Recommendation for a COUNCIL RECOMMENDATION on the National Reform Programme 2011 of Bulgariaand delivering a Council opinionon the updated Convergence Programme of Bulgaria, 2011-2014
Date: 2011-06-07
Institutions: European Commission
Subjects: Bulgaria, EU programme, budget policy, economic growth, employment policy

EUROPEAN COMMISSION 

Brussels, 7.6.2011 
SEC(2011) 818 final 

Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Bulgaria 

and delivering a Council opinion 

on the updated Convergence Programme of Bulgaria, 2011-2014 

{SEC(2011) 711 final} 

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Recommendation for a 

COUNCIL RECOMMENDATION 

on the National Reform Programme 2011 of Bulgaria 

and delivering a Council opinion 

on the updated Convergence Programme of Bulgaria, 2011-2014 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Article 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1 , and in particular Article 9(3) thereof, 

Having regard to the recommendation of the European Commission2, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

After consulting the Economic and Financial Committee, 

Whereas: 

(1) 

(2) 

On  26  March  2010,  the  European  Council  agreed  to  the  European  Commission's 
proposal  to  launch  a  new  strategy  for  jobs  and  growth,  Europe  2020,  based  on 
enhanced coordination of economic policies, which will focus on the key areas where 
action 
to  boost  Europe’s  potential  for  sustainable  growth  and 
competitiveness. 

is  needed 

On 13 July 2010, the Council adopted a recommendation on the broad guidelines for 
the economic policies of the Member States and the Union (2010 to 2014) and on 21 
October  2010,  adopted  a  decision  on  Guidelines  for  the  employment  policies  of  the 
Member States3, which together form the “integrated guidelines”. Member States were 
invited  to  take  the  integrated  guidelines  into  account  in  their  national  economic  and 
employment policies. 

1 
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3 

OJ L 209, 2.8.1997, p. 1. 
OJ C , p. . 
Maintained for 2011 by Council Decision 2011/308/EU of 19 May 2011. 

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(3) 

(4) 

(5) 

(6) 

(7) 

(8) 

On  12  January  2011,  the  Commission  adopted  the  first  Annual  Growth  Survey, 
marking  the  start  of  a  new  cycle  of  economic  governance  in  the  EU  and  the  first 
European semester of ex-ante and integrated policy coordination, which is anchored in 
the Europe 2020 strategy.  

On  25  March  2011,  the  European  Council  endorsed  the  priorities  for  fiscal 
consolidation  and  structural  reform  (in  line  with  the  Council’s  conclusions  of  15 
February and 7 March 2011 and further to the Commission’s Annual Growth Survey). 
It  underscored  the  need  to  give  priority  to  restoring  sound  budgets  and  fiscal 
sustainability,  reducing  unemployment  through  labour  market  reforms  and  making 
new efforts to enhance growth. It requested Member States to translate these priorities 
into  concrete measures to be included  in their Stability or Convergence Programmes 
and National Reform Programmes.  

On 25 March 2011, the European Council also invited the Member States participating 
in  the  Euro  Plus  Pact  to  present  their  commitments  in  time  to  be  included  in  their 
Stability or Convergence Programmes and their National Reform Programmes. 

On  15  April  2011,  Bulgaria  submitted  its  2011  Convergence  Programme  update 
covering the period 2011-2014 and its 2011 National Reform Programme. In order to 
take account of the interlinkages, the two programmes have been assessed at the same 
time. 

The  economic  crisis  interrupted  a  period  of  strong  growth  fuelled  by  substantial 
foreign  direct  investment  inflows  and  credit  expansion.  GDP  growth  returned  in  the 
second  quarter  of  2010,  after  falling  cumulatively  by  7.1%  from  peak  to  trough, 
resulting in a broadly flat real GDP for 2010 as a whole. A strong upturn in exports, 
restocking  of  inventories  have  been  the  most  important  growth  drivers.  The  general 
government balance moved form a surplus prior to the crisis into a deficit of 4.7% of 
GDP in 2009 and 3.3% of GDP in 2010. While output and employment in export-led 
industries  increased,  subdued  activity  in  construction,  real  estate  and  retail  has 
constrained the recovery over the past year. Employment bore the brunt of the output 
correction  with  a  loss  of  about  358.000  jobs  since  the  peak  in  2008.  As  a  result, 
unemployment  increased  by  several  percentage  points  to  10.2%  in  2010,  and 
employment is not expected to return to its pre-crisis level in the medium-term. 

