Bulgaria External Relations Briefing: Two International Events with Strong Socio-Economic Significance for Bulgarian Development Evgeniy Kandilarov

ISSN: 2560-1601

Vol. 31, No. 4 (BG)

July 2020

Bulgaria external relations briefing: Two International Events with Strong Socio-Economic Significance for Bulgarian Development Evgeniy Kandilarov

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Two International Events with Strong Socio-Economic Significance for Bulgarian Development

Within the last month, two very important international events for Bulgaria took place. Both are related to the Bulgaria-EU relations. The first one is joining the ERM II Exchange Rate Mechanism. The second – was the participation of the Bulgarian Prime Minister in the negotiations during the summit of the European Council 17-21 July and the achieved results. Both events are related to the country's International Relations, but at the same time have a strong socio-economic significance.

Joining the ERM II and its consequences for Bulgaria At the request of the Bulgarian authorities, the finance ministers of the euro area Member States of the European Union, the President of the European Central Bank, and the finance ministers and central bank governors of Denmark and Bulgaria have decided, by mutual agreement, to include the Bulgarian lev in the Exchange Rate Mechanism (ERM II). The Commission has been involved and the Economic and Financial Committee has been consulted. The central rate of the Bulgarian lev is set at 1 euro = 1.95583 leva. The standard fluctuation band of plus or minus 15 percent will be observed around the central rate of the lev. At the same time, following a careful assessment of the appropriateness and sustainability of Bulgaria’s currency board, it was accepted that Bulgaria is joining the exchange rate mechanism with its existing currency board arrangement in place, as a unilateral commitment, thus placing no additional obligations on the ECB. The agreement on participation of the lev in ERM II is based, inter alia, on the commitment by Bulgaria to join the Banking Union and ERM II simultaneously and the completion by the Bulgarian authorities of a set of measures, described in their letter of intent dated 29 June 2018, that are highly relevant for a smooth transition to, and participation in ERM II. These measures pertain to the following six policy areas: banking supervision, the macroprudential framework, the supervision of the non-banking financial sector, the anti- money laundering framework, the insolvency framework, and the governance of state-owned enterprises. The ERM II parties welcome the positive assessment of the implementation of these commitments by the European Central Bank and the European Commission. The European Central Bank has also announced the establishment of close cooperation with Bulgarian National Bank. The agreement on participation of the Bulgarian lev in ERM II is furthermore

1 accompanied by a firm commitment by the Bulgarian authorities to pursue sound economic policies with the aim of preserving economic and financial stability and achieving a high degree of sustainable economic convergence. The Bulgarian authorities have committed to implement specific policy measures on the non-banking financial sector, state-owned enterprises, the insolvency framework, and the anti-money laundering framework. Bulgaria will also continue implementing the extensive reforms carried out in the judiciary and in the fight against corruption and organized crime in Bulgaria, in light of their importance for the stability and the integrity of the financial system. The authorities, together with the responsible European Union bodies, will closely monitor macroeconomic policy developments and the implementation of these policy measures, in the appropriate frameworks. The decision of the ERM II parties represents an important milestone in Bulgaria’s efforts to join the euro area. It must now participate in the mechanism without severe tensions and, in particular, without devaluing its currency central rate against the euro on its own initiative, for at least two years before it can qualify to adopt the euro. The Commission will continue to encourage and support the efforts of the Bulgarian authorities to complete the process of joining the euro area. The preliminary stage for the adoption of the euro as the national currency lasts three years. This means that the euro can replace the lev in 2023.The forthcoming enlargement of the eurozone will be the first since 2015. Participation in ERM II will help to strengthen the resilience of Bulgaria’s economy. It will help the country to focus its policies on stability, foster its convergence and eventually support Bulgarian government in its efforts to adopt the euro. Although public opinion in Bulgaria is not unanimous about the positives and negatives of this foreign policy act, the Bulgarian government considers this a huge success, which in the opinion of the Prime Minister will enable the country to get as close as possible to social - economic levels and standards of developed Western European countries. Whether this will really happen remains to be seen. However, the fears and anxieties of those who believe that Bulgaria is far from ready to adopt the euro should not be overlooked.

