Lack of rule of law threatens Bulgaria’s economic recovery

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

Bulgarian farmers sit in a cart with EU flag in Altimir, some 150 km from Sofia, Bulgaria. [Vassil Donev/EPA/EFE]

According to the World Bank, it turns out to be easier to do business in post-Soviet Belarus, Armenia, Azerbaijan, Kazakhstan and Russia than in EU member Bulgaria, writes Joël Ruet.

Joël Ruet is the chairman of The Bridge Tank

As European countries emerge from lockdown, most governments are trying to restart economies and ensure a rapid recovery. They try to be as attractive as possible to foreign investors.

The EU’s poorest country, however, seems to be doing just the opposite: Bulgaria is trapped in power struggles and corporate raidings that risk scaring away the few foreign investors who are still in the country.

Bulgaria’s economy is predicted to contract in 2020 by a staggering 7.2%, according to the European Commission. This recession is all the more terrible as Bulgaria is already, by far, the poorest EU member state, with a GDP per capita less than €9,000. This is 20% lower than its northern neighbour Romania, and half the GDP per capita of its southern neighbour Greece.

A crucial solution in generating sustainable economic growth is attracting foreign investment. Serbia, a neighbor with a similar population size and significantly lower GDP per capita, manages to attract four times as much foreign investment as Bulgaria.

Foreign investment in Bulgaria has meanwhile decreased remarkably over the last decade, from $31 billion in 2007 to less than $2 billion in 2018.  This is all the more shocking as Bulgaria has one of the most favorable corporate tax regimes in the EU.

There is a consensus amongst international experts on the underlying reason for this appalling economic performance: the lack of rule of law. In 2018, Bulgaria had the weakest score in the EU on the rule of law, according to the German Friedrich Naumann Foundation. It is also the most corrupt EU country according to Transparency International.

Since its accession in 2007, Bulgaria has been closely monitored by the EU’s Cooperation Verification Mechanism (CVM), which focuses on the anti-corruption and judicial reform commitments Bulgaria made when it became an EU member. Very little progress has been made.

Prime Minister Boiko Borissov, who has been leading Bulgaria for the last 11 years, does not appear ready to take the country on a different course. Corruption scandals and power struggles accumulate at an ever-increasing pace.

Over the last few months, the Bulgarian leadership has been consumed by a fight against a dodgy gambling businessman in exile in Dubai. Casino magnate Vassil Bozhkov has taken to releasing what seems to be an endless series of “kompromat”, accusing the Government of entrenched corruption practices, illegal take-overs of his companies, and selective justice.

Oligarchic infighting would be comical if it did not have such a detrimental impact on the economy. International companies are regularly targeted too. The French company Belvedere Group saw its bank accounts frozen and an administrator appointed to oversee its Bulgarian subsidiaries over a questionable payment dispute with a local company.

It took an official protest from the French government to have this groundless case – which was essentially a state-sponsored corporate raid – dropped.

Last week, Monbat AD, a large battery-producer with operations in Bulgaria, Romania, Serbia, Italy and Germany, was targeted by another clear example of politically motivated corporate raiding. Its CEO has been arrested on dubious grounds, most probably because of his political closeness with Vassil Bozhkov in Dubai, who is a rival to the current Government.

This will certainly not reassure foreign investors, and in particular the EBRD and Allianz, who are two of the largest shareholders in Monbat AD. It might displease Berlin as well, as the company has made sizable investments into Germany in the Lithium-Ion battery industry.

Political raiding and legal arbitrariness are not sound foundations for an appealing investment case. According to the World Bank, it turns out to be easier to do business in post-Soviet Belarus, Armenia, Azerbaijan, Kazakhstan and Russia than in Bulgaria.

Unfortunately, Europe presents a fragmented front to address this issue. France has never really been interested in Eastern and South-Eastern Europe, the UK is leaving the EU, and Brussels and its Cooperation Verification Mechanism seem powerless to address entrenched corruption and the lack of rule of law within member states.

Angela Merkel and the German leaders of the European People’s Party (EPP), who like to portray themselves as the European champions of rule of law, have paradoxically been the main political backers of the current Bulgarian leadership.

The latest corruption scandals and corporate raids might, however, be the straw that breaks the camel’s back. Will Germany eventually distance itself from Borissov, as evidence accumulates showing the Prime Minister’s contempt for the rule of law?

Hungary and Poland have proven that lack of rule of law is toxic for democracy and human rights. Bulgaria is now proving that it is also detrimental for economic growth.

Unless the European Union takes real action, Bulgaria may become not just a political embarrassment for the EPP, but a rule of law black hole that could poison the neighbourhood and question the credibility of the EU enlargement project.

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