Accession to the EU is a strategic objective for Bulgaria. The criteria and the standards that should be met are known. Equally obvious is that it is impossible within ten years to comply with the standards of the Union. The most important policies and instruments Bulgaria should apply during the preparation for accession are more or less clear. The pre-accession economic policy must gradually converge with the economic policy of the EU member countries. Therefore, the major framework of economic and social objectives (the ends) and the policy instruments (the means) are more or less known.

The quantitative and qualitative macroeconomic framework of such a Strategy is provided in Table No.8 (Section 2) as well as in the other sections of this analysis.

The expanded Union will grow in diversity and will be less flexible and efficient in global competition. The EU does not have much chances of success in global competition, particularly with regard to the USA, under present complicated economic and institutional arrangements and growing heterogeneity. Its future chances will be subject to the intensity of intracommunity integration and more vigorous competition. The most advanced EU member countries would hardly accept the speed of integration to be determined by the weaker members, and even less so – by the new members. This would guarantee the failure of the EU in global competition. The most advanced member countries will probably prefer dynamic manoeurability to clumsy monoliths.

2. Assessment of the Effects of the Bulgarian Integration into the European Union.

As stated in Section 1, the decision at the end of 1999 to invite Bulgaria for accession negotiations was politically motivated. Political considerations have played a major role for extending such invitations to other CEE countries as well. "Nonaccession" of Bulgaria never was and will never be a viable alternative to "accession" for reasons, elaborated above. Political and economic security offered by the EU were a fundamental goal for Bulgaria and the other applicant countries. The achievement of such goal justified any costs. It was also assumed by intuition that benefits from accession prevailed by far over the costs. It was even felt that assessment of such effects was a waste of time.

Accession negotiations have already started, though the most difficult for Bulgaria are to come. The politicians and the professionals should answer the difficult question: how to prepare, so that the gains of accession are the most and the losses - the least?

The answer of this question does not necessarily require an exact accounting balance of the overall positive and negative effects. It necessitates, however, great number (70–80 or more) analyses of the positive and negative effects of specific aspects of integration. Such as joining of the Single Market, Common Agricultural Policy, structural and regional policies, appropriate patterns of financing, accession preparation costs, development of various components of infrastructure and the links between the national systems and the transeuropean ones, the development of nuclear power energy generation and nuclear safety, protection of consumers and their health, development of modern human capital (education, health care and others), economic and social issues of aging, preparation for the challenges of information society as well as of genetic engineering, room for development of national science and research activities, complete liberalization of trade, capital and labour flows, consequences from the brain drain, new aspects of regional policy, comprehensive cost–benefit analysis on each transitional arrangement requested, and many others.

There are no comprehensive analyses and forecasts on these specific issues in Bulgaria. If anything is being done, it is confined to a closed circle of civil servants without involvement of the most prominent independent experts. There are no guarantees that it is sufficient for the forthcoming difficult accession negotiations. To the contrary, there are symptoms that it is not.

The Bulgarian parliament, the professional associations, the public opinion get no information on the progress of negotiations. Everything is veiled in secrecy. Of course, in such important negotiations full publicity is counter productive. Decisions on fundamental issues in total secrecy are even more damaging to the vital national interests.

In Sections 4.4, 4.5 and 6 we describe the asymmetric liberalization of the integration flows and the implications for the countries involved. Bulgaria and the other applicant countries endure the negative effects of this asymmetry.

Within the context of labour flows in Section 4.4 is stated that a large portion of the skilled immigrants from Bulgaria and the other CEECs perform unskilled work in the EU countries. Their stay in these countries under such conditions does not enrich their knowledge and experience. They do not learn enough novelties, which could be transferred to their countries upon return. They may even loose part of the initial skills. Such irrational utilization of skilled labour is wasteful both to the sending and the receiving countries.

The skilled labour is educated and trained in the CEECs for many years. It costs these countries hundreds of billions of dollars. Owing to the economic and social crisis in the transition countries and the large income gaps, they are looking for better prospects in the EU countries and elsewhere. Moreover, the EU governments take vigorous action to recruit highly skilled experts, particularly on information technologies, offering them attractive working and living conditions. This will certainly expand over the following years and decades with the deterioration of aging in the EU countries. This new wave of "brain drain" emerges as a powerful instrument for intellectual and economic bleeding of the CEE countries in the foreseeable future.

