2018 will be an important year for the six Western Balkan states currently working towards EU membership. The region has seen strong economic growth in recent years, so much so that the European Commission recently praised Montenegro, Serbia, Macedonia, Albania, Bosnia and Herzegovina and Kosovo for their reform efforts they have enacted on the path to EU accession. However, the Balkan countries are still a long way off from meeting the economic standards required by the EU.
According to the World Bank’s Western Balkans Regular Economic Report, the Western Balkans’ GDP has grown by a compounded 2.6% in 2017. While this was 0.6% lower than initially projected and 0.3% lower than 2016, the World Bank expects growth to pick up in 2018 and 2019 thanks to recovering domestic consumption, rising private investment and higher exports. Another contributing factor is the EU’s intensified financial engagement with the region. Despite the fact that FDI and bank loans to the region began to flow a few years later than in the new EU member states, economic integration with the Balkans’ Western neighbours took off faster than expected.
Nonetheless, these developments cannot hide the fact that the region is still lagging far behind EU economies, at a GDP per capita more than two times lower than the EU average in December 2017. This is a problem if convergence with the EU is to be achieved anytime soon. Even if the growth rate registered in the Western Balkans between 1995 and 2015 is maintained, it will take 60 years for local income levels to match those of the EU. And although while the six countries increased their per capita income from 17% of Germany’s (1995) to 27% (2015), they still remain among the poorest countries in Europe.
However, the region’s recent delays and reversals in economic, legal and democratic reforms, coupled with high political volatility, will affect vital sources of capital such as FDI. Lack of accountability, corruption and inconsistent adherence to the rule of law, have not only slowed recovery from the 2008 financial crisis, and are preventing Western Balkan markets from performing at their full potential – they are also a driving factor behind the rising internal fragility. In turn, this will hinder EU membership talks and lock the Balkans into a consumption-, rather than private investment-driven, economy vital for attaining higher growth rates, lower unemployment, and increased productivity.
Beneath the Surface
The need to revitalise reforms is especially important for Montenegro and Serbia. Both have received the most attention since their notable progress was regularly praised by the EU. In the annual dialogue held in 2017 between EU officials and Western Balkan countries, the European Commission commended Serbia’s past economic growth and strong fiscal consolidation, as well as its growing financial stability. Montenegro has also received praise for being a high performer relative to the EU acquis
Yet, is has become abundantly clear that all that glitters is not gold: while on the surface economic conditions look favourable, a closer look reveals several major structural obstacles standing in the way of the two states’ long-term prospects, let alone EU membership.
For starters, ongoing Montenegrin corruption has sent investor confidence plummeting. Vested interests in the public and private sector continue to absorb public investments – a major driving factor behind the growing public debt (63.7% of GDP in 2016) and the persistently high unemployment (37%). As a result, FDI has declined from €573.4m to €312.7m throughout 2016, a significant decrease compared to star-year 2015. Even though the new Law on Prevention of Corruption was adopted in January 2016, little has been done to protect whistleblowers.
Furthermore, the country remains a hotbed for narcotics and organised crime. As of August 2017, there are 700 documented organised criminals active in the country, and gang violence has racked up a murder rate of 35.62 people per million in a country of under 680,000, including 12 gang murder cases in 2016. This not only throws the stability of the country into question, but also shifts focus on its former Prime Minister, Milo Djukanovic, who has seen his share of controversy.
Worse, the country’s gang violence is spilling over into Serbia, as the recent slaying of a Montenegrin mafia boss in Belgrade demonstrates. The fact that many of Montenegro’s crime figures often also possess Serbian citizenship suggests that they are receiving help from Serbian authorities in perpetuating their activities.
This adds to the high number of unresolved corruption scandals relating to gang crimes and public official abuse. In 2017, thousands of Serbians took to the streets to protest against corruption and clampdown on press freedom, after Aleksandar Vučić, Slobodan Milosevic’s former information minister, was elected President with 55% of the votes. The demonstrations are a stark reminder of the omnipresent threat of political instability, one that is exacerbated by the risk of state bankruptcy as a result of growing public debt.
As EU accession talks with Serbia and Montenegro, and the Western Balkans more generally, are moving forward, it becomes ever clearer that the path set for the region by the EU cannot produce change by itself. To this day, structural problems remain so debilitating to both Montenegro and Serbia’s that their GDPs are still behind their 1989 levels and at a third of EU member state average GDP.
Convergence could be sped up by structural reforms meant to encourage economic competitiveness in the region, particularly by attracting foreign investors to offset the predominance of state companies, as well as the unemployment legacy left by Yugoslavia.
Such policies could also help the Balkans return to their stellar economic growth from before the economic crisis. Between 2000 and 2008, WB6 were growing at a 5.6% average per year, faster than the world average. In fact, an annual growth rate of 5% would enable Western Balkans’ convergence with the EU forty years sooner. But in the absence of sweeping socio-economic reforms, however, the Western Balