The Canadian NATO Parliamentary
Association has the honour to present its report on the meetings of the
Economics and Security Committee’s Sub-Committee on East-West Economic
Co-Operation and Convergence, held in Sofia, Bulgaria April 27-29, 2010.
Canada was represented by Mr. Sukh Dhaliwal, M.P.
Bulgaria is a middle sized European
country with a population of roughly seven million people. 83% of that
population is ethnically Bulgarian, 9.4% are Turkish, and 4.7% are Roma.
Bulgarians pride themselves on a tradition of tolerance and good interethnic
relations and this remains an important source of domestic stability.
ECONOMIC OVERVIEW
The country today confronts serious
economic challenges. Its per capita income stands at 47% of the average for the
EU 27. Joining the Euro area has been a consistent goal for the nation and
towards that end, the government created a currency board in 1997. This tied
the value of the leva to the euro and thereby stripped the state of any power
to set interest and exchange rates. The only powerful monetary tool the state
wields is the power to set minimum reserve requirements. The exchange rate is
locked at euro 1.95 and inflation today stands at 2.4%
The country’s oldest public institution
is the central bank. Its primary goal today is to maintain the current
exchange rate until the euro is adopted as the national currency. This compels
the government to pursue tough and consistent fiscal policies. The government
is determined to join the euro and sees this as inevitability. The goal had
been to adopt the euro in 2007, but political factors are slowing the process.
The current difficulties in the Euro area are also complicating factors.
Bulgaria has been very consistent in
its approach to the euro which it aims to adopt as soon as conditions are ripe
for accession. It has maintained a currency board arrangement and will do so
until it is able to adopt the euro formally. The fixed exchange rate means
that the country is essentially operating as if it were already in the Euro
zone and the current arrangements have forced important adjustments on the
national economy and on policy makers. It is generally seen to have been a
successful policy although it has meant that Bulgarian officials have not had
the option of depreciating the currency in difficult times. It has rather
liberalized the labour market, imposed fiscal discipline and sought to improve
the business climate as ways to bolster national competitiveness. The EU has
allowed Bulgaria to maintain the currency board rather than moving to the ERM
II. This has allowed the country to adopt a fixed exchange rate until adopting
the euro, which Bulgarian officials had long hoped would happen 2010. This has
now been postponed partly because of the unsettled condition of international
exchange markets.
Bulgaria’s economic structure is
weighted toward manufacturing which accounts for 16% of GDP. Transport and
communication generate 9.5%, trade 8.9% real estate.8.5%, financial
intermediation 7.9%, public administration 7.2%, agriculture and forestry 6.8%,
electricity, gas and water supply 4.5% education 3.7% and health care 2.5%.
Bulgaria is an important producer of steel, copper, zinc and other metals and
mining generates 1.7% GDP.
Over the past two decades, Bulgaria has
orchestrated a massive reorientation of its trade. Commercial exchange was one
largely limited to the COMECON countries but today Bulgarian exports and
imports are largely western oriented. The country’s primary trade partners are
Germany, Italy, Greece, Romania and Turkey. Russia remains an important
supplier of energy imports and accounts for 16% of Bulgarian imports but only
3% of exports. By contrast 65% of Bulgaria’s trade today is with the EU-a
relationship which the currency board peg reinforces. Most invoices are
registered in Euros. The Balkan region including Turkey is Bulgaria’s second
largest regional trading partner, accounting for 15% of the country’s trade.
The figures for China and the United States are 5% and 2% respectively.
The EU accounts for 85% of the total
foreign investment flowing in Bulgaria. Among EU countries, Austria is the
largest investor followed by the Netherlands, the United Kingdom, Greece,
Germany and Cyprus. The United States accounts for only 4.4% of FDI. Financial
intermediation attracts 24% of all FDI followed by real estate and business
activities, manufacturing, transport and communication. Large capital inflows
in 2008 drove up prices and inflation, which that year reached 12%. It
subsequently fell dramatically in 2009. The EU average today is 1.2% and the
expectation is that Bulgarian inflation will rise to 2.4% this year.
