Financial Services

Bulgaria puts the brakes on its euro accession timeline but may finally be on the verge of forming a government after several unsuccessful attempts

Written by

Dr. Michael Huertas

Kristin Lyaskova, LL.M. Finance

RegCORE Client Alert | Banking Union


Bulgaria has been committed to joining the euro area since it first became an EU Member State in 2007. On 10 July 2020 the European Central Bank (ECB) acting in its central banking role confirmed that the Croatian kuna and the Bulgarian lev, previously pegged to the euro (but without a voice in the ECB and de facto bound by the ECB’s monetary policy) had been admitted to the Exchange Rate Mechanism II (ERM II) ERM II was developed in 1999 as a method for evaluating an EU member state's convergence with the Eurozone. In its capacity as a central bank, and most notably through the General Council, the ECB monitors ERM II countries' compliance and chooses when to implement "intervention procedures" with the central banks of ERM II Member States, i.e., to stabilise the currency within the ERM II rate band. The General Council, along with the European Commission, assesses periodically, based on "Convergence Reports," and ultimately at the end of the minimum two-year assessment period, whether an applicant's participation in ERM II has been deemed sustainable, and thus whether it should advance from ERM II to euro area membership. Not only does the ERM II allow for the management of exchange rates between a non-euro area Member State's currency and the euro, but it is also, and most significantly, a tool to assess the sustainability of convergence before to and after euro adoption.Show Footnote, an important pre-requisite to full euro adoption that was planned for 2023 An EU member state is required to participate in ERM II for at least two years and satisfy the ‘Maastricht’ or Convergence Criteria prior to adopting the euro. Regular updates on progress are published at least every two years by the ECB and the European Commission in respective “Convergence Reports”.Show Footnote. Croatia proceeded to adopt the euro on 1 January 2023 as the euro area’s 20th member but in the case of Bulgaria its prospects fell behind and the timeline was delayed to 2024. Full adoption of the euro would lead to decrease cost of borrowing for Bulgaria and full access to euro area stimulus packages.

On 17 February 2023 the Bulgarian Finance Minister announced that it would not file the necessary required Convergence Report meaning this already delayed timeline would slip further as the January 2024 adoption date could not be met and could possibly be only achieved at the earliest by mid-2024 or even 1 January 2025.

Parallel with these developments, Bulgaria held another parliamentary election on 2 April 2023 after failing to form a government at the previous four attempts in the past two years. On 15 May 2023, Mariya Gabriel, the EU’s Commissioner for Research and Innovation resigned from her post as she takes on the challenge of forming a new Bulgarian coalition government. Gabriel was picked the week before by Boyko Borissov, former Prime Minister and leader of her party to take on that task. Bulgarian President Rumen Radev has granted her the institutional mandate to form the next government.

This Client Alert assesses this most recent development and what it means for financial sector market participants both in Bulgaria and looking to do business there.

Dealing with the euro accession delay

The continuing delay is not ideal for the country’s prospects of boosting investment and credit security amidst a prolonged political crisis. Inflation jumped to 14.3% year-on-year at the end of 2022 making it the eight highest in the EU. This coupled with a need to complete outstanding necessary legal changes that a new parliament would have to pass also runs the risk of already lukewarm backing of the electorate to join the euro running out of remaining steam. The lack of (prospect for a timely) entry could weigh on credit ratings further. However, Bulgaria is also in the top three countries in terms of public debt/GDP ratio, with debt at approximately 23% of GDP and the country meets the benchmark for long-term interest with the second-best performance after Sweden.

Some of the key legislative changes that remain outstanding include the introduction of a personal bankruptcy act, changes to the anti-money laundering act as well as to the insurance code related to the European Green Card – a proof of vehicle insurance. Reforms had already been prepared and introduced by bills of parliament by the caretaker government. Parliament was dissolved before these were passed and Bulgaria has been in a protracted political crisis following numerous inconclusive elections and failed attempts to form a government. The reforms to the insurance code are paramount. The code regulates the repayment of obligations of Bulgarian insurers for car traffic accidents abroad. At the end of 2021, approximately nine million euros are owed to insurers in the EU. Insurance is typically never this (politically) exciting as certain politicians complain that reforming the insurance code will subject Bulgarian consumers to price increases and insurers agree that such higher insurance prices will bankrupt companies.

