Title page
Contents
ABSTRACT 2
LIST OF ABBREVIATIONS 8
EXECUTIVE SUMMARY 11
1. INTRODUCTION 14
2. THE STATE OF NOMINAL AND REAL CONVERGENCE IN NON-EURO AREA COUNTRIES 18
2.1. Nominal convergence 18
2.1.1. Price stability 18
2.1.2. Sound public finances 19
2.1.3. Exchange rate stability 21
2.1.4. Long-term interest rates 21
2.2. Real convergence 22
2.2.1. Price convergence and the Balassa-Samuelson effect 25
3. EU RESPONSE TO COVID-19: EFFECTS ON CONVERGENCE 29
3.1. ECB monetary policy response 29
3.2. Easing the way for national fiscal policies 32
3.2.1. Temporary state aid framework 33
3.2.2. Activation of the general escape clause 35
3.3. Tackling the immediate effects of the pandemic: budgetary and financial support measures 36
3.3.1. Coronavirus Response Investment Initiative (CRII and CRII+) 36
3.3.2. European Investment Bank initiatives 38
3.3.3. SURE 39
3.4. Supporting Member States' recovery 40
4. LATEST DEVELOPMENTS IN CROATIA AND BULGARIA 42
4.1. Accession process and commitments 42
4.2. Overview of economic developments 45
4.2.1. Economic outlook of Croatia and Bulgaria in early 2020 45
4.2.2. Depth of the pandemic crisis in Croatia and Bulgaria 46
4.2.3. Fiscal response to the COVID-19 crisis 47
4.3. Trends in nominal convergence 48
4.3.1. Price stability 48
4.3.2. Medium-term prospects 53
4.3.3. Sound public finances 53
4.3.4. Interest rates 54
4.3.5. Exchange rates 54
4.4. Croatian recovery and resilience plan 56
4.4.1. Investments in the NRRP 57
4.4.2. Reforms in the NRRP 58
4.4.3. Long-lasting impact of the NRRP 60
4.5. Bulgarian recovery and resilience plan 61
4.5.1. Investments in the NRRP 62
4.5.2. Reforms in the NRRP 63
4.5.3. Long-lasting impact of the NRRP 65
5. SUSTAINABILITY OF CONVERGENCE CRITERIA 66
5.1. Additional economic factors 67
5.1.1. Economic structure 69
5.1.2. Institutional factors 70
5.1.3. Perception 70
6. LEGAL CONVERGENCE 72
6.1. Croatia 72
6.2. Bulgaria 73
6.3. Quality of statistics 76
7. CONCLUSIONS 78
REFERENCES 81
ANNEX: METHODOLOGICAL APPROACH 84
Table 1. Provision of euro liquidity through ECB swap and repo operations in non-euro area Member States during COVID-19 pandemic 30
Table 2. Bulgarian ERM II post-entry commitments 42
Table 3. Croatian ERM II post-entry commitments 44
Table 4. Overview of 2018 and 2020 ECB Convergence Reports for Croatia and Bulgaria 45
Table 5. Timeline for completion of reforms and investment projects under Croatian NRRP 56
Table 6. Timeline for completion of reforms and investment projects under Bulgarian NRRP 61
Table 7. MIP scoreboard 66
Figure 1. HICP 12-month average rate of change (April 2015-April 2022) 18
Figure 2. General government gross debt 20
Figure 3. General government budget balance 20
Figure 4. Bilateral exchange rate vis-a-vis the euro (index end of Jan 2006 = 100; monthly data; Jan 2006-April 2022) 21
Figure 5. Long-term interest rates (April 2017-April 2022) 22
Figure 6. Beta convergence: GDP per capita convergence in non-euro area countries relative to euro area average 23
Figure 7. Changes in GDP per capita, 2020 and 2021 23
Figure 8. Sigma convergence: coefficient of variation, euro area, non-euro area and EU 24
Figure 9. GDP per capita average (LHS) and standard deviation (RHS) in the euro area and non-euro area group 24
Figure 10. Employment rates: beta convergence (left panel) sigma convergence (right panel) 25
Figure 11. Inflation dispersion (p.p.) 26
Figure 12. Relationship between real GDP per capita and price levels (index value 2015 = 100) 27
Figure 13. Relationship between labour productivity and price levels, tradeable (left panel) and non-tradable (right panel) (index value 2015 = 100) 27
Figure 14. Evolution of price (left panel) and productivity levels (right panel) across sectors (index value 2015 = 100) 28
Figure 15. Asset purchases by central banks during the pandemic (% of 2020 GDP), end-Feb 2020 to end-June 2021 32
Figure 16. Discretionary fiscal measures under the temporary state aid framework (% GDP) 34
Figure 17. Increase in debt levels in 2020 and pre-COVID-19 debt burden 35
Figure 18. Budget deficits and debts 36
Figure 19. Breakdown of investment volumes under CRII 37
Figure 20. Allocation of reprogrammed funds under CRII/CRII+ explicitly indicated by non-euro area Member States using the Commission's common... 37
Figure 21. Share of programmes and priorities 38
Figure 22. Share and sectoral distribution of EIB COVID-19 projects across non-euro area Member States, 30 March 2022 39
Figure 23. SURE loans, disbursed and proposed amounts per Member State 40
Figure 24. Annualised MFF 2021-2027 and RRF grants (% of 2020 GDP) 41
Figure 25. COVID-19 stringency index 46
Figure 26. Fiscal measures in Bulgaria 48
Figure 27. Fiscal measures in Croatia 48
Figure 28. 12-month HICP rate of change in Bulgaria and Croatia compared to the running reference value 49
Figure 29. Croatian 12-month average HICP rate of change and reference values under the four scenarios 50
Figure 30. Bulgarian 12-month average HICP rate of change and reference values under the four scenarios 50
Figure 31. EU 12-month average rate of change in HICP components, April 2022 51
Figure 32. 12-month average rate of change in transport and housing & energy prices in best performers 51
Figure 33. Bulgaria - BGN/EUR exchange rate 55
Figure 34. Croatia - HRK/EUR exchange rate 55
Figure 35. Planned Croatian expenditure financed by RRF grants, and expected completion of investment projects 56
Figure 36. Croatian investments by six RRF pillars 57
Figure 37. Planned Bulgarian expenditure financed by RRF grants, and expected completion of investment projects 62
Figure 38. Bulgarian investments by six RRF pillars 62
Figure 39. Current account, % GDP 67
Figure 40. Real effective exchange rate, % change from previous year (left panel) and nominal ULC based on hours worked (right panel) 68
Figure 41. Employment (left panel) and unemployment rates (right panel), 2003-2020 69
Figure 42. Quality of governance indicators (selected countries), 1996-2020 70
Boxes
Box 1. Lithuania's delay in joining the euro area 52