May 25, 2018 / 1:44 PM / a year ago

UPDATE 1-Bulgaria's entry into euro zone's ERM-2 should not be blocked -central banker

(Adds details, background)

SOFIA, May 25 (Reuters) - Bulgaria’s drive to join ERM-2, the “waiting room” for euro zone membership, should not be blocked but welcomed, given the Balkan country’s strong macroeconomic performance, its central bank governor Dimitar Radev said.

The European Central Bank (ECB) and the European Commission said this week that Bulgaria does not yet meet all criteria to join the single currency.

That was seen as an attempt to cool Sofia’s ambitions to enter the exchange rate mechanism (ERM-2), the obligatory two-year precursor to adopting the euro, this year. Bulgaria says it intends to formally apply to join the ERM II by the end of June.

With low inflation, sound public finances and its lev currency pegged to the euro, Bulgaria meets the nominal criteria for euro membership but still needs to make its economy more like those of the richer Western countries.

"It is logical to expect that a country with such a record should not be blocked, but rather welcomed to start its journey towards joining the euro area through the participation of the lev ... in the exchange rate mechanism II," Radev wrote in the introduction to a report that was also published on the central bank's website. (here)

The assessments by the ECB and the EU’s executive Commission’s view are likely to slow but not stop Sofia’s efforts to become the 20th euro zone member.

Existing euro zone countries are also concerned about admitting Bulgaria soon given its relatively low income levels and widespread corruption, and the possible impact of membership on the stability of Bulgarian banks.

Bulgaria’s gross domestic product per capita, calculated as power purchasing parity, is 49 percent of the EU average, well below euro zone member states. The country also ranks as most corrupt EU country according to Transparency International.

Addressing such concerns, Radev said in the foreword to policy think-tank OMFIF’s Global Public Investor report, he believed the timing of euro adoption would depend economic convergence and that ERM-2 membership could foster reforms.

He said Bulgaria’s banking sector is healthy, with capital adequacy and liquidity exceeding the EU averages.

“There are structural and institutional policies that need to be implemented and consistently pursued, in order to speed up real convergence,” Radev wrote. “Thus the process of euro area accession, starting with the participation of the national currency in the ERM II, will be a catalyst for further improvements, adjustments and reforms.” (Reporting by Tsvetelia Tsolova, Editing by Catherine Evans)

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