Stop Bulgaria's EU price hike hype

09:00 Mon 25 Dec 2006 - Metodi V. Metodiev

Researcher Finance and Macroeconomics Institute for Market Economy

Because of the particular Bulgarian mentality or simply because it is human nature to be suspicious, there has been a lot of speculation about what will happen to prices after Bulgaria’s EU accession on January 1 2007. We want to explain some crucial points about economic aspects of consumer prices after accession.

What is going on with prices after January 1 2007? The answer is nothing special!

The price impacts of accession will probably be only slight; in other words there will not be a dramatic price hike as some have claimed.

First, we shall have a look at what happened in the Czech Republic when it joined the EU, and then we shall set out accession’s effect on Bulgaria’s economy.

The Czech Republic experience
According to a Czech National Bank survey, there are a few key points determining the situation after EU accession. Tax harmonisation related to EU accession was implemented in 2004. In January, excise duties were raised on fuels, cigarettes, LPG, spirits and wine and some items were simultaneously moved from the lower to the basic VAT rate, with a direct impact on consumer prices of 0.1 percentage point. In May, the basic VAT rate was lowered from 22 per cent to 19 per cent and some items were moved from one of the VAT rates to the other; the total direct impact of this change amounted to about 0.2 percentage point. Overall, the direct effect of the tax adjustments was about one-third lower than originally assumed owing to a different-than-expected wording of the VAT Act.

The effects on food prices of the Czech Republic’s integration into the Common Agricultural Policy (CAP) had been expected to be very low. Larger price movements had been expected only for some items affected by changes in the market environment. The actual developments after EU accession essentially confirmed these assumptions. Higher growth in agricultural producer prices, and subsequently in food prices, was recorded primarily in the case of sugar beet and consumer prices of sugar and confectionery products. A further partial increase in agricultural producer prices because of the change in the market environment was recorded in particular for livestock production.

The Czech Republic’s joining the CAP caused changes to food prices, but did not affect the overall absolute level of these prices in the short term. There were no increases in the price of foodstuffs after the introduction of the Single Customs Policy of the European Union either. There are conflicting pressures on food prices because of the changes in customs and related legislation; but the overall direction and scale of the pressure this change can cause cannot be accurately predicted. Nevertheless, there are no fundamental aggregate impacts on consumer prices.

Prior to EU accession, the change in the customs system did not lead to a market change in import prices. The situation for many food items was subject to detailed analysis, but no factors were found suggesting that the change in the customs system would have any identifiable impacts on consumer prices in the Czech Republic.

What about the Bulgarian economy?
What we can see from what happened in the Czech Republic after it joined the EU in 2004, should also alleviate fears of a fundamental price shock. But an economy is a dynamic process. The main risks are associated with two unknowns that are beyond any accurate forecasts: oil prices and natural disasters. For example, one of the major causes of relatively high inflation was the floods and natural disasters that hit the country in 2005.

The following may be seen as the fundamental factors that could, in the short term after EU accession, lead to a major, one-off jump in consumer prices: harmonisation of taxes, integration of the Bulgaria into the CAP and the Single Customs Policy of the European Union:

(1) Harmonisation of the structure and rates of indirect taxes - for example, excises must meet minimum European requirements and so the prices of alcohol and cigarettes will increase. Furthermore, Bulgaria is to put excises on electricity and coal;

(2) The CAP - Imposing minimum purchase prices in line with CAP rules is the key factor influencing prices. On entry to the EU, prices of agricultural products can be expected to move in both directions; on one hand, some commodities (for example, milk) are expected to rise sharply in price, and on the other hand, for example, slaughterhouse pigs and certain types of poultry in particular should become cheaper. Overall, it is possible to estimate that entry to the EU should not have a major impact on prices of agricultural products in Bulgaria;

(3) Introduction of the EU single customs policy - As far as the movement of goods and services is concerned, prices will be affected by changes in customs tariffs and other circumstances (quotas, imports of subsidised goods) related to the introduction of the EU’s single customs policy. According to the Bulgarian Customs Agency, the average custom duties on import from non-EU25 countries will decrease from 11-12 per cent to six to seven per cent; for the industry commodities, from 8.67 per cent to 3.7 per cent; for agriculture commodities from 22.89 per cent to 16.5 per cent. Duty on imports from existing EU25 countries will be abolished. There will therefore be movements in both directions in the prices of foodstuffs or raw materials for foodstuffs production that are imported to the Bulgaria from EU countries. Bulgarian agricultural output will also find itself in competition with foodstuffs from other EU25 countries. Conversely, the abolition of duty on exports to existing EU states will strengthen Bulgarian producers’ position somewhat. The prices of agricultural products and foodstuffs imported to Bulgaria from third-party countries will rise for the most part (because of the increased customs protection in the EU).

