The introduction of the euro in Bulgaria will not lead to serious overall inflationary effects, according to leading economists and financiers from the Council for Economic Analysis, Bulgarian National Radio reported on August 5.
This is the conclusion of the team’s analysis of the effects of joining the euro zone, the report said.
“The accession of Bulgaria to the euro zone would not represent a serious change for the Bulgarian economy,” the analysts said.
The research is based on practical experience from the countries that have already introduced the single European currency.
One of its main focuses is inflation, and the recommendation of leading economists including Guntram Wolff, Jeffrey Nielsen, Yoto Yotov and Plamen Nenov is that a serious campaign should be carried out among the population and that “it is important for Bulgaria to implement the policies used by other Eastern European countries to adapt society to the new currency”.
At the same time, in the period of introduction of the euro, large differences were found between real inflation and perceptions of inflation. The analysis of inflation in the period of adoption of the euro in five Eastern European countries – the Baltic States, Slovenia and Slovakia – shows relatively stable levels in the period before and after the introduction of the euro.
Specifically in the service sector, however, a one-time increase in prices was observed exactly in the month of joining the zone. Such growth was also observed in the restaurant sector in Croatia. One of the explanations is that the prices of services change relatively less often than those of goods, and entering the zone is used as an opportune moment for an increase, including the realization of deferred intentions in this direction.
Bulgaria has already consumed part of the possible effects of the introduction of the euro zone on trade, such as stability of the exchange rate, along the currency board. However, membership of the euro zone is expected to improve the country’s credibility and reputation, thus contributing to greater trade exchanges. A reduction in transaction costs is also expected. The authors of the analysis assessed the effects of the Eurozone on 170 industries and, based on the results, expect a positive effect on trade in the range of 10-20 per cent, with the effect expected to be particularly pronounced in agriculture and services.
Euro zone membership generally has a beneficial effect on capital flows – purchases of foreign assets by domestic persons and of domestic assets by foreign persons increase. Experts predict that the effect will be greater in the first two quarters after the date of accession. However, risks are also highlighted here – there is a risk of credit booms and a sudden stop of capital flows. This risk can be managed through a conservative fiscal policy and a countercyclical capital buffer, the authors of the report point out.
Joining the euro zone as a whole could reduce interest rate spreads by removing currency risk. For a country with a currency board and a low level of public debt, the expected effects of the reduced currency risk and other influencing factors are limited, experts point out. Data for the Baltic countries, Slovenia and Slovakia show a small negative effect of joining the euro area on the public debt-to-GDP ratio.
In Bulgaria, however, there may be an additional risk of debt deterioration due to the change in the level of required reserves for deposits that banks maintain. They are currently 12 per cent at 0 per cent interest.
After joining the euro zone, the required minimum reserves will be one per cent and the banks could use the freed resource for internal lending, and with it goes the risk of a credit boom and additional inflation.
However, for this to happen, banks must be constrained and unable to make a profit on these reserves, and this is not the case. By leaving the excess reserves on deposit with the ECB, the banks would receive 3.5 per cent interest compared to the 0 per cent interest currently paid by the BNB for these reserves. Banks have the opportunity to invest the reserves abroad in other, more profitable ways than channeling them for lending, the analysis said.
The analysts warned that a slight one-off price increase is possible at first, especially in services.
The reason is that introducing a new currency requires changing price tags and preparing new menus in restaurants, for example. This gives traders a reason to change prices. Often they delay increases as they wait for that moment.
In spite of this, the effect is “one-off” and “limited”, the economists are convinced, adding that the many advantages of adopting the euro, such as easier management of the liquidity of Bulgarian public finances and reduced transaction costs in trade.
“In addition, Bulgaria would become part of the official decision-making process regarding monetary policy and banking supervision.”
The effect on interest rates would be minimal. The economist, however, recommend that even after the introduction of the single European currency, the trend of conservative fiscal policy should continue, the report said.
For Bulgaria’s current pro-Western government, that took office in June 2023, one of its five main policy priorities is joining the euro zone from January 1 2025.
Source : SofiaGlobe
