ONE YEAR IN, BULGARIA FINDS EU MEMBERSHIP BRINGS

C O N F I D E N T I A L SECTION 01 OF 03 SOFIA 000017

SIPDIS

SIPDIS

E.O. 12958: DECL: 01/06/2018
TAGS: ECON PGOV PREL BU
SUBJECT: ONE YEAR IN, BULGARIA FINDS EU MEMBERSHIP BRINGS
NO QUICK FIXES

Classified By: Charge Alex Karagiannis for reasons 1.4 (b) and (d).


1. (C) Summary: Bulgaria welcomed January 1, 2007 with
more than just fireworks -- it joined the EU with high
expectations and hopes for rapid change. One year later,
Bulgarians still overwhelmingly support the EU, but with a
collective sigh (or shrug) about membership benefits.
Bulgarians were grateful for the EU's role in the release of
the Bulgarian nurses from Libya in July. But, apart from the
EU's positive role in this high-profile case, and rising
inflation -- which the average Bulgarian attributes, at least
in part, to EU accession -- there has been little else to
impress Bulgarians about EU membership. Despite its sterling
economic record (GDP growth of at least five percent for the
past seven years),the country is still the poorest in the
EU. Many Bulgarians still sense their country has second
tier EU status, and view the EU's multi-headed agenda as
distant and alien to everyday priorities. Bulgaria has not
yet begun to tap into EU funds, corruption remains a serious
concern, and social sectors such as health and education
remain in dire need of structural reform.


2. (C) As political parties begin to realign ahead of
scheduled 2009 general elections, the Socialist-led
government will likely steer clear of controversial foreign
policy matters and focus on achieving tangible improvement in
living standards. When Bulgaria does look outward, there
will be pressure to look east to Russia, especially as Moscow
exerts energy muscle, as much as westward to Brussels and
Washington. The United States remains the lodestar for
Bulgaria, which is committed to a transatlantic course; Sofia
will continue its Euro-Atlantic integration, but it will
surely encounter bumps and twists. As we advocate our
agenda, we can help smooth out Bulgaria's path and accelerate
its progress through senior visits and constant
attentiveness. End Summary.


3. (C) Successive post-1997 Bulgarian governments had put
NATO and EU membership at the top of national priorities.
Following NATO entry in 2004 and a 2005 change of government,
the Bulgarian Socialist Party (BSP)-led three party coalition
took up and drove home EU membership in 2007. For a country
that had suffered near economic collapse in 1997, the
successful double run in the space of a decade was
noteworthy. Predictably, expectations about EU membership
have run ahead of reality. And with the government's major
accomplishments in hand, it lacks a grand overarching goal to
motivate the public. PM Stanishev is doggedly pursuing
reforms to improve public services and raise wages and
purchasing power, but the public has largely discounted the
(for modern Bulgaria) unprecedented material prosperity.
Instead, the government seems to lack steam, and the public
lacks confidence in the political class.

ECONOMY PERFORMS WELL BUT INFLATION ERODES GAINS


4. (C) Bulgaria's economy continued to perform well in 2007.
GDP growth reached six percent, unemployment fell to an all
time low of 6.6 percent, and foreign investors, buoyed by EU
membership, showed sustained confidence in Bulgaria's
economic fundamentals. By November, analysts began to
predict the Bulgarian economy was overheating -- inflation
reached 12.6 percent year-on-year in November and the current
account deficit topped 20 percent of GDP by year's end.
Growing inflation moved eventual eurozone membership further
out of reach and took a bite out of the gains the average
Bulgarian expected to experience from the first year of EU
membership. At the same time, due to a combination of
Brussels' cumbersome bureaucracy and Bulgaria's low
absorption capacity, Bulgaria barely began to tap into the
eagerly anticipated EU funds in 2007. By year's end, 79
percent of Bulgarians still favored Bulgaria's EU accession,
but 52 percent were skeptical of the benefits Bulgaria
actually received from such membership. Worse, widening
income disparities (geographically, sectorally, and by age
cohorts) feed insecurity and vulnerability among those least
able to cope with the dramatic economic changes. Not
unnaturally, it leads to two consequences: soft to
plummeting support for (or outright antagonism to) coalition
partners; and an inward focus by the public and government on
domestic issues.

RULE OF LAW: BULGARIA'S ACHILLES HEAL


5. (C) Corruption remained high in public consciousness,
but government and public action were tepid and results
therefore weak, despite continued pressure from the United
States and EU for more vigorous and effective measures. Last
year did not yield a single, high-profile organized crime or

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corruption-related conviction. Instead, in spring 2007
Bulgaria experienced its most far-reaching corruption scandal
in years, involving top magistrates and government officials.
As a result, the shady Minister of Economy and Energy and
the Chief of the National Investigation Service lost their
jobs, only to land other influential positions in government.
Organized crime groups, already operating openly in Bulgaria
before EU membership, expanded their presence in the
legitimate economy in 2007, making it more difficult to trace
the origins of their wealth. There were at least ten
contract killings in 2007, with no significant investigative
progress. Incremental forward movement (blocking a
prostitution bill, preventing a lowered tax rate for casinos,
tackling duty free shops that are money laundering machines)
was made through vigorous Embassy engagement. But there were
few government, public, or NGO initiatives that on their own
achieved significant breakthroughs. Continued external
encouragement will remain necessary to build political will,
public awareness, and institutional capacity to break a
culture of impunity for the powerful and well-connected.

