Should Bulgaria wait for 90% real convergence before joining the Eurozone?

Ganev, Georgy (2025): Should Bulgaria wait for 90% real convergence before joining the Eurozone? Published in: Public Policy.bg , Vol. 15, No. 3 (November 2024): pp. 14-28.

Abstract

In the lively public policy debate in Bulgaria on the country joining the Eurozone, a claim is being made that real convergence of at least 90% is a crucial precondition for joining and therefore Bulgaria should wait until the early 2040s, because only then it is expected to achieve such convergence. The claim is supported with theoretical arguments, empirical evidence and forecasts. Here they are examined in some detail in the context of Bulgaria’s unique position as a country in the EU with a Currency board regime anchored in the euro. It is concluded that economic theory does not pose a requirement for any level of real convergence for an economic area to join a monetary union. In theory, problems due to a less-rich country joining a more affluent monetary union may, but also may not, cause problems such as excess inflation or amplified business cycle. It is also concluded that neither the claim that there exists a convergence threshold of 90% of real income per capita, nor the claim that Bulgaria will necessarily need at least two decades to reach it can withstand even most elementary checks for empirical robustness. Both the theoretical and the empirical claims that Bulgaria should wait for a 90% real convergence until at least the early 2040s before joining the Eurozone are found to have no real economic foundation.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bulgaria; optimal currency area; monetary union; real convergence; currency board
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy ; Stabilization ; Treasury Policy

References

Aizenman, J. (2016) Optimal currency area: A 20th century idea for the 21st century?, NBER Working Paper, No. 22097

Alesina A., R. Barro, Tenreyero, S. (2002) Optimal currency areas, NBER Working Paper, No. 9072.

Balassa, B. (1964) The Purchasing Power Parity Doctrine: A Reappraisal, Journal of Political Economy, 72(6), 584–596.

Broz, T. (2005) The theory of optimum currency areas: A literature review, Privredna kretanja i ekonomska politika 15.104, 52-78.

Buiter, W. (1999) The EMU and the NAMU: What is the Case for North American Monetary Union?, Canadian Public Policy, 25, 285–305.

Dorich, J., Reza, A., Sarker, S. (2017) An Update on the Neutral Rate of Interest, Bank of Canada Review, Autumn 2017.

Friedman, M. (1953) The Case for Flexible Exchange Rates, in Friedman M. (ed.), Essays in Positive Economics, University of Chicago Press, Chicago, 157-203.

Hayek, F.A., 1990, “Denationalization of money – the argument refined. An analysis of the theory and practice of concurrent currencies”, Third edition, Institute of economic affairs.

Huerta de Soto, J. (2013) In Defense of the Euro: An Austrian Perspective, Journal des Economistes Et des Etudes Humaines, 19(1), 1-28.

Magyar Nemzeti Bank (2020) Long-term sustainability and the euro – how to rethink the Maastricht criteria?, Prospektus Kft.

McCririck, R., Daniel Rees, D. (2017) The Neutral Interest Rate', Bulletin, Reserve Bank of Australia, September quarter 2017.

McKinnon, R. (1963) Optimum Currency Areas, American Economic Review, 53, 717–725.

Mundell, R. (1961) A Theory of Optimum Currency Areas, American Economic Review, 51, 657–675.

Papazov et al. (2023) Proposal to hold a national referendum on the question: do you agree the Bulgarian lev to be the only official currency in Bulgaria until 2043?, submitted to the Bulgarian National assembly on 2023-04-07, available at https://parliament.bg/pub/referendum/3393b3e94b25530c6decc1cb7ab95425e29e85ea.pdf

Samuelson, P. (1964) Theoretical Notes on Trade Problems, Review of Economics and Statistics, 46(2), 145–154.

World Bank Group (2022) A Path to High Income, Bulgaria Country Economic Memorandum, December 2022.