The Bulgarian Parliament will vote on second reading Wednesday and Thursday legislation relating to Bulgaria’s state budget for 2012.

Prior to that, the Bulgarian government had agreed with trade unions not to up the retirement age before 2021, and had signed an agreement with representatives of farmers regarding much larger subsidies than those stipulated in the draft budget 2012.

Key figures in Bulgaria’s draft budget for 2012, as defended by Minister of Finance Simeon Djankov, include a deficit of 1.35% of GDP, growth of 2.9%, and inflation of 2%.

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They insisted on a meeting with Borisov and his Deputy, Finance Minister, Simeon Djankov, but did not get a positive response.

Meanwhile, the demonstrators, represented by the National Grain Producers Association, were invited to meet with Agriculture Minister, Miroslav Naydenov, but declined the invitation on the grounds he is not authorized to sign any decisions.

The Association’s Chair says – one the invitation came too late and two – people have trust only in Borisov’s words.

The grain producers demand adherence to the financial agreement signed by the cabinet in September, immediate lift on excise on fuel they use and Djankov’s and Naydenov’s resignations. They vowed to stage a new protest Wednesday. Their permit expires at 10 pm the same day, when they have to leave the city.

Meanwhile, Naydenov confirmed that the cabinet remains unwavering in not giving in to the grain producers in their demands for more funding, saying he favored their sector for a long time, and now is “enjoying the results of it.”

“They will receive what is slated in the budget – this is what we can do now; I wish it was more too. If we show weakness and yield to the pressure – we will have a domino effect,” the Minister stressed.

He appealed to the protesting farmers to act reasonably and stop the rallies, saying as a citizen and father, he wants Bulgarians to have on the table not only grain, but meat, fruits and vegetables.

Naydenov explained that the Association of Grain Producers first asked to meet at 9 am; then said it was too early and asked for 11 am, and then changed it to 2 pm, and finally were the only ones from the farming sector, who failed to show up.

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The EU member states showing a better fiscal discipline should be motivated with bonuses, Bulgarian Prime Minister Boyko Borisov proposed during a meeting with his Danish counterpart.

The block’s best performers in terms of fiscal stability could receive more EU funds during the next program period and could spend less on co-financing EU projects, the Bulgarian Prime Minister has proposed.

“What went wrong in the European cooperation is that not all countries abided by the rules,” Danish Prime Minister Helle Thoring-Schmidt stated during her meeting with Borisov on Monday, as cited by dnevnik.bg.

Thoring-Schmidt declared she was pleased with the fact that Bulgaria is keeping the rules and taking the right decisions despite not being among the richer EU countries.

Also on Monday, the Danish Prime Minister said that she firmly supported Bulgaria and Romania’s Schengen bids and hoped that the two countries would join the agreement during Denmark‘s EU presidency.

Denmark is working very actively in support of Bulgaria’s Schengen accession bid, according to Thoring-Schmidt.

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Denmark firmly supports Bulgaria and Romania‘s Schengen bids and hopes that the two countries would join the agreement during its EU presidency, Danish PM Helle Thorning-Schmidt has said.

“Bulgaria and Romania have met the requirements for joining the Schengen Agreement; we should stimulate them by accepting them in Schengen. If someone has abided by the rules, they should proceed to the next level,” Thorning-Schmidt has declared, as cited by the Bulgarian BGNES news agency.

Denmark is working very actively in support of Bulgaria‘s Schengen accession bid, according to the Danish Prime Minister.

On Monday, Thorning-Schmidt met with her Bulgarian counterpart Boyko Borisov in the Balkan country’s capital Sofia.

The Netherlands remains the last Schengen state to strictly oppose Bulgaria‘s phased-in accession to the agreement after Finland softened its position in mid-November. Finland now says it would accept a phased-in solution for the Balkan country if it sees a positive Cooperation and Verification Mechanism interim report at the beginning of 2012.

Bulgaria and Romania were initially planned to join the Schengen Area in the spring of 2011, but their entry was opposed by France and Germany, which also voiced objections relating not to technical criteria, but rather to corruption and organized crime.

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“As an EU member and one of the best NATO partners Bulgaria can be of great help for Arab countries and we’re completely ready to do that,” said Borisov.

The Bulgarian PM commented that Bulgarians have deep sympathies with pro-democracy efforts of the citizens of the Arabic countries, as Bulgarian themselves led a similar struggle in the late 1980s and early 1990s.

“Back then, it was considerably easier for us than it is now for our Arab friends. For Bulgaria is located in Europe, and it had the support of all those countries that composed the EU back then,” said Borisov.

