By Martin Dimitrov
Eurogroup finance ministers and the ECB on Thursday welcomed Bulgaria’s readiness to join the Banking Union, so entering the eurozone ‘waiting room’ – but have postponed a final decision for at least a year.
Finance ministers of Eurozone countries and the European Central Bank, ECB, on Thursday welcomed Bulgaria’s intention to “put in place the necessary elements for a successful entry into ERM 2” – the so-called “waiting room” for the Eurozone.
In a statement issued after the meeting they said Bulgaria can launch its formal bid to enter into close cooperation with the ECB, allowing for the European bank to comprehensively assess its banking sector and prepare it for entering the European Banking Union.
Bulgaria, which previously did not wish to join the Banking Union before entering ERM 2, recently changed its tactics.
In a letter to the President of the ECB and the Eurogroup ministers, signed 29 June, the Bulgarian authorities expressed their intentions to simultaneously become part of both institutions before July 2019.
The ECB, however, is not pledging to get into an association agreement with Sofia by a specific date.
In its Thursday decision, the Finance ministers and the ECB note that the Bank “could be expected to conclude its comprehensive assessment within approximately one year after Bulgaria’s formal application for close cooperation, and its decision may make the start date of close cooperation” – but adds that any final decision will be conditional on “Bulgaria’s progress in implementing the possible measures required in relation to the results of the comprehensive assessment”.
In practice, this means the Frankfurt-based banking supervision organ can impose additional criteria while they assess Bulgaria’s financial system.
The ECB leaves a loophole to prolong the process, as with the European Commission’s June promise to Macedonia and Albania to open negotiations for EU membership within a year, on condition that certain judicial and institutional reforms are carried out in the meantime.
The assessment of Bulgaria’s progress should last around one year, “but if there is need for more time, that could be more than one year,” ECB board member Benoit Coeure said on Thursday, cited by Reuters.
These are only the banking sector commitments Bulgaria has to make. Others relate to other financial sector issues and institutional quality and governance, the Eurogroup and ECB statement says.
“Such reform efforts towards a more robust financial sector, stronger institutions and more efficient economic structures will contribute to the successful participation of Bulgaria in ERM 2”, it reads.
Bulgaria also has to make reforms geared towards achieving a high degree of sustainable economic convergence by the time the euro is introduced.
It has also to prove that it is implementing the reforms monitored by the Commission under the Cooperation and Verification Mechanism, CVM.
The CVM was imposed on Bulgaria and Romania when they entered the EU a decade ago, to guarantee completion in the two countries of institutional reforms. The mechanism remains in place.
The Finance ministers of the Eurozone area and the ECB underline that judicial reform and the fight against corruption and organised crime need to be pushed onward before Bulgaria is accepted in the Eurozone, as they are of high importance for the stability and integrity of the financial system.
Bulgaria’s Finance Minister and Central Bank Governor are expected to send official letters of application to join the ECB close cooperation mechanism in a few days.
The ECB will then carry out a thorough examination of the Bulgarian financial sector, including of some systemically important Bulgarian-owned banks.
Once they have provided a positive assessment, a decision will be taken by the ERM 2 parties on Bulgaria’s formal application to join the Exchange Rate Mechanism.
Bulgarian banks underwent a stress-test in 2016. Despite none of them requiring state support, some had to raise capital or sell assets to bolster their capital buffers. One of them included the largest Bulgarian-owned lender, First Investment Bank.
The ECB and the Eurogroup underline that the approach towards Bulgaria will become the standard for other countries wanting to join the Eurozone.
“In the future, we expect to follow a similar approach for Member States wishing to join ERM II, in line with the principle of equal treatment,” the statement says.