The Role of the Central Bank of Bosnia and Herzegovina in the European Union Accession Process

The process of European integration in BiH is primarily and almost exclusively addressed as a political issue, sidelining the technical and professional aspects of the accession process. The European Union is a political union, but also an economic and monetary union for which membership, very complex and demanding criteria, known as the Copenhagen and Maastricht criteria, are set.

At this stage of European integration, the EU's requirements for BiH as a potential member are based on the conclusions of the European Council adopted at the meeting in Copenhagen in 1993. The Copenhagen criteria include the following:

- Stability of democratic institutions and the rule of law – respect for civil rights and protection of national minorities;
- Firmly established market instruments and functioning market economy, as well as the ability to withstand competitive pressures and adapt to the EU's market mechanisms;
- Readiness to assume the obligations of membership, i.e., commitment to the objectives of the political, economic and monetary union.

The experiences of other countries confirm that the role of central banks is very important in the process of a country's accession to the EU, as a stable and reliable central bank makes a key contribution to macroeconomic stability, improves the process of economic transition and convergence towards a market economy, and contributes to the overall better preparedness of the country for EU membership. Achieving full and sustainable implementation of the economic Copenhagen criteria is necessary for a country's accession to the European Union, a community comprising 28 countries, 500 million inhabitants, and 11 currencies in 2015.

When BiH becomes a member of the European Union, the Central Bank of BiH will become a member of the European System of Central Banks (ESCB), which consists of the European Central Bank (ECB) and the national central banks of all EU member states. The Governor of the Central Bank of BiH will be a full member of the ECB's General Council, and a large number of the Central Bank of BiH's staff will be involved in the work of committees, subcommittees, and working groups within the ESCB bodies. Therefore, in order to adequately prepare, the Central Bank of BiH is undertaking continuous investments in the development of institutional capacities and professional knowledge of its staff, including specialized training and leadership and negotiation skills development. In the process of convergence towards EU standards and preparations for joining the ESCB, the implementation of European central banking standards in the Central Bank's operations is also achieved through access to EU funds and direct cooperation with the ECB and the central banks of the Eurosystem (which comprises the ECB and the central banks of EU member states that have adopted the euro), which the Central Bank of BiH began back in 2006.

In the context of the necessary institutional and functional changes in central banks, the experiences of central banks of countries in more advanced stages of European integration indicate that the process of European integration requires improved coordination within the country through formal coordination structures. The Central Bank participates in the work of the EU-BiH Subcommittee on Economic and Financial Affairs and Statistics, as well as in the preparation of materials for the Annual Progress Report of BiH in the EU accession process. According to the findings of the 2014 Progress Report, the monetary policy of the Central Bank of BiH within the currency board arrangement functions well and continues to enjoy a high level of reliability and trust.

Economic governance has become one of the three fundamental pillars in the EU enlargement process in recent years, and changes are evident in the economic policy dialogue with candidate countries, which include reforms that promote macroeconomic stability, ensure fiscal sustainability, and support long-term reforms and competitiveness. In the context of a new EU initiative, which also includes strengthening economic governance, BiH is participating for the first time this year in the Ministerial Dialogue on Economic Policies with the Western Balkan countries (Albania, Macedonia, Montenegro, Serbia, Bosnia and Herzegovina, and Kosovo) and Turkey. In addition to representatives of the Ministry of Finance of BiH, FBiH, and RS, the EU has also invited the Central Bank of BiH to this high-level economic dialogue in Brussels, attended by representatives of EU member states (finance ministers), the European Commission (EC), and the ECB. The aim is to prepare the country for meeting the economic criteria for EU entry and to improve communication and coordination of economic policies and measures that the country needs to implement.

The basis for the dialogue is the Economic Reform Program for BiH 2015-2017, in the preparation of which the Central Bank of BiH participated as one of the co-authoring institutions. The Economic Reform Program 2015-2017, instead of the previous Economic and Fiscal Program, which focused on fiscal policy, now includes sectoral structural reforms. In accordance with the EC Guidelines, this document consists of two parts:

1. The first part provides an overview of the framework for medium-term macroeconomic and fiscal policies and structural reforms that have a direct macro-fiscal impact.

2. The second part includes structural reform measures, which are more sectoral in nature, aimed at improving the country's competitiveness and thus accelerating growth.

Formal conclusions (recommendations) from the Ministerial Dialogue will form the basis for the preparation of the Economic Reform Program 2016-2018, i.e., the basis for shaping BiH's economic policy in the next medium-term period.

The Central Bank of BiH also faces very demanding Maastricht criteria, the fulfillment of which is a condition for all potential EU member states to become part of the Eurosystem, a single monetary area with a common currency – the euro.

The Maastricht criteria, or convergence criteria, i.e., criteria for introducing the euro, established by the Treaty of Maastricht in 1992, which created the common currency, the euro, are as follows:

Price stability: the inflation rate of a candidate member state for the EMU must not be more than 1.5 percentage points higher than the average inflation rate of the three EU member states with the lowest inflation performance. Therefore, according to the price stability criterion, member states that had the best inflation performance in the reference period form the reference inflation rate. It is calculated as the arithmetic mean of the inflation rates of the three countries with the lowest rates, considering that these rates are an indicator of price stability.

Sustainability of public finances:

The budget deficit must not exceed 3% of gross domestic product (GDP).
The public debt criterion stipulates that public debt must not exceed 60% at the end of the previous financial year, and if it does not, the debt ratio must show a tendency to decrease significantly and must approach the reference value with satisfactory dynamics.

Exchange rate stability: a stable exchange rate is also a prerequisite that a member state must fulfill by participating in the Exchange Rate Mechanism (ERM II) continuously for two years. This criterion relates to respecting the established fluctuation margins of the exchange rate, without deviations for at least two years before the introduction of the euro. During this period, the country cannot unilaterally devalue its currency against the currency of another EU member state to improve its economy's competitiveness. The ECB does not encourage or discourage the currency board arrangement, nor is monetary policy based on the currency board principle tied to the euro considered an obstacle, nor an advantage, in the process of adopting the euro. A euro-linked currency board cannot replace mandatory participation in ERM 2. However, continuing to maintain the currency board system until full membership in the Economic and Monetary Union and the Eurosystem represents the most adequate strategy for a country pursuing monetary policy based on the currency board principle.

Fulfillment of the long-term interest rate criterion (on government bonds) by a member state implies that its long-term interest rates must not exceed the corresponding average interest rate in the three member states with the lowest inflation performance by more than two percentage points (these are the same countries mentioned in the price stability criterion).

Legal obligations regarding the integration of a national central bank into the Eurosystem must also be harmonized by the date of EU accession, although they do not have to take effect by the date of that member state's transition to the euro. Generally speaking, the Law on the Central Bank of BiH reflects good practices regarding central banking functions and central bank independence, although certain adjustments to the EU Treaty will be necessary.

In addition to demanding and necessary professional, technical, and legal harmonizations, it is crucial to build a culture in which the entire society, including politicians, considers the independence of the central bank, which aims to ensure price stability, a public good.

(Central Bank of BiH)