The crisis in Bulgaria accelerated
after the collapse of Lehman Brothers in New York; after growing by 6% in 2008,
it then shrank by 5% in 2009. The crisis first became apparent in Bulgaria when
exports fell in October 2008. This was followed by an ever-mounting contraction
of financial flows. By the first quarter of 2009, domestic demand and export
revenues had begun to collapse and the government was compelled to reduce
spending to ensure the country’s sustained fiscal health. The fall in domestic
demand, however, has kept external imbalances in check. Bulgarian savers did
not have the reserves to bolster demand. By the second half of 2009, job
losses began to mount with unemployment reaching 7.9% in the fourth quarter of
last year. The unemployment rate for 2010 will likely hit 8.8% although this is
below the European average. Relative to many other transition economies,
Bulgaria’s labour markets have fared rather well. Exports are now starting to
recover and Bulgaria has enjoyed four months of export growth. The economy is
forecast to grow at 1% this year and 4% in 2011.
The governments of Bulgaria have
consistently pursued tough fiscal policies. In 2007 the budget surplus was
over 3%. In this election year, initial government reports did not include
anticipated outlays for a range of projects. When those costs were factored in,
the deficit jumped to 3.9%. This is nonetheless a relatively small deficit.
Bulgaria thus has one of the lowest budget deficits in Europe and outperforms
most European countries in this regard, with the exception of Sweden and
Estonia. The government has steadfastly remained compliant with the stability
and growth pact targets and is very dedicated to qualifying for Euro
membership. Indeed government policy is backed by a strong social consensus on
the need to pursue anti-inflationary policies, which is partly inspired by the
severe consequences of the inflationary crisis of 1997. The ratio of gross
government debt to GDP has improved dramatically. It was once over 100%, and in
2010 will stand at 15.3%. The current account deficit has declined dramatically
over the past two years, a trend driven by falling foreign direct investment.
That deficit stood at 24% of GDP in2008, 9.4% in 2009 and will likely be 6% in
2010. Foreign reserves, however, have remained fairly constant. Bulgaria’s
total debt stands at roughly 100% of GDP, although this is not considered a serious
vulnerability for the country. Roughly 42% of this debt originates in
intercompany loans. Recently interest rates have begun to stabilize and are now
falling while equities prices are beginning to rise.
The standard of living in Bulgaria
remains low relative to that of its European partners. The average monthly
salary is roughly 350 Euros, and pension payouts are one third of that. This
can be a source of anger and frustration and sometimes the currency board is
blamed for the difficulties. But there is a strong anti-inflationary bias in
the country because of the ill effects of the financial crisis of 1996-1997.
The Bulgarian banking sector is very
tightly regulated and well capitalized. This has helped insulate the country
from the worst effects of the global financial crisis. For all intents and
purposes, Bulgaria has not suffered a financial crisis although the real
economy has undergone a significant fall in domestic and international demand.
Bulgaria’s banking sector has remained robust as very strict reserve
requirements essentially cordoned off the country from financial contagion.
Capital adequacy requirements (17%) significantly exceed the Basle ratio. There
are 24 banks operating in Bulgaria, and 81% of these are EU based. Bulgarian
owned banks make up 16% of the total.
Bulgaria did, however, suffer a very
serious banking crisis in 1997, and this helped lay the foundation for
important macro-economic and regulatory reforms. Greek investors have been
partially active in Bulgaria and Greek banks play an important role there as
well, although they are subject to Bulgaria’s strict rules.
Corruptions in Bulgaria, and
particularly problems in the judicial branch, have complicated relations with
the EU. The current government is confronting this in an open fashion and is
now reforming the pre-trial process of investigations, which have posed real
problems in Bulgaria. But the political challenge goes beyond this particular
matter and obviously the serious situation in Greece has put the Euro accession
on hold for the moment. The impact of the Greek crisis is particularly evident
in the southern Bulgaria where there is a greater presence of Greek companies,
some of which have lay off workers or ceased paying salaries.
Bulgarian officials feel that they have
resisted contagion from the Greek crisis largely by managing its budget in an
austere manner, imposing tough controls on the banking sector and ensuring a
degree of flexibility in key markets including the labour market. Government
debt is low by any standard of comparison and much of that debt is intercompany
debt. One third is market debt and most of this is of a long-term nature.
