The opposition came to power, and the new prime minister, Ivan Kostov—in close cooperation with the IMF—moved to stabilize the economy. The weakest banks had been closed, and with public debt (issued in leva) inflated away, the new government was ready to take a key step to stabilize inflation and support long-term credibility and financial stability: creation of a currency board.
This meant pegging the value of the lev rigidly to an international reserve currency, at the time the deutsche mark and later the euro. Bulgaria could issue leva only based on its existing and later newly acquired reserves of deutsche marks and gold, with some limited flexibility based on extra reserves that had been set aside to guarantee the stability of the banking sector. The Bulgarian National Bank would transparently manage the arrangement—crucial to maintaining confidence.
To bolster public confidence, the government wrote the currency board into law, which guaranteed that any changes to the board had to be approved by Parliament and therefore be made publicly. The government also invited the IMF to verify Bulgaria’s reserves. In June 1997, the night before the currency board went live, one of the authors (Anne-Marie) was led to the vault in the central bank’s basement to observe a final count of the gold bars.
The economy began to stabilize following the currency board announcement in March of that year. Inflation fell to 22 percent by 1998, and interest rates dropped as well. Within months, the economy began to grow again. GDP rose by 3.5 percent in 1998 after declining 10.9 percent and 6.9 percent in 1996 and 1997, respectively. Public debt fell by nearly half.
Bulgaria had achieved a hard-won victory.
But in its quest for EU membership, the country still had mountains to climb. A free market called for private businesses and banks—previously almost nonexistent. And the state had to strengthen the rule of law and its capacity to govern such an economy.
Following relative political stability in the first decade of the currency board, the next decades brought increasing political instability—and a total of 18 different governments— including one led by the country’s World War II–era child king and three led by a businessman. Throughout this turbulence, the currency board and the low inflation it brought were immensely popular. But the requisite fiscal restraint forced sometimes difficult choices, and people voted with their feet—nearly 1 million of the country’s 8.5 million people emigrated during this time.
Still, Bulgaria accomplished much. By 2007, when the EU welcomed Bulgaria as a new member (alongside Romania), 75 percent of the economy was privately owned, including all the banks. Key institutions had been strengthened, and capital markets started to develop. The country had achieved upper-middle-income status.
2007–24: Growing pains, external shocks
With EU membership in hand, Bulgaria’s economic policymakers were focused on their next goal: entering the European Exchange Rate Mechanism (ERM II), known as the “waiting room for the euro.” They hoped to accomplish this within two years, just like the Baltic countries that entered the EU with currency boards in place. Then as soon as two years after that, the policymakers thought, they could seek full euro area membership.
The financial turbulence that began affecting some countries in mid-2007 seemed far away from the Land of Roses at first. Investment was flowing into the country, which was welcome, for sure. But hard currency lending, a housing boom, and supercharged wage growth stoked double-digit inflation and drove the current account deficit above 20 percent of GDP. These imbalances prevented Bulgaria from immediately joining ERM II.
The country kept working to close the wealth gap with other European countries. By 2009, the currency board had proved its worth yet again, and inflation was back below 2.5 percent. But theturbulence that started in 2007 was now a hurricane—the global financial crisis had reached the center of Europe, and many thought the euro itself was at risk and the euro area would not be considering new members anytime soon.
And no one entered the euro waiting room for more than a decade.
A short but devastating domestic banking crisis in 2014 showed the depth of remaining governance challenges. Soon after that, though, under Prime Minister Boyko Borisov’s second government, Bulgaria was ready to make another big push to join ERM II.
The EU and the European Central Bank (ECB) were officially supportive, but still cautious after the global and euro area crises and amid remaining concern about the rule of law in Bulgaria. They pushed for continued progress on a set of agreed legal and institutional commitments, including anti-corruption measures. Bulgaria completed these requirements by 2020 and finally entered ERM II in the summer and the European Banking Union in the fall, alongside Croatia.
While achieving these milestones, the government was working to accelerate convergence while at the same time protecting the people and economy from the pandemic and energy related external shocks. Public spending, while necessary, pushed inflation above the level required for convergence, and the dream was again deferred.
By 2024, the winds were again at the country’s back. The World Bank officially declared Bulgaria a high-income country—the culmination of many years of hard work and steady growth. The country was approved as a member of the Schengen passport-free travel area—a welcome vote of confidence from Brussels. The currency was the last major step in Bulgaria’s European integration.
As the pandemic and the energy shock receded, the 2024 EU and ECB convergence reports noted significant progress—despite the need for continued vigilance, Bulgaria’s laws met EU requirements. But inflation was still too high. By the end of the year, though, it had declined, and Bulgaria’s central bankers, under Governor Dimitar Radev, were feeling confident. The convergence assessments typically happened every two years, but the country had come so close. Would the EU do another review after just one year? The signals were positive, and in February 2025, Bulgaria formally requested a special convergence assessment.
Success at last
Back to the warm June day. The report had landed—and success! Nearly three decades after the hyperinflation crisis that was seared into the national memory, the moment had arrived. Bulgaria had met the conditions to join the euro area. On New Year’s Day 2026, it became the 21st member of the single currency.
This also marked the end of the currency board. For nearly three decades, as economic cycles, governments, and crises came and went, the board endured. What’s more, unlike in some other countries, it enjoyed great public support for keeping inflation low and reining in fiscal spending. Ordinary citizens said they were actually sad to see it go, which is notable for a rather arcane monetary policy instrument.
