Cablegate: Economic Snapshot of Eu Enlargement for Uk

DE RUEHLO #1991/01 1431442
P 231442Z MAY 07




E.O. 12958: N/A


1. Since Romania and Bulgaria formally joined the European
Union (EU) on January 1, 2007, we have witnessed increased
reference to economic activity between the UK and the new
member states, ranging from high level visits to various UK
contacts indicating they have purchased vacation property in
the region. A closer look at trade and investment flows
indicates the change in the economic relationship started
back in 1999 when the EU agreed to begin accession
negotiations with both countries. The anticipated economic
reforms leading up to EU membership created an attractive
market for UK trade and investment. Anecdotal evidence
appears to indicate that formal accession on January 1 has
not had a similar impact on the UK economy, although it is
still early in the process.

2. British companies are already among the leaders in
foreign direct investment in both countries, and UK trade
with each country, while still relatively small, has grown
significantly since 1999. Bulgaria, in particular, has moved
to enhance ties with the UK in 2007, including a visit by
Prime Minister Stanishev to London and a visit of the UK's
Deputy Prime Minister Prescott to Bucharest; while His Royal
Highness (HRH) Prince Charles has helped highlight British
investment in real estate in Romania. Further UK ties with
Romania and Bulgaria have been enhanced by visa free travel,
partner city arrangements, and UK bilateral assistance aimed
at supporting EU integration. We are yet to see whether the
increased activity will bear economic fruit for the UK. This
cable is only a snapshot of economic activity and does not
reflect a comprehensive report on the economic costs and
benefits of enlargement.


3. UK trade (exports plus imports) with Romania and Bulgaria
grew by almost 200 percent from 1999 to 2006. In comparison,
UK trade with the other 25 EU member states increased by 63
percent during the same period. Trade with
Romania increased by almost GBP 1 billion since 1999 to GBP
1.473 billion (USD 2.8 billion) in 2006. Most of the growth
in UK-Romanian trade took place from 1999 to 2004, averaging
23 percent per year. Trade in 2005 and 2006 slowed
significantly to only 2.7 percent per year and has continued
at this lower rate during the first two months of 2007.
According to Romanian Embassy officials, much of the
increased trade activity leading up to EU accession calmed
down after the end of EU negotiations in December 2004.
Overall, the UK has a growing trade deficit with Romania as
exports remain stable and imports, primarily textile and
electrical parts, continue to grow.

4. From 1999 to 2006, UK trade with Bulgaria increased at a
similar rate per year (16.8 percent) to that with the much
larger Romania (16.9 percent). However, Bulgaria has avoided
Romania's recent slowdown with increases of 27.5 percent in
2005 and 10.8 percent in 2006. The UK has a small trade
surplus with Bulgaria, led by British exports of machinery,
medicinal and pharmaceutical products, and telecommunications
equipment. While still small, UK trade with Bulgaria nearly
doubled as a proportion of UK trade with the entire EU from
1999 (0.07 percent) to 2006 (0.13 percent). Despite the
impressive growth, combined UK trade with Bulgaria and
Romania remains well below 1 percent of UK trade with the
expanded 27 member European Union.


5. UK investment in Romania to date is dominated by large
infrastructure, financial services, and privatization
projects, highlighted by Vodafone's acquisition of the mobile
network operator Connex in 2005 for 2.5 million euro in the
biggest deal in Romanian history. Large UK retailers have
invested in small and medium sized enterprises (SMEs) for
textile manufacturing, but UK businesses have otherwise
lagged behind other European countries in regards to linking
with Romanian SMEs. One area that has increased sharply
since EU accession, according to Romanian Embassy officials
in London, is UK investment in both commercial and
residential real estate. Our contact passed some credit for
the recent increased interest in Romania to HRH Prince
Charles who purchased a house in Transylvania at the end of
2006 and is the royal patron to a trust set up to restore the
cultural heritage of the area's Saxon villages. Our Romanian
contact also cited a few recent examples of British firms
their call centers from India to take advantage of the many
European languages spoken in Romania.

6. The UK was the third largest foreign investor in Bulgaria
in 2005, and more than doubled that investment in the first
nine months of 2006. UK investment is focused on the oil and

LONDON 00001991 002 OF 002

gas sector, real estate, and property development. Since
joining the EU, Bulgarian officials and businesses have
flooded the UK with forums, seminars and speeches aimed at
encouraging more foreign direct investment. Prime Minister
Stanishev touted Bulgaria's economic growth and reunification
with Europe in speeches at a prominent London university and
a well-attended investment seminar at the European Bank for
Reconstruction and Development (EBRD). At the EBRD event,
Minister of Economy and Energy Ovcharov pointed investors
towards the energy, transport, infrastructure, and tourism
sectors. The EBRD and risk management consultants praised
Bulgaria's macroeconomic stability and new, low corporate tax
rate, but also warned UK businesses that political, legal and
administrative challenges remain.

7. For both Romania and Bulgaria, the investment seems to
flow in one direction. There is little evidence that
Romanian or Bulgarian investors have targeted the high-priced
UK market. This investment may also be constrained by the UK
opting for the first time to restrict working permits for
citizens of the newest EU member states.


8. Bulgaria Prime Minister Sergey Stanishev told students
and journalists at the London School of Economics and
Political Science (LSE) on February 8, 2007 that
reunification with a "free, democratic and prosperous" Europe
through joining the EU represented the final fall of the
Berlin Wall for Bulgaria. He said the difference is tangible
for Bulgarians in that just seven years ago they had to wait
in long queues for visas to travel to other European
countries. Upon entry into the EU on January 1, 2007,
Bulgarians (and Romanians) can now travel visa free to every
member state, including the UK (although restrictions remain
on work permits in the UK). In the case of Romania, EU
accession has also revived partner city campaigns, including
enhanced bilateral investment and tourism between Leeds, the
third largest city in the UK, and Brasov in Romania.

9. The UK also provides bilateral assistance to Romania and
Bulgaria through the Foreign and Commonwealth Office's Global
Opportunities Fund (GOF). The GOF's Reuniting Europe Program
is scheduled this year to award GBP 650,000 (USD 1.3 million)
and GBP 500,000 (USD 1 million) towards projects in Romania
and Bulgaria, respectively. The Reuniting Europe Program
focuses on promoting transparency and accountability and
building administrative capacity for EU integration. In
2006/2007, the emphasis of GOF projects in both countries was
on justice and home affairs, regional economic development,
administrative capacity and creation of a pro-business

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