As stated in Section 6 the problem is more complex than it looks. The issue is not of the "black and white" type. At first glance the "brain drain" is harmful only to the poor countries and beneficial to the rich ones. If these young people remained in Bulgaria they would contribute to its development, but their innovative potential would not develop in its full strength. Bulgaria cannot offer them the indispensable informational, technological, financial, experimental, institutional, and other prerequisites. Only the advance countries can afford it. And, of course, they will extract the benefits. The global science and technology development will also benefit.

The real issue is not the existence of a "brain drain", but how to share the benefits between the sending countries, which grow and educate them and the receiving countries, which develop them further and get all benefits.

4. The Migration Policy of Bulgaria, Related to the "Brain Drain"

In Section 4.4.5 some ideas are shared on the migration policy of Bulgaria with special focus on the "brain drain". It is stated that the policy should be balanced, target–oriented, reciprocal and pragmatic.

The components of such a policy should be developed in greater details, based on the following principles and ideas:

In Section 4.2. is shown that trade flows between the CEE and the EU were liberalized to a large extent. The only exceptions are the protectionist regime of the EU for agricultural goods and trade with some services. The arrangements made in the middle of 2000 alleviated only partially the problem with agricultural trade. The goods for which Bulgaria and the other CEE countries are relatively competitive (or less uncompetitive) have a difficult access to the EU market. The goods for which CEECs are not competitive or which they do not produce have easy access to the EU market. This trade regime is obviously aimed at protecting the interests of EU producers and suppressing CEE exports to the Community.

Such one-sided trade policy has no meaningful economic foundations. Particularly having in mind that an economic giant like the EU is practicing it with less developed countries, invited for accession negotiations. Such restrictions impede the preparation of these countries for accession. Ultimately, this policy generates problems for the Union in the future, originating from accession of ill prepared new members, for which the Community would be partly to blame.

In Section 4.2 and elsewhere in the analysis is shown that trade between the EU and the CEE is unbalanced. The trade deficit of the CEE is chronic and ever growing for years. The problem will become more acute over the years, particularly for countries such as Bulgaria.

There is no easy solution of this problem. The CEE countries need the investment goods and the modern technologies of the EU countries and are going to import them in even larger quantities in the process of accession preparation. The imports of consumer goods are also growing. The economic consequences of the trade deficits due to imports of capital goods differ from these owing to imports of consumer goods.

The export potential of Bulgaria is and will remain limited in the foreseeable future due to low competitiveness. At the same time imports will be booming. This will boost the trade deficit to (may be) unbearable levels in the medium– and long–term. The question is – how long can the economy afford such a deficit? Apparently, not for too long. In case of serious constraints on the balance of payments, urgent EU support might be needed. If the "unbearability threshold" of trade and payments deficits is reached, this may hamper the trade between the EU and the CEE, with negative implications for both sides.

Other candidate countries could take such steps as well. The Vienna Institute for International Economic Studies (WIIW) might also contribute with its comprehensive analyses. This institute might even assume co-ordination of national CEECs studies on this issue.

6. Overcoming the Asymmetry between the EU and the CEECs in the Timing of the Costs and Benefits of Integration.

In Sections 5 and 6 is proven that the EU countries got the bulk of the benefits of the integration during the 90s while the CEE countries were investing for accession preparation. The same pattern of sharing of the costs and benefits is expected during the new decade. Therefore, the EU gets the benefits first, and later on will make the costs as transfers to the applicant countries, and opening of its labour markets. The CEE countries incur first the costs, including the accumulated large trade deficits and will hope for benefits later on over the years as transfers, free access to goods, capital and labour markets of the expanded Union. The ratio in sharing the costs and the benefits may be slightly better for the CE countries, due to their earlier accession, say by 2005.

