VZCZCXRO4223
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHLO #1991/01 1431442
ZNR UUUUU ZZH
P 231442Z MAY 07
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC PRIORITY 3630
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY

UNCLAS SECTION 01 OF 02 LONDON 001991 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON PREL EU UK
SUBJECT: ECONOMIC SNAPSHOT OF EU ENLARGEMENT FOR UK 
 
 
SUMMARY AND COMMENT 
 
¶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. 
 
INCREASED TRADE FLOWS 
 
¶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. 
 
ONE WAY INVESTMENT 
 
¶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 
relocating 
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. 
 
FURTHER TIES 
 
¶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 
environment. 
 
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