Based on the assessment of the updated Convergence Programme pursuant to Council 
Regulation  (EC)  No  1466/97,  the  Council  is  of  the  opinion  that  the  macroeconomic 
scenario  underpinning  the  fiscal  projections  is  based  on  more  favourable  growth 
projections than those of the Commission services' forecast. After a considerable and 
frontloaded budgetary adjustment of more than 2 percentage points in structural terms 
in 2010, the fiscal effort in 2011 is well below the recommended adjustment of at least 
0.75%  of  GDP.  Nevertheless,  the  updated  Convergence  Programme  foresees  a 
correction of the excessive general government deficit in 2011 in compliance with the 
Council  Recommendation  and  further  reductions  afterwards..  However,  the  update 
does  not  provide  sufficient  details  of  the  planned  budgetary  measures  to  achieve  the 
fiscal targets in 2012-14. The downward revised medium-term objective (MTO) of a 
structural deficit of 0.6% of GDP, scheduled for 2014, is still more ambitious than the 
minimum required level. It reflects the objectives of the Stability and Growth Pact and 
it is foreseen to be achieved by the end of the programme period (2014). However, the 
envisaged  annual  average  structural  fiscal  effort  in  2012-14,  after  the  planned 

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correction  of  the  excessive  deficit  in  2011,  is  well  below  the  minimum  annual 
structural  improvement  of  0.5%  of  GDP  recommended.  In  view  of  the  gradually 
improving economic outlook, the programme should aim for a faster progress towards 
the achievement of the MTO. When assessed against a prudent estimate of medium-
term potential output growth, the projected budgetary expenditure growth in 2012-13 
seems to be on the optimistic side, posing a risk to the structural fiscal position in the 
medium term. 

(9) 

Correcting  the  excessive  deficit  as  envisaged  by  the  end  of  2011  will  help  regain 
confidence  and  strengthen  the  credibility  of  government  policies.  Over  the  medium 
term, achieving the objective of a small structural deficit of 0.6% of GDP is important 
to  ensure  that  fiscal  policy  is  supportive  to  the  monetary  regime  in  place.  However, 
fiscal consolidation is hindered by inefficiencies in the public sector which may lead 
to  considerable  expenditure  pressures  while  budget  revenues  are  likely  to  be 
structurally lower than in the pre-crisis boom years. Ambitious public finance reforms 
are thus needed in order to carry out the necessary fiscal adjustment and help secure 
funding  for  the  implementation  of  necessary  structural  reforms,  including  the  co-
financing needed for EU-supported projects.  

(10)  The Bulgarian fiscal performance was relatively positive in the favourable economic 
environment prior to the crisis. Fiscal targets were consistently met and sizeable fiscal 
buffers  were  accumulated.  In  2009,  under  the  impact  of  the  economic  crisis;  for  the 
first time in many years the budget went into deficit, and the rule to keep the budget 
balanced or in surplus and public expenditure below 40% of GDP was breached. This 
was  partly  related  to  weaknesses  in  expenditure  planning  and  control.  It  further 
reflected  the  fact  that  the  revenue  windfalls  resulting  from  the  buoyant  economic 
activity prior to the crisis had been used to finance relatively large increases in ad-hoc 
expenditure  and  cuts  in  the  social  security  rate.  To  address  these  problems,  the 
authorities  undertook  several 
improve  expenditure  control  and 
monitoring  and  reporting  systems,  including  the  adoption  of  a  comprehensive 
legislative  package,  strengthening  the  fiscal  rules  and  the  medium-term  budgetary 
framework. It is expected to enhance fiscal discipline and the predictability of policies, 
to reduce macroeconomic volatility and to ensure less a pro-cyclical fiscal policy.  

initiatives 

to 

(11)  The pre-crisis boom years saw a considerable tightening of the labour market and high 
wage  growth,  outpacing  the  increases  in  productivity.  Wage  growth  peaked  at  an 
annual rate close to 20% in the fourth quarter of 2007. Following the downturn, wages 
have started to decelerate, although wage growth remained relatively high at close to 
10%  in  2010  for  employees  under  labour  contracts  (representing  around  65%  of  the 
labour force). Bringing wage growth in line with productivity growth will facilitate the 
internal restructuring of the economy towards productive and export-led sectors.  

