Cause and Effect in European Politics and Law

Bulgaria Is Getting Older, It Is not Reforming and Is Getting Poorer

Adelina Marini, May 18, 2015

One conclusion that surfaces every time from the European Commission country-specific recommendations under the European semester is that Bulgaria is getting older, poorer and is incapable of reforming itself. What is new this year is that the Commission has changed its approach and is now focusing instead of on long-term and persistent problems only on those that can deliver quickly. As Vice President Valdis Dombrovskis (Latvia, EPP) said, the recommendations are focusing mainly on what can be done this year or in a year and a half at the latest. Because, as he explained, if everything is a priority then nothing is a priority. That is why, instead of the usual 7-8 recommendations, this year Bulgaria received only five. Two very important recommendations have dropped out from the list like the one concerning the reform of the judiciary and the one on energy dependence.

However, this does not entirely mean that the Commission has lowered its attention toward these two crucial areas. In that respect, the analysis of the Commission that precedes the specific recommendations is very useful. It reveals that the Commission does not accept the Bulgarian government's expectations for reduction of the budget deficit this year and in 2016. Moreover, the Commission says that the planned targets for the deficit for the period 2016-2018 are not sufficiently specific. In addition, on the basis of the spring economic forecast, the Commission sees a risk of deviation from the fiscal consolidation targets in 2014-2015 and in 2016 there is a risk of significant deviation. Generally, the Commission is of the opinion that there is a risk Bulgaria not to meet the provisions of the Stability and Growth Pact. That is why, it recommends additional measures this year to avoid deterioration of the structural balance of the public finances and regarding next year it recommends a correction of 0.5% of GDP.

Part of the measures may also include improvement of tax collection which is mentioned in all specific recommendations for Bulgaria since the establishment of the European semester, tackling the shadow economy, improving spending on healthcare. Also recommended is a comprehensive analysis of the risk and a feasibility assessment of the measures undertaken earlier. This is a new piece of advice by the Commission which was for the first time mentioned in the in-depth analysis of the economic situation of Bulgaria. According to the Commission, a major challenge for Bulgaria continues to be respect for the tax legislation. Alas, what lacks in the analysis is that, in fact, Bulgaria has problems with the respect of any legislation, not just tax provisions. This is precisely why it is very important the Commission to keep in sight the problem with the dependent judiciary.

This problem is described in the context of the creation of a favourable business environment for investors. "A key building block for an investor-friendly business environment is an independent, high-quality and efficient judicial system and effective mechanisms to fight corruption. Key challenges in this area include a lack of overall coordination, institutional shortcomings and a weak track-record on securing final convictions in court". It is added that all this will be covered by the Cooperation and Verification Mechanism (CVM) which explains why there is no specific recommendation in this area, apart from it being a very long-term commitment.

With the improvement of the investment climate is related the fifth specific recommendation for preparation of "a comprehensive reform of the insolvency framework drawing on international best practise and expertise, in particular to improve mechanisms for pre-insolvency and out-of-court restructuring". This is another painfully familiar recommendation from all previous years of the European semester. In the analysis accompanying the recommendations it is said that the legal framework for insolvency in Bulgaria has proved inefficient, "increasing uncertainty among market participants and reducing the country’s overall attractiveness to investors. Insolvencies take longer than in comparable countries and the claim recovery rate is low".

Criticism is especially strong toward the health care system. There, the analysis is shocking, though quite familiar. It is said that among the important challenges the system is facing are poor health outcome, low level of funding, efficiency of used resources, This is, so to say, the purely technical part. What deserves special attention, however, is that in Bulgaria life expectancy is significantly below EU average and life expectancy at birth is among the lowest in the EU. The hospital sector continues to be too big. In the first recommendation this issue is dealt with by recommending Bulgaria to improve the efficiency of spending, more specifically by reviewing the way prices are formed for health care and to strengthen outpatient and primary care.

Bulgaria has the fastest ageing rates. In the same time, the country has the highest number of young people who are neither on the labour market nor in education or training or else. The share of Roma is the biggest. That is why Bulgaria is among the countries facing the highest risk of poverty in the EU. The pension reform is no longer among the five recommendations of the Commission. The International Monetary Fund published its own report on Bulgaria on the same day as the Commission. In it, the Fund outlines the problem of ageing and emigration as a very challenging problem.

This year, too, the Commission is recommending the establishment of a transparent mechanism for setting of the minimum wage. Although the Bulgarian minimum wage is the lowest in EU nominally it has grown tangibly since 2011, as more increases are planned in the coming years. This, according to the Commission, can lead to distortions of the functioning of the labour market. In addition and even more importantly, there are no clear guidelines about its formation. The Commission recommends such a mechanism to include also the formation of the minimum social security contributions given their impact on poverty among workers, job creation and competitiveness. This recommendation has been slightly changed compared to previous years but is still present. This year the IMF expects unemployment to be 10.9% and next year 10.3%.

Again, the low level of education and training systems has been criticised as well as their limited relevance for the labour market. The Commission emphasises that another year in a row the School Education Act is not adopted. This area is covered by the fourth recommendation where Bulgaria is encouraged to adopt the act and to increase the participation in the education system of disadvantaged children, especially Roma.

The IMF is much harder in its analysis and recommendations pointing out that with its current actions Bulgaria is dooming the convergence of income to a very low pace. Moreover, it is expected the age, gender and regional income disparities to be maintained. In this spirit, the IMF deems very important the fight against corruption and strengthening the rule of law to restore trust in key institutions. Both the IMF and the Commission pay significant attention on the problems in the financial system that emerged with the KTB case (Corporate Commercial Bank). These problems are addressed in the second specific recommendation where the need of an independent quality asset review is emphasised for the entire banking system together with stress tests in close cooperation with the European bodies. In parallel, it is recommended to review the portfolios of the pension funds and the insurance sector.

To review and enhance supervision in the banking and non-banking sector, including strengthening the provisions that guarantee deposits, is also part of the recommendations. The Commission mentioned in February, when it published the in-depth economic report on Bulgaria, that the payment of guaranteed deposits was delayed significantly which is recalled in the analysis that accompanies the five specific recommendations. IMF is of the opinion that despite the problems the financial sector has proved resilient but it also recommends the doubts in supervision to be cleared. IMF has an additional recommendation that is not present in the Commission report, namely the need to monitor closely the situation in Greece and to develop a plan in case of the worst case scenario in that country. The Fund does not say which scenario that may be but probably it has in mind a possible default of Greece and a possible exit from the euro area which may have grave consequences for Bulgaria.

What draws attention in this year's recommendations is that energy is not mentioned neither in the recommendations nor in the analysis. A probable reason is that this Commission proposed an energy union strategy where it intends to deal with energy issues. Similarly, it transfers the in-depth analysis of the reform of the judiciary to the special mechanism (CVM) which, however, is valid only for Bulgaria and Romania. In previous years, the Commission made recommendations related to the judiciary to countries that do not have that mechanism, like Italy. In fact, in 2013 10 member states received similar recommendations. In addition to Bulgaria and Italy, recommendations in that area received also Spain, Hungary, Latvia, Malta, Poland, Romania, Slovenia and Slovakia.

The previous Commission of Jose Manuel Barroso created a special justice scoreboard which is an integral part of the European semester. Last year, the economic directorate of the Commission published a broad analysis of the link between reforms in the judiciary and economic performance. It says that the efficient judiciary systems, which means quality, independence and efficiency, are "an important structural condition" member states to achieve sustainable growth. So, it is indeed puzzling that the recommendations have stopped covering this area, especially bearing in mind that the common rule of law mechanism that covers some of the problems has been significantly changed.