The journey to adopt the euro: The case of Bulgaria and Croatia

Maria J Nieto and Dalvinder Singh

This article is based on a study that analyses the recent European Central Bank (ECB) Governing Council announcement that both Bulgaria and Croatia were required entry to “close cooperation” with their respective central banks, following the fulfilment of the necessary supervisory and legislative prerequisites prior to the inclusion of their respective currencies in the Exchange Rate Mechanism II (ERM II). The move towards greater monetary integration requires appropriate banking supervision to ensure the stability of the ensuing cross-border credit flows between the respective groups of countries. Together, these two steps pave the way for Bulgaria and Croatia’s future participation in the euro area. It is evident from the research undertaken in this article that there are clear benefits of close cooperation for these member states whose domestic currencies were already linked to the euro, in view of the dominant position euro area banks have in their respective domestic markets. Those banks channel the likely strong expansion of credit that goes hand in hand with the participation in the ERM II as shown in the latest round of participation (Estonia, Lithuania, Slovenia, Latvia and Slovakia). It is more difficult for a national authority to exercise discretion in implementing ECB decisions once it is committed to the path leading to full European Monetary Union (EMU) membership. The uncertainty about the functioning and durability of the close-cooperation arrangement is largely removed.