(12)  Labour  market  participation  barriers  reflect  in  part  the  insufficient  provision  of 
properly  targeted  and  tailored  active  labour  market  policies  (ALMP),  together  with 
ineffective  and  underfunded  Public  Employment  Services.  The  quality  of  public 
services  in  the  areas  of  activation,  job  search  assistance  and  retraining  is  low  as  is 
public  spending.  ALMP  coverage  is  also  limited  with  only  12%  of  jobseekers 
participating  in  activation  measures.  Launching  more  region-based  employment 
programmes,  and  European  Structural  Funds  large-scale  training  programmes,  will 
have  a  positive  effect  in  the  short  term.  However,  weak  capacity  to  monitor  and 
evaluate programme results hampers policy design. As pointed out by a recent report 

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commissioned  by  the  Public  Employment  Service  ("Evaluation  of  the  net  effect  of 
ALMPs in Bulgaria"), more individualised and better-quality services, as well as better 
infrastructure  of  labour  offices,  would  support  more  effectively  the  unemployed  in 
finding a job. 

(13)  The  economic  crisis  continues  to  impact  the  labour  market.  The  unemployment  rate 
increased from 5.4% in 2008 to 10.2% in 2010, while for young persons (aged 15-24) 
it reached 23.2% in 2010. The crisis particularly hit the low skilled (including a large 
part of the Roma minority) who represent almost 70% of the unemployed. The share 
of  long-term  unemployment  (46%  in  2010)  is  higher  than  the  EU  average  (2010: 
40%),  and  there  may  be  a  risk  of  it  becoming  structural.  The  youth  activity  rate  has 
consistently  stayed  at  less  than  two  thirds  of  the  EU  average  (2009:  29.5%;  EU: 
43.8%).  The  youth  employment  rate  was  24.8%  in  2009  (EU:  35.2%).  Bulgaria  also 
has  the  highest  share  of  young  people  who  are  neither  in  education  or  employment 
(19.5% of persons aged 15-24). One of the main barriers to youth participation in the 
labour  market  is  the  shortage  of  opportunities  to  combine  education  and  work,  in 
particular  through  internships  and  apprenticeships  in  their  field  of  study,  which 
facilitate transition to the labour market.  

(14)  Despite  an  above  average  educational  attainment,  Bulgaria  has  over  40%  of  low 
achievers in literacy and numeracy. This shows there is scope for improvements in the 
education  system  to  better  align  it  to  labour  market  needs.  Building  on  the  positive 
results of the recent school decentralisation reform, the upcoming Law on Pre-School 
and  School  Education  is  expected  to  provide  some  solutions  which  can  be  further 
strengthened, i.e. with respect to financial autonomy, pre-school participation rates and 
external evaluation, as well as ensuring accountability. The early school leaving rate 
(14.7% in 2009) is close to the EU average, but is particularly high among the Roma 
(where  it  was  estimated  at  43%  in  2008).  Tertiary  attainment  rates  (27.9%  in  2009) 
remain  below  the  EU  average  (32.2%).  Bulgaria  has  significantly  delayed  its  higher 
education  reform.  The  new  Higher  Education  Law,  already  tabled  in  2010  but 
subsequently withdrawn, should provide a useful step to address reform needs. 

(15)  The pension reform decided in 2010 is not linked to life expectancy or to the situation 
of the health and long-term care system. The implementation period is from 2011 to 
2026, with most of the measures taking effect in the second half of the period which 
could  put  both  the  implementation  and  the  sustainability  of  the  first  pillar  of  the 
pension system at risk.  

