The threat of not being able to master the money from EU structural and cohesion funds and from agricultural subsidies is one of the most discussed issues of the day in Bulgaria.

Although Bulgaria joined the EU on January 1 2007, EU funding programmes, as well as the application process, have not started functioning yet.

But in the first two months, the state made its mandatory contribution to the EU budget, to the amount of 146.6 million leva.

According to its treaty obligations to the EU, Bulgaria should contribute 1.2 per cent of its annual GDP to the EU budget, and the amount for 2007 is expected to exceed 640 million leva.

In exchange for these payments, the state receives a share of the EU budget in the form of subsidies and gratuitous relief funds. The subsidies and relief funds amount to the large sum of 4.6 billion leva for the period 2007-2009, allocated to agriculture (1.5 billion euro), restructuring policies - building of infrastructure, competition between firms and regional development (2.3 billion euro) and domestic policies, improvement of administration and budget compensation (730 million euro).

Bulgaria's Finance Ministry has published data on the financial implementation of the pre-accession programs in Bulgaria toward the end of March 2007. The data might be an initial indication of future assimilation of the instruments of structural funds and financial resources, provided for the implementation of the Common Agricultural Policy (CAP), although these funds, in only three years, represent more than double the budget of the pre-accession programmes.

The data shows that the implementation of SAPARD programme (which finances the agriculture and food, wine, and tobacco industries) is 95 per cent, while the implementation of the PHARE programme is 64 per cent and of the ISPA program (which finances infrastructural projects at national level) is 43 per cent. As ISPA has the biggest share in the aggregate amount of the resources provided from pre-accession programmes, assimilation at the beginning of 2007 represents on average about 60 per cent of the total amount of the funds. The situation in Romania is similar. The implementation of the SAPARD programme is more than 95 per cent, and of the ISPA programme is about 35 per cent. This indicates that in these two countries there is a lack of willingness for managing big infrastructural projects, as this reluctance is often prompted by political reasons or insufficient financial and management capacity of local authorities to implement infrastructural projects.

The leader in the assimilation of the EU funds among eight of the newly-accepted EU member-states is Slovenia, which in October 2006 agreed upon 43 per cent of the budget, provided for subsidies and relief funds for the period. In second place was Estonia with 39 per cent, followed by Hungary: 31 per cent of the resources provided by the agreement. The last places in the "assimilation contest" were taken by the Czech Republic, Slovakia, and Poland which have agreed upon about 15 per cent of the common budget of the EU funds provided by the financial agreements of these countries with the EU. It is evident that in all these member states, the assimilation process of the funds in the beginning of their membership is relatively low.

As a whole, the net effect from the EU membership over the budget is negative because of the obligation to co-finance EU-funded projects from state budgets, the advanced financing of the approved projects, the countries' contributions to the EU, and the costs of sustaining a larger administration as a result of administering the subsidies and transfers.

Some widespread myths about EU funds:

· 1) EU Funds must be 100 per cent assimilated:

Bulgaria is the country for which the biggest amount of subsidies and relief from structural and cohesion funds as a percentage of GDP has been agreed on.

The fear that Bulgaria would not be able to take full advantage of this "privilege" and assimilate all the money is one of the leading criticisms against both politicians and business circles in the country.

In reality however, the assimilation of funds depends not only on administrative capacity, but also on the macroeconomic capacity of the country to carry out projects in exchange for the money.

The distribution of funds in various sectors depends on the re-assigned, centrally prepared tasks and priorities.

The real needs of the economy may be differentiated from the guaranteed spheres of financing.

The desire to assimilate all resources at any cost in this case will lead to big distortions in the economy, changes in the relative prices of goods and services, pro-inflation pressures, and to implementation of projects that later on appear to be unprofitable.

The interventions distort the behavior of entrepreneurs. Instead of striving to increase their output, some firms will make more profit if they design projects with which to apply for EU funding. However, the logic of the market is exactly the opposite: an entrepreneur conceives a business idea and then looks for ways to finance it.

The market functions on the principle of natural selection and projects that have the biggest potential to become profitable, are financed. The investment of own resources is an incentive for entrepreneurs and investors in order to correctly evaluate projects and to aim at making a minimal number of mistakes in their evaluations. This is not applicable to officials who operate with somebody else's, not their own, money.

· 2) Control in the EU over the spending of resources from EU funds is more reliable and misappropriations are fewer:

The mechanism of distributing subsidies and relief funds involves large transaction costs and clumsy administrative structures. The aggregate amount of resources from EU funds to be distributed among the 27 EU member states in 2007 is about 100 billion euro.

Everywhere in the world, concentration of excessive power and discretion in the hands of public organs creates pre-conditions for corruption, rent-seeking, and lobbying for the interests of certain groups. Scandals and disclosures of abuses of EU funds are an inseparable part of the EU existence and are not characteristic only of Bulgaria and Romania, or Eastern European countries as a whole, but also of countries of "Old Europe" like Greece and Italy. It is indicative that already 12 years in a row the European Chamber of Accounts has not certified the EU budget, because of omissions and suspected abuses, and of "mistakes in the legality and regularity" of reporting the common funds.

· 3) Poor regions may achieve more substantial economic growth through receiving money, without making any effort.

Prosperity and long-term economic growth can come only from an increase in labour productivity and an increase of investment and capital in the economy, but not as a result of the artificial increase of money aggregation in the economy.

Some studies have appeared that prove that the attraction of technological innovations in regions with an untrained labour force, insufficient resources, and inappropriate conditions for the development of high-technological business may lead to more costs for people than potential benefits.

On the other hand, subsidies create a culture of dependence and do not stimulate innovations and an enterprising spirit among market players.

For example, subsidies are the reason for making short-sighted decisions and sustaining unprofitable and losing productions.

Community policy on banana production stimulates European producers in France and Spain to increase output, although their costs are many times higher than the costs of Latin American producers.

In the long run, without relying on EU officials for support, these producers will go bankrupt.

The conclusion is that EU funds will not solve Bulgaria's inherent problems related to low incomes and unsatisfactory quality of services in some public spheres like education and health care.

To improve the well-being of people, real economic reforms and maintaining a favourable institutional and political environment are necessary too.