New pressures
Bulgaria’s central bank, too, will face a significant adjustment. Under the currency board regime, inflation has been kept largely in check not through interest rate policy — which Sofia has ceded — but through fiscal discipline and tax policy.
The Bulgarian National Bank’s main levers have instead been bank reserve requirements, currently set at 12 percent, and the interest rate charged on those reserves, which is set at zero. But it will lose control of both those levers from next year, with potentially big consequences: The ECB’s reserve requirement is only 1 percent. That means that, other things being equal, Bulgarian banks will suddenly have a lot more money available to lend, stoking a credit boom that is already in full swing: Mortgage lending was up 26 percent in the year to April, while consumer credit was up 14 percent.
Joining the eurozone and shedding the currency board removes an automatic discipline mechanism and makes the Stability and Growth Pact rules — a framework that the EU has deliberately made more flexible — the ultimate constraint on fiscal policy. Those rules are all enshrined in national law too, but in its convergence report, the ECB noted that “further progress is still desirable” to ensure that Bulgaria’s fiscal council, which is responsible for monitoring the government’s observance of the rules, can provide adequate accountability.
“It is a structural characteristic of the monetary union that monetary policy is common, while fiscal policies remain national,” Radev said, acknowledging the potential asymmetries. “We should not expect the ECB to tailor policy for individual economies — the responsibility lies with national authorities to align and adapt.”
Digital euro and monetary innovation
Bulgaria is joining the eurozone at a unique juncture: the potential introduction of a digital euro. Banking associations across the bloc are fretting that this will make their members more susceptible to deposit runs and crimp their ability to lend, if designed wrongly. That could be a particular problem for Bulgaria, where banks play an even larger role in financing the economy than in most parts of the eurozone, due to the lack of a domestic capital market.
While Radev dismissed concerns that the digital euro would complicate Bulgaria’s entry, he acknowledged it adds “a layer of strategic thinking, particularly in the payments and technology domains.”