Euro adoption may expose Bulgaria, Croatia to economic policy vulnerabilities - ECB

Euro adoption may expose Bulgaria, Croatia to economic policy vulnerabilities - ECB

The forthcoming adoption of the euro in Bulgaria and Croatia, despite its benefits, may create vulnerabilities for the two countries in terms of economic policy, the European Central Bank (ECB) said on Thursday.

The adoption of a global currency as legal tender fosters monetary stability, which in turn manifests itself in a stable and low real interest rate environment, but this benefit may also expose a country to vulnerabilities if it considers monetary stability as a substitute for disciplined and sustainable economic policies, the ECB said in its most recent economic bulletin.

"From a policy standpoint, the adoption of the euro is an opportunity, albeit not a guarantee, for member states to reap substantial benefits," the ECB noted.

The ECB said on July 10, 2020 that it is accepting Bulgaria and Croatia to the Exchange Rate Mechanism (ERM II), the mandatory training grounds for the euro adoption. Back then the ECB emphasised a 'firm commitment' by the respective authorities 'to pursue sound economic policies with the aim of preserving economic and financial stability, and achieving a high degree of sustainable economic convergence'.

In order to apply for eurozone membership, Croatia and Bulgaria need to spend some two and a half years in ERM II and meet all Maastricht criteria for euro convergence. The mechanism ensures that exchange rate fluctuations between the euro and other EU currencies do not disrupt economic stability within the single market. It also helps non euro-area countries to prepare for joining the euro area.

The prior commitments made by the Bulgarian and Croatian authorities in recent years have spurred the introduction of important measures that will mitigate risks under ERM II, the ECB said. However, there is still significant progress to be made with regard to the overall quality of institutions and governance. In this regard, taking a long-term view on policymaking will be decisive going forward, especially in the light of the new divergence risks caused by the coronavirus shock, the financial institution noted.

These policy efforts will also need to include measures aimed at preventing the euro changeover from being used by firms and price-setters as an excuse for unwarranted price hikes that may harm the trust of the population in the single currency, the ECB added.

The national authorities of Bulgaria and Croatia, in cooperation with the European Commission and the ECB, can benefit from past experiences with euro changeover in other countries, which have included measures such as public campaigns and the introduction of dual price display, the ECB concluded.

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