311. Working toward the EU: Bulgaria's Progress and Serbia's Struggles

John R. Lampe is Professor of History at the University of Maryland-College Park and was a Wilson Center Fellow for 2003-2004. He spoke at an EES noon discussion on February 17, 2005. The following is an updated summary of his presentation. Meeting Report 311.

Two recent trips to the region, to Sofia in October and to Belgrade in January, inform these observations. Beyond simply reporting on the latest in my long series of visits to both cities, I welcome the chance to call attention to Southeastern Europe at a time when American interest is flagging. Since 9/11 and the occupation of Iraq, the Middle East has understandably moved to the forefront of policy-relevant regions. But that priority does not justify neglecting Southeastern Europe. Its problems may be "forgotten but not fixed," as Edward Joseph put it in "Back to the Balkans," Foreign Affairs (Jan.-Feb. 2005).

From an American perspective, Joseph's included, those problems seem concentrated in the troubled triangle of Bosnia, Macedonia and Kosovo. And indeed, the US played a leading role in the Dayton and Ohrid Agreements. American troops remain under UN and NATO auspices in Kosovo. As in Bosnia, our military intervention there in 1999 was supposed to lead to a happy ending and not just a cease-fire. The democratic standards that would support independent status are yet to be achieved, although Bosnia has made more progress in multi-ethnic tolerance and refugee return than in Kosovo. If we have unfinished business in the troubled triangle, however, we must realize that those troubles will resist solution unless the surrounding states succeed in their own right.

There is now only one road open for such success, the road to membership in the European Union. The EU's Thessaloniki summit of 2003 opened that road wide for the "western Balkans." Responding to the magnetic attraction of EU membership, especially its economic pull, Macedonia and Albania have pushed ahead with the Feasibility Study that is the first step. They have largely answered the Study's myriad questions, while the Bosnian confederation is also trying to address them. But for any of them to succeed as candidates let alone members, they will need the large non-members on their borders to go ahead and succeed as well. Croatia, Serbia (with or without Montenegro) and Bulgaria have populations and economies whose combined totals exceed those of the troubled triangle and trained specialists whose number far exceed theirs. The surrounding states' accession to the EU is essential for Bosnia, Kosovo and Macedonia, and therefore crucial for the happy ending promised by American intervention there, crucial for the wider international reputation we seek to repair.

Leaving the Croatian case aside for now, let me turn to Bulgaria and Serbia. Comparisons of the two over the past century have generally favored Serbia, reflecting a better Western reputation since the First World War and a higher standard of living since the 1950s. Over the past decade, however, these fortunes have been reversed, a reversal whose reality, let alone its lessons, has proved difficult to accept in Belgrade.

The reality of this reversal stands out when we look at prospects for EU membership. Bulgaria has already complied with the 31 chapters of the acquis communautaire, now swollen to 10,000 pages, and is on a clear track for membership in 2007. It has been certified, according to the Copenhagen criteria, as having not only a functioning market economy but also stable democratic institutions guaranteeing the rule of rule of law and respect for minority rights. By contrast, Serbia's earliest possible accession, again with or without Montenegro, would seem to be 2012. That is the optimistic forecast of Miroljub Labus, the able economist leader of G-17 Plus who will head Serbia's team to begin a Feasibility Study. Already delayed by more than one year by disagreements on the Serbian side, the EU's insistence on the delivery of remaining indictees to the Hague Tribunal put off the start of the Study (anticipated in early 2005) by several more months. That issue aside, however, there remain instructive economic and political contrasts between Serbia and Bulgaria.

Bulgaria's economic progress despite a political stalemate
The country's macro-economic indicators and the pace of constructive privatization surely offer an encouraging picture. Even Roumen Avramov, the Center for Liberal Strategies chief economist who previously doubted optimistic forecasts for the Bulgarian economy, acknowledges the promise that has emerged. Real (price-adjusted) GDP per capita has continued to rise 4 percent a year since 2000 and may approach 6 percent for 2004. Per capita income has risen over $1,000 during that time to $2,700, while Serbia's has stayed at $1,500. Unemployment has finally come down, from 17.5 percent in 2002 to 11.9 percent this past September (Serbia's official figure is 31.7 percent). Bulgaria's Currency Board has held the lev's exchange rate to the euro steady, supported by rising reserves of foreign exchange. The European Central Bank has now agreed to preserve the Board into 2010.