The EU countries will benefit even more from the integration process in the future. As stated in Section 6.2, Bulgaria and the other CEE countries will carry a major structural, technological, financial, ecological and other modernization over the next two–three decades. The modernization investments will amount to trillions of US dollars. The bulk will be modern equipment, technologies, software, know–how, and will be procured mainly from the EU member countries. This will generate additional growth, exports, jobs, budget revenues, social security system revenues and private incomes for these countries. If there were no accession preparations for the CEECs, this would not have happened. At least, not of this scale!

The implicit consent of the CEE countries with this obvious economic asymmetry is hardly the most rational behavior! Of course, it should be kept in mind that the CEECs are the weaker partner in the negotiations and cannot do much in the absence of good will from the stronger partner. Hopefully, there are a number of politicians and professionals in the EU, who will understand that it will be difficult to uphold such a policy. And would adopt a more balanced one!

7. Preparation for the Single Market.

In Sections 2., 4.2 and 4.3 is stated that the preparation for participation in the Single Market will be the greatest challenge for Bulgaria. The competitiveness of Bulgarian goods is low. Decades will be neded to narrow the gap in competitiveness between Bulgarian and EU companies. Particularly within the context of limited saving capacities of the Bulgarian economy and the modest transfers from the pre-accession funds. Competitive pressure from the Community will grow stronger after the accession. In addition, it will be the most difficult to obtain transitional arrangements in the Single Market area.

We recommend to the Bulgarian government to initiate the preparation of a thorough analysis of the current situation and a forecast for the costs and benefits of trade and financial integration of Bulgaria into the EU. Both traditional methods and simulating models should be applied in the analysis and the projections.

Top EU officials keep saying that there will be limited transition periods on issues, related to the Internal Market. This is quite reasonable because inflated with numerous transitional arrangements the Single market will no longer be the same. The Market must apply the same rules to all economic agents. Differentiated treatment of the participants destroys the market and the competition. The implications for present and future members and for the Union as a whole will be grave.

With limited financial resources, short pre-accession periods and symbolic transfers from the EU, most of the new members (and certainly Bulgaria) will not be prepared to face the competition on the Single Market and to comply with the EU standards in other areas. This will disturb the functioning of the Market and the expanded Union. The concussions in the ill prepared new members will be more dangerous. Let there is no illusions!

As stated in Section 5 an invitation for accession negotiations may be extended as a gesture of gratitude for political loyalty, but this is not sufficient to face the challenges of the competition on the Internal Market. The political gestures’ language is incomprehensible to the Single Market. A regional European political market is unthinkable at the globalization age on the threshold of the New century. There were attempts to establish a regional political market under Soviet domination – CMEA. The outcome is well known.

It is stated in Section 5, that the EU Acquis will keep developing over the years prior to accession. The decisions on modifications will be taken by the present member countries, but they will concern the future members as well. The Acquis will probably evolve towards greater liberalisation of goods, capital and labour markets, important modifications of the Common agricultural policy, of structural and regional policy arrangements, etc. Ecological, labour, social, health protection and other standards will grow stricter. This is a normal process of development and adjustment of the Acquis. The challenges facing the new members by 2010 will be greater than the present ones and those which will be applied for the applicants from the first group, say by 2005.

The funds for the Common agricultural policy (CAP) and for the rural development were 40,92 bill. Euro – the largest component of the EU budget for 2000. Its share was 45,7% in 2000, and is expected to reach 46, 6% in 2006.

The structural funds absorbed 32,05 bill. Euro of the Union’s budget in 2000. From 35.8% in 2000 their share is expected to be 32, 5% by 2006.

There is evidence of convergence among the EU countries on GDP per capita during the last decade. The gaps among regions within EU countries are however growing. This is most likely to happen in Bulgaria, due, among other reasons, to the inflow of FDI, which will go to regions with the most attractive conditions for economic activities. It is already happening in this country.

The government’s capacities to prevent growing regional disparities will be limited. Even more so for disparities, originating from the inflow of FDI and the private domestic investment.

In Section 5, we argue on the imperative for large investments to comply with the Acquis and the EU standards – around $110–120 bill. over the next 25–30 years. On this basis high investment rates are projected for the pre-accession period – between 26 and 30%. During the first half of this period around 95% of the overall investment will be provided by Bulgaria, and for the second half – 90%.

