For Romania and Bulgaria, the EU accession process has been nothing short of tortuous: for more than 15 years, the two countries have watched as others have overtaken them in jockeying for position among the elite of Europe.
Now the wait is over. As of January 1, Bulgaria and Romania gained membership to the most sought-after of clubs. The exclusivity once associated with membership of the EU has lessened, but that is of little concern, considering the host of contemporaneous benefits awaiting the two Black Sea neighbours. Prior to May 2004, 15 countries were members of the EU; now there are 27. But the 10 countries that joined in the middle of 2004 have reaped substantial benefits. And those benefits were already visible across Romania’s and Bulgaria’s socio/economic landscapes long before the accession date.
The economic growth numbers are compelling; but are the two countries, which at one time were in the grip of Russia’s iron fist, able to make the transition from communist economy to fully paid-up member of the EU, without any hitches?
There are many who say no. And to find those detractors, look no further than the home of the EU itself. Corruption, bribery and black-market business are major black marks on the record of the two countries. These, among other factors, added to the delay in membership. Even now, Brussels acknowledges that the problems have not been eradicated. However, the general consensus is that Bulgaria and Romania are better off under the watchful eye of the EU politicians, where they are susceptible to certain punishment, than if they were left to sort out their issues alone.
The explosive economic growth experienced by Bulgaria in the past four years is testimony to the fervour created by EU accession. Its gross domestic product per capita has doubled in just four years. This outperforms other central and eastern European countries as well as eurozone economies.
There can be little doubt that interest in the country has flourished recently, as shown by an increase in both imports and FDI. Import growth has exceeded export growth since 2003 and FDI inflows have been the second largest, behind the Czech Republic, in all of eastern Europe (adjusted by economic size). Steel giant Laxmi Mittal of Mittal Steel has already invested heavily in Bulgaria.
Last year, Romania experienced its most successful year to date for inward investment. Big-name players such as General Electric, Hewlett-Packard, Microsoft, Samsung and Unilever established operations in the country in anticipation of the trading benefits that would be derived after accession. And many multinationals are ramping up existing operations in the country: UniCredit Romania has set up 10 FDI projects in Romania since 2002; Automobile Dacia, nine; Mivan, seven; and ING Bank Romania and Holcim Romania, six.
Figures in for the first 10 months of 2006 confirm Romania’s growing appeal. FDI reached almost €8bn, up 90% on the period last year.
Drawing these companies to Romania’s flourishing economy and one of the most appealing aspects of starting a business there is the flat tax rate. According to Raduta Matache, Romania’s acting ambassador to the UK, this has had two benefits. “It has increased the overall amount of tax contribution,” she says, which is a help to government funds, and has contributed to diminishing the informal economy. The second factor gives Romania a competitive advantage over some of the other EU member states, principally the likes of Greece, which includes black-market earnings in its GDP growth estimates, she says.
All this has helped Romania to achieve 6% annual average GDP growth in the past five years and caused the European Commission (EC) to hike up its forecasts repeatedly. The EC has estimated growth in Romania at 7% for 2007.
Bulgaria and Romania boast lower wage costs than the rest of the EU and possess a generous amount of skilled labour, of which foreign multinationals can take advantage. Because wages act as such an important part of operating cost, the lower the better, and among all the newly acceded countries wages do not come any lower than in Romania and Bulgaria. Bulgaria’s €167 a month is by far the lowest and is about 5.5 times lower than Croatia. Romania is not quite so cheap but still comes in pretty low at €275, which is 3.5 times lower than Croatia’s level and about 1.6 times lower than the Slovak Republic, its nearest competitor.
So far, all this positive news has encouraged multinational enterprises to set up subsidiaries in Romania. In addition to the companies listed already, Ms Matache says that mobile phone operator Vodafone spent £2bn (€3bn) in 2005 on its operations in Romania. But that is where it may end – Ms Matache says she now thinks multinationals will be usurped by small and medium-sized enterprises (SMEs) when it comes to FDI. “We expect a boom in investment when it comes to SMEs,” she says.
However, Romania cannot be choosy about the type of company it attracts. The Romanian government has set up priority areas for investments. Clearly, these are underdeveloped industries, craving funding.
To help the likes of Bulgaria and Romania even more, the EU has sought to incentivise new accession countries further. There is €30bn worth of EU funding available over the next seven years. However, this is only available to certain projects. Ms Matache confirms that many of the industries on the list are out of Romania’s reach. “We don’t have the expertise that, let’s say, the earliest 15 member states do,” she says. That is why Romania and Bulgaria have to keep their competitive advantages of lower wages and some skilled labour to pull in the necessary expertise from abroad.
The question remains of how Romania will balance the outflow of skilled labour with attracting multinationals and SMEs to its shores? If educated workers are leaving in search of better pay, it loses this attractive resource. Ms Matache says that fewer of them are leaving the country: “The incentives for going abroad have diminished drastically, and jobs that are advertised for work abroad are not being filled.”
To what extent this is the case is another matter, but it does seem that the Romanian government is at least attempting to keep its keenest minds in the country. “The government has increased public sector wages to bring them more in line with the EU average,” says Ms Matache. However, she confirms that public sector wages had a long way to go.
Ms Matache believes that the opportunities for her home country are endless. But, for her, the accession process is just beginning and the next 12 months will be a better gauge of how the EU accepts Romania and Bulgaria.
Priyan P Khakhar is a research and teaching associate at ESCP-EAP European School of Management and Zaki Abushal is a freelance journalist.