Bulgaria to become 21st eurozone member amid persistent inflation, housing boom

Bulgaria is giving up the lev on Jan. 1, 2026 and adopting the euro. (The most recent nation to join the single currency was Croatia in 2023.)

While all European Union member states are eventually required to join the eurozone, the timing was controversial locally. Political parties quarreled about whether Bulgarian inflation was low enough to meet the criteria for euro adoption. On the debate's extremes, some euro proponents accused opponents of being insufficiently pro-western; on the other side, abandoning the lev was characterized by some as giving up too much sovereignty. But short-term disruption should be minimal given that the lev had been pegged to the euro since the single currency's inception (and before that, pegged to the Deutsche Mark) after a bout of post-Communist hyperinflation.

Generally, adopting the euro is seen as positive for Bulgaria -- promoting cross-border investment and financial stability. After the nation got final EU approval to join on July 8, Fitch upgraded Bulgaria's credit rating to BBB+, three notches into investment-grade status. That's the same rating as Malaysia and Thailand, and better than Italy's.

Despite this positivity, several metrics of Bulgaria's economic health remain stretched. Like many countries, Bulgaria piled on debt during Covid, as our first chart shows. But loose borrowing persisted, with critics accusing the government of directing spending into excessive public-sector pay instead of infrastructure and productivity improvements. Total central government debt increased to EUR 27.8 billion euro in mid-2025, up from 12.4 billion euro in mid-2020; this compares to the tight fiscal stance of the post-GFC era, when Bulgaria's budget discipline was praised (and critiqued for its perceived high social cost).

The fiscal looseness is likely tied to Bulgaria's persistent inflation, which is decoupling from the eurozone average again after slowing in 2024. As our second chart shows, harmonized CPI rose at a 3.1% year-on-year pace in June, versus 2% for the Eurozone. Food prices are surging at a 7.6% pace -- a problem given that this category accounts for 30% of Bulgarian household spending.

Meanwhile, local house prices are on a tear -- outpacing average yearly European gains, as the third chart shows. This is tied to mortgage rates, which have continued their long-term decline to record lows, staying below their eurozone equivalents since 2022 and unaffected by ECB rate hikes. And this, in turn, is linked to the money being pumped into the (already quite liquid) Bulgarian banks, with more to come: banks' minimum reserve requirements will plunge from 12% to 1%, aligning with eurozone standards.

Eurozone membership should be good for local capital markets, and fund-flow data from EPFR is already showing growing foreign interest in Bulgarian sovereign bonds. Net accumulated bond flows since 2007, when the country joined the EU, stood at USD 44.5 million as of mid-July -- with an upturn in recent months.

Equities have long been less popular among foreign investors, but the outflow trend has been slowly reversing for about a year. The long-term outflows reflect the tiny, illiquid nature of the local market and a lack of interest by retail investors, who tend to prefer property. The benchmark Sofix index has yet to recover to pre-2007 levels, while the market capitalization of the Bulgarian stock exchange stood at a mere EUR 6.8 billion as of June -- which would make it the fourth-smallest in the eurozone on a relative-to-GDP basis. This contrasts with much stronger trends in Croatia and Romania.

Further progress for Bulgaria depends on whether the nation will be able to tackle corruption, improve infrastructure, bolster trust in the judiciary and close the economic gap between Sofia and regions outside the capital.

Click here to read about  fund-flow data from EPFR.