The European Commission’s half-hearted approval on May 16 of Bulgaria’s EU bid comes as a mixed blessing to prime minister Sergey Stanishev. Just days earlier, the embattled official was issuing emotional statements following the first rumours that the EC would delay its decision on the next round of accession by up to five months.
“We are not second-class citizens,” he said at the time. “Do not humiliate us.”
But the tentative go-ahead for Bulgaria and its EU hopeful neighbour Romania nevertheless delays a final decision until an early September review. In theory, the commission could still decide to postpone membership until 2008, to give both countries more time for reform.
In Bulgaria’s case, the cloud hanging over its EU hopes is its poor record in enforcing law and order. The commission’s report gives Sofia red flags for dragging its feet on fighting corruption, organized crime and money laundering. “Indictments, prosecution, trials, convictions and dissuasive sentences remain rare in the fight against high-level corruption. Bulgaria needs to demonstrate clear evidence of results in the areas,” it said.
Bulgaria’s Socialist-led government, in power since August of last year, spent the summer pushing through a raft of new legislation to comply with the Commission’s demands on crime and corruption. Stanishev’s government insists it has made progress, including constitutional changes that reduce immunity, appointing a credible chief prosecutor and restructuring the police and intelligence services. Earlier this month, the trial of two underworld bosses accused of plotting the murder of two businessmen and an ex-foreign minister began.
Indeed, until just 18 months ago, Bulgaria was the stronger of the two accession candidates, based on improving business conditions and better-run banks. Yet even if the country’s bid is frustrated by another year, come the EC’s September assessment, Bulgaria’s investment climate is unlikely to suffer dramatically, according to analysts.
Missing out?
Fabrizio Coricelli, research fellow at the Centre for Economic Policy Research, says: “Talk of delays has created a little bit of disillusionment, and will not be good for the government, but will not make a major difference.” The real cost to Bulgaria of staying out for an extra year will be losing out on some of the E15 billion earmarked for it by Brussels between 2007 and 2013, he says.
Bulgaria has made more progress with its capacity to absorb these funds than Romania has, according to Coricelli, a former adviser to the World Bank and IMF on transition economies, and to the EU’s enlargement commission between 2001 and 2002. Bulgaria’s ministries have been quicker to deliver concrete plans for projects, a system for prioritizing investments, and training civil servants.
“The banking sector was reformed first of all, and that was the most important thing to happen for Bulgaria’s economy,” says Vladimir Mihailovski, country officer for the International Finance Corporation (IFC) in Sofia.
After a severe economic and financial crisis in 1997, involving a sharp contraction in GDP, the collapse of the banking sector, and a major foreign exchange crisis, Bulgaria adopted a currency board agreement. The government also began wide-ranging economic reforms, of which the first phase was privatization of the banks. The banking system is now fully privatized, and three-quarters of its assets of around E13 billion are owned by foreign banks, most of them European.
“Credito Italiano, HVB, Bank Austria Creditanstalt: these kinds of names are the owners of major banks,” says Mihailovski.
“After these successful privatizations, banks have started to apply a modern European approach to banking. The product range is not much different to that in other European countries. The scale is much smaller, but sophistication is equal to that in the west,” he adds.
So much so that the IFC’s focus in Bulgaria is now on financing infrastructure, wind farm and biomass power generation, and helping foreign investors develop manufacturing facilities in the country.
Banking turnaround
Mihailovski credits the rapid turnaround in the banking sector after 1997 to the expertise of foreign managers: “There are very good managers in place, from the headquarters of foreign banks. They’re modern thinkers, they believe in teamwork. The old hierarchies are out of fashion.”
According to Frank Bauer, president of the Bulgarian American Enterprise Fund, the banking system has “vastly improved”. By working with the IMF and EBRD, the government has developed a “first rate” legislative framework.
Bauer has been in Bulgaria since the Enterprise Fund’s inception in 1992, and just completed the flotation of the Bulgarian American Credit Bank on the Sofia stock exchange. The bank, which specializes in funding to small and medium-sized enterprises, was valued at E200 million: it was started in 1997 with an investment of E9 million.
According to Bauer, when Bulgaria joins the EU is not that important: “Obviously it would be nice if it went ahead as planned. It’s important longer term for the country to join the EU, but the zigzag path it takes to get there surprises no one. The range of possible outcomes for getting from where we are today to getting into the EU in one or two years will not affect our work or how our clients work.”
On the cost to business of crime, Bauer says: “These things do affect everybody, but the business community here has learned to thrive despite these difficulties.”
Still, the IFC’s Mihailovski says crime and corruption are “quite relevant”. Corruption, and the complicated web that connects politicians and organized crime bosses, do influence business: “You never know who is connected with whom. When an important large-scale transaction, like an airport or motorway is to take place, there are always complications and breaks, and it is never clear who is behind them.”