Bulgaria does not meet all euro entry criteria, Commission to say

By Jan Strupczewski

BRUSSELS (Reuters) - Euro-hopeful Bulgaria does not yet meet the criteria to adopt the single currency, the European Commission will say on Wednesday in an assessment of European Union countries that must one day switch to the euro.

Unlike bigger and richer EU countries that still use their own currency, such as Sweden and Poland, Bulgaria, the EU's poorest member, is eager to join the euro zone and wants to begin the two-year waiting period in May or June.

Apart from Britain, which will leave the EU next year, and Denmark, which has a permanent exemption from adopting the euro, all EU countries are legally obliged to join the single currency once they meet all the criteria.

"In light of its assessment on legal compatibility and on the fulfilment of the convergence criteria, and taking into account the additional relevant factors, the Commission considers that Bulgaria does not fulfil the conditions for the adoption of the euro," says the Commission assessment, seen by Reuters, that is to be formally approved on Wednesday.

To adopt the euro, a country has to have low long-term interest rates, inflation, government deficit and debt and a stable exchange rate against the euro. It also has to have an independent central bank and be well-integrated into the euro zone economy.

The Commission will say that Bulgaria meets the criteria of low inflation and sound public finances. But its law on the central bank falls short of requirements for central bank independence and the prohibition of monetary financing.

Neither does the country meet the exchange rate stability criterion, the Commission will say.

The formal requirement is that the Bulgarian lev must spend two years in the Exchange Rate Mechanism II, trading in a band of plus or minus 15 percent around a central parity rate, during which time appreciation is more welcome than depreciation.

In practice, the lev easily meets this criterion, because it has been pegged to the euro since the euro was created. But Bulgaria intends to formally apply to start its two-year ERM II test only by the end of June.

That is causing tensions in the euro zone because once it completes two years in the ERM and changes its central bank law, it will have met all the formal criteria and will have to be accepted.

But many zone countries do not want Bulgaria to join anytime soon. They worry about the country's widespread corruption and how it may affect the stability of Bulgarian banks.

Euro zone officials are therefore pushing for Bulgaria to join the euro zone's banking union before it applies to start its ERM II stability test. That give the European Central Bank to address any instability and non-performing loan issues in the country's banks before adopting the single currency.

Bulgaria has pointed out that under EU law membership in the banking union is neither a criterion for euro membership nor for starting the ERM II stability test. But the decision to admit a country to the ERM II is in the hands of euro zone governments and the European Central Bank.

Senior euro zone officials from the Commission, the ECB and the financial policy-making body of euro zone governments will hold talks in Sofia on ERM II membership on Wednesday.

"People are worried that unless Sofia's euro adoption is prepared well, Bulgaria could one day become another Greece," one senior euro zone official said. "The Greek trauma is still fresh in people's minds and weighs on the perceptions of Bulgarian euro ambitions."

(Reporting By Jan Strupczewski)