Fiscal stability has long been on Bulgaria's agenda, just as it was the European Union's main point of interest when assessing the country's readiness to enter the ranks of the euro and so expand the European Monetary Union (EMU).

With its accession to the EU, Bulgaria automatically earned the right to become a eurozone member but only when it complies with certain stipulations. For this reason, it has for the first time received a detailed appraisal on its readiness to join the monetary union in the Convergence Reports 2008 of the European Commission (EC) and the European Central Bank (ECB). Both institutions are obliged to report regularly on the progress of aspirant eurozone members to meet the Maastricht criteria under Article 121(2) of the EU Treaty.

These reports, which covered 10 countries yet to join the eurozone (the UK and Denmark have a legal opt-out from the euro), gave the green light for Slovakia and saw nine member states non-compliant or with a "derogation".

Bulgaria, in particular, meets three and fails on two criteria. It derogates on the price stability criterion, which envisages that its inflation does not exceed that of the three EU member states with the lowest inflation (Malta, the Netherlands and Denmark) by 1.5 percentage points. Bulgaria's inflation in the 12 months to March 2008 reached 9.4 per cent, well above the reference value of 3.2 per cent, the report said.

"Drivers of increasing inflation included higher energy and food prices and hikes in administered prices and excise duties, although underlying inflationary pressures also strengthened amid buoyant domestic demand and wage growth," the EC report said.

Faced with these circumstances, the report said, inflation is unlikely to be harnessed in the next few months. In 2008, the EC forecasts, inflation will remain at a high 10 per cent and in 2009 at six per cent as the boom in domestic demand fades.

On the upside, Bulgaria fulfils the state budget criterion, which foresees that the deficit does not exceed three per cent of the country's gross domestic product (GDP). Over the past few years, the report said, the country has consistently improved its budget fundamentals and since 2003, a break-even point, the budget ran surpluses and in 2007 was at 3.4 per cent of GDP. The EC forecasts that it will remain at 3.2 per cent of GDP in both 2008 and 2009.

In regard to public debt, Bulgaria has also been within the prescribed cap of 60 per cent of GDP. Government debt has also been declining consistently, from 50 per cent of GDP to 18 per cent in 2007. The EC expects the downward trend to be sustained and reach 11 per cent of GDP in 2009.

Delving further into macro-economic fundamentals, the EC again sounded the alarm over the soaring current account deficit. Widening from six per cent in 2004 to 20 per cent in 2007, it draws on the rapid growth of consumption and foreign investment. While it has been fully - or almost fully - covered by foreign direct investment (FDI), the EC voiced concern that about 40 per cent of it went into real estate and construction, hardly facilitating Bulgaria's catch-up with EU economies.

The Bulgarian currency is yet to enter the ERM II system, hence the requirement that the exchange rate of the lev to the euro fluctuates in a +/- 15 per cent range from a reference value is irrelevant. Besides, under the currency board, which Bulgaria introduced in the aftermath of the 1996/97 financial crisis, the lev is pegged to the euro. The exchange rate has been flat since 2003 and is unlikely to change soon, "though investor risk perceptions seem to have heightened somewhat in the context of the recent global financial market turbulences as indicated by a widening of short-term interest rate spreads vis-a-vis the euro area since late 2007".

Bulgaria's long-term interest rate, at 4.7 per cent as of March 2008 and hovering around this percentage since EU accession, is safe within the 6.5 per cent requirement, the report said.

Apart from economic criteria, the convergence report also assesses countries' compliance with the legislation applicable within the European Monetary Union (EMU). The report has found Bulgaria's Law on the Bulgarian National Bank (BNB), the law governing fiscal and monetary relations within the country, not fully compliant with the Statute of European System of Central Banks (ESCB) and the European Central Bank (ECB), the legislation applicable in the EMU.

According to the report, the Law on the BNB still suffers from "imperfections" in regard to "banknotes and coins issues, the promotion of the smooth operation of payment systems, the ECB's approval before participation in international monetary institutions, the statistical role of the ECB and the EU, auditing by independent external auditors, institutional and personal independence, as well as the prohibition of monetary financing".

Therefore, the EC has recommended that Bulgaria introduce clauses that would institute the ECB as the authority granting approval for important financial transactions and agreements, ensure that Bulgarian government and municipal lenders be treated on equal terms with private entities, as well as legally allow external auditors to check into BNB books for transparency purposes.

Shortly after the issue of the convergence report, international lender UniCredit Group projected in an analysis called "The Euro goes Eastwards" that, although Bulgaria has set euro adoption as a priority, it would only be able to join in 2013/2014.

UniCredit assesses Slovakia's chances to join the eurozone as of January 1 2009 at 90 per cent. It expects Estonia and Lithuania to follow suit in 2011, whereas Hungary, Poland, the Czech Republic and Latvia are likely to join in 2012. Romania is put on a par with Bulgaria.

Debora Revoltella, the chief economist for Central and Eastern Europe (CEE) at UniCredit Group, called on Bulgaria and other eurozone aspirants to mind as main challenge "the inflation criterion because of the price pressure observed in almost the entire CEE region". "Inflation is the main culprit for the gradual postponement of euro adoption dates," Revoltella said.