Should Bulgaria be allowed to join the eurozone and the EU’s banking union? That is the question that has been under consideration by European policymakers this summer.
In theory, of course, Bulgaria not only has a right to join both but is legally obliged to do so, under the conditions of its accession to the bloc.
In practice, the response of EU leaders to Bulgaria’s request to enter the Exchange Rate Mechanism – the precursor to euro adoption – has been lukewarm. While agreeing in principle in late June, they kicked the can as far as possible down the road by setting an assessment period of “at least a year”.
Their caution is not due to Bulgaria’s macroeconomic position. The country easily meets the Maastricht criteria. What EU policymakers are not happy about are Bulgaria’s low income levels, failure to get a grip on corruption and the integrity – or lack thereof – of its banking sector.
At first glance, such circumspection seems reasonable. Bulgaria’s institutions remain weak and governance is shoddy.
Concerns about the stability of its banking sector are also not without foundation. It is only four years since the collapse of the country’s fourth-largest lender, Corpbank, revealed shocking failures of management and supervision.
The fallout from that affair has seen two Bulgarian deputy central bank governors indicted, along with Corpbank’s main shareholder, more than a dozen of its staff and two local auditors.
Bad as this looks, however, it is slightly misleading. Bulgaria’s banking sector has had its problems, but there is no reason to expect a systemic crisis.
All but three of the country’s 10 biggest banks are part of western groups, including runaway market leader UniCredit Bulbank. The second-largest, DSK Bank, is owned by Hungary’s OTP. Between them, these eight entities account for more than two-thirds of all banking assets in Bulgaria. The largest surviving local lender, First Investment Bank (FIBank) ranks fourth by total assets and has a deposit base of Lev7.4 billion ($4.4 billion).
Furthermore, if something were to go wrong in the sector, the chances of other EU countries being on the hook are slim to vanishing.
For one thing, Bulgaria has its own generous and well-funded deposit insurance guarantee scheme. For another, the EU does not. In late June, Eurogroup leaders once again failed to agree on the creation of a common scheme for the bloc, the so-called third pillar of banking union.
That leaves the Single Resolution Fund, which would be under no obligation to bail out a failing Bulgarian lender. In any case, Bulgaria has already shown that it is capable of rescuing its own banks. It bailed out FIBank in 2014 and could easily afford do so again, given a debt-to-GDP ratio of just 25%.
Why, then, are EU leaders dragging their heels on Bulgaria’s application to join the eurozone and banking union? Some might argue that the bloc has been too lenient in the past with its newer members and that it is time, belatedly, to impose some discipline.
But why should Bulgaria be singled out? It is, after all, less than four years since Latvia was welcomed into the single currency, despite the well-publicized propensity of some banks for laundering Russian money.
The suspicion must arise that some EU policymakers regret extending membership of the bloc to countries such as Bulgaria in the first place and are now trying to renege on the commitments they made during that process.
If that is the case, they should say so – and not hide behind scare stories about Bulgaria’s banks.