The Bulgarian PM went on to argue that now Bulgaria in turn is ready to offer similar support to other countries on their way to democratic self-rule of their peoples.

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Salaries of top politicians in Bulgaria will be frozen at their levels from the end of 2009, according to Prime Minister, Boyko Borisov.

The move will be implemented despite the cabinet’s decision to up the minimum monthly wage in Bulgaria in May, 2012 – from BGN 270 to BGN 290.

“This is the situation globally; this is the situation in Bulgaria,” Borisov says, cited by “Monitor” daily.

According to the Parliamentary Code, the wage of Members of the Parliament equals three times the average monthly salary for the country.

The average salary in the third quarter of 2011 was BGN 753. If it stays at this level in the beginning of 2012, it means that MPs, whose fixed salaries range between BGN 2 196 and BGN 2 259, will lose BGN 63 each month.

Ministers, on their part, will lose BGN 82 a month. Their salaries are fixed at BGN 2 855.

Borisov has a monthly wage of EUR 1 500, which he says is way less than the one of his western counterparts.

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Bulgaria has done a wonderful job in meeting Schengen criteria and must join the free movement area as soon as possible, stated Luxembourg PM Jean-Claude Juncker, who is on a visit to Bulgaria Wednesday.

In Varna, Juncker met his Bulgarian counterpart Boyko Borisov to discuss Bulgaria’s perspectives as an EU member, as well as bilateral relations.

“Bulgaria has made tremendous efforts so that Schengen external borders are well defended and it is high time that other members reward those efforts,” stated the Luxembourgeois PM Wednesday.

Jean-Claude Juncker, who is in addition president of the Eurozone, also highly commended the Bulgarian government for its policies in the field of finance.

“Public finances in Bulgaria are managed in a way that has rendered the country far better off than some Eurozone members,” commented Juncker.

Bulgaria and neighbor Romania’s hopes of joining Schengen as scheduled in the spring of this year were dashed by members such as Germany, France and the Netherlands.

They voiced worries related to levels of corruption and organized crime in the two countries, which in essence are informal and have nothing to do with the strict criteria for Schengen accession, but have nevertheless proved a decisive obstacle.

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The name of the actual buyer of the State-owned cigarette-maker monopoly Bulgartabac is going to be revealed very soon, Economy and Energy Minister, Traicho Traikov, promised.

Speaking Saturday from the Black Sea city of Varna, Traikov, however, stressed that the most important issue was who the investor is, not the buyer. He added that there is no guarantee about the ID of the latter, “unless it is one of the strategic ones.”

The Minister explained the possibility the tobacco monopoly can be resold stands, but whoever acquires it, will have the same commitments, reiterating social ones, related to the jobs of people at the company, were among the best protected.

In an earlier TV interview, also on Saturday, the Minister said the contract guarantees jobs at the Holding, and the company’s continuing pay of taxes and fees to the State. He pointed out workers there have excellent job conditions, and their labor contracts are among the most generous in the country.

When asked who is going to be the guarantor that Bulgartabac will comply with the contract, Traikov stated the control belongs fully to the Privatization and Post-privatization Control Agency.

The only member of the Agency’s Supervisory Board, Rusi Statkov, to vote against the deal, declared earlier that Bulgartabac must not be sold since the contract is against national interests. The Minister stressed again the deal was a good one taking into account the current situation.

After five-hour debates on Friday, the Supervisory Council of the Privatization and Post-privatization Control Agency approved the sale of Bulgartabac to o BT Invest, a firm wholly owned by Russia‘s government bank VTB.

The Supervisory Board of the Privatization and Post-privatization Control Agency is a political body, elected by the Parliament. It consist of three representatives of the ruling Citizens for European Development of Bulgaria, GERB, party, one each from the opposition left-wing from the quota of the opposition left-wing Bulgarian Socialist Party, BSP, the opposition ethnic Turkish Movement for Rights and Freedoms, DPS, the right-wing Democrats for Strong Bulgaria, DSB, and the far-right, nationalist Ataka.

The price offered by BT Invest, the sole bidder standing, after several major players withdrew, is EUR 100.1 M with investments of BGN 7 M in the next two years and the commitment to purchase 5 000 metric tons of Bulgarian tobacco a year (about 14% of the crop). The draft contract also includes a clause banning a resell in the next 5 years.

Meanwhile, the same day, the labor union of the Bulgartabac workers organized a protest rally in front of the Privatization Agency’s building in Sofia. They oppose the sale of the cigarette maker to the only remaining bidder in the public procurement procedure and insist that the Governing Board rejects the offer.

