MNI INTERVIEW: Bulgaria Hawkish GovCo Voice - Ex-Deputy PM

Bulgaria will be a data-led and relatively hawkish participant in European Central Bank’ Governing Council discussions, a former senior government official in Sofia told MNI.

“Bulgaria historically has a higher growth rate, higher inflation and a lower debt-to-GDP ratio than some other member states. I would therefore expect Bulgaria’s voice to be more on the Baltic-German end of the spectrum than the southern European one,” Atanas Pekanov, deputy prime minister from 2021-2023, said in an interview.

Bulgarian National Bank governor Dimitar Radev, who will oversee accession to the common currency from Jan 1, 2026, after the country was given the green light by the ECB and the European Commission earlier this month, is experienced and pragmatic, Pekanov said. (See MNI EM INTERVIEW: BNB's Radev Sees Limited Euro Inflation Impact)

While domestic opponents of euro accession have questioned how much weight Bulgaria will have within the Governing Council, Pekanov dismissed criticism of voting procedures critics claim are weighted in favour of the five biggest economies.

“That is not how the Council works, and we also know that our governor will be present for two days every six weeks, during which time he can be as active and persuasive as anyone else present. And if he chooses not to be, it will be because he judges it is not necessary.”

Pekanov conceded that a “considerable part” of Bulgaria’s population is scared of price rises once the new currency comes in, as occurred in Croatia in 2023.

CROATIAN PRICE RISES

“It'll be a question of waiting and seeing how it goes in practice. I would expect us to do a bit better than Croatia, which was also very well-prepared, but had the misfortune of having to make the transition at a time when upward price pressures were extreme. Things went better in the case of the Baltic countries where inflation was only around 1% at the time of entering.”

Annual wage growth has been high over the last two or three years - 8-10% above inflation in some cases - Pekanov said, adding to the risk of higher prices.

“We also need to understand the scarring effect of previous bouts of inflation. But my expectation is that these fears and these voices will be less pronounced as our experience of EU integration deepens.”

It would be a mistake for authorities to be too strict in monitoring prices, for example by not allowing supermarket price changes for a number of months, said Pekanov, an economist at the Austrian Institute for Economic Research.

“That would only lead to a huge bump at the end of that period, which would then be linked to joining the euro. It should be more dispersed.”

FDI

Discussions with international CEOs indicate that euro accession is seen as removing any shadow risk that the country could ditch its currency board, though the speed at which foreign direct investment increases after leaving the lev remains to be seen, despite Bulgaria’s relatively low tax and light regulation, he said.

“The biggest investors in Bulgaria - German and Austrian firms - are going through a difficult period right now, so it is unlikely that they are going to be making any big FDI decisions for some time. I’m also not sure about the level of U.S. appetite for new investments abroad, although the basis for doing so is now there.”

With a debt-to-GDP ratio of just 23% - among the lowest in the EU - Bulgaria should borrow more to make up for an expected decline in structural and cohesion funds, but there is little political will to do so, Pekanov said.

“Bulgaria is going to have to spend more of its own money, including on defence. That’s hard to do while maintaining a small budget and low taxes, and at the same time politically difficult. Bulgaria is very much one of the ‘Frugals’ in the EU, despite not being as vocal as some of them.”