COSTS AND BENEFITS OF BULGARIAN INTEGRATION IN THE EUROPEAN UNION

5. Costs for Accession Preparation

Bulgaria will finance the bulk of overall costs for accession preparation. It will come from domestic saving (public and private), FDI, external borrowing and capital markets.

5.1.Overall Costs for Accession Preparation

There are three groups of costs, related to accession preparation:

Costs for development of modern legislature consistent with the EU Acquis; for its implementation and enforcement; for development of efficient public administration and institutions. Compared to other groups of costs, this one is the smallest in pecuniary terms (5-10% of overall investment). It is however heterogeneous and comprises overcoming of deeply rooted traditions of legal nihilism, disrespect of the law and order, mistrust towards public institutions, laws and democratic traditions. The most difficult will be the development of appropriate political, economic, social, institutional, psychological and other prerequisites for law implementation and enforcement. This could be achieved not only, and not mainly by re-educating the people. A new generation is needed, which will succeed us. The intangible efforts in this area are the greatest, the most heterogeneous, and for that - the most difficult.

Costs of compliance with European standards on environment protection, modernisation of transport, telecommunications, energy generation and transmission, other components of infrastructure, nuclear safety, labour safety and health, consumer protection, upgrading of social standards, veterinary-sanitary control and animal protection, protection of external borders of the expanded EU and many others. The compliance with these standards calls for large investments and will further reduce the cost competitiveness of Bulgarian products, at least in the short- and medium term. If transitional periods are less and shorter, the bulk of the costs has to be made prior to accession. This group of investments are larger (25-35% of overall investment), and are beyond the capacities of the Central and East European countries (CEECs), and particularly – the more backward, such as Bulgaria. According to some estimates for the achievement of environment standards alone the applicant CEECs need 122 bill. Euro. The amount for Bulgaria is 15 bill. Euro – around 6% of the annual GDP for 20 years. For compliance with standards in transport the CEECs need 90 bill. Euro, including 5,3 bill. Euro for Bulgaria – 4,6% of the annual GDP for 10 years.

Costs for total modernisation of the production potential: industry, agriculture and services. It must be upgraded to modern structural, technological and ecological standards; to be capable of generating sustained growth, much higher productivity and competitiveness. Huge investments are needed both for physical and human capital through modernisation of education and health care systems, preparation for the information society and the New Economy. The Bulgarian economy must be competitive on the Single Market of the EU and on the global markets. Large investments are needed for modernisation of the financial and social systems. This group of costs is the largest - around 60-65% of overall investment.

The above shares are not to be taken rigidly. First, it is very difficult to anticipate the overall volume of investment. Second, if some investments are easier to identify for each group, others are mixed. For instance, environment protection standards could be met not only, and not even mainly, by cleaning and protective equipment, but rather by modern energy saving and environment friendly technologies.

Our estimates indicate that Bulgaria needs at least $ 110-120 billion for 25-30 years to achieve competitiveness as more or less equal partner on the European and Global markets. Even more difficult – it needs a new generation with modern knowledge, working discipline, and social behaviour. This can’t be assessed in pecuniary terms. It is highly desirable that the Bulgarian policy markets grasp as soon as possible the scale and the challenges of this gigantic undertaking.

The total amount of investment for accession preparation cannot be defined by detailed calculations starting with individual projects, activities, branches, sources of finance, timing, etc. The attempts for such calculations for the four Central European /CE/ countries have proven extremely difficult and unreliable.

At this early stage of accession preparation comparative analysis, combined with detailed calculations, is preferable. If done professionally, covering a large number of countries from Europe and other regions, one could attain a satisfactory first approximation to the saving and investment rates, needed for the coming years and decades. Such an approach should be combined with an estimation of the additional investments, needed directly for accession. The adjustments should be made for all components, listed above.

Based on such an analysis we estimated that for 2001-2005 Bulgaria needs an average annual investment rate of at least 25-26% and domestic saving rate of 21-22%. Such saving and investment rates along with the expected ICORs could generate 5,0 – 5,5% average annual growth rates of GDP. For 2006-2010 one needs an average annual investment rate of 29-31% and domestic saving rate of 24-25%. These rates along with the expected ICORs could generate an average annual growth rate of GDP 4,7-5,0%. For the saving and investment rates see Fig.3:

Figure 3

Under normal conditions the adjustment to the Acquis and EU standards should take place prior to accession. Any delay would provoke serious post-accession problems:

The EU cannot accept constant or prolonged (for 5-10 years) transitional arrangements for the new members, particularly in the Internal Market. This could threaten the very functioning of the market, the economic and social homogeneity of the Union.
The implementation of the Community rules in different manner to different market players will hamper the competition and the normal operation of the market. This will be detrimental to economic agents who observe the rules – environmental and social standards, state aid, nuclear safety, etc. And gainful to violators. Such an approach would destroy the Single Market.
Nonobservance of standards may have harmful implications on consumers, to the health and safety of the Community citizens.
The confusion in the operation of the Single Market, the insufficient protection of the health and safety of the citizens may provoke strong political reactions, pressure for reinstating boarder control and protectionist regime among member countries. This would undermine the stability of the Single Market and the confidence in EU.