In Section 5.2 is stated that accession preparation investments during the next ten years should be very high if Bulgaria (and other applicant countries) are to comply with the EU standards. This would bring the overall investment rate to at least 43-45%. Such investment activity, however, is not feasible, due to both shortage of absorbtion capacities and lack of financing.

Such studies should be undertaken in Bulgaria too with financial support by the Foreign Investment Agency (FIA). The Agency should also expand and substantiate the information it publishes on FDI. The discrepancies between the FDI information, published by the Bulgarian National Bank, the Central Statistical Office and the FIA should also be clarified and sorted out. To this end lessons should be learned from the experience of the CE countries.

The Government should provide a portion of the domestic savings. The prevailing number of infrastructure projects built with foreign participation should be supported by domestic public funds as well. Other infrastructure projects are to be built predominantly with public funds. This will be an additional burden to the budget for many years. The budget must also shoulder the heavy external debt service for many years to come. This will in turn limit the maneuverability of the state in this area.

The gross transfers to all applicants from the pre-accession funds are budgeted at 3,12 bill. Euro per annum up to 2006. This amounts to 3,4% of overall EU appropriations for payments.

The Financial Perspective EU-15 and the Financial Framework EU–21 provide for gradual switching in of the new members to the Community funds for the initial five years. The access might be more or less normal only at the fifth year. This is not appropriate, as the applicants need resources for preparation mostly during the pre–accession and the years immediately after accession. The budget provisions prove that just over these years they will get thither financing.

The member countries do not get gross, but net transfers. The receipt of the net transfers is also not certain and does not equal the net gains. This will be subject to the absorption capacities of the applicants and the new members and compliance with specific requirements. At low absorption capacities there might be no net gains.

Gross transfers from the pre-accession funds of 3.4% of the EU budget, and only 1% of the annual GDP of the applicant countries are far from been enough. Even the most advanced candidate countries need more than 30% annual overall investment rates over the following years to comply with the EU standards. This is a clear manifestation of the meager financial support by the EU. Such transfers are not consistent with the political statements of top European Commission officials on the high priority they assign to enlargement.

• Bulgaria and most of the CEE applicant countries are underdeveloped economies. Their GDP per capita is lower than the one of all acceding countries so far, including the poorest during the Southern enlargement of the Community. This applies to productivity, competitiveness, personal incomes, consumption and other economic indicators;
• Bulgaria and the other CEE countries are still in transition. They began developing market relations at a much lower starting point ten years ago. Private economic agents have been developing over the last decade. These countries were under central planning, without a private sector (with an exception of Poland in agriculture), without a market infrastructure, with highly distorted economic, social, institutional and other patterns;
• The economies of Bulgaria and of the other CEE countries performed during the past decade under asymmetric liberalization of trade, capital and labour flows, which was disadvantageous to them. The CEECs were on the loosing side also due to asymmetry in the sharing of net positive effects with the EU;
• Bulgaria and the other CEE countries have been treated more unfavourably than the applicants during the Southern Enlargement. Greece, Portugal and Spain liberalized their goods and capital markets only after accession to the Community, having already an access to the agricultural, structural and other funds to compensate for the negative consequences of restructuring and adjustment. An inverse approach is being applied to the CEECs – they are told first to liberalize the goods and capital markets, with no access to the Union’s funds, and promises only for future accession, without firm guarantees;
• During all the previous enlargements, including the southern one, accession of new members was preceded by large migration flows to the European Community. EU effectively blocked labour flows from Bulgaria and the other applicant countries since 1993. This caused the applicants additional problems in restructuring and preparation for accession;
• As stated in Sections 4.2 and 6.2 the EU member countries have accumulated large surpluses in their trade with applicant countries, which keep growing. Some CEE countries may soon reach the " unbearability threshold" in their trade and payment accounts;
• As stated above, the applicant countries have initiated major structural, technological, financial, ecological and other modernization. The investments for this modernization will amount to trillions of US dollars. The bulk of them will be used for procurements from the EU countries and will therefore boost their development over the next 25–30 years;
• Some of the applicant countries, and particularly Bulgaria, suffered heavily from the embargo operations of the UN and the EU against Yugoslavia, and got no compensation. The negative economic implications of the Yugoslav tragedy on Bulgaria may prove more severe and long lasting, than originally hoped for.

