FRANKFURT – European Union officials gave the green light Wednesday for Bulgaria to become the 21st member of the euro currency union, a key EU project aimed at deepening the ties between member countries.
The Balkan country of 6.4 million people is to make the switch from its national currency, the lev, to the euro on Jan. 1.
Here are basic facts about the currency union, also called the eurozone, and how countries join it.
What is the euro?
The euro is a shared currency and monetary system launched in 1999 when 11 EU member countries irrevocably fixed their currencies to the euro as an accounting currency, then swapped out the national notes and coins in 2002.
The EU established the European Central Bank to handle monetary policy and set interest rate benchmarks for member countries, similar to the role of the U.S. Federal Reserve in the U.S.
How do countries join the euro?
Countries must meet four criteria: low inflation, keeping deficits and debt under control, low long-term interest rates and a stable exchange rate between their currency and the euro. Countries must go through a two-year “waiting room” in which their currency does not fluctuate excessively against the euro. The process is meant to demonstrate that their economies are sustainably converging with that of the eurozone.
Once the European Commission determines that requirements have been met, the member governments of the EU decide by what’s called a qualified majority vote. Approval needs a minimum of 55% of member states representing at least 65% of the EU population.
After joining, countries face rules limiting debt and deficits. Those rules are intended to keep countries from running large deficits that could undermine the euro.
What is Bulgaria’s situation?
The European Commission ruled Wednesday that Bulgaria has met the requirements, seconded by an opinion from the ECB. The matter now goes to a vote at a meeting of EU finance ministers slated for July 8. EU officials say the vote is a done deal.
Bulgaria is unusual in that it pegged its currency, the lev, to the euro right from the beginning of monetary union in 1999, even before it joined the European Union in 2007. Bulgaria also has very low levels of debt, only 24.1% of annual economic output. That is well below the 60% level set in the economic criteria for eurozone membership. The last step was getting inflation below the benchmark of 2.8%, or no more than 1.5% higher than the average of the three lowest eurozone members.
There were concerns about the level of corruption and money laundering in the EU’s poorest country. The commission and the ECB found however that Bulgaria has made progress in those areas.
What do people in Bulgaria think about the euro?
The most recent Eurobarometer poll carried out by the EU showed that 50% of Bulgarians were opposed and 43% in favor. Reasons include fears of inflation, distrust of official institutions in a country that has had seven governments in four years, and widespread misinformation on social media.
The issue has been taken up by pro-Russian nationalist politicians who argue for keeping the national currency. President Rumen Radev stoked anti-euro forces with a proposal for a referendum, which was rejected by parliament. Misinformation included false claims that the euro would allow EU officials to confiscate dormant bank accounts or use a digital euro to control people.
On Jan.1, only euros will be dispensed from cash machines, though both currencies will circulate in cash for a month. After that, lev notes can be exchanged at banks for 12 months and for an unlimited time at the Bulgarian national bank.
What are the advantages of euro membership?
In theory, the euro brings means lower interest rates for business and consumers and eases cross-border trade within the eurozone. Companies no longer have to engage in currency exchange transactions or worry that exchange rate shifts will erode their profits or holdings. Travelers no longer have to pay commissions at an exchange booth or on their credit card bill when vacationing or on a business trip to another EU country.
Member countries get a seat on the ECB’s rate-setting council and so have a voice in eurozone-wide monetary policy.
Are there disadvantages or risks?
Countries that join lose some authority over their own economy. They give up their ability set their own interest rates, and face restrictions on government spending and deficits, though those rules have proved flexible in practice. And they can no longer gain competitiveness relative to other countries by allowing their currency’s exchange rate to devalue.
Bitter memories remain of the debt and economic crisis that shook the eurozone in 2010-2015. After Greece admitted its deficit and debts were much larger than previously reported, it wound up defaulting on its debts and market turmoil spread to other eurozone countries.
Greece, Portugal, Ireland, Spain, and Cyprus were bailed out with loans by the other eurozone governments, in return for strict austerity measures that impacted many ordinary people including government workers and retirees.
Has the euro been strengthened since then?
ECB President Mario Draghi is credited with defusing the eurozone crisis in 2012 by saying that the central bank would do “whatever it takes” to save the euro. The ECB then said it could intervene in bond markets to support countries hit by turmoil, a safeguard that calmed markets even though it was never used.
Later other backstops were added, including a eurozone bailout fund and moving banking oversight from sometimes-lax national supervisors to the ECB.
Why aren’t all 27 members of the EU in the euro?
Countries agree to join the euro as part of joining the EU, but not all have made the effort to meet the economic requirements. There is no time window to join.
Denmark was granted an opt out, while Sweden rejected the euro in a 2003 referendum despite not having an opt out and has no target date to join. Other non-members are Czechia, Hungary, Poland and Romania.
Officials in Poland, the biggest non-member, have shown little interest in joining despite acknowledging the obligation to join someday. The winner of Sunday’s presidential election, Karol Nawrocki, campaigned on keeping the zloty currency.
The country’s economy has grown strongly without euro membership, doubling in size over the past two decades as its standard of living has almost caught up with Western Europe since emerging from communist rule in 1989.
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