As suggested above, there were some
concerns that Bulgaria had abruptly revised its figures on the deficit. In fact,
the previous government had engaged in several public spending projects that
were not reported on the initial estimates as the funds had not yet been
disbursed. The new government revised the numbers. The preliminary numbers
suggested a deficit of 1.9% but the final announced deficit was 3.95% which
included works concluded but not yet settled. The government has made its
declaration on an accrual basis to be totally transparent — something that was
seen as particularly important in light of the Greek crisis which is partly
rooted in fundamentally inadequate budgetary reputing.
The economic and political situation in
Bulgaria was also the focus of discussions with parliamentary representatives
from both opposition and governing parties held at the parliament. Bulgarian
politicians are clearly worried about the situation in Greece which is an
important neighbour and partner country. If the crisis worsens, the political
fallout could have serious implications for the region. The crisis is also
leading to uncertainty about Bulgaria’s ambitions to join the Euro area anytime
in the immediate future. Some in the opposition are also expressing
reservations about the austere fiscal environment, and some of the specific
spending choices the government has made.
Over the long run, Bulgarian officials
would like to build a more diversified national economy which is somewhat less
reliant on real estate and banking, both of which have attracted significant
levels of foreign direct investment. Business outsourcing represents a
potential growth industry given the advanced technical skills of Bulgarian
workers and the low cost of doing business in Bulgaria. There is some
confidence that Bulgaria can compete with countries like India in this field
and a number of high tech multinationals have indeed established regional
offices in the country.
Bulgaria is very dependent on natural
resource sales while innovation industries generate far less national income
than in most EU countries. Bulgaria’s economy is also heavily dependent on
capital intensive industries which generate 25% of GDP as opposed to the 19% EU
average. Although capital intensive industries have grown in recent years, they
do not create many jobs. This is why the county’s leaders are looking to higher
technology sectors where job creation might be more robust. Energy saving green
technologies may also hold some promise.
ENERGY
Bulgaria is pushing to increase the
share of renewable sources in its overall energy basket. The goal is that
renewable energy will account for 16% of energy use by 2020. Bulgarians have
suffered terrible consequences when Russia has cut off gas supplies, and its
leaders are determined to build in redundancies to the national energy
structure as a hedge against future Russian gas cut offs. Diversification of
gas supplies, the construction of reverse flow energy interconnections with
neighbouring countries, constructing an LNG terminal and improved gas storage
are all critical priorities. Bulgaria strongly supports both the Nabucco and
South Stream gas pipeline projects and would host both on its territory. It
would like to see far greater transparency in the operation of energy pipelines
in Europe and feels that transmission system operators should be independent of
energy producers.
CONCERNS OVER THE RESET OF RELATIONS
BETWEEN RUSSIA AND UKRAINE
Bulgarian officials and members of
parliament have been very concerned about the situation in Ukraine. The recent
chaos in the Ukrainian parliament and the decision of the government to sign a
very long naval basing lease with Russia is worrying. An unstable Ukraine
would pose serious problems for the Black Sea Region. Although Bulgarian
officials recognize that settling the energy dispute between Russia and Ukraine
will stabilize supplies to Bulgaria itself, there are some concerns that this
decision was made without achieving a genuine consensus in Ukraine itself.
Indeed that country is terribly divided politically, and these fault lines
could ultimately prove destabilizing. Russian energy policies have at times
very adversely affected Bulgaria and the country has seen its energy supplies
surreptitiously cut off as a result of disputes to which it was not a party.
Russia’s policies in the Black Sea are also a source of concern, particularly
in the wake of Russia’s aggression in Georgia and its plans to build or upgrade
bases in Abkhazia and Ukraine. Russia is also refusing to renew its
participation in CFE Treaty arrangements, and this could trigger an arms race
in the region.