An increase in the EU transfers prior to and immediately after accession should be negotiated through multilateral negotiations between the EU and the CEECs. Full mobilization of national resources of the applicant countries along with larger transfers would assure better preparation for accession. The well-prepared new members are a guarantee for normal functioning of the Single Market and the expanded Union. This is in everybody’s interest – to the present and the new members of the Union.

12. More Caution is Needed in Forecasting the Economic Growth and Convergence with the European Union

The GDP per capita in Bulgaria, the long-term and very distant prospects of its increase are argued in Sections 1.2 and 2.2.1. Excessive optimism is being witnessed in this country in projections for GDP growth, and convergence with the EU on GDP per capita, productivity, competitiveness, incomes, etc. Important political decisions are been taken on this ground. The thorough investigation of the experience of other countries of comparable size and level of development proves that it is not so simple.

Bulgaria and the other countries, still in transformation recession, may reach high growth rates (5-6%) for several years due to very low basis. With the recovery of the pre-reform level of output the transitional growth potential will be depleted and the growth rate will take a normal pace.

Competent researchers of growth state explicitly that "…convergence takes time: On the assumption that the average convergence rate found in the cross-country regression holds true for the convergence of the CEECs, it will take approximately 35 years for the CEEC–10 to achieve 55 per cent, and for the first round candidates - 60 per cent of the average per capita income in the present EU. Depending on the initial income, growth rates would initially vary between 3,5 and 5,5 per cent across the CEECs. …Any realistic policy scenario has to acknowledge the fact, that the large gap in per capita incomes between the present EU and most of the CEECs will persist for decades rather than just years". And there is no guarantee that the process will be smooth.

Bulgaria and the other CEE countries are aiming at accession to the EU, and later on – to the Economic and Monetary Union (EMU). Some Bulgarian politicians and government economists have even claimed that the country had already met the Maastricht convergence criteria and should accede to the EMU. The two goals are interrelated, but autonomous. In a more distant future (13-15 years or more) they may converge. This is however not the case in the short– and medium–term.

The analyses and the projections of both Eastern and Western European researchers indicate that the real appreciation of the currencies of the candidate countries with pegged exchange rates will go on (and may even accelerate) during the pre-accession period. This also applies to the Bulgarian currency. It is an inevitable byproduct of the convergence to the EU. This "… requires that their price levels or nominal exchange rates (or both) be able to adjust".

Some Bulgarian politicians and official economists insist that the country must stick to low inflation and to the present fixed exchange rate in compliance with the Maastrich criteria and the Currency Board arrangement until accession to the EU and the EMU, namely in the next 10–15 years.

Such twin objectives in a package are incompatible. Even less so under increasing domestic deregulation and complete liberalization of goods and capital flows with the EU, "Stability of the exchange rate in a country with highly under–priced goods does imply inflation. One of the two goals has to be abandoned. Worse still, as practice has repeatedly shown that the attempts at meeting such incompatible goals usually end in developments resulting in both goals being abandoned". This thesis has been asserted a number of times in our publications in the recent years.

As stated above, Bulgaria and the other CEE countries need large investments during the pre–accession period to comply with the EU standards. These resources will be secured mainly from domestic saving and to a lesser extent – by external flows. This will burden the budget by public investment for infrastructure and indirectly – through higher debt service payments.

Restructuring and re-capitalisation in the corporate and financial sectors may also burden the budget. Health and pension reforms will have similar implications, particularly under conditions of high unemployment, low personal incomes, low collection rate of social security contributions, aging population and increased emigration of young people. Trade liberalisation and joining the Customs Union will reduce the budget revenues from import tariffs and taxes. The adjustment of the domestic tax system to the EU standards aiming at gradual unification may reduce some taxes. On the other hand, the financing of accession preparations may generate pressure for higher taxes.

Bulgaria needs FDI and external borrowing. Approaching accession is expected to boost investment inflows. Particularly during the second half of the new decade. This will increase money supply and boost inflation pressure.