Despite all of this, a comparison can also be drawn between Bulgaria and another two EU member states with a similar past – Estonia and Lithuania and all three countries having a currency board.Official Bulgarian public policy since 2007 has been extremely open about the country’s desire to adopt the euro, although it has retained its currency board for more than two decades. Existing euro area members may not recognise the significance of the currency board setup, but some linked it to a religion. In fact, the Bulgarian government was instructed to withdraw from ERM II negotiations if the then current fixed lev-euro exchange rate were not to be recognised as the standard conversion rate, which effectively then did occur.Show Footnote The Baltic States were included in the ERM II a couple of months after their EU accession in 2004. Despite their speedy inclusion, however, it took another six years for the Council of the EU to approve Estonia’s accession to the Eurozone and a total of 10 years for Lithuania, making the latter the newest Eurozone member until Croatia’s adoption of the euro in January 2023.
Bulgaria is already looking at how Croatia quickly acted to correct illegal price increases following the euro’s introduction. Much of those actions draw upon lessons learned from previous adoptions by other Member States and efforts taken, in particular in the aftermath of the 2009 debt crisis to counterbalance the disrepute and scepticism that had been held by certain pockets of the general public, corporations and politicians that have begun to diminish following the COVID-19 pandemic and the euro areas improving financial mechanisms and the currency’ strength on the global stage.

Building off the Banking Union

While Bulgaria’s transition to full euro adoption may still be some while off, its currency continues to participate in the ERM II thus providing exchange rate certainty. Moreover, since 1 October 2020, the country is a participant in the Banking Union’s Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). SSM and SRM participation provides stability for the financial services sector including as a result of the Banking Union’s single supervisory culture and a much more intrusive level of scrutiny of compliance with the Single Rulebook.

While the majority of the Bulgarian banking sector is defined by Banking Union supervised institutions (BUSIs) headquartered in the euro area, the extension of the SSM’s and the SRB’s rules to Bulgaria has required such firms’ domestic operations to reform. This is particularly the case following the ECB-SSM’s operations and staff returning to a more normal post-COVID-19 means of how and where it focuses its attention. That too is welcome as the level of financial markets supervision continues to rise the domestic standard to what is a more level playing field in the Banking Union and its application of the EU’s Single Rulebook for financial services.

Outlook and what this means for financial sector market participants

So, what does all of the above mean for financial sector market participants?

What is important to remember is that the delay in the euro accession is a temporary setback and just like any other similar situation, it should be viewed as an opportunity. The country is now aiming at a 1 July 2024 date but in any case, plans to become a member no later than on 1 January 2025. This means an additional period of a little over a year or a little under two years to be used for domestic consolidation and increase in the foreign buying opportunities. In the meantime, investors coming to the country can still benefit from the currency peg.

Ensuring more political stability would certainly aid Bulgaria in reaching its euro accession goals. After a period of political turmoil and since previously failing to form a coalition or agree on a suitable candidate, the current European Commissioner for Innovation, Research, Culture, Education and Youth Mariya Gabriel is being put forward as a Prime Minister candidate by the GERB party which won most of the votes at the last election, in an attempt to unite several parties with differing political views and mandates.

Ms. Gabriel's resignation as a member of the College of Commissioners was formally accepted by President von der Leyen on 15 May, the day she was presented to the President of Bulgaria to receive the institutional mandate to form a government. Being pro-EU and a member of the European Parliament (with interruptions) since 2009, she has been in her role as commissioner for the past three and a half years, implementing the EU’s key funding programme for research and innovation, Horizon Europe.

It remains to be seen what the outcome of Mariya Gabriel’s candidacy and potential success would mean for the country’s euro accession timeline but if she can succeed, then the country may again return to being on the right path to accession.

About us

PwC Legal is assisting a number of financial services firms and market participants in forward planning for changes stemming from these developments. We have assembled a multi-disciplinary and multijurisdictional team of sector experts to support clients navigate challenges and seize opportunities as well as to proactively engage with their market stakeholders and regulators. Moreover, we have developed a number of RegTech and SupTech tools for supervised firms, including PwC Legal’s Rule Scanner solution for horizon scanning and risk mapping of all legislative and regulatory developments as well as sanctions and fines from over 750 stakeholders in over 170 jurisdictions impacting financial services firms and their business.

If you would like to discuss any of the developments mentioned above, or how they may affect your business more generally, please contact any of our key contacts or PwC Legal’s RegCORE Team via or our website.