site.btaFiscal Council: Euro Adoption Not Linked to Inflation

The adoption of the euro is a nominal change and, as such, is not linked to rising inflation, the Fiscal Council of Bulgaria said Monday in an analysis examining inflation levels in several eurozone countries three years before and three years after introducing the euro. According to the Council, inflation is not caused by the currency change itself but by real factors such as military conflicts directly affecting the country, production costs, demand, energy prices, and economic policy.

Prices and incomes in Bulgaria were recalculated at the fixed exchange rate, which did not lead to an increase in money supply, particularly since the country operated under a currency board, the Fiscal Council noted. Experiences from eurozone countries show only a minimal one-time effect, while the perception of general price increases is often more psychological than real, the analysis says.

The Fiscal Council noted that prior to euro adoption, inflation ranged from moderate to high in the countries examined, specifically, it was high in Estonia, negative to moderate in Latvia, and moderate in Slovenia, Slovakia, and Croatia.

In the first year after euro adoption, inflation rose in three countries: Slovenia (+1.3 percentage points), Estonia (+2.4 p.p.), and Latvia (+0.7 p.p.). In three other countries, inflation declined: Slovakia (-3.0 p.p.), Lithuania (-0.9 p.p.), and Croatia (-2.1 p.p.).

In the second and third years following adoption, inflation stabilized and returned to moderate levels in all six countries. Despite elevated levels in Croatia, the data show actual inflation was lower than in the period immediately preceding euro adoption, the analysis notes.