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February 2007

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More than just two tickets for the gravy train...

On 1st January 2007, the EU welcomed two new member states – Bulgaria and Romania – the 26th and 27th members of the European Union. Europe’s fifth round of enlargement increased the EU’s population by another 30 million people. While the two new members celebrated joining the EU, the reaction was muted in other member states.

The European media greeted Bulgaria and Romania with scepticism, claiming a general EU fatigue and focusing on the potential problems that the two countries as well as the rest of the EU may face as a result of the enlargement. Coverage of labour market restrictions for Romanian and Bulgarian migrants, and in particular of corruption, echoed in part the assessment of EU officials, which imposed the strictest conditions ever applied to new members of the Union.

Both countries may face possible legal and financial sanctions unless issues such as the implementation of an efficient administration as well as independent jurisdiction to fight organised crime and high-level corruption are tackled effectively. Penalties could include the suspension of regional aid payments worth billions of euros. The so-called ‘safeguard’ clauses that are part of the accession treaties will force the two countries to continue a number of reforms that have been initiated in order to qualify for EU membership. The heightened surveillance under which the ‘acquis communautaire’ – the existing body of EU rules, laws and regulations – is implemented in the two countries is a positive signal for businesses and investors.

Even if much work remains to be done – and ‘safeguard’ clauses are no absolute guarantee for the development of a favourable business environment – the achievements that have already been accomplished by major reform programmes should not be forgotten. On a macroeconomic level, Bulgaria and Romania have experienced continuous growth during the past years and displayed GDP levels of around 6% and 7% respectively in 2006. Employment is growing and unemployment rates are under 10% in both countries. The banking systems in Bulgaria and Romania have stabilised as a result of the presence of foreign banks and due to tighter governance.

The countries’ budgets and public-sector debt are in line with relevant Maastricht criteria for membership of the Eurozone. Inflation – currently at 7.3% in Bulgaria and 6.6% in Romania – is expected to come down in the short-term, but remains the main weakness in both economies together with a high current account deficit. The overall positive business climate is reflected by the substantial fall of risk premiums for Romanian and Bulgarian government bonds traded on the international capital markets.

Corporates operating in Bulgaria and Romania will therefore have reasons for optimism, despite the problems that will need to be addressed in the countries’ legal systems and administrations. But it remains to be seen what strains the expansion will put on the euro as a whole. Bulgaria and Romania are unlikely to join until 2012 or 2013 and, of the 10 countries joining the Union in 2004, only Slovenia has managed to adopt the euro. An event celebrated with a great New Year party. Time will tell whether the hangover is worse.