Nominal versus real convergence: Bulgaria’s practical approach toward euro adoption

Looking at the role that monetary policy plays in the catching-up process is highly relevant to Bulgaria and has been for many years. Currently, Bulgaria addresses the role of monetary policy in the context of the country’s specificity of its monetary policy regime and in the context of its recent initiative to join simultaneously the Exchange Rate Mechanism (ERM II) and the Banking Union as an initial step toward the adoption of the euro. Tracing back the path that Bulgaria chose toward euro adoption, the country’s experience gained so far leads to three conclusions. First, nominal convergence is a critically important precondition in the catching-up process to facilitate and accelerate the real convergence process. In the case of Bulgaria, the public financial management system has delivered the right outcomes in this regard for quite some time; yet this is far from sufficient. Second, the main drivers of real convergence are of a more long-term and structural nature. This is why, while aiming to maintain the current monetary and fiscal stance, Bulgaria’s main focus is, on the one hand, on tackling the structural reform agenda - which is still lagging behind - and, on the other hand, on improving the governance and quality of institutions. Third, there are country-specific factors that need to be taken into consideration. One such factor is the path that Bulgaria follows to move forward: more precisely, the country’s current initiative to join simultaneously the ERM II and the Banking Union through a well-structured process. Treading this path is expected to help not only consolidate the country’s nominal convergence but also accelerate its real convergence.