Plan B – Effects of the Eventual Delay of Bulgaria’s Joining the EU Georgi Angelov, Svetla Kostadinova, Dimitar Chobanov

Accession treaty art. (39):

If, on the basis of the Commission's continuous monitoring of commitments undertaken by Bulgaria and Romania in the context of the accession negotiations and in particular the Commission's monitoring reports, there is clear evidence that the state of preparations for adoption and implementation of the acquis in Bulgaria or Romania is such that there is a serious risk of either of those States being manifestly unprepared to meet the requirements of membership by the date of accession of 1 January 2007 in a number of important areas, the Council may, acting unanimously on the basis of a Commission recommendation, decide that the date of accession of that State is postponed by one year to 1 January 2008.

The European Union as a reform stimulator

Most of the economic reforms in Bulgaria have been made not because of the inner confidence of the people who carried them out, but due to the outer pressure mainly from international financial institutions such as the International Monetary Fund and the World Bank. Their basic medium of forcing the government to carry out reforms was the so crucial to the financial and macroeconomic stability of the country. However, as time has passed, the importance of the funding from international financial institutions began to decrease, and so did the ability of the IMF and the World Bank to provoke reforms in Bulgaria.

Gradually the EU took the place of the IMF and the World Bank as a reform stimulator, and part of the more recent reforms have been made under its pressure. The willingness of the Bulgarian people and politicians for Bulgaria to become member of EU, gave the EU the power to push the reform process. The problem is that the more certain Bulgaria's EU membership becomes, the less influence on reforms the EU has. When a certain country becomes a member of the EU, the inner consensus necessary for the reforming process disappears, along with the purpose of the reforms –EU-accession.

Using the preventive clause (1), the EU tries to solve this problem, stimulating Bulgaria and Romania to continue their reforms. This clause keeps both countries in check and prevents them from thinking that they are already members of the EU and that there is no need to change any more. It turned out that the lack of inner confidence in the Bulgarian society, concerning the necessity of the reforms, should be compensated by outer pressure. In that case the preventive clause (especially if it urges forward the reforming process without coming into power) could have a good effect on the country. But it's coming into power will have both positive (reform stimulation) and negative effects such as the inability to profit by the advantages which an eventual EU membership would give and of course the risk of further postponement.

Free migration

Free movement of people inside the EU is one of the biggest advantages that EU membership can give to a country. Unfortunately, the economic problems in some European countries which are members of the EU led to restrictions in migration for new member countries from the former Soviet Union. Despite this, three of the old members (Ireland, Great Britain and Sweden) and two of the new ones (Malta and Cyprus) apply the free movement principle towards all member countries and will probably apply it towards Bulgaria after its EU accession.

Free movement of people ensures competition on the labor market, with all of its advantages. On a limited national labor market it is more possible that a shortage of certain types of labor occurs, with the resulting problems to the economy following it, compared to an opened international labor market. Besides citizens of a certain country have the opportunity to gain know-how and experience in a foreign land and later apply it in their motherland (provided that a suitable business environment exists). Also important is the fact that part of the money earned by Bulgarian emigrants is a sizable and steadily increasing income for their families back home, forming national income bigger than the educational and the healthcare budget of the country.

Postponing the accession of Bulgaria to the EU will lead to a decrease in the opportunity for Bulgarian workers to work legally abroad in countries that do not hinder free migration. This means that many people will continue to work illegally abroad or will try to emigrate illegally, thus increasing expenses.

Not joining the EU will definitely have a negative impact on free people movement in Bulgaria. It will be cushioned by the fact that many countries do not admit workers from former Soviet Union countries to their labor market. The only adequate response politicians in Bulgaria could give to this situation is to create ? business-friendly environment, thus stimulating the opening of well paid working places. This will, to a certain extent, reduce the negative effect of an EU-accession delay.

 European funds

Expected funds after joining the EU:

Financial package 2007 – 2009

1) Since the date of their accession Bulgaria and Romania pay the following sums, according to their share capital, carried in for the registered capital, defined in art. (4) from the By- laws of the European Investment Bank (3).

Advantages:

• The eventual introduction and use of new technologies will increase productivity of labor, which is lower than the EU average, especially in agriculture.

As a conclusion, we can summarize – the expected EU funding for the year 2007, which comes up to 804.8 mln. EUR (1573.6 mln. BGN), will be spent on different society groups. If we take the 2004 state budget over fulfillment data into consideration (1500 mln. BGN), we can expect that in 2005 it will be at least 1000-1500 mln. BGN. In that case, it is completely possible that Bulgaria could continue its reforms without European funding. In order for the country to sustain its rate of economic growth it is necessary (and feasible) that the overall tax burden would be reduced. Thus the effect will be enhanced, no unnecessary expenses and increase in government administration will be made, entrepreneurship and employment will be stimulated.

