Bulgaria has abandoned all hope of joining the ERM II exchange-rate mechanism, the waiting room for Eurozone aspirants, in 2010. The country has been forced to postpone its ERM II candidacy thanks to a “hidden budget deficit” that the previous government left behind, Prime Minister Boyko Borisov and Finance Minister Simeon Dyankov said at a press conference April 9. The previous administration, led by the Bulgarian Socialist Party, created this unseen pitfall by signing extensions to numerous contracts that were financially unsecured. Officials have not released any detailed information on what these “inherited” contracts were for, but they are estimated at BGN 2.15 billion (€1.1 billion).
Bulgaria’s “hidden budget deficit” may dash the country’s prospects of adopting the euro in the medium term. The state budgets for 2008 and 2009 were not completely correct because they did not include information about the “hidden” contracts.
PM Borisov’s Citizens for the European Development of Bulgaria (GERB) party, which replaced the Socialist-led coalition in 2009, set ERM II as a top priority and focused its fiscal policy on achieving that goal. The government made enormous efforts to cut public spending in the second half of 2009 so Bulgaria could finish the year with a small budget deficit. However, according to new estimates that use European Union methodology, Bulgaria's budget deficit for 2009 stands at 3.7% of GDP, well above the 3% threshold that ERM II requires.
Until recently, Bulgaria had appeared to be fulfilling the Maastricht criteria for Eurozone entry even before it joined ERM II. The country has easily managed to keep its budget deficit below 3% of GDP, as Maastricht requires, since the country set up its currency board in 1997, according to official data.
The hidden deficit changes that picture. PM Borisov and Finance Minister Dyankov declared that Bulgaria will revise the budgets for 2008 and 2009 and will inform the European Commission and the European Central Bank about the new figures. The revised data will probably reveal that Bulgarian fiscal stability was a myth. Nonetheless, the 2008-2009 budget revisions will not impact the 2010 budget plan, and the government will do its best to keep the deficit under 3%, Finance Minister Dyankov said.
Since Dyankov has pledged to keep the budget deficit within Maastricht limits, the hasty decision to give up ERM II seems unjustified. In all likelihood, the real reason is that the government wants to postpone reform because it is reluctant to restrict public spending. Until now, GERB’s fiscal hawks have been pushing a prudent and conservative spending policy in order to make ERM II a reality. The biggest threat now is the government will loosen its budgetary policy and wobble to the populist side.