If more important national interests necessitate one must be ready for adjustments in the Currency Board arrangement. This however does not mean abandoning of all its instruments. By that we mean a more flexible exchange rate policy, for instance moving to crawling peg exchange rate system. It is very likely that more important economic and social goals will necessitate such an adjustment. This change does not look indispensable within a year or two, unless appreciation of the Euro proves faster than expected at the end of 2000; if the oil prices rise beyond limit and if the US economy fails with the soft landing.

As stated in Sections 1 and 2, the economic convergence of the CEE, and Bulgaria in particular, with the EU will take decades, rather than years. Much longer, than accession to the EU, the EMU and the adoption of the Euro.

It follows from the above, that during the pre–accession period the design and implementation of rational policy on more balanced budget and balance of payments, pegged exchange rate, low inflation and so on will be more complicated than it has been so far. The compliance with vital criteria for accession to the EU (higher GDP growth rate, productivity, competitiveness, incomes) over the new decade will be at variance with the convergence criteria for accession to the EMU (balanced budget, low inflation, stable exchange rate, low public debt).

Moreover, with the introduction of a Currency Board arrangement in the middle of 1997, Bulgaria has no longer its own monetary and foreign exchange policies. The Bulgarian National Bank is no longer a normal central bank. Its functions are strictly curtailed. The instruments of macroeconomic policy for management of the national economy are also more limited.

With the introduction of the Currency Board arrangement Bulgaria dispensed itself with monetary and foreign exchange policies and laid on their functions to fiscal policy. However, due to its very nature the fiscal policy cannot be an adequate substitute. The reasons are many. One of them are the long time lags, much longer than those of the monetary policy. The feedbacks in the behaviour of economic agents on the signals of fiscal policy are slow. Macroeconomic management by fiscal policy instruments is more difficult, than by monetary policy instruments.

The Ministry of Finance makes things worse by misusing the basic interest rate. This rate has been transformed into a mere administrative instrument, applied by an institution with vested interests. It serves only the balancing of budget, to the detriment of households, the economic agents and the economy as a whole.

The economic convergence and accession to the EU will hardly be so smooth and certain, as some people hope for! Fluctuations in the global and European economies cannot be precluded. Destabilising impulses may come from the energy prices on the global market during the coming years. There are arguments nurturing an expectation for higher oil prices. One of them is the oil price dynamics in real terms. As stated in Section 4.2.3 the oil prices in 2000 were at the level of 1973-1975 in 1990 US dollars. According to other studies the oil prices in 2000 were at the 1900 level in real terms. Too low oil prices are confortable in the short–term, but do not provide a good service to the global economy and the search for new energy sources in the long–term.

There are no guarantees that the preparation of Bulgaria will be smooth and accession will take place by 2010. The opposite is true – with present investment levels the country will not be able to comply with the most important EU standards. There are no guarantees that the internal institutional reforms of the EU will match the requirements for enlargement and globalisation. The European conference in Nice (December 2000) was a warning signal.

This may lead to delays in accession, the symptoms of which are evident for the first group countries. Accession of some of these countries, say by 2005, may not be problem free, which is quite natural for such a gigantic project. This may lead to a revision of the EU strategy and tactics on the Eastern Enlargement, delaying further the accession of Bulgaria and other countries. It is not precluded that some new members (including Bulgaria) may be placed in an intermediate transitional group of restricted membership: limited labour mobility, restricted access to the funds and programmes of the Community, a number of restrictive (for them) transitional arrangements, and so on. They may even make a third group, if the concept of the EU development on two or more speeds gets an upper hand.

The possible alternatives listed above are sources for accession risks. The risks that Bulgaria would face are greater in number and much more likely to occur than for the CE economies. The emergence of such uncertainties may have negative implications. It may decelerate the pace of reforms and the preparations for accession. It may also weaken the public support for enlargement, both in the EU and the CEE. This would make the fragile CEE economies even more vulnerable to political, economic and other shocks. It, in turn, may undermine the confidence of the world financial community and particularly of potential investors, at a time, when we are in great need of them.

Such a pessimistic scenario is possible, but not unavoidable. Its prevention depends mostly on the policies of the USA, the EU and Japan