(16)  Bulgarian  citizens  experience  a  greater  degree  of  poverty  in  comparison  to  the  EU 
average (41.9% of the population experiences severe material deprivation as compared 
to  8.1%  for  EU).  Around  66%  of  the  elderly  are  at  risk  of  poverty,  which  is 
considerably  higher  than  the  EU  average.  There  are  signs  of  deteriorating  living 
conditions in the last couple of years. Given the demographic situation, achieving the 
NRP  targets  for  poverty  reduction  depends  to  a  large  extent  on  the  proper  design  of 
policies  for  older  workers  and  disadvantaged  people,  as  well  as  on  the  adequacy  of 
social  transfers.  The  NRP  announces  the  development  of  an  operational  strategy  for 
Roma integration (estimated at 10% of the population), to address the multiple barriers 
faced  in  the  domains  of  employment,  education,  health  and  housing  in  a  single 
comprehensive plan. 

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(17)  The  low  efficiency  of  public  services  remains  an  obstacle  to  growth.  Despite  recent 
streamlining, the public administration reform has not dealt with upgrading the quality 
of  staff  or  key  functions.  Bulgaria  has  a  very  low  fixed  broadband  penetration  –  at 
14.9%  it  has  the  second-lowest  figure  of  the  EU,  which  also  limits  uptake  of  all 
electronically delivered services.  

(18)  The public procurement irregularity rate reaches 60% of all procedures verified and is 
even  higher  for  large  public  infrastructure  projects,  where  the  authorities  have  an 
obligation of ex-ante control. The capacity of the Public Financial Inspection Agency 
has been reduced substantially and as a result, the agency performed ex-post controls 
in only 12% of all public procurement procedures in 2009. 

(19)  The  energy  intensity  of  the  Bulgarian  economy  is  one  of  the  highest  in  the  EU.  A 
salient  example  is  household  heating,  with  poorly  maintained  multi-apartment 
buildings  accounting  for  the  bulk  of  the  problem.  Recent  changes  in  the  eligibility 
rules create the possibility of using EU Structural Funds to support energy efficiency 
investments.  Few  investments  have  been  made,  whilst  revenues  from  energy  and 
transport taxes have fallen relative to GDP and also relative to taxes on labour, which 
are well above the EU average. Access to the energy market is hampered by reduced 
competition and opaque price setting mechanisms. 

(20)  Bulgaria has made a number of commitments under the Euro Plus Pact4. On the fiscal 
side,  the  commitments  indicate  that  the  sustainability  of  public  finances  will  be 
underpinned by pension reform measures, action to ensure performance-based pay in 
the public sector by freezing pensions and wages until 2013 and strengthening of the 
domestic  fiscal  framework  through  the  adoption  of  a  Financial  Stability  Pact,  which 
includes binding numerical fiscal rules. To foster employment, measures will be taken 
to  reduce  the  share  of  undeclared  employment  and  increase  labour  participation. 
Competitiveness measures focus on reducing administrative burdens and increasing e-
governance;  improving  access  to  education  and  enhancing  the  performance  of  the 
education system.. The above commitments refer to three out of the four areas of the 
Pact, leaving out the financial sector. They represent a continuity of the broader reform 
agenda  outlined  in  the  Convergence  and  National  Reform  Programmes,  and  step  up 
ongoing reform projects in the areas of fiscal governance, public administration, and 
education.  The  Euro  Plus  Pact  commitments  have  been  assessed  and  taken  into 
account in the recommendations. 

(21)  The  Commission  has  assessed  the  Convergence  Programme  and  National  Reform 
Programme, and the Euro Plus Pact commitments5. It has taken into account not only 
their  relevance  for  sustainable  fiscal  and  socio-economic  policy  in  Bulgaria  but  also 
their  respect  of  EU  rules  and  guidance,  given  the  need  to  reinforce  the  overall 
economic governance of the European Union by providing EU level input into future 
national  decisions.  It  considers  that  after  a  considerable  and  frontloaded  budgetary 
adjustment  in  2010,  fiscal  consolidation  plans  for  2011  should  be  implemented  as 
envisaged and the deficit should be brought below the 3% reference value in line with 
the  Council  Recommendation.  The  update  does  not  provide  sufficient  details  for 
planned  budgetary  measures  to  achieve  the  fiscal  targets  in  2012-14  and  a  faster 
progress  towards  the  selected  medium  term  objective  could  have  been  ensured. 

