PAYING UP

by Petkan Iliev

Bulgaria may be a net contributor to the EU

"Bulgaria and Romania are in a position to take up the rights and obligations of Eu membership on 1 January 2007."

This is what Jose Manuel Durao Barroso, President of the European Commission, told the European Parliament in Strasbourg at exactly 4pm Bulgarian time on 26 September. Even after their accession, Bulgaria and Romania will still be monitored closely with "safeguard clauses" possible in several areas. Every six months, the two countries have to report on their progress. The areas which are a source of concern for both countries are organised crime and corruption, food safety and the management of European tax payers' money.

Bulgaria is expected to take immediate steps to crack down on corruption, organised crime and money laundering. Cash flows from agricultural and structural funds for the poorest areas in the EU may also stop if fund management is unsatisfactory. There is a risk of not establishing a fully functional system to manage agricultural funds, and failing to meet the requirements will result in a reduction in financing. The third safeguard measure concerns food safety. After accession, some animal products and companies may be refused access to the EU market but will still be able to produce for the national one.

"Bulgaria is entering the EU not to consume its assets, but with the ambition of strengthening it," said Bulgarian President Georgi Parvanov. He pointed out as proof of this that the country has the most stable macroeconomic indicators in southeastern Europe: a GDP growth of over six percent and unemployment of less than nine percent.

Against this framework of conditions outlined by national and foreign politicians, it is interesting to find out what Bulgaria expects in the economic area after 1 January 2007.

First, Bulgaria may end up as a net contributor to the EU, which means that it will pay more money than it receives. This will result from the fact that it still does not have the capacity and resources to use EU funds. According to official expectations, 20 percent of EU money will be utilised in 2007, but the figure is more likely to be 16-18 percent. Bulgaria's contribution to the EU budget is 1.24 percent of its GDP.

Second, it is expected that in 2007 there will be a greater flow of workers towards Europe. Free labour mobility within the EU is one of the greatest advantages which EU membership can give. Unfortunately, domestic economic problems in most member countries have led to the suspension of this right for the recently admitted former Communist countries. Three of the older member states (Ireland, the UK and Sweden) and two of the new ones (Malta and Cyprus) have put into effect the right to free movement of people from all member states but it is not yet decided if they will extend this right to Bulgaria and Romania.

Another positive effect is related to the expected funds for Bulgaria after its accession to the EU. The financial package for the initial three years includes the following resources:

Mostly due to inexperience and inadequate preparation for fund utilisation, these resources, however, will probably be inefficiently spent in the first years, particularly in the area of agriculture. The money will probably go to establish administrative structures for management and control of the funds rather than in aid to agricultural producers.

The positive effect of EU money will be related to the expected introduction and application of new technologies, which will lead to an increase in productivity, which is now low in comparison with the average figures for Europe, especially in agriculture.

The other effects of Bulgaria's accession to the EU concern the investment climate in the country. The Commision's decision to accept the country as a full member of the EU means that the harmonization of its legislation with that of the EU has finished. On the one hand, some of the approved regulations are not necessarily useful for business. They will create obstacles for a number of companies because of the requirement to meet certain standards, sometimes even before the accession date. This may entail impossibly high expenses for some medium and small enterprises and may lead to bankruptcies.

Another consequence will be the expected reduction in the number of people that such companies employ as well as of their pay. On the other hand, the companies which manage to adapt to the new regulations will get better access both to European and other international markets. They will have greater export opportunities for their goods and thus will increase their profits.

In short, the very fact that Bulgaria will become a full member of the EU will be a powerful stimulus for foreign investors.

The long-term gain from EU membership is also related to the Euroisation of the Bulgarian economy.

There are several positive effects. One is the elimination of the risk premium for deposits in euro or leva. The euro acts as a stimulus for trade and tourism within the EU because it reduces the amount of transactional costs and allows for a direct comparison of goods and service prices in the Eurozone.

After fulfiling the first condition for adoption of the euro, that is becoming an EU member, Bulgaria also has to apply the exchange rate mechanism for at least two years and obey a set of criteria. Some of them (concerning the budget deficit, foreign debt, exchange rate, interest rate of government bonds) are covered even now, while the major challenge remains the inflation criterion. Inflation has to be kept at a level of under 3.5 percent for two consecutive years (2007 and 2008), something that will be hard to achieve. Higher inflation rates are expected, for 2007 in particular, because of the fact that almost all "new" member states have experienced an inflation shock. Some experts calculate that inflation in the first year of accession will be between 4.5 and six percent.

According to Eurostat data, Bulgaria and Turkey are the poorest member and candidate member countries in the EU. GDP per capita in Bulgaria in 2005 was only 31 percent of the EU average (measured using purchasing power parity, that is, what a person can buy for the same amount of money in two different countries). The main factor for reaching the average level is economic growth. For the past eight years, the Bulgarian economy has achieved a real growth of 3.1 percent on average.

There are different scenarios concerning when Bulgaria will come up to the economic development of the EU and they all depend on the economic policy of the country. The most optimistic calculations show that, as a result of quickly implemented market reforms, the average annual economic growth in the next two to three decades is expected to be about seven percent. This means that there is a chance of Bulgaria reaching the average GDP per capita in the EU within 20-25 years.

The pessimistic calculations, based on economic growth between 0 and three percent in the next decades, do not envisage reaching the average EU level this century. If there is a moderate growth of the economy of four percent or so, GDP per capita will reach the average EU level in 50 to 65 years.

In reality, however, Bulgaria has had an economic growth of minus 1.39 percent over the past 13, and 4.1 percent on average for the past five years. So after 45 years of Communist advancement, we are in for at least 45 more of Capitalist progress.

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