The Road Ahead for Bulgaria

Tens of thousands of Bulgarians have held protests across their country over the past month. Their grievances range from a poverty rate above 22 percent, skyrocketing utility costs and rising unemployment, to cronyism and corruption. The self-immolation of four demonstrators and violent clashes between protestors and police underscore the rising tension. Under such pressure, Prime Minister Borisov and his right-of-center party -- Citizens for the European Development of Bulgaria (GERB) -- resigned on Feb. 20. An interim government is in power until early elections in May and the protests have been halted to provide the government an opportunity to begin its work. If the next government fails to provide adequate solutions to the rising tide of problems, the political turmoil will continue.

Part of the reason for citizens' displeasure is that EU membership has failed to improve Bulgaria's economic performance. The country's unemployment rate averaged 10 percent in the three years preceding EU membership in 2007; today it exceeds 12 percent. Also prior to EU membership, GDP growth averaged 1.75 percent per quarter, yet since joining the EU it has dropped to an average of .3 percent, with several quarters of negative or zero growth. By Bulgaria's historical standards over the past 20 years, inflation has been tame, averaging approximately 5 percent since 2007.

Most of Bulgaria's experience since 1990 has been characterized by serious economic instability. Due to a low birth rate and corresponding "brain drain," the country's population has dropped 19 percent over the past 20 years. The UN sanctions imposed on Iraq and Yugoslavia hurt Bulgaria's economy given that the two states were major trading partners. More recently, the 2008/9 global financial crisis and the 2009 Russian-Ukrainian gas dispute prompted GDP to shrink from approximately $52 billion to $48 between 2009 and 2011, unemployment has jumped 248 percent over the last four years, and Bulgaria's dependence on Russian raw materials has notably increased.

The magnitude of the protests suggests that the current economic crisis may drive real political change. On the other hand, the demonstrators' lack of unity and clarity may hinder their ability to enact genuine reform. One area of unity, however, is demonstrators' stance against foreign electric companies' monopolies. The protestors want the government to renegotiate long-term electricity contracts, but doing so would have a negative impact of the country's foreign investment rankings.Bulgaria is currently ranked 66th out of 185th in the World Bank's Doing Business ranking. It scores in the top third as an investment destination in only three of the ranking's 10 sub-components, and ranks in the bottom third in two of them -- not an enviable position for a European country.

While some protestors demanded a new constitution and others an end to all political parties, widespread dissatisfaction with the post-1989 political system is perhaps the most common theme. Whatever political party begins to govern after the May election, it will be forced to make political compromises and difficult decisions. While the popularity of Borisov's party has declined in the last year and the opposition Socialist Party's approval ratings have increased, recent polls indicate that neither party enjoys widespread support. It is unlikely that either will win a majority in May, requiring the victor to form a coalition government and raising question about the durability of whatever 'solutions' are proposed.

A key issue for Bulgaria's next government is corruption. According to Transparency International, Bulgaria was the most corrupt member of the EU in 2012, and the Global Competiveness Report (2011-2012) cited corruption as the largest barrier to doing business there. The country has also been excluded from the EU's Schengen Area due to corruption. A recent poll indicated that 96 percent of the Bulgarian population believes that corruption is an important issue for the country. There is a widespread perception that power-hungry politicians are linked to corrupt businessmen, and that broken government institutions do not serve the public effectively.

The long-term implications of political unrest in Bulgaria are difficult to predict. The government reacted to outrage over high electricity bills by proposing to revoke the license of the Czech-owned firm ČEZ, which cannot bode well for relations between Sofia and Prague, nor for Bulgaria's future with the other EU states, which must be wondering if a similar fate awaits their companies that do business in sensitive industries there. The extent to which Sofia challenges the bloc's rules for domestic purposes will determine much about how the relationship between Bulgaria and the EU unfolds.

Previous enthusiasm for joining the exchange rate mechanism, as expressed by Prime Minister Borisov in January 2010, before adopting the euro, have been tempered by the EU's economic downturn and a shift in Bulgarian public opinion following three years of austerity. It is certainly clear that the Bulgarian people, who set high expectations about the benefits of EU membership for their economy, have reason to be disappointed.

Regardless of how Sofia and Brussels approach their differences, Bulgaria's new leaders will be compelled to address fundamental questions about Bulgaria's role within the EU. If Bulgaria seeks to attract more foreign investment and become a more mainstream EU member, Sofia must address the corruption issue head on. Moreover, the Bulgarian people must continue to demand greater accountability from their leaders. Perhaps the demonstrators' legacy will not only be lasting and meaningful political change, but they will hopefully have set an example for what other European citizens should be demanding of their own governments.

Bulgaria may be ripe as the potential birthplace for a 'European Spring.' Just as Tunisia was a seemingly unlikely place for the Arab Spring to unexpectedly erupt, Bulgaria may yet earn the distinction of being the birthplace of a well-deserved change in how governments operate and business is done throughout Europe. Surely, other European countries stand to benefit from a similar exercise in public discourse.

Reprinted with permission from the Eurasia Review.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk advisory firm, and author of the book "Managing Country Risk". Giorgio Cafiero is a research analyst with CRS based in Washington.