The Polish EU Presidency has stated Tuesday it backs the initiative of German Chancellor Angela Merkel and French President Nicolas Sarkozy to forge new rules to secure the financial stability of the EU.

Poland, who is EU‘s rotational presiding member state until the end of 2012, will back all efforts to rescue the eurozone, said Polish PM Donald Tusk at a press conference in Warsaw.

“This can be done either by a new EU Treaty, which we favor, or by an intergovernmental agreement, which we view as less effective but quicker,” said Tusk.

According to the proposal, innovation may come either as amendments to the existing EU Treaties, or in a new agreement among the 17 member states of the eurozone.

The two key EU leaders agreed to propose automatic penalties for countries that exceed European deficit limits, as well as the creation of a monetary fund for Europe.

Merkel and Sarkozy also said they would prefer the treaty changes to be agreed upon by all 27 EU countries, but that they may consider a smaller number of countries to go ahead with the changes.

Amendments are expected to run along 4 main lines: stricter requirements for fiscal discipline to be embedded in amendments to EU Treaties; a boosting of the current bailout fund, the European Financial Stability Facility, to 2-3 times its current balance; a tranche of money from the IMF to augment the bailout fund; and a political mandate for the European Central Bank to keep buying debt from Italy and Spain.

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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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Bulgaria, the poorest EU member state, is said to feel cheated as the EU institutions are about to seal a new policy allowing six other member states, which are struggling financially, to be able to co-fund projects with much less money.

“Countries which maintain a strict financial discipline should not be punished and those that do not maintain the discipline should not be rewarded,” said a senior Bulgarian diplomat, as quoted by EurActiv.

“We are not in a position to block this legislation,” he added a day after the European Parliament voted in favor of the new proposal, stressing that Bulgaria will keep its position “in principle”

EurActiv reminds that the European Commission proposed last summer to increase the EU co-financing in cohesion, fisheries and rural development policies for countries that have received financial assistance under the balance of payments support mechanism – Romania, Latvia and Hungary- or under the European Financial Stability Facility – Greece, Ireland and Portugal.

This does not offer the six countries more money, but it enables them to “actually implement” some EU projects that would otherwise never be put in place, because of the inability of the countries to provide the remaining funds needed in the co-financing process.

In practice, Brussels has increased its co-financing rate by 10 percentage points.

For example, the EC will provide a maximum of 95% project financing in the case of Greece – from a previous 78% .

The Greek government would not need to provide the 15% usually requested to member states, but only up to 5% of the cost of a project.

In Ireland, the co-financing rate of the EU was only 50% and it will increase until a maximum of 60%, given its regions are richer and more competitive already.

According to an EU source, the deal that will be officially agreed between the ministers from all EU countries has already been struck and little if any is expected to change by 12 December.

“A change of the situation is not envisaged soon, but Bulgaria keeps its position also for the next multi-annual financial framework and for the future,” the diplomat added.

Bulgaria criticized the move as it did not understand why those countries which did spend the allocated EU funds were “punished” by not being offered the 95% co-financing alternative.

“EU funds are seen as a gold mine by new entrants in the EU, such as Romania and Bulgaria, according to EU sources. Despite the potential lying under the “mountain of money”, as a Romanian saying would put it, Romania continues to have the lowest fund absorption rate in the EU,” states EurActiv in its article.

“In some member states it was hard for countries to get projects done because there was a liquidity problem,” an EU official is quoted as saying.

Although Bulgaria is the poorest EU country, it is excluded from the beneficiaries because its macroeconomic indicators are stable.

Commenting on the adoption of the law by the EP, president of the European Commission, José Manuel Barroso said:

“Today we have taken an important step on the path to European recovery. I am glad that the Parliament acted so quickly and agreed to our proposal. This measure is Europe’s expression of solidarity with and support for Member States implementing painful economic adjustment programmes. They currently do not have much space for investing in growth and jobs. Our measure will inject into those economies funding essential for boosting their competitiveness and employment.”

Bulgarian daily Dnevnik quoted Prime Minister Boyko Borisov as saying that he is strongly against any support given to the bailout countries by reducing the ratio of national financing for EU-sponsored projects.

To the contrary, those who needed to be stimulated are those who respect the financial discipline, Borissov said. “If this ratio is to be lowered, then it should be lowered for all countries.”

MEP Danuta Huebner (EPP, Poland), rapporteur and Regional Development Committee chair, said that “the Parliament wants this derogation to apply as soon as possible”.

“Swift actions to help those hit hard by the crisis have been our priority. A temporary rise in co-financing ceilings will not affect total EU regional funding in the Member States but will allow funds to be concentrated on completing some projects and thus reduce the pressure on national budgets,” Huebner said.