A premature accession to the Single Market is even riskier for new members. Unfavourable side effects can be the price increases, and a large number of bankruptcies with respective economic and social implications. No more than 10-15% of Bulgarian goods and services are cost and quality competitive.

As stated in Section 3 the numerous and lengthy transitional periods after accession are not a solution of the problems. They could be avoided or alleviated only by better preparation of the applicant countries. This, in turn requires large investments and other efforts.

If the objective is clear - proper preparation for accession, its attainment is subject to two preconditions: time and resources.

The time will vary between a minimum and a maximum. It cannot be cut under a certain minimum in view of absorption capacities of the applicant countries and technological time limits for preparation. On the other side accession cannot be delayed endlessly due to political reasons and commitments already made.

The resources also vary within limits. The scale and nature of the preparatory work determine the minimum. The capacities for delivery – the maximum.

One should look for a mix between the two. If some of the applicants are going to join, say by 2005, and the others - by 2010 one should increase the resources to accelerate, and more important - upgrade preparation.

One feels, however, that neither the leaders of the EU and of the member countries, nor the governments of the applicants have a realistic position on this issue. The top officials of the EU balance between geopolitical considerations, commitments to the applicant countries and the sentiments of the people in the member countries. The governments of the applicant countries place above all the time of accession, without due account to the degree of preparedness and the possible consequences after accession, owning to poor preparation. The logic of their thinking is the following: "Let’s accede and then we will see" The implications of such behaviour could be harmful to both – the candidate countries and the EU. They may be devastating to Bulgaria and other ill prepared applicants.

5.2 Expected Financing from the EU Pre-Accession Funds

The applicant countries always considered the EU transfers as important external source of financing during the pre-accession period, and even more so – after accession. The expectations were higher in the beginning and subsided after the publication of the Financial Perspective EU-15 and the Financial Framework EU–21 for 2000-2006. One should also add the envisaged gradual switching in by the Financial Framework EU–21 for gross transfers to the new members in the initial years after accession. This does not take into account that the bulk of the preparatory work is to be done during the pre-accession period and immediately after accession.

With the publication of the Financial Perspective EU–15 for 2000-2006 there is more information about the resources from the pre-accession funds one may count upon. The countries, which may accede by 2005, have an idea about the transfers during the initial years after accession. In the estimates for Bulgaria we assume that accession will take place around 2010, if (implicitly) modified Copenhagen criteria were applied, and if no other surprises occur. Under "implicit modification" we have in mind overstating the importance of the political criteria at the expense of the economic ones.

From the Financial Perspective EU–15, other documents of the European Commission, and statements by high-ranking EU officials is obvious, that the EU transfers will cover only a minor portion of the costs for accession preparation, both before and after accession.

The Financial Perspective EU-15 provides pre-accession assistance to all applicant countries worth 3,12 bill. Euro per annum for 2000-2006. This will be done through the Phare Program and the new instruments – ISPA and SAPARD. The programming of the three instruments will be done on the basis of the principles, priorities and conditions, defined by Accession Partnerships with each applicant country.

Further increase of resources for pre- and post-accession transfers to the new members could come from two sources:

Sustainable high growth in the member countries. At a constant ceiling of 1,27% of the GNP this will generate larger amount of resources. If the expectations of the Lisbon European Council (March 2000) for 3% growth over the following years prove right, additional resources would be significant;

Internal re-allocation of resources. The first modest step along this line was made by the Berlin European Council, as well as during the current implementation of the budget in recent years.

The European Conference in Nice (December 2000) for institutional reforms in the Union confirmed how difficult it is to re-allocate decision making power. Even more sensitive reforms on re-allocation of resources are forthcoming in the following 5-10 years, particularly for agrarian and structural funds. The difficulties in Nice will pale before these related to re-allocations of billions of Euro from the present to the new members. It will be easier for a member country to give up a share of voting power in the European Council or the European Parliament, say from 4,4% to 4,1%, than give up subsidies from the agrarian and structural funds, say from 6 bill. Euro to 4,5 bill. Euro. This is forthcoming for the new budget cycle after 2006 and there will be no escape.

As impressive as they may be at first glance, the pre-accession funds are not sufficient for financing the huge investments of the applicant countries for accession preparation. According to our estimates the transfers from these funds would cover 6-7% of the overall costs of Bulgaria, based on the investment rates forecasted in Section 5.1 above. We must provide the balance from domestic resources, FDI, external borrowing and capital markets. The EU transfers would rather be a catalyst for mobilisation of much larger resources through co-financing.