As for structural change, the privatization of all domestic banks has now been completed. New foreign banks, mainly Greek judging by the row of them lining what used to be Ruski Bulevar, have added credit resources and competitive standards as they have in Croatia. This domestic and foreign capacity has fueled a credit boom. Investment is now 20 percent of GDP, although the rate of inflation has risen to a still-manageable 6 percent. Loans are flowing to private housing, as in Greece, but also to industry and tourist facilities. High-end complexes, one complete with a golf course, are going up on the Black Sea coast. The ski resort at Bansko does a booming business, with new condominiums there selling out to European buyers. The privatization of state industry and utility assets is now 85 percent complete. Two parts of the tobacco conglomerate Bulgartabac now have Western buyers, and a Czech-Austrian-German combination has purchased the seven enterprises distributing electric power. This past year's direct foreign investment topped $2 billion, and an IMF Stand By agreement is in place. Rising exports have cut the import surplus to the lowest in the region. All this relieves concern about replacing the one-time gains from sales of state assets from the Communist period.

Public support for EU membership in general and Turkey's candidacy in particular remains high. Yet serious challenges still lie ahead, economic ones at the micro level and political ones at the macro level. The grey economy's share of GDP has now fallen below 30 percent, but that proportion is still uncomfortably close to Serbia's. Avramov points to public administration and the judiciary as areas of concern over corruption still shared by EU negotiators. Organized crime and the attendant Russian or Ukrainian ties are still too strong. Rumors of laundered money entering the new tourist facilities abound. The most discomforting economic indicator is the swelling income gap between Sofia, Plovdiv and the Black Sea Coast on the one hand, and the smaller towns dependent on a single industry or rural villages on the other. Rural poverty is at 80 percent for the immobile older generation. Too many younger people from across the country work as seasonal labor as far away as Spain or leave permanently. Hence the striking decline in Bulgaria's population, from 8.9 million in 1990 to 7.8 million in 2004. At least some of the more educated are now returning for professional employment in Sofia.

Yet, they return to an ongoing political stalemate. Hopes soon faded that the plurality won in the 2001 elections by the National Movement Simeon II (NMS), led by the former King, Simeon Saxe-Coburg, could establish an enduring majority. As coalition partners departed and a number of unsuccessful ministers were cut loose, the party has seen its polling support drop. Both the Bulgarian Socialist Party (BSP), with over 20 percent, and the Union of Democratic Forces (UDF) with somewhat less, have moved ahead. At least the shares for the NMS have now come up past 10 percent, although the prospect of Simeon's continuing as Prime Minister after the forthcoming parliamentary elections this summer seem unlikely. This time the BSP under Georgi Parvanov, who already won the presidency in 2003, seems likely to form a coalition government with the Turkish Movement for Rights and Freedoms (MRF) party. The UDF's only hope may be an alliance with Sofia's mayor, Stefan Sofianski, uncertain at this writing. But Parvanov and his new BSP leadership claim to be just as committed as the UDF, if not more so, to moving ahead with Bulgaria's EU candidacy and continuing its NATO membership.

Serbia's delayed economic transition and political turmoil
A set of discouraging economic indicators adds to the dismaying spectacle of the privatization process in Serbia. The growth of real GDP per capita has bounced back to 6 percent in 2004, but this is hardly a trend after falling short of 2 percent in the last two years. Industrial production lagged in particular. Inflation had at least been cut back to 7.5 percent for 2003, but jumped back to more than 12 percent in 2004 with no signs of abating this year. Given the high figures for unemployment and the minimal per capita income of $1,500, social despair is mounting. Suicides have become commonplace in Belgrade. Only ties to criminals at home or relatives abroad are allowing many families to survive. Meanwhile, the grey economy grows and the trade deficit gallops ahead, with imports rising to twice the value of exports in 2004.

