EU slams Bulgaria on corruption

BRUSSELS (Reuters) - The European Commission issued ascathing indictment of corruption in Bulgaria on Wednesday,suspending aid worth hundreds of millions of euros (dollars)and barring two key payments agencies from receiving EU funds.

A report on the management of European Union funds by thelatest and poorest EU member said the fight against high-levelcorruption and organised crime was not producing results andthe Commission had to act to protect taxpayers' money.

"Therefore, the Commission has taken the decision today toformalise this suspension (of aid) and withdraw theaccreditation for two government agencies in charge of managingthese pre-accession funds," chief Commission spokesman JohannesLaitenberger told a news conference.

The two reports on Bulgaria -- one on funds and the otheron judicial reform -- were the harshest criticism ever levelledby Brussels at a member state. A report on fellow newcomerRomania, which also joined in January 2007, pointed topolitical and judicial obstruction of corruption trials butavoided sanctions.

Commission President Jose Manuel Barroso called them "areality check -- they show that both the Bulgarian and Romaniangovernments need to step up their efforts on judicial reform,corruption and in the case of Bulgaria organised crime".

Analysts said the Commission was trying to set an exampleto other Balkan candidate countries and to reassure votersdisenchanted with the 27-nation bloc's eastward enlargement.

"Reform of the judiciary and law enforcement structures isnecessary and long overdue," the Commission said.

But the EU executive softened the blow at the last minuteby toning down the tougher wording of earlier drafts andomitting a threat to delay Bulgaria's entry into the eurosingle currency zone and the Schengen area of passport-freetravel.

And the reports were presented to the media by low-profilespokesmen rather than Barroso or another political figure.

"MORAL DAMAGES"

Laitenberger gave no overall figure for the suspendedfunds, but Commission spokesmanark Gray cited amounts that addup to 486 million euros (383 million pounds).

Those funds are mainly for the PHARE technical assistanceprogramme for acceding countries, the ISPA road-building schemeand the SAPARD agricultural marketing plan.

In the case of PHARE, unless the payments agencies arereformed sufficiently and recover their accreditation by theend of November, 556 million euros will be lost definitively,officials said.

Neil Shearing, an economist at London-based consultancyCapital Economics, said any decision to punish Bulgaria bywithholding EU funds would hit the Balkan economy hard and deala blow to investor confidence.

"If the EU were to hold back fiscal transfers scheduled fornext year, the likely drop in infrastructure investment alonecould cut GDP growth by 1 percent," he wrote.

Bulgaria is due to receive some 11 billion euros in farmsubsidies and regional development aid in the 2007-2013 budgetperiod but has received little so far.

The EU report did credit Prime Minister Sergei Stanishev'sgovernment with progress in setting up a national securityagency to fight corruption and organised crime, and closingduty-free shops and petrol stations that were a focus of crime.

However, Bulgaria's rightist opposition asked parliament tohold a vote of no-confidence against the Socialist-ledgovernment, accusing it of failure to stop fraud with EU funds.

The vote, the sixth against the government, is unlikely totopple the three-party coalition which has an overwhelmingmajority in parliament, but could further dent its erodingpopularity ahead of 2009 elections, commentators said.

"The government has caused material and moral damages toBulgaria and its citizens because of loss of money from theEuropean funds," the no-confidence motion said.

Some opposition parties threatened to boycott parliament'swork if the government survives the no-confidence vote,expected to take place in the chamber next week.

Conservative members of the European Parliament applaudedthe decision to block some EU funds for Bulgaria.

German Christian Democrat Elmar Brok said the situation haddeteriorated in both Romania and Bulgaria since they joined the27-nation bloc and this was "the only way to ensure thecredibility of the EU enlargement process".

(additional reporting by Darren Ennis and Marcin Grajewskiin Brussels and Anna Mudeva in Sofia; editing by GilesElgood)