After a year and a half of European Union membership, Bulgaria is undergoing a reality check. While the country is enjoying strong economic growth, there is growing popular frustration over a wide gap with "old" Europe in standards of living and social protection.
Consumer protests against fuel prices have so far been muted in Bulgaria. But planned increases in the cost of basic utilities and public transport could spark discontent on a larger scale.
Yet the global credit squeeze has had only a moderate impact.
Economic growth, projected at 5 per cent for 2008, remains among the highest in the European Union. The stock market has been hardest hit - although the sharp fall in prices has encouraged Bulgaria's largest companies to consider offerings on leading international stock exchanges.
Strong credit growth, at about 55 per cent last year, underlines the strength of Bulgaria's recovery from the economic collapse of the 1990s. A modest decline in growth rates may even prove healthier and prevent overheating in certain sectors.
But there is a sense of lost direction in the wake of EU accession.
While the ratio of state foreign debt to gross domestic product has dwindled to 15 per cent, foreign private debt has surged along with levels of household indebtedness. Although the debt to GDP ratio is well below the EU average, volatile global markets leave no room for complacency, given Bulgaria's high current account deficit and further debt growth in sight.
Rigid fiscal policies have yielded unprecedented budget surpluses of as much as 5 per cent of GDP. But there is a growing need for long-term budget planning, transparent budget allocation procedures and full convergence of monetary and fiscal policies.
Adoption of the euro has been postponed until 2014-2015 - although, technically, inflation is the only Maastricht criterion that Bulgaria has failed to achieve. But new member-states such as Bulgaria, with currency board regimes, need clear guidance from the European Central Bank. Different speeds of convergence of monetary, financial and economic systems make integration harder for new member-states.
The tough talk from Brussels should assist reformers in Sofia to put an end to old dependencies and corrupt practices. This will make it possible to start drawing down transfers from the EU cohesion and structural funds - projected to reach about 6 per cent of annual public spending until 2013.
Disbursement of EU funds will help kick-start key infrastructure projects, while close monitoring will have an impact on the reform process. But the current delay in disbursement means that Bulgaria is likely to remain a net financial contributor to the EU budget in 2008.
Bridging the gap with the rest of the EU is proving an elusive target. Technology-intensive, food sufficient and high value-added economies actually gain in competitiveness with upswings in key strategic commodities. But the Bulgarian added-value chain is too short at present to absorb a global shock.
Traditional growth engines are showing signs of fatigue. Tourism still heals trade deficits, but outbound tourism spending is quickly eroding its effect. Real estate continues to attract the bulk of inward foreign investment.
A lack of sophisticated and diverse product and service markets, a shortage of both skilled and unskilled labour and more demanding debt markets have dimmed some of Bulgaria's original lustre as an investment destination. However, the appeal of the Bulgarian property and construction markets will remain strong in the medium and longer term.
Negative demographic trends paint a bleak picture: the workforce is projected to shrink by 50 per cent by 2050. A lack of effective immigration policies, low wages, poor internal labour mobility and a cumbersome administration reduce Bulgaria's appeal as a destination for job seekers. The government needs to take urgent action to address these issues.
The skills deficit mainly affects the public administration as wage differences between the public and private sector widen, making it almost impossible to build administrative capacity to cope with an overloaded integration agenda. Outsourcing and public- private partnerships may offer a solution.
Bulgaria has a comparative edge in sectors that are critical for the global economy - energy transit, food processing and agriculture.
Moreover, Europe's best hope for diversification of its natural gas supply lies in the routes accessing Caspian and Middle East sources. It does not make sense to explore the option of importing gas from Yamal in Siberia, which will be hard to access, while overlooking gas-rich Qatar, which is the same distance. Bulgaria, and more generally south-east Europe, are bound to play a key role in the EU's energy security plans.
Bulgaria has one of the lowest rates of taxation of assets and income. This offers an incentive for more local companies to come out in the open.
Another indicator of normal economic conditions is that the dynamism of the economy is largely independent of the political cycle. But a genuine reform effort and clear leadership are needed if EU membership is to deliver the positive effect most Bulgarians expect.