# **A. INTRODUCTION**

European Union (EU) membership allows new member states (NMS) to fully benefit from sizeable EU transfers to national budgets, among other things. Given the lower standard of living in Bulgaria, the Union has committed a considerable amount of assistance to the country after its suggested accession in 2007. The aim of these transfers is to facilitate Bulgaria’s income convergence with the rest of the EU. However, EU membership is also associated with member states’ contributions to the EU budget, while complying to the 2002 Copenhagen summit principle of maintaining pre-accession net fiscal positions after joining the EU.<sup>1</sup> Inevitably, EU accession brings new fiscal challenges to the NMSs’ national budgets, as resources enter into and exit from the new members’ national budget accounts. Hence, a key question for prospective EU members is whether, on balance, membership would engender positive effects or instead bring about fiscal strains for the new member country.

This paper presents a fiscal estimate of the prospective EU membership of Bulgaria. The projected EU funds have two distinct effects: first, there is the overall effect on the balance of payments of the country; and second, there is the pure effect on the national budget. The paper concludes that the country is likely to benefit from large net inflows of resources of an average of 3.7% of gross domestic product (GDP) in 2007-2009. In contrast, Bulgaria’s fiscal position is expected to deteriorate by 1.6% of GDP on average in 2007-2009, if no expenditure restructuring of the fiscal framework is carried out.

EU accession is expected to bring about additional direct and indirect effects on the revenue side of the budget, owing to the alignment of the national legislation with the _acquis communautaire_ and second-round positive impacts of EU accession on trade integration, investment and growth. However in this paper, only the direct effects on the budget have been estimated. Additionally, the impact on the budget balance is calculated on a cash basis, assuming that all EU related public expenditures would be recorded in the consolidated fiscal program. The estimates are based on the official Financial Package for the Accession Negotiation of Bulgaria and Romania of 2004 and updated with information from the Accession Treaty for Bulgaria and Romania. We also rely on the latest available information and data obtained from the national authorities in Bulgaria and the EU. Finally, the changes envisaged for the 2007-2013 financial perspective regarding EU funds’ attribution and co-financing rates have also been taken into account.

The paper is structured as follows. The next section B briefly outlines the financial envelope for Bulgaria. Based on this negotiated financial framework, section C analyzes the overall net impact of EU accession for Bulgaria and traces all flows between Bulgaria and the European Union. It describes the inflows to the country: various payments appropriations from the EU budget as well as pre-accession instruments (under which disbursements might continue until 2011). The outflows of funds from Bulgaria, namely the Bulgarian contribution to the EU budget are also treated in this section. In the next section D, the direct net effect on the national budget for 20072009 is estimated and compared to the overall effect on Bulgaria’s balance of payments. In both estimates, we employ a cash-flow approach as opposed to an accrual budget accounting in order to gauge the macroeconomic implications on the budget. Section E summarizes the macroeconomic and absorption challenges which Bulgaria’s EU accession brings.

> 1 See The Presidency Conclusions of the Copenhagen Summit of December 2002, at http://ue.eu.int/ueDocs/cms_Data/docs/pressData/en/ec/73842.pdf

2