MNI INTERVIEW: Bulgaria Accession To Add Hawkish Voice To ECB

Bulgaria is on track to join the euro area in 2025 and will add another hawkish voice to the Governing Council of the European Central Bank, a former deputy prime minister and advisor to the Bulgarian president told MNI.

Bulgaria was forced to scrap plans to join the currency bloc in 2024 earlier this year, after 2022 saw it fail to meet key Maastricht criteria, and with headline inflation hitting 15%.

That dipped to 8.7% in June, and the rate is now expected to be less than 1.5 percentage points above that of the three best-performing members, Atanas Pekanov said in an interview.

Laws bringing institutions such as the Bulgarian National Bank - under recently reappointed governor Dimitar Radev - in line with European rules are expected to be approved within weeks, Pekanov said.

Bulgaria’s economy is also well-synchronised with Germany’s, thanks in part to its place in German industry supply chains, making ECB monetary policy a “good fit.”

“Once we have joined the currency union the central bank and its representatives can be much more vocal on the monetary policy side. Bulgarian society and the understanding of most economists is relatively conservative, so I could imagine that the position would be more-or-less on the hawkish side,” he said.

CHEAP ENERGY

Bulgaria was a net exporter of electricity last year, with the competitive advantage secured from cheap energy at home boosting both exports and GDP.

The country should now seize the opportunity to assume a greater share of production from non-EU countries no longer regarded as secure, Pekanov said.

Eastern European EU members should in general be more vocal in demanding a common industrial policy, he added, although he cautioned against a relaxation of state aid rules.

“That would only enable richer or bigger or poorer countries to be able to subsidise their own manufacturing and even to compete for manufacturing from within other EU countries. This would not only endanger Eastern Europe economically, but also politically.”

The European Commission should be less “pedantic” in enforcing Recovery and Resilience Facility conditions, said Pekanov, who has rejoined the Austrian Institute of Economic Research (WIFO) after stepping down from his second spell in government last month.

Having himself worked to implement RRF reforms in government, Pekanov called for greater flexibility if projects across Europe are not to fall victim to ballooning costs caused by high inflation and shrinking national budgets.

“Political realities change, governments change, majorities in parliament change. Sometimes this becomes either almost impossible, or very, very difficult to do as was written,” he said.

“In times of fiscal consolidation this becomes relatively unrealistic, so countries either forfeit part of the money or it goes unspent. This runs the risk that at the end of 2026 the absorption rate of the recovery plans will be relatively low [and] we just say, well, this might have been a good idea, but because of its implementation we don't want to have such a tool for the future.” (See MNI: EU Asks Italy To Speed Up National Recovery Plan Overhaul)

TOO EARLY FOR ECB PAUSE

Pekanov, who worked at the Austrian National Bank, then as a research analyst at the European Central Bank from 2015-17, said it was too early for the ECB to signal a pause in interest rate hikes ahead of the September meeting, with sticky core inflation still a source of concern. (See MNI INTERVIEW:Inflation Should Slow In Time For Sept ECB Pause)

“After September there could be some months where we need to just observe what happens with economic activity; where decision making should continue being data dependent, but looking not only into inflation, but also at the overall macroeconomic outcomes. Talking about rate cuts now is premature,” he said.

One key measure will be the ECB’s Household Finance and Consumption survey, which provides an indication of how changing financing conditions are transmitted heterogeneously across the broader economy, he said.

But with the passthrough of previous monetary policy decisions still to be fully felt, and with no sign as yet of a wage-price spiral despite pay growth in some sectors, he said he was “relatively optimistic” regarding the likelihood of a soft landing - although the effect on energy prices of war in Ukraine will remain a source of major uncertainty going into the winter.