden, none of which meet all four criteria. Sweden meets the inflation rate requirement, Bulgaria and Sweden meet the budget deficit requirement, and only Bulgaria meets the exchange rate requirement. Bulgaria, the Czech Republic, and Sweden meet the long-term interest rate requirement. Only Bulgaria has aligned its legislation with the needs of using the euro.

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