Bulgaria’s entry into the eurozone this month is unlikely to transform the country’s economic trajectory, with income convergence towards Western Europe set to remain slow over the coming decade, Capital Economics said in a report published on January 14.

The country adopted the euro on January 1, becoming the 21st member of the single-currency bloc and its poorest. While living standards are expected to keep catching up with the rest of the bloc, the pace will lag behind that seen in other Central and Eastern European economies at a similar stage of development.

“We forecast per capita GDP to rise from around 40% of the euro-zone average to about 55% by 2035, leaving Bulgaria at the bottom of the euro-zone income distribution,” Capital Economics said.

Analysts argued that joining the euro would have “only a small macroeconomic impact” because Bulgaria had already effectively surrendered monetary policy under its long-standing currency board, which pegged the lev first to the Deutsche mark and later to the euro.

“Bulgaria’s long-standing currency board had already delivered most of the benefits associated with eliminating exchange-rate risk,” it said, adding that any gains from lower reserve requirements, narrower bond spreads or a stronger ECB backstop would be “marginal or have already occurred”.

Still, the near-term outlook looks relatively bright. Capital Economics expects GDP growth of around 3% in 2026-27, making Bulgaria one of the faster-growing economies in the euro zone, driven mainly by strong household spending. Inflation, which stood at 3.7% in November, is expected to ease but remain above the European Central Bank’s 2% target through 2027.

“While the fiscal deficit may remain near the upper limit of the EU fiscal rules at 3% of GDP – particularly in light of recent protests and renewed political turbulence – Bulgaria’s very low public debt suggests that the public finances will not present a major risk to macroeconomic stability for the next few years,” the report said.

Over the longer term, however, Bulgaria’s prospects will be shaped by a shrinking and ageing population and only moderate productivity gains. The working-age population is projected to fall by about 7% by 2035, one of the steepest declines in the European Union.

Productivity growth is expected to average just over 3% a year, faster than the euro-zone average but weaker than in some regional peers. “This would be higher than our forecasts for Czechia and Hungary but lower than Poland,” the report said.

Capital Economics noted that Bulgaria could outperform if it strengthens its IT sector, improves governance and makes better use of EU funds. 

Meanwhile, political instability and corruption remain major risks. Bulgaria has held seven elections since 2021 and is set for another in 2026, after the recent collapse of Rossen Zhelyakov’s government. 

“Downside risks include political instability, which could result in excessive fiscal deficits and weaker governance, as well as a failure to draw down the substantial EU funding available,” the report said.

Persistent corruption also weighs on investment and growth. Bulgaria ranks near the bottom of the EU in Transparency International’s corruption index, and a World Bank study cited by Capital Economics found that “bid-rigging and cartel behaviour” can inflate public procurement costs by up to 50%.