In a declaration to Prime Minister, Boyko Borisov, the Union demands halting the deal and the resignation of the Privatization Agency’s CEO, Emil Karanikolov. About 500 people took part in the rally.

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Georgi Angelov, Senior Economist with the Open Society Institute – Sofia,argues that the ESM and the Pact for the Euro are a real burden for the poorer EU member states and they significantly decrease their incentives to join the Eurozone.

The background

In the first decade of the existence of the euro, there was a very interesting phenomenon. The Eurozone candidate countries had to meet strict criteria, while the Eurozone member states in practice had no such conditions (normatively, such rules existed but were not observed). There was a remarkable case, when a candidate for the Eurozone was not admitted as it had inflation rate just 0,01% above the required level. At the same time, many countries of the Eurozone did not meet the requirements for a government debt for years on end, but no action was taken against them.

The Eurozone rules were not only unjust – they were counterproductive too. Common sense requires respecting the rules within the Eurozone in order to ensure stability of the euro. As this was not done, now many Eurozone member states are on the verge of default. At the same time, the goal of imposing the euro as a global currency required the quick accession of the new member states of the EU, at the time when they were willing to enter the Eurozone. This was not done.

Paradoxically, the countries with a better fiscal and economic policy were outside of the Eurozone, while the countries within the Eurozone had worse fiscal policy. For example, in 2008 all new EU member states had a government debt below 50% of GDP, excluding only Hungary, while in the Eurozone the government debt was over on average 70% of GDP. What is more – seven of

the ten countries with the lowest level of government debt in the EU were outside the Eurozone in 2008. They were outside the Eurozone mostly because they were not admitted to it. The Eurozone did not admit countries with a good economic policy, while the Eurozone itself had a weak fiscal policy as a whole. It is hard to believe, but it is a fact.

The current state of affairs

From the perspective of the countries outside the Eurozone, the situation in recent months did not change for the better. It is just the opposite. After they created the mess with the Eurozone fiscal problems, the big countries came up with a “solution” – a bailout fund for rescuing the defaulted states – although bailout of bankrupt countries is illegal under the current legislation of the EU. Now the change in the Lisbon Treaty is put forward, aiming at legalizing the bailout fund, the so-called ESM (European Stability Mechanism).

The rescue fund itself (ESM) will have a capital of 700 billion euro of which 80 billion euro will be effectively deposited and the rest will be provided when necessary. The initial proposal was to allocate the capital on the basis of population and GDP – meaning that the poorest countries will pay the most as a share of GDP, while the richest will pay least. It was only after strong opposition by the new member states a small and temporary concession was made – during the first 12 years of Eurozone membership for the countries with less than 75% of average GDP, the weight of population will be 12,5% instead of 50%.

However, even under the new system the poor countries will pay more as a share of GDP, and this problem will exacerbate after the 12 year transitional period. Twelve years are not enough for the poor to become rich. Rather paradoxically, the poorest member of the Eurozone will pay the most as a share of GDP – and this money will save one of the richest countries in the EU such as Ireland, Belgium, Spain, etc. It will be even more paradoxical if poorer countries enter the Eurozone – such as Romania, Bulgaria and Latvia. The poorest will come to the rescue of the richest!

The financing mechanism of the ESM is in no way linked to the risk of one country needing assistance. In fact, the countries with the smaller government debt as Estonia and Bulgaria (which are least likely to default) will pay most as a share of GDP in the rescue fund. I.e. the allocation of capital is not only unjust to the poorer countries – it punishes the prudent countries, which have to increase significantly their debts in order to contribute their share to the fund. At the same time, the counties with the largest government debt will pay the least.

And we are not talking about some trivial sums here. For example, the share of Bulgaria in a 50-50 weight of population and GDP is about 6,1 billion euro – or about 17% of GDP. Countries such as Luxemburg, the Netherlands, Austria, Belgium and Finland will have a 3% to 5% share of GDP. In practice, this is an “entry fee” for Eurozone membership, i.e. an additional criterion to the candidates, which are already facing higher requirements. The candidate countries, which have nothing to do with the problems of the Eurozone and have always have had a better fiscal policy, will have to participate with a larger share in saving the defaulted Eurozone member states.

What is the responsibility of Bulgaria for non-compliance with the Eurozone rules in the last decade so that it has to pay for it? Bulgaria holds the European record for government debt reduction for the last decade – but will not be rewarded for it, but it will be “fined” to pay the most in the ESM when it enters the Eurozone. The payment in cash, together with the promise for future payments when necessary will put a burden on the cost of financing of the country, i.e. this is a real burden for the economy.