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More details on the commitments made under the Euro Plus Pact can be found in SEC(2011) 711. 
SEC(2011) 711. 

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Strengthening  of  the  domestic  fiscal  framework  will  anchor  fiscal  discipline  and 
provide  for  predictability  and  credibility  of  government  policy  in  the  medium-term. 
Further steps should also be taken to strengthen competitiveness, to help people into 
jobs,  to  protect  the  most  vulnerable  groups  facing  multiple  barriers,  to  enhance  the 
capacity  of  public  administration  and  regulators,  to  increase  resource  efficiency  as 
well as to open up more opportunities for investment and growth. 

(22) 

In  light  of  this  assessment,  also  taking  into  account  the  Council  Recommendation 
under Article 126(7) Treaty on the Functioning of the European Union of 2 June 2010, 
the Council has examined the 2011 update of the Convergence Programme of Bulgaria 
and its opinion6 is reflected in particular in its recommendations under (1) and (2) set 
out below. Taking into account the European Council conclusions of 25 March 2011, 
the Council has examined the National Reform Programme of Bulgaria, 

HEREBY RECOMMENDS that Bulgaria should take action within the period 2011-2012 to: 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

Proceed with effective budget implementation so as to correct the excessive deficit in 
2011. Specify the measures underpinning the budgetary strategy for 2012-2014 and 
take  advantage  of  the  ongoing  economic  recovery  to  speed  up  fiscal  adjustment 
towards  the  medium-term  budgetary  objective,  primarily  by  keeping  expenditure 
growth  in  line  with  medium-term  potential  growth,  while  increasing  the  share  of 
growth-enhancing public expenditure. 

to 

improve 

the  predictability  of  budgetary  planning  and 

its 
Take  steps 
implementation in particular by strengthening fiscal governance. To this end, design 
and  put  in  place  binding  fiscal  rules  and  a  well-defined  medium-term  budgetary 
framework that ensures transparency at all government levels. Introduce measures to 
put budget reporting on an accrual basis. 

Take  steps  to  speed  up  the  current  reform  of  the  pension  system  and  strengthen 
measures to help older workers to stay longer in employment.  

Promote,  in  consultation  with  the  social  partners  and  in  accordance  with  national 
practices,  policies  to  ensure  that  wage  growth  better  reflects  developments  in 
productivity and sustain competitiveness. 

Take  steps  to  address  the  challenge  of  combating  poverty  and  promoting  social 
inclusion,  especially  for  vulnerable  groups  facing  multiple  barriers,  by  :  expanding 
the  market  for  private  job  service  providers;  modernising  public  employment 
services  to  enhance  their  capacity  to  match  skills  profiles  with  labour  market 
demand;  and  focusing  support  on  young  people  with  low  skills.  Advance  the 
educational  reform  by  adopting  a  Law  on  Pre-School  and  School  Education  and  a 
new Higher Education Act by mid 2012.  

Step up efforts to enhance administrative capacity in key government functions and 
regulatory authorities, in order to make public services more effective in responding 
to  the  needs  of  citizens  and  businesses;  introduce  measures  to  check  public 
procurement  on  the  basis  of  risk  assessments,  strengthen  the  capacity  of  the 

6 

Foreseen in Article 9(3) of Council Regulation (EC) No 1466/97. 

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authorities  to  prevent  and  sanction  irregularities,  in  order  to  improve  quality  and 
value-for-money in the use of public funds. 

(7) 

Abolish  barriers  to  entry,  guaranteed  profits  arrangements  and  price  controls  and 
ensure full independence of the Bulgarian Energy Regulator, in order to open up the 
electricity  and  gas  markets  to  greater  competition.  Introduce  incentives  to  upgrade 
the energy efficiency of buildings.  

Done at Brussels, 

For the Council 
The President 

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