AT A TIME OF CRISIS

Rays of hope have started to peep through the cloud-covered economic horizon – even in the new EU member states. Poland has managed to avoid going into recession. The Baltic states, which were on the verge of collapse until recently, have recorded a slight but encouraging restoration of productivity. The European Commission included Estonia and Bulgaria in the top five EU countries with the greatest financial stability.

But the devil is in the details. Everybody knows that when the global economic crisis ends, everything will be different, but nobody can be certain how exactly things will change. One of the biggest questions concerns those EU countries which entered the union in the expansions of 2004 and 2007. For them, the crisis may continue, despite the encouraging news. Having shaken off the restrictions of Communism only 20 years ago, they are now facing a difficult task. They have to continue with reforms in the areas of education, social policy and healthcare. Since the EU considered these areas a matter of national policy rather than general policy, they were not paid particular attention during the pre-accession period. Now, like all the other countries, the new member states have to deal with the crisis too and when they emerge from it, they will have to adapt to the new realities – whatever they may be.

Perhaps the new EU member states can prove the aptness of the cliché that a crisis is just an opportunity. All they have to do is act quickly and sensibly. The New Reform Agenda of the New EU Member States International Conference focused on the risks they are facing and what the best model for action might be.

The event, organised by the European Policy Initiative, a programme of the Open Society Institute think tank, and the World Bank in Sofia, brought together delegates from all over Europe, including World Bank experts and three Bulgarian ministers.

One of the main dangers for the new member states, especially those experiencing recession, is that their development may slow down relative to that of the older member states, said Tonny Lybek, IMF Resident Representative for Bulgaria and Romania. Before the crisis started, "new EU member states" and "rapid economic growth" had become nearly synonymous. The positive state of the world economy boosted their exports and western banks quickly entered the local markets. Excited by the prospect of joining the EU, their governments implemented liberal economic policies. However, when the crisis struck, the foundation of the previous growth turned into a foundation for economic problems. The budget deficit went up and the extent of the involvement of the failing western banks hit local economies. Exports and foreign investment reduced sharply and the GDP began to fall – in the case of the Baltic republics, by over 10 percent. Economic difficulties are a source of real danger for the new member states: they could slow down the necessary reforms. According to Marek Dabrowski, President of the Centre for Social and Economic Research, this may lead to another danger. The EU may split into two camps: the rich and their poor relatives. Florian Fichtl, country manager of Sofia's World Bank office, thinks that the new member states will need much longer to recover from the crisis than the old ones.

Despite the encouraging signs of stabilisation in the countries of the region, their governments, citizens and entrepreneurs are facing incredible difficulties. Unemployment is on the increase and so, as a result, is social expenditure. Private companies and individuals find it increasingly difficult to repay their bank loans and access to credit is limited. Banks are also at a disadvantage because it is almost imposwsible to rely on capital inflows from abroad.

Fichtl's analysis was confirmed by Krassimir Popov, deputy minister of labour and social policy. He announced at the conference that the number of unemployed had risen by 219,000 between January and September 2009. Another 100,000 people will join them by May 2010, most coming from the sector that until recently was among the pillars of the country's economic growth: the construction industry.

Unemployment has risen from 6.5 to 8.03 percent since the beginning of the year and, what is more, its composition has visibly changed over the past 18 months. During the period of economic growth most of those on the dole were long-term unemployed but today the largest group is those who have recently lost their jobs due to the economic crisis.

Fichtl recommends several strategies that governments can pursue. Public expenditure should be reduced and financial stability should become the primary objective. The good news for Bulgaria in this respect is the currency board. The exchange rate of the Bulgarian lev was fixed to the German mark (and afterwards to the euro) in 1997, following the catastrophic hyperinflation and economic crisis resulting from the period of Zhan Videnov's Socialist government (1995-1997). Only a year ago there were ongoing debates about whether to terminate the currency board. "When there is a crisis, the lack of an independent currency is not a disadvantage," Kalin Hristov, who became vice governor of the Bulgarian National Bank a week later, said at the conference. Georgi Angelov, senior economist of the Open Society Institute, argued that Bulgaria will soon meet all the criteria for adopting the euro and should definitely apply for accession to ERM2, the financial mechanism known as "the waiting room for the euro zone."

Minister of Finance Simeon Djankov also took part in the conference, where he presented his views on the country's immediate future. "We, the Bulgarians, have to define our national strategy for development for the next five or 10 years. What has so far impeded Bulgaria's further advancement is not the lack of administrative capacity but the absence of political will for reform," Djankov said. Among the problems in this area, Djankov pointed to the symbiosis between organised crime and some politicians and the reluctance to reform certain sectors, such as customs and energy.

He also named the priority areas for the present government: education, healthcare, infrastructure and the protection of the environment.

Djankov, who announced that Bulgaria may apply next week for accession to ERM2 in the spring of 2010, attracted everybody's attention at the conference with a bold idea. He said that the government may withdraw part of Bulgaria's fiscal reserve from the Bulgarian National Bank and deposit it in commercial banks at higher interest rates. His suggestion was received negatively by the other participants, and a day later the Prime Minister Boyko Borisov rejected emphatically such possibility.

Economic reforms are only half the answer to the question of what we should do in a time of crisis. Social policy and investment in people are equally important. Krassimir Popov said that the protection of people facing redundancy will be a priority of the government. Minister of Education Yordanka Fandakova stressed the importance of education. "Investment in education is not a social activity. Investment in education is essentially a counter-crisis measure," she argued.

One of the main problems of the Bulgarian education system at present – and it is something that has grown over the years – is the utter discrepancy between what schools and universities teach and what businesses need in terms of specialists. Fandakova's ministry is starting work on a programme aimed at reforming vocational schools so that they can respond to the real needs of industry.

Such statements provide a ray of hope. But, as the Bulgarian saying goes, "chicks are counted in the autumn." Similarly, the success of the anti- crisis measures can be evaluated only after the crisis ends.