DEFENCE ASPECTS
Members of the delegation had an
opportunity to observe a joint Bulgarian US military exercise — Thracian
Spring. This is an annual training exercise designed to help Bulgarian forces
become more interoperable with their NATO allies. The exercise this year was
run out of the Plovdiv International Airport and Krumovo Airbase. It engaged
members of the US Air force and the Bulgarian Army, Air force and Navy in
exercises to train Bulgarian paratroopers, pilots and support crews in a range
of different of jumps including night jumps. These jumps were made from the
American Hercules aircraft. The goal was to perform these jumps to NATO
standards, to exercise the conduct of tactical tasks and mission planning,
share maintenance and support experiences, improve force interoperability and
share airlift experience techniques and procedures. 350 Bulgarian paratroopers
participated in the exercise.
A key priority for the MOD is to
develop modern and efficient management structures to improve the capability,
performance and efficiency of Bulgarian armed forces. NATO and Euro-Atlantic
security and defense play a central role in defense planning and Bulgarian
officials strive to ensure that Bulgaria remains a consistent and reliable
ally.
The global financial crisis has
compelled defense officials to make tough cuts and defense spending in 2010
stands at 1.4% of GDP as opposed to 2.4% in 2009. Of course these spending
reductions will complicate efforts to upgrade force management systems, modernize
national forces and improve interoperability — all of which remain important
priorities. Defense leaders are seeking new helicopters for the air force and
navy as well a new transport aircraft and a multi-role fighter. The financial
crisis will delay some of these acquisitions and has also been a factor in
personnel reductions. Over the past decade, Bulgarian authorities have
implemented far tighter financial controls over defense spending procedures to
ensure more effective use of scarce resources and to make corruption more
difficult.
Since Bulgaria moved to an
all-volunteer force, the number of military personnel has fallen 32%. The
previous government had set social goals within the defense budget list of
priorities including housing for soldiers. The current government has decided
to cut many of these programs simply because they were too expensive. A central
priority for the Ministry is to make Bulgarian force interoperable with NATO
and prepare that force for critical missions including those outside of the
NATO area. Force modernization is critical but financial constraints are
obviously impinging on the capacity of the state to affect these changes. The
MoD currently hopes to acquire a multi-role fighter and new helicopters as well
as new transport aircraft and transport vehicles.
Bulgaria has deployed troops to
Afghanistan but the mission in not popular in the country. The government
accepts it as a critical obligation and recognizes that NATO must succeed in
its mission there. Members of parliament expressed concern about the corruption
problem in Afghanistan and feel that poor governance there is undermining the
NATO mission. Bulgarian soldiers are serving in Kabul and Kandahar. A decision
will soon be made whether or not to increase the size of the Bulgarian
contribution in Afghanistan.
BULGARIA’S VIEWS FOR THE NEW NATO
STRATEGIC CONCEPT
Bulgarian authorities believe that
Article 5 should remain at the very core of NATO’s strategic functions and have
pushed to reaffirm this in the new strategic concept. The government
accordingly supports the notion of bolstering NATO’s Article 5 capabilities and
for this reason would like to see an anti-missile system capable of working
with the US system developed as a pan-NATO project. Bulgarian officials take
it for granted that Iran aspires to develop a nuclear weapons capability.
Equally Bulgaria supports the principle that NATO retain the right to deliver
military infrastructure to all new member states and it is delighted to host US
joint facilities on its territory. This is indeed a core priority for many new
member states. Bulgarian officials are also very wary of dismantling the
tactical nuclear deterrent on the continent without clear evidence of
reciprocity.
Article 4 must also be reaffirmed and
Bulgaria is particularly keen on the Alliance making energy security a key
priority. Bulgarian officials are adamant that diversifications of energy
resources, supply and delivery systems are essential to security.
Bulgaria
strongly supports NATO enlargement and is prepared to welcome new members from
the Western Balkans and the Black Sea Region as long as those countries are
fully dedicated to accession and are able to meet the criteria for membership.
Bulgarian officials also strongly advocate deeper military and strategic
cooperation between NATO and the EU. The current level of cooperation is
unsatisfactory and the monthly meeting of the capabilities group is not
encouraging the kind of cooperation some had expected it would. Bulgarian
officials want to ensure that the Black Sea is considered part of the
Euro-Atlantic space, and security there should neither be regionalized nor seen
as a potential zone of influence for one or two countries.
Respectfully
submitted,
Mr. Leon Benoit, M.P.
Chair Canadian NATO Parliamentary Association
(NATO PA)