Foreign direct investment lags well behind Bulgaria's, and this year's goal of at least one billion dollars faces fallout from corruption, controversy and delay in privatizing major assets. The recent sale of the prime producer of mineral water to a member of Milosevic's Socialist Party (SPS) instead of a Western group headed by NBA basketball star Vlade Divac will surely discourage other foreign investors. Also discouraging is the parliamentary delay in legislation to expedite foreign investment and the public's continuing preference for restitution to original owners. When a successful foreign sale is made, as in the case of US Steel's purchase of salvageable sections of the Smederevo works, press coverage concentrates only on how much the price paid undervalues the exaggerated sum that public opinion likes to believe it should be worth. Letters to the editor reflect a sense of economic victimization, with no attention paid to the new enterprise's current standing as Serbia's largest exporter.

Genuinely widespread socio-economic distress and the media-flaunted wealth of a suspect few also feed the corrosive sense of Serbian victimization. Anniversaries of the NATO bombing campaign of 1999, combined with the continuing demands of the Hague Tribunal, encourage conspiracy theories. (One theory traces the breakup of Yugoslavia to plans hatched by Ronald Reagan and the Pope!) All of this helps the campaign promises of the Radical Party—currently holding a plurality in the polls—to impose compulsory rationing and break all Western ties. The SPS also benefits. Witness its several victories in recent municipal elections. At the same time, a divided government with Boris Tadic as President, barely elected over a Radical candidate, and Vojislav Kostunica as Prime Minister continues to operate on separate tracks, each seeking to speak for Serbia. Unless their respective coalitions reach some agreement before the next elections in 2006, Serbia risks a government in which either the Radicals or the SPS become major players, or worse still, governing partners.

A revised coalition of the parties that overthrew the Milosevic regime in 2000 is obviously in the American interest. That interest has not been well served in recent months. In a series of articles in the Belgrade press, former US Ambassador William Montgomery, now retired and establishing his credentials as an independent business consultant in Serbia, has criticized both the 1999 NATO intervention and the current procedures of the Hague Tribunal. Criticizing the Hague process, which has been widely unpopular in Belgrade, undercuts the EU demand for the delivery of indictees as a condition of beginning Serbia's Feasibility Study, which is obviously in the interest of the US as well. The current US administration has also done its part to slow the accession process. While understandably holding back $10 million of a modest aid package of $50 million in January for Serbia's failure to hand over Hague indictees, the US Embassy announced the withdrawal of economic advisors. Their return would be a constructive step, if as it appears from the announcement from Brussels on April 12, 2005, the EU is sufficiently satisfied with Serbia's recent spate of transfers to the tribunal to initiate a Feasibility Study.

Some hopeful signs: settling Montenegro's status and Serbia's financial standards
There remains the question of what favorable prospects may be found for Serbia's response to the Study's hard questions. The expressed common commitment of Tadic and Kostunica to EU membership should help. But public opinion, which favors joining by two to one, shows much less readiness to accept specific provisions. The most formidable obstacles are the socio-economic distress, corruption and the politically divisive issue of Kosovo's status. On the latter issue, constructive American engagement in negotiations between Belgrade and Pristina will help.
But for the internal reform still needed almost five years after the fall of the Milosevic regime, it will be up to Serbia, paraphrasing the old national moto, to save itself. One constructive step may now be final political separation from Montenegro. Public opinion in both now favors an independent Montenegro by a 5:3 margin. Their economic harmonization, supposedly proceeding under EU guidelines, has achieved little—"a snail on a double track" according to the Belgrade Economist. Their small joint ministries are reported to be hardly functioning, and the two partners are the only entities in Southeast Europe still without a free trade agreement. Now that the EU has already accepted separate economic tracks for Serbia and Montenegro, their political parting promises a better approach to the joint negotiations that their joint accession, still an EU mandate as well as an obvious requirement for Montenegro, will require.

Of more immediate promise is Serbia's recent progress in financial restructuring. The dinar has remained stable despite the liberalization of prices and internal trade. The London Club has written off 62 percent of Serbia's $2.8 billion debt to Western commercial banks, and the IMF released another $147 million to support banking reforms in June 2004. By the fall, the Standard and Poor Index advanced Serbia's credit rating for short-term debt to B and for long-term debt to B+. The surprise success story of Predrag Bubalo, a no-nonsense businessman with joint venture experience, as Minister of the Economy has also helped. Legal registration for new enterprises and textile privatization are now moving ahead. Add a crash program in EU specifics for public officials and parliamentary representatives from the G-17 Institute, and maybe the sum of these hopeful signs will build the momentum needed to create a genuine reversal of Serbia's fortunes.