Young demoracy under a watchful eye

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Bulgarians have learnt with a shock that, while European Union accession brings many benefits, it is by no means the answer to all of their difficulties.

Since the country joined the union alongside Romania in January 2007, the economy has performed well, with output growing at 6 per cent a year, unemployment falling, pay rising and foreign investment pouring in.

But EU membership has put Bulgaria’s ruling elite under unprecedented external scrutiny over the country’s performance in tackling corruption and organised crime. Sergei Stanishev, the prime minister, and his colleagues labour under huge pressures to push through meaningful reforms before the European Commission later this month delivers its verdict on Bulgaria’s record in justice and home affairs. Bucharest faces a similar judgment, but its record is stronger than Sofia’s.

No EU member has ever before been subjected to such relentless pressure. But the Commission is acting within the powers it was given to monitor Sofia and Bucharest for two years after accession, amid widespread doubts among existing members of the two countries’ readiness for membership. If either fail to meet the grade, Brussels could even impose sanctions such as asking other EU members to stop recognising Romanian and Bulgarian court judgments.

For Bulgaria, the poorest country in the EU, much is at stake. Bulgarians are annoyed that their country is seen as a capital of organised crime, with more than 120 unsolved contract killings on its books. Ivan Krastev, chairman of the Centre for Liberal Strategies, a Sofia think tank, says: “Sixty per cent of Bulgarians support tougher action.”

Mr Stanishev pleads for understanding, arguing that Bulgaria is still a young democracy, having overthrown communism only in 1989. He says: “It takes time to impose these new European standards. If you compare Bulgaria to Sweden, the Netherlands or Britain, you will see many problems still ... but [those countries] have had hundreds of years of democracy and market economy. We have 20 years behind us and, in that period of time, it is a revolution what we have achieved, not only in our institutions and our economy but also our mentality.”

Mr Stanishev, the Socialist party leader who took power in 2005 at the head of a centre-left coalition, has pushed through a host of reforms including an overhaul of the courts, the creation of an anti-corruption investigative unit, and laws on public procurements and conflicts of interest.

But he has struggled against a series of scandals over the past year: the economy minister quit after allegedly intervening in a corruption investigation; the head of the highways agency resigned over suspected conflicts of interest in a contract awarded to his brother’s company; and the interior minister left the government after it emerged that senior officials had leaked information to organised crime groups and he himself had met alleged crime bosses. He has denied wrongdoing.

Mr Stanishev has overhauled his administration with a spring reshuffle, including installing Meglena Plugchieva, the widely-admired ex-ambassador to Germany, as a deputy prime minister responsible for EU funds. But it may not be enough to win over Brussels – and it certainly has not been sufficient to convince an angry electorate. Without a dramatic turnround, the Socialists may face defeat in next year’s parliamentary elections. The main winner could be Gerb, a centre-right anti-corruption party, formed around Boyko Borissov, the outspoken mayor of Sofia.

Meanwhile, the Socialists hope that continued strong economic performance will assist their fortunes. Like many emerging markets, Bulgaria has so far weathered the global financial storm with the government forecasting an increase in gross domestic product this year of 6.4 per cent, up from last year’s 6.2 per cent. Consumption and investment lead the way, including a heavy dose of investment in property and construction. Consumers are benefiting from record pay increases and a boom in credit, including mortgages. Unemployment has dropped from nearly 20 per cent in 2001 to under 6 per cent, thanks to job creation and emigration – employers now complain about skills shortages.

The government has kept a tight grip on the budget, running a surplus that it is increasing slightly to 3.3 per cent of GDP this year. But it is struggling to contain inflation, which exceeded 14 per cent year-on-year in May, and to manage the current account deficit that last year reached 21 per cent of GDP. So far, the deficits have been covered by strong foreign direct investment inflows. But with the global climate uncertain, Bulgaria’s position has caused concern, notably at the International Monetary Fund, which has drawn attention to the vulnerability of countries with high current account deficits and their reliance on external financing.

The economy is overly dependent on the property sector, which, for example, last year accounted for a full 35 per cent of foreign direct investment. Anthony Hassiotis, chief executive of Postbank, the Bulgarian subsidiary of Greece’s Eurobank, says the mix is now changing, with the euphoria of the real-estate boom calming down, and other investors, including manufacturers, on the way. Among them is Wienerberger, the Austrian brick maker, which is putting €29m ($45m, £23m) into modernising a Bulgarian plant.

James Hyslop, head of the Sofia office of the European Bank for Reconstruction and Development, argues that more reforms are needed to broaden the range of investors. He says: “I think the business environment in Bulgaria has improved over the past five or 10 years. However, there’s ample room for improvement in specific areas including strengthening state institutions, public administration, the functioning of the judiciary, and the independence of law enforcement.”

As a small country of 8m people, Bulgaria has a modest voice in EU affairs, but Mr Stanishev says it is making its presence felt as a “good European”. Back in March Bulgaria was among the first EU members to ratify the controversial Lisbon treaty. Along with Hungary and Croatia, it was among the first states in south-east Europe to recognise the independence of Kosovo – a brave move in a country where many people sympathise with Serbia.

On energy, Bulgaria has sometimes been accused by EU partners of cosying up to Russia, on which it is heavily dependent for gas and oil. Sofia is a partner in the EU-backed Nabucco pipeline project to bring Caspian Sea gas to central Europe without crossing Russian territory. But this year it was the first EU member to back the Russian-sponsored Southstream pipeline into the region, which some western industry experts see as a threat to Nabucco.

Mr Stanishev says that, far from betraying the cause of EU solidarity, Sofia stood up for the EU by extracting tough terms from Moscow – notably an agreement that ownership of the local Southstream company would be split 50-50 between Bulgaria and Russia.

Meanwhile, the government is pressing ahead with plans for a €6bn nuclear power plant at Belene on the Danube to replace capacity lost by EU-ordered closures of reactors at the communist-era Kozluduy power station. The new 2,000 megawatt plant, to be built by Russian, German and French contractors, is due to come on stream in 2013 and 2014 and expand Bulgaria’s capacity to export electricity in a power-hungry region.

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