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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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Very bad things happened in the last few months in Europe, which imposed changes in Bulgaria’s fiscal policy, says Deputy Prime Minister and Finance Minister, Simeon Djankov.

Speaking in an interview for the TV channel bTV Tuesday morning, Djankov responded to criticism that he had made promises for more funding to different sectors earlier and is now retracting them.

He explained it with planning for more revenues, which had not materialized.

According to the Minister, there is a real chance the Eurozone could fall apart in the next 6 months. He pointed intentions of former Greek Prime Minister, George Papandreou, to hold a referendum on austerity measures as a prime accelerator of difficulties across the European Union.

“This made the bailout for Greece questionable and toppled their cabinet; then the crisis spread to Italy and Belgium,” Djankov explained, adding Germany is Bulgaria’s biggest market, followed by Italy thus their confirmations they will suffer economic crisis in 2012 are calling for adequate reaction from Bulgaria.

“Luckily, we have not introduced the EUR, so we will not be affected that much. People’s bank savings are guaranteed, but there is a threat for our export – we must redirect it to Asia and Russia, which cannot happen in the course of several months,” the Minister pointed out.

He further stressed that in the beginning of the year there were plans for a conservative 2012 budget over assurance Greece‘s bailout will receive green light, but now, over a more unstable situation in the EU, the budget must have buffers.

According to Djankov, the draft budget is optimistic because it has been calculated on the basis of 1% economy growth, with expectations the latter will be larger.

He assured that the 2012 budget will be able to sustain the crisis and the deficit will end up being lower than 2.5% – second or third in the EU. He noted that if the Eurozone is replaced by a fiscal union as alternative, Bulgaria would be one of the 8 countries to be immediately admitted there.

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Bulgaria still wants to join the euro zone despite recent predictions that the single currency will collapse, Traicho Traikov, Bulgaria’s Economy Minister, told CNBC on Thursday.

“I know now it’s fashionable to predict the end of the monetary union, but I think common sense will still dominate and it is going to survive. Of course, in the end we want to be a part of it,” Traikov said.

“Ever since we introduced a currency board in 1997, our focus has been on keeping the fundamentals right, so we ran government surpluses for most of these years,” he explained.

“For us, being a part of the euro zone means lower interest rates on credits for business,” Traikov said.

CNBC points out that Bulgaria is the poorest EU member state but that its “tough reforms” have helped it achieve one of the smallest debt to gross domestic product ratios in the European Union and a budget deficit of around the Maastricht-agreed 3% of GDP ceiling.

The US TV further stresses the fact that Bulgaria has the lowest corporate tax in the EU at 10%, and that the government in Sofia remains firmly opposed to the introduction of a single tax rate in the euro zone even as Germany has proposed greater fiscal integration within the euro zone in order to avoid a situation where prudent countries end up paying for the profligate.

“For us, coordinated fiscal policy does not include coordinated tax policy,” Bulgaria’s Economy Minister told CNBC.

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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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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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Bulgaria has dropped three places to 74th in a yearly economic competitiveness ranking of the World Economic Forum.

The 2011-2012 Global Competitiveness Report (GCR) covers 142 world economies, according to an announcement of the Center for Economic Development, a Bulgarian non-governmental think tank.

Bulgaria’s downgrading is due to low scores on goods market efficiency, technological readiness, business sophistication, infrastructure and innovation.

At the same time, the country has registered progress in the spheres of institutions, financial market development, labor market efficiency and quality of education and on-the-job training.

The latest edition of the report shows Switzerland to be the most competitive economy, followed by Singapore.

The US drops one place to fifth position, while the top ten predominantly comprises EU countries- Sweden (3rd), Germany (6th), the Netherlands (7th), Denmark (8th) and the United Kingdom (10th).

Japan ranks 9th, falling three places since last year.

The report confirms a continuous deterioration in the competitive power of the US economy over the past 3 years, with EU‘s position remaining constant and China registering rapid growth.

Another trend that can be observed is that the economic crisis has dragged some EU member states down the 2011-2012 global competitiveness list.

Bulgaria used to rank at the bottom of the group of EU countries, but it has now managed to outpace Romania, which has dropped 10 places to 77th.

According to the report, Romania’s competitiveness has deteriorated in all areas.

Greece, as expected, continues its downward trend to 90th position due to the debt crisis and the problems plaguing its labor market.

The top performer among Central and Eastern European EU Member States is Estonia, which retains 33th place, followed by the Czech Republic (38th), with Slovenia registering a serious decline from 45th to 57th place.

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