Gaining support from the EU for socio-economic development and recovery from the COVID-19 pandemic The other key international event for the EU member states including Bulgaria was the first in-person EU summit since the coronavirus outbreak. After four days of difficult discussions, EU leaders reached what they called a “historic agreement” on the bloc’s budget for 2021-2027 and on a 750-billion-euro coronavirus recovery fund, known as Next Generation EU. It was first put forward by the European Commission in May and will be made available

2 to fund post-Covid-19 relief efforts across the EU. The Commission will itself borrow the money – cheaply, using its triple-A rating. As a bonus, leaders also signed off on the EU’s next seven-year multi-annual budget, which will be worth and additional 1.074 trillion euros. Leaders from central and south-east European EU member states also expressed satisfaction. Member states were largely split between those hit hardest by the outbreak and keen to revive their economies, and those more concerned about the costs of the recovery plan. On the first-hand Bulgarian position during the negotiations was that for Bulgaria the appropriate financing and implementation of the traditional policies - Cohesion and the Common Agricultural Policy - is of paramount importance, as they have an important role even after the current crisis. Cohesion policy remains the EU's main investment instrument in support of growth, employment, competitiveness and convergence. Another point of the Bulgarian Prime Minister Boyko Borissov was for maximum support regarding the medical aspect of the pandemic and focus on assistance for the socially disadvantaged and for the preservation of employment. According to Borrisov, it is crucial to support medical workers, medical centers and the medical side of the pandemic in general and to have a single medical protocol for all European countries, for example in terms of masks, distance, schools, restaurants. In this regard Bulgarian Prime Minister cited European solidarity. According to him, it is important to have grants for the socially disadvantaged, for people who lost their jobs as a result of the pandemic and to support measures to maintain employment. According to Borissov, the EU should give concerts on the next 6 months to a year, when it is considered that the situation will be the worst in socio-economic terms. He also expressed that the countries that participate with greater financial resources have the right to seek greater control over the spending of funds and this is normal. At the same time, Borissov pointed out that in the EU structure, the body exercising control is the European Commission. On July 21, after the end of the European Council meeting in Brussels, Bulgarian Prime Minister Boyko Borissov announced that Bulgaria is set to receive 29 billion euro in EU funds during the bloc’s next budget period between 2021 and 2027. “This is more money in the new budget and we are one of the few countries that will receive more money, nearly one billion euro, compared to the current multi-annual financial framework,” Borissov said. That is despite the fact that the size of the next multi-annual financial framework is 62 billion euro lower than the current one. Borissov explained that the EU funding under the cohesion policy and common agricultural policy, which he described as his “red line” during the EU summit talks, would not be cut. The cohesion policy funding for Bulgaria would increase in the next budget period by 800 million euro to nine billion euro. According to the government this is

3 important for achieving Bulgaria’s main goals, which is competitiveness, economic growth and employment. Additionally, Bulgaria will receive 200 million euro specifically towards investment in growth and jobs for its less developed regions. The money would go primarily to the northern and north-western parts of the country. Bulgaria was also slated to receive 7.7 billion euro in grants under the Next Generation EU package, with the bulk of the money, about six billion euro, allocated under the recovery and resilience facility of the package. Finally, it should be noted that the receipt of funds of EUR 29 billion is not unconditional. The EU budget will continue to spend on programs and projects that require a share of national co-financing. Observance of the rule of law is added as a new condition for the first time. The European Commission initially had strong ambitions to impose a close link between it and European funding, but the role of the new mechanism was severely curtailed in the negotiations at the European Council at the request of Poland and Hungary. It is limited to infringements relating to the financial interests of the EU. However, decisions to impose sanctions on offending countries will be taken by a qualified majority, not by consensus, which provides some guarantees for the effectiveness of the mechanism. Funds from the Recovery Fund are also not unconditional. The instrument requires the development and approval by the European Commission of a national recovery and sustainability plan for the period 2021-2023.

In conclusion, Bulgarian government considers as its huge international success both the entry into the ERM II mechanism and the agreement reached on the future EU budget as well as the funds for recovery from the pandemic. Unfortunately, however, this opinion is not shared at all by the tens of thousands of protesting Bulgarians, who have been protesting on the streets of Sofia and other cities for 17 days now, demanding the resignation of the government. Whether the government will withstand this pressure remains to be seen in the coming weeks.