Trade

Free movement of goods , as far as it is not hindered as migration, is an extremely important advantage following from the EU membership. It eliminates possible monopolies on the domestic market already existing in Bulgaria, due to import limitations on certain commodities. At the same time, it eases the export of domestic products, most of all agricultural ones, which are currently not freely traded. From this point of view, the eventual delay of Bulgaria's EU accession will slow down the process of integration of the country's economy to the world economy and will result in an inability to fully take advantage of labor division.

Investment

Postponement of the EU accession is the topic considered to be fundamental before the general elections in Bulgaria. It is presented only as harmful to the economy, considering the benefits from joining the EU. But there are certain negative effects of the EU membership, which should also be taken into consideration.

The accession to the EU means that the harmonization between Bulgarian and European legislation is complete and some regulations that are not necessarily good for the business are approved. During the process of integration, part of the legislation was adopted without evaluating its effect on Bulgarian companies. The principle in the EU when proposing new regulations or altering old ones, is to evaluate their effect by making a cost-benefit analysis. Thus the new regulation is approved only if the benefits exceed the costs. The Bulgarian government however did not respect this principle, because it hurried to close the negotiation chapters (claiming the political benefits from it), ignoring the fact that the acquiring of its short-term aim might be in contradiction with the interests of many Bulgarian firms and citizens.

Thus, many impediments for the domestic companies are created, because they are compelled to obey certain standards before the country joins the EU. This would provoke particularly large expenses for the small- and medium-sized enterprises and may cause their bankruptcy. A one-year delay of the EU membership could give them enough time to prepare and avoid bankruptcy. Some of them however won't be able t ? persist, even under these conditions , because the investment needed is too large to fund. Therefore the postponement will keep them artificially on the market for one more year , preventing them from relocating their resources into more profitable areas i.e. we can expect negative impact on economic efficiency as a result of the delay.

The net effect from the two opposite actions can hardly be measured, but what we can expect is the crash of some companies, reduction of employment and income of the people who work there. On the other hand, the firms which survive will have better access to European and international markets. They will have the opportunity to export most of their production and increase profits.

Another aspect of the preventive clause is its impact on investment in the country. Investment is to a great extent influenced by the elected government and by the policy it pursues during its mandate. The acceptance of Bulgaria in the EU is a powerful stimulant to investors and the essential fact is that that whether in 2007 or 2008, Bulgaria will become a member. Nevertheless, the investors will consider the postponement a bad sign. It is crucial that the necessary reforms in administration and the judiciary system are undertaken in order to reduce corruption, which is considered to be the main barrier for investment. Also important is the improvement in protecting private property , which guarantees risk-takers reward for their efforts.

Bulgaria could compensate the eventual negative effect, by improving the rest of the factors influencing over investment. One of these factors is taxation, and a lot can be done to reduce the tax-welfare burden. But failing in changing that, may lead to a further fall behind of Bulgaria, in compare to its competitors, which are already in the EU, namely Estonia, Lithuania and Slovakia.

Another possible unfavorable effect on incoming cash flow in 2007 could be the eventual raise of interest rates by the European Central Bank. Currently they are at a very low level, which makes investment in EU countries unprofitable. Therefore, part of the investments are re-directed to countries like Bulgaria. If the ECB raises the interest rates, combined with the eventual coming into power of the preventive clause and the slowing down of the privatization process, this may lead to a decrease in foreign investment. In general, this will affect the country's rate of economic growth and the opening of new working places.

Adoption of the European currency

The postponement of Bulgaria's EU-membership will have a direct effect on the adoption of the euro as a legal means of exchange (eurozation) in the Bulgarian economy. The eurozation has several positive effects. One of them is the abolition of the insurance premium on European and Bulgarian currency deposits. This premium consists of lower interest rates on credits, granted by credit institutions, when denominating EUR to BGN, which raises the expenses for funding Bulgarian currency. Besides, the adoption of the Euro will reduce the possibility of a currency or a bank crisis. The Euro is a powerful stimulant to trade and tourism within the limits of the EU, significantly reducing transaction costs and provides the ability to easier compare prices of goods and services in the Euro zone.

EU-membership and compliance with the Exchange Rate Mechanism 2 are indispensable conditions for adopting the Euro. According to the ERM 2 several criteria must be fulfilled. Some of them (budget deficit, government debt, exchange rate and yield of government securities) are already achieved, but the main challenge remains inflation. Inflation must be kept under 3.5% for two successive years (2007 and 2008), which is hardly feasible, considering its rate after the currency board was brought in. Therefore, delaying Bulgaria's EU accession will inflict many losses in this direction.

Instead of a conclusion

Generally, the delay of Bulgaria's accession to the EU would have a mixed impact on the economy. However, the country's economic development depends chiefly on the internal economic policy. No matter when Bulgaria actually joins the EU the economic results achieved by the country's economy (good or bad) are consequences solely from the policy of the government and are its responsibility. If the government is open enough to reforms, there will be no reason for us to expect postponement of Bulgaria's EU-membership, and even if that happens it won't cause much trouble. If not, then substantial economic problems can be expected, independent from the year of accession.