Without accession to the EU and lower (normal) growth rates Bulgaria would have needed an average annual investment rate of 20-21% over the new decade. The minimum required accession preparation in the broadest sense calls for an investment rate of at least 30-31%. The margin of 10 percentage points is "the price" for accession preparation. According to A.Wallden, quoted by the last Transition Report of the European Bank directly related accession costs over the new decade are expected to be around 11% of the annual GDP of the applicant countries.

Transfers to Bulgaria from the pre-accession funds as defined by the Financial Perspective EU-15 are expected to be 260 mill. Euro per annum, or 1,2% of GDP. For the second half of the decade we expect more than doubling of the transfers – to 600-700 mill. Euro, or 2,8% of the annual GDP, due, among other things, to accession of some of the applications by 2005. Altogether for the decade the pre-accession EU transfers to Bulgaria would provide 6-7% of the overall investments needed.

The European Commission helps applicant countries in collecting co-financing for projects, financed with EU transfers. Bulgaria, however, does not have much room for manoeuvring in this respect, due to its heavy external indebtedness – 80% of GDP. On this ground one cannot count on annual inflow of more than 2,5% of GDP, or 8% of total pre-accession investments.

FDI are the preferable source of funds for accession preparation. A thorough analysis of the factors, defining the capital inflows in our region and Bulgaria, in particular, does not offer ground for much optimism. An inflow of 2,5-3,0% of GDP per annum for the decade would be a success, having in mind that privatisation is nearly over. This would make 10% of the total pre-accession investment.

On overall for the coming decade the external sources (EU transfers, FDI, foreign borrowing) will be no more than 25% of the total investment needed for accession preparation. The balance must come from domestic saving.

Taking into account:

the limited capacity for domestic saving now and in the foreseeable future, due to the poor shape of the economy;
the expected negative trade balances over the decade;
the high EU standards to be met with limited transition periods;
the modest transfers from the EU pre-accession funds, FDI and limited borrowing capacity,

It is difficult to envisage Bulgaria ready to assume its responsibilities as full-fledged EU member by the end of this decade.

The estimates described above are presented in Table No. 24 and Fig.4:

Table 24

Expected Pattern of financing the pre-accession preparation of Bulgaria (average annual)

Sources of financing	2000-2005		2006-2010
Sources of financing	% of GDP	Composition-%	% of GDP	Composition-%
1. Pre-accession funds	1,2	4,8	2,8	9,3
2. FDI	2,5	10,0	3,0	10,0
3. External loans	2,0	9,0	2,5	8,3
4. Domestic saving	19,3	77,2	21,7	72,3
Total	25,0	100,0	30,0	100,0

Source: Author’s assessment

Figure 4

If one is to be accurate, one should add to the costs in Table No.24 the expected negative trade balances (8,5-9% of GDP) over the period under consideration (see table No.8 in Section 2). They are also accession preparation costs for Bulgaria.

As stated above, the accession of unprepared applicant countries may cause problems to the Single Market. The confusion in the Bulgarian economy would be even greater. To prevent possible perturbations in the Bulgarian economy one must think now. There are no easy solutions of the problem. One should look for various opportunities:

Provision of larger pre- and post-accession EU assistance to more backward applicant countries, such as Bulgaria. The transfers should be higher than allowed by the existing ceilings. They should focus on the preparation for the Internal Market related issues.

More flexible application of transitional arrangements for new members in areas outside the Single Market.

Cool-minded re-assessment of the accession deadlines. An invitation for negotiations may be a gesture of political reward, but it does not help an applicant country to perform the responsibilities of a full-fledged EU member. The Single Market does not understand the language of political gestures. It does not care whether the goods come from a country with politically loyal government. What matters is quality and price. We had a political market, both at home and in the CMEA under the totalitarian regime. The outcome is well known. The proper performance of the responsibilities of a full-fledged member of the Community is feasible only if truly functioning and truly competitive market economy is in place. The present Bulgarian economy is far from complying with these requirements. Facing the challenges of the Single Market may have devastating consequences for the Bulgarian economy.
The discussion about two-speed EU integration will probably develop, covering the new members as well. One feels that some member countries such as Greece, Portugal, Spain, and others have no potential for faster political, social and economic integration, desired by the most advanced member countries (Germany, France, Belgium and others) and pressed for by global competition. It is hardly possible to imagine within this context how new members would cope with the higher speed of integration. The most advanced EU members will certainly not accept the rate of intra community integration to be determined by the least advanced new members. It is likely that under the pressure of economic realities the new members from CEE will make a third (the lowest speed) integration group soon after accession.