It is unclear why the ESM is being established, when the International Monetary Fund can adequately fulfill this role. Moreover, the rescue fund of the Eurozone is being used for political goals, e.g. the pressure by France against the low corporate tax in Ireland.

Poor and low debt countries to pay the most in ESM

Estonia and Bulgaria have a minimal government debt – with a minimal share in the common debt of the countries in the EU, Their share in the ESM capital however is about 15 times higher than their share in the EU gross debt. On the contrary, Germany, France and Austria will pay less to the ESM than their share in the debt. The poorest and least indebted countries will pay much larger share in the ESM than they are entitled to.

But the ESM financing is not the only problem. In parallel, the Pact for the Euro is being developed and the countries outside of the Eurozone were not invited in the discussions in any way. Despite this, there is a huge political pressure on them to announce that they “voluntarily” join the Pact for the Euro. Apparently, the Pact for the Euro breaches the principles of equality in the EU, because the opinion of the new member states was not taken into consideration. It is also used for imposing policies that are harmful to the poor states and detrimental for achieving high economic growth. The Pact for the Euro includes coordination and harmonization of taxes, which has nothing to do with the stability of the euro, and is promoted mainly by France with its wish to prohibit low taxes. But the low taxes are the key element of the policy for encouraging higher economic growth and convergence – if the poor countries have the same high taxes as the rich, there will never be high growth, prosperity and wealth.

We already have an experience with the harmonization of the indirect taxes, which demonstrates clearly how the same minimal rate is appropriate for a rich country as Germany, but it is extremely heavy for a poor country as Bulgaria. For a German, a 30-40 cents tax on a liter of fuel is negligible, while for a Bulgarian this is a huge sum with an average salary of 300 euro per month. It is not coincidental that the high excise duties on fuel and cigarettes create problems with smuggling and grey economy in the poor countries.

In addition, the Pact for the Euro talks about assessment of competitiveness, which will be done through comparison in the dynamics of salaries. The Pact claims that the big and steady increases in wages bring about erosion of competitiveness. However, there is no exemption from the rule for the poorer countries. It is obvious that if a country is poor and achieves high economic growth, the levels of prices and levels of salaries in this country will increase at a faster pace that in the richer member states – this is the whole logic of convergence. The poor countries can never become rich if they don’t achieve a high growth of incomes.

It is not surprising that the Pact for the Euro does not include the point of view of the poorer countries – after all, they didn’t participate in its negotiation. This is an evidence that policies dictated entirely by the “old” Memeber States are not the best for everyone, especially for the poorer member states. Even before the crisis Brussels was displaying lack of understanding for the economic circumstances in the new member states. Then, it was often claimed that the big current account deficit is a problem, although the latter was a direct consequence of the intensive FDI flows. We have to thank only the financial crisis because as a result the big current account deficits quickly disappeared, thus invalidating the assumption that they would cause problems during the crisis.

In short, both the ESM and the Pact for the Euro are a real burden for the poorer EU member states and they significantly decrease their incentives to join the Eurozone. The new member states are gradually taking Sweden’s route – according to Eurobarometer surveys popular support for joining the Eurozone is dwindling in these countries, while trust in local currencies is rising (especially if it’s a stable one like in Bulgaria and the Czech Republic). For years we have been warning that the Eurozone has to enlarge rapidly while the new Mmeber States are still willing to join, because the time will come that they will no longer be wishing to do so. It appears like this moment is approaching and introducing new burdens such as the ESM and the Pact for the Euro will only aggravate anti-Euro tendencies.

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I cannot see the eurozone risking a second recession, stated Luxembourg PM and Eurozone President Jean-Claude Juncker on an official visit to Bulgaria Wednesday.

“The truth is that growth in the eurozone has slowed down, but that is due to external factors and does not warrant a new recession,” said the Eurozone president.

He nevertheless added that strong and continual efforts must be made to overcome the economically unfavorable situation, especially in the field of public finance.

At the same time, Juncker commended the Bulgarian government headed by Borisov for its efforts in finance, saying that a lot of eurozone countries fare worse than Bulgaria.

“I am confident that Bulgaria’s next generation will feel the effects and reap the fruits of these efforts,” said the Luxembourgeois PM.

He also commended Borisov’s center-right GERB government for its successes in developing Bulgaria’s infrastructure.

Juncker spoke highly of Bulgaria’s level of satisfaction of criteria for joining Schengen and stated the country must accede to the free movement treaty “as soon as possible.”

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