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SOFIA -(Dow Jones)- As the European Union struggles to avoid a full-blown debt crisis in 2010, an unlikely candidate has emerged as a fiscal model for the bloc - its newest and poorest member.
Bulgaria joined the EU in 2007, posted the smallest budget deficit of any of the 27 member states last year, and is tipped to be the only EU economy to balance its budget in 2010. Growth forecasts for this year have been revised up to predict an expansion, and credit ratings agencies have upgraded the EU newcomer's outlook from negative to stable.
Spearheading that austerity drive is Prime Minister Boyko Borisov, a tough-talking former karate champion who says his government will formally apply to join the euro zone by the end of January, setting it on course to adopt the single currency in 2013.
"We have everything in order and we're ready to start the road to the euro zone by the end of the month - it is now the first foreign policy priority of my government to enter the euro zone," Borisov said in an interview.
The Prime Minister's declaration ends months of speculation over when the Balkan state would formally apply to the bloc's exchange rate mechanism--a two-year currency stability test for euro hopefuls.
A successful application would boost confidence and foreign investment in Bulgaria, and mean that it would join the currency area before nearby Romania and Hungary.
But it must meet a number of criteria covering currency stability, public sector debt levels, interest rates and inflation. And its application must be approved by EU heads of government and European Central Bank President Jean-Claude Trichet.
Economists say Bulgaria's economic and fiscal management has made it a role model for other countries in Europe.
"Its experience has a lot to teach other EU economies preparing to cut spending," said Nigel Rendell, emerging markets economist at RBC Capital Markets.
But Borisov, who has drawn international accolades for cutting spending 15% while maintaining high levels of public support, fears Bulgaria's fiscal performance, which far outshines each of the 16 countries in the euro zone, won't make them a shoo-in to enter the currency club.
His fear is that an intensification of debt problems among some existing euro zone members may mean the bar is set even higher for new entrants, as nervous euro zone policymakers opt to consolidate existing borders rather than expand the bloc.
"I am afraid that the debt crisis in newer euro zone countries will negatively affect us," he said. "We hope that the authorities respect the admission criteria as we've worked hard to get here."
In a thinly veiled reference to Greece, which has struggled to convince investors it can cut its ballooning budget deficit from over 13% of GDP towards the EU's 3% ceiling, Borisov said he was making progress in persuading European leaders his government would be fiscally disciplined "now and in the future."
Greece joined the euro zone on the basis of public sector debt figures that were subsequently revealed to underestimate the true size of its budget deficit. It then failed to address underlying weaknesses in its public finances that led to the explosion in debt last year.
Government fears that Bulgaria's candidacy could be vetoed by policymakers anxious to avoid further expansion of the euro zone are shared by business leaders here.
"It makes sense for Bulgaria to apply--but I worry that at a time of crisis the European Central Bank could postpone the application on a technical point because they want to consolidate," said Ivo Prokopiev, chairman of industry group the Confederation of Bulgarian Employers and Industrialists. For the euro bid and beyond, policy analysts say Bulgaria's steps could provide a blueprint for policymakers across central and eastern Europe, which is likely to see a succession of new governments from the seven elections due this year alone.
"How Bulgaria is treated by the EU will send a message to all the other countries in the region - if Brussels doesn't reward their fiscal discipline then the message which goes is keep on spending," said Ivan Krastev, Chairman of the Sofia-based Center for Liberal Strategies.
Borisov, who's polling numbers have dipped modestly in recent months, indicates that his government's efforts to cut costs and balance the budget are not limitless.
"If fiscal discipline is still hitting people really hard in the years ahead, then we'll have to reconsider our approach," he said.
But for now, the government appears to be holding its nerve, with Borisov signaling he would extend the powers of his 'cost-cutter-in-chief,' Finance Minister Simeon Djankov, to add increased supervision of the real economy to his treasury portfolio.
Djankov, a former World Bank economist who's appointment steadied investor nerves about Borisov's incoming administration in July, said in an interview that fiscal credibility was "non-negotiable" and was essential to safely navigate Bulgaria's entry into the euro zone.
"We want to be very clear that we take fiscal credibility very seriously - its a fundamental part of repairing the credibility of Bulgaria which will allow us to work as equal partners within the EU," he said in an interview.
Copyright 2009 Dow Jones Newswires
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