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01 February 2021
bulgaria croatia

Bulgaria and Croatia join ERM II and the Banking Union

On 10 July 2020 the Bulgarian lev and the Croatian kuna were included in the Exchange Rate Mechanism II (ERM II). In the short term this means that the inclusion would support the confidence and credit ratings of the two countries while in the long term – this is an important milestone in Bulgaria and Croatia's efforts to join the euro area.

On the same day, the ECB Governing Council took decisions resulting in close cooperation with Bulgaria and Croatia, marking their entry into the Banking Union.

  1. The Exchange Rate Mechanism (ERM II)
    ERM II is a vehicle designed to ensure that exchange rate fluctuations between the euro and other EU currencies (in this case of Bulgaria and Croatia) do not disrupt economic stability within the single market. ERM II provides the framework to manage the exchange rates between EU currencies, and ensures stability.

    Participation in ERM II is also one of the convergence criteria for entry into the euro area, where a country must participate in the mechanism without severe tensions and without devaluing its central rate against the euro on its own initiative for at least two years before it can qualify to adopt the euro.

    Currently, ERM II includes the currencies of Bulgaria, Croatia and Denmark. The Bulgarian lev observes a central rate of 1.95583 to the euro (fixed under currency board statutory arrangements). Although the standard fluctuation band of ±15 is applicable (the currency is allowed to fluctuate by up to 15 % above or below this central rate), due to serious public concerns around potential devaluation, Bulgaria committed unilaterally to continue its currency board arrangement within the ERM II. Still, despite the said commitment of Bulgaria to maintain no fluctuation, it has no impact on the official ±15 % fluctuation margin. The Croatian kuna observes a central rate of 7.53450 to the euro with a standard fluctuation band of ±15 %.

  2. European Central Bank’s help in sustaining stability
    The participation in ERM II brings about serious benefit - in the form of the guarantee of the European Central Bank’s help in sustaining the stability at a time of exchange rate tensions. Such intervention at the margins of the fluctuation band, is in principle automatic and unlimited regarding interventions within the fluctuation band, the help would be limited up to EUR 530 million for Bulgaria and up to 430 million for Croatia.
  3. Commitment to reform
    The agreement on participation of the Bulgarian lev and the Croatian kuna in ERM II is furthermore accompanied by a firm commitment by the Bulgarian and the Croatian authorities to pursue sound economic policies with the aim of preserving economic and financial stability and achieving a high degree of sustainable economic convergence.

    Both Bulgarian and Croatian authorities have committed to implement specific policy measures on the anti-money laundering framework, state-owned enterprises and the insolvency framework. In addition to the above - identical areas for both countries, the Croatian authorities have committed to implement specific policy measures in the business environment, while Bulgarian authorities have committed in addition to the above (i) to implement specific policy measures in the non-banking financial sector; (ii) to continue implementing the extensive reforms carried out in the judiciary and in the fight against corruption and organised crime in Bulgaria, in light of their importance for the stability and the integrity of the financial system.

  4. ECB establishes close cooperation with the central banks of Bulgaria and Croatia
    On 10 July 2020, alongside the accession of the two countries to ERM II, the European Central Bank (ECB) decided to establish close cooperation with the Bulgarian National Bank and the Croatian National Bank, following the fulfilment of the necessary supervisory and legislative prerequisites.

    As of 1 October 2020, the ECB is in charge of the direct supervision of the significant institutions in the Republic of Bulgaria and the Republic of Croatia and the common procedures for all supervised entities, as well as the oversight of less significant institutions.

    On 11 September 2020 the ECB announced that the following Bulgarian banks will be subject to direct supervision: UniCredit Bulbank AD; DSK Bank AD; United Bulgarian Bank AD; Eurobank Bulgaria AD; and Raiffeisenbank (Bulgaria) EAD. For Croatia, direct supervision will affect Zagrebačka banka d.d., Croatia's largest credit institution; Privredna banka Zagreb d.d.; Erste & Steiermärkische Bank d.d.; PBZ stambena štedionica d.d.; Raiffeisen stambena štedionica d.d.; Sberbank d.d.; and Addiko Bank d.d. together with its mother company Addiko Bank AG and Slovenian sister company Addiko Bank d.d.

authors: Tsvetan Krumov, Ozren Kobsa 


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