The European Commission (EC) decided to indefinitely suspend funding to Bulgaria due to serious concerns about corruption and organised crime.
The decision on July 23 to "withdraw the accreditation of the two implementing agencies concerned, namely the central financing and contracting unit and the implementing agency at the ministry of regional development and public work", as an EC report termed it, docks $757m from the forecast government budget. These include funds earmarked for road construction.
When Bulgaria joined the EU at the start of 2007, the EC included "safeguard mechanisms" reserving the right to freeze payments to the country. At the same time, a system known as the "Cooperation and Verification Mechanism" (CVM) was established to monitor progress in judicial reform and the fight against organised crime and official graft. Interim reports issued in July 2007 and in February 2008 warned that, while Bulgaria had made progress on reform, having established some of the structures necessary to stamp out corruption, implementation on the ground remained patchy. The reports already threatened to suspend some of the $11bn due to be paid to Bulgaria from EU coffers over the next five years.
A series of scandals, some relating to the allocation of EU funding, have shaken the country in recent months, leaving the EC with little choice. According to several commentators, failure to act would have made the Commission look impotent and raised fears that European taxpayers' money was being poured into a Bulgarian black hole with little regard for probity.
In January, after the research for the second interim report had been completed, some $78m of funds due to be paid to the National Road Infrastructure Fund (NRIF) were temporarily frozen after it was alleged that the organisation's executive director had awarded construction tenders to his brother's company, Binder. In March, the EC suspended a further portion of funds (reported to be around $155m) for agricultural development under the special accession programme for agriculture and rural development (SAPARD) programme. The month also saw the resignation of Deputy Foreign Minister Feim Chaushev after it was revealed that he had business interests registered under another name.
More bad news hit Sofia in April putting organised crime under the spotlight once again. The assassinations of crime writer Georgi Stoev and Borislav Georgiev, director of Atomenergoremont, a nuclear power repair company, came within hours of one another and made headlines worldwide.
Meanwhile, Justice Minister Rumen Petkov resigned in controversial circumstances. It was alleged that ministry officials had been leaking information to criminal suspects, and Petkov himself admitted to meeting leading underworld figures, though he denied any wrongdoing.
The Commission's decision to freeze funding has a range of implications. Most importantly, Bulgaria has been left with a large budget shortfall, particularly for its transport infrastructure. Secondly, stalling the country's road building programme would be a real blow to the economy, its citizens and the logistics sector, which stands to gain the most from an improved transport infrastructure.
Bulgaria's road and rail network has been deemed inadequate in several places. This is particularly unfortunate given the country's location in the middle of the Balkans and on a major transportation route between Europe and the Middle East. In recent years, progress has been made, with several major motorway projects launched or resumed, including the Trakia motorway from Sofia to the port of Burgas, the Hemus (from Sofia to Varna, the largest port), the Maritsa (from Plovdiv in the south of the country to the Turkish border) and the Struma (Sofia to the Greek city of Thessaloniki).
The Trakia project suffered a further setback this year when doubts were raised over its Portuguese contractor's ability to fund the development. The government has contemplated taking back control, but without EU funding available to it, it would have to make up the funding gap from other sources.
According to the local press, the shortfall might be covered by the state tapping into its sizeable budget surplus. In June, analysts from Raiffeisen said they expected the surplus to reach 3.5% of Gross Domestic Product (GDP) in 2008. The surplus reached $2.96bn for the first half of the year, and should help reduce the funding setback. However, using the funds could defy the EC's wishes and erode the strong reputation for tight fiscal policy that Bulgaria has developed over the past decade. Furthermore, pumping money into organisations and authorities with limited absorption capacity and cases of corruption seems to defeat the object of the sanctions.
Nonetheless, the government could feel that infrastructure projects - and the many jobs that depend on them - should remain a priority. A moderate outlay from the fiscal reserves would not tip the budget into deficit, and seems unlikely to damage Bulgaria's macroeconomic stability.
Beyond the immediate economic and political impact of the EC's decision, there is little sense of crisis. The spending cut is unlikely to affect the majority of the country's foreign and domestic firms. Growth remains robust, with the International Monetary Fund forecasting a figure of 5.5% this year and 4.9% in 2009. Bulgarians' incomes are increasing steadily, and the regions are now attracting increasing investment interest.
It is worth noting that action being taken against the NRIF suggests that transgressions are being exposed and prosecuted where they exist, while the ousting of Petkov and Chaushev shows that those allegedly responsible face removal from their positions.
Bulgaria remains irreversibly locked into the EU, yet challenges clearly remain before it is fully accepted by its peers. The EC's suspension of funding underlines serious concerns. Yet the EU rap could be a spur, encouraging internal reforms, rather than delivering a long-lasting blow to a flourishing economy.