site.btaBest Way out of Currency Board Arrangement Is Eurozone Membership – Central Bank Deputy Governor

The best way out of the currency board arrangement (CBA) in Bulgaria is to get the country into the eurozone, the Bulgarian National Bank Deputy Governor in charge of the Banking Department, Petar Chobanov, said on Monday. Chobanov delivered a lecture to students of the University of National and World Economy in Sofia titled “The Euro and the Currency Board Arrangement” as the university’s Euro Week drew to a close.

The former finance minister recalled that the CBA, set up in 1997, created a disciplining framework for the functioning of the national economy. After an initial peg of the Bulgarian lev to the Deutsche mark, the arrangement was modified to peg the lev to the euro as the European Central Bank (ECB) and 12 national central banks enforced the Euro Changeover of 2002. The CBA is intrinsically linked to the euro, it is part of Bulgaria’s road to the euro, Chobanov said. A phase-in of the ECB’s monetary policy in Bulgaria has been taking place throughout the whole period, with local short-term interest rates coming close to eurozone levels. After the country acceded to Exchange Rate Mechanism II and the banking union in 2020, the most effective strategy is for Bulgaria to adopt the single European currency as soon as possible, he argued.

The euro accelerates the process of convergence in the EU and will continue to do so after Bulgaria enters the eurozone. Before the CBA, 60% of Bulgaria’s foreign trade was denominated in US dollars, but the currency peg and EU entry quickly changed the balance in favour of the euro, Chobanov said.

If we are to use one sentence to say why Bulgaria should adopt the euro, the quickest answer would be that the country has reached its credit rating ceiling and cannot go any higher unless it joins the eurozone, he said.

Among the advantages of eurozone membership, Chobanov singled out reducing transaction costs, removing the currency risk with respect to the euro, making a currency crisis less likely and earning a higher credit rating for the country, and hence, for its banks and businesses. The expected euro changeover in Bulgaria will also boost total domestic demand and production and will facilitate foreign trade and tourism with the economies which use the euro.

The changeover will likely increase the flow of investments, which, however, depends on the overall business environment. Using a single currency will make it easier to compare prices between Bulgaria and the rest of the eurozone. Pressure will be created to raise labour productivity and keep inflation low, for otherwise competitiveness will suffer, Chobanov said.