Finally we can say that the evaluation of the overall effect of these conflicting changes associated with the new duty system, tax harmonisation and implementation of Common Agricultural Policy lead to the conclusion that no fundamental impact on consumer prices can be expected.

Comments

Comments by Anthony - 04:15 26 Dec 2006
	Im responding to the article claiming that joining the EU had very little impact on the cost of living in Prague. Im sure that the writer is very well educated. However, Im in a bit of a shock after reading the article. Prices went up considerably after joining the EU. Anyone on the street can tell you that from direct experience. Im not an economist, but I can tell you from real world price-checking, the cost of living went up. Im also wondering if the writer overlooked such things as increased taxes needed to implement various EU related standards. Im also wondering if the writer took into account such day-to-day realities such as the cost to resturants to bring their business up to EU code (and therefor passing that cost along). Im also wondering if the writer is taking into account the effect of relaxed borders: real estate in Prague jumped after EU integration. Im not expressing an opinion as to whether joining the EU is a good or bad idea. Im just stating my direct observation- and those of friends- that the cost of living did indeed rise significantly upon EU accension in Prague.
Comments by Philip Cruttwell - 17:05 02 Jan 2007
	I write as an Englishman living and working in Bulgaria and now married to a Bulgarian. It was of course reassuring to read the comments of your Economist, however Bulgarian should realize that the impact of EU accession will go much deeper than just possible price rises. With EU accession, believe me; every aspect of Bulgarian life will be subject to change. Willing or not, Bulgarian people must face up to new challenges for which I see little evidence that they are prepared. Who are the people thinking about the impact on the very fabric of Bulgarian life? No aspect of its social and economic activity will remain untouched by EU accession whose laws will invade every aspect of your lives, including your families and villages. The real wealth of Bulgaria This is my primary concern. Who will stand up for the Bulgarian villages and families that are of such vital importance for the health of the Bulgarian nation? According to economic statistics Bulgaria is one of the poorest nations in Europe, but this is to overlook the real wealth of Bulgaria that lies in its traditional values that are mostly to be found in village life. And the reality is that EU legislation looks to undermine some core rural activities such as keeping and slaughtering your own livestock. Under the guise of concern for public health, animals must be transported to remote abattoirs for slaughter – of course at great expense and of no benefit to the livestock, the consumer or the villager. You should look at the public health records for outbreaks of food poisoning in the UK – this really is a matter of concern. Who is notorious for Mad Cow disease and salmonella? The reality of global competition With EU accession, the fierce winds of competiton will open up the Bulgarian economy to intense global challenges that we are ill prepared for - international businesses think only how to increase profits and shareholder value. They have no longterm consideration for Bulgaria or indeed any other country. Right now Bulgaria is a tourist magnet thanks to low prices, but how loyal are the tourists and the investors when they soon find a cheaper destination? Shaping our own future Of course we can’t turn back the clock. In no way should we seek to preserve village life like some kind of “theme park” for the amusement of Bulgaria’s tourist industry. But we should be looking at how to strengthen and develop our local economic and social communities that serve people first, not the balance sheet. For this is where, in the long term, our true wealth is stored. Who is thinking about these issues that are so important? You can’t rely on the political parties – they have a different agenda. Now it’s time for people to stand up and start the hard but rewarding work of taking the future back into our own hands.
Comments by Jackie - 23:17 12 Jan 2007
	How can you say that price hike will be very low. it has already been announced in the papers that the price has risen by 30% in bulgarian supermarkets since they joined the EU, How on earth are the bulgarians supposed to live. It is like everything else to do with the EU join it and you will see prices rise dramaticly. Bulgaria was doing very well with the tourist trade but on saying that so was Portugal until they joined the EU. I know that because l went to Portugal and all the Portugese were complaining that it had been their quitest year for Tourist in years