POLITICS: UNLIKELY COALITION REMAINS INTACT


6. (C) Bulgaria remained politically stable during its
freshman year in the EU, and certainly does not have the same
scale of political turbulence that other East European states
experienced soon after EU entry. The complex political and
business interests that hold together the three coalition
partners (the Socialists, ex-PM Simeon Saxe-Coburg's party,
and the ethnic-Turkish party) proved stronger than their
recurring conflicts. The past year heralded the emergence of
a new force on the domestic political scene -- the populist
party of Sofia Mayor Boiko Borissov, which, with the
traditional center-right in disarray, quickly became the main
opposition voice. Undoubtedly Bulgaria's most charismatic
politician, Borissov comes with baggage which includes at
least superficial ties to 1990,s organized crime leaders.
Borissov's questionable past has not marred his popularity,
and his personality-based party, which he portrays as
Bulgaria's "new center-right," edged out the Socialists in
last year's EU Parliamentary and local elections.


7. (C) Borissov's successful political debut does not pose a
serious threat to the Socialist-led coalition at this point,
but its rise has triggered a process of political realignment
of the center-right, as parties begin to reposition
themselves ahead of general elections scheduled for mid-2009.
The traditional centrist and center-right parties have slid
in the polls to near irrelevance; if they don't remake
themselves through massive leadership and organizational
change (possible but unlikely) they face either oblivion or
being swallowed by Borissov's party.


8. (C) The ruling Socialists are struggling to overcome
internal woes; one third of the party is wedded to the
discredited pre-1990 past, and a sizable cohort is elderly
and unmotivated. PM Stanishev is intently but slowly working
to transform the party into a modern social democratic force.
He is obliged to parry attacks from the party's old guard,
who seek to regain influence lost to reformist technocrats.
This is another grinding realignment. Any serious threat to
the coalition is likely to come from within BSP's own ranks
or from growing tension over social issues rather than from
the opposition. Although early elections are not entirely
ruled out, odds-makers believes the PM will keep his seat
until the end of his term in 2009. President Georgi
Parvanov, whose exposure as a communist-era State Security
Agent in 2007 did not affect his political standing, will
continue to play an important role in domestic and foreign
policy matters despite the PM's growing emancipation from his
former mentor. (Note: Septel provides an in-depth look into
Bulgaria's political landscape.)

SOCIAL ISSUES TO DOMINATE BULGARIA'S SOPHOMORE YEAR IN THE EU


9. (C) Social issues dominated the headlines in 2007, forcing
the government to vow that its major goal for 2008 will be
making more Bulgarians feel the positive effects of the
country's economic development. Despite its impressive
economic record, Bulgaria remains the poorest EU member state
and the vast majority of citizens are disillusioned by the
lack of improvement in their living standards. High on the
government agenda will be reforms in education and health
care -- two sectors plagued by protests and strikes in 2007.
Striking teachers closed the entire Bulgarian school system
for more than a month in the fall. Although the government
resisted pressure for drastic salary hikes (the teaches
wanted their salaries doubled),the strike -- the longest in
Bulgaria's modern history -- served as a wake up call for

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badly needed public sector structural reform.


10. (C) The government allocated a considerable increase in
spending for the education and health sectors in the 2008
budget, and the ruling coalition now has a limited window to
introduce meaningful structural reforms in these and other
public sectors to avoid social tensions similar to -- or
worse than -- those seen in 2007. As 2009 general elections
approach, the government will also likely focus on the plight
of pensioners, who make up the bulk of the ruling Socialist
Party electoral base. Focusing on such domestic issues, the
Socialist-led government will shy away from difficult
decisions on politically sensitive issues such as Bulgaria's
involvement in Afghanistan and Iraq, which are widely
unpopular, particularly with the Socialist base.


11. (C) Comment: With EU membership turning out not to be
the panacea hoped for by the average citizen, in 2008
Bulgarians will increasingly demand their government focus on
pressing domestic issues - wages, inflation, health care,
education and pensions. With general elections on the
horizon, and an emergent political force organizing a new
center-right opposition, the Socialist-led coalition will be
all too eager to avoid controversial foreign policy topics
and focus on domestic concerns. When Bulgaria does look
outward in 2008, it will be pressed to look east, to Russia.
Moscow's near monopoly position as energy supplier grates on
Bulgarians, creating its own counter-force to Russian
influence. But the scale of Russian business ventures here,
and the number of Russian tourists, plus historical nostalgia
will, nonetheless, exert a pull on Sofia. The EU
decision-making process and EU funds will also pull, but in
an EU-centric direction. The Bulgarians still look to us for
leadership and advice, and they are determined to be
steadfast allies. Our agenda -- keeping them engaged in Iraq
and Afghanistan, encouraging them to stand steadfast in the
face of Russian pressure on everything from Kosovo to
pipelines, and making progress on the rule of law -- has deep
support from the policy cognoscenti. Still, the government's
preoccupation with domestic matters -- and electoral
calculations -- will likely work against consistent foreign
policy decisiveness. Because Sofia does want to be seen as a
reliable and predictable partner, we will get decisions to go
our way. A steady diet of high-level visits and interest
from Washington, intensified Embassy and reinvigorated public
outreach will keep the Bulgarians on the transatlantic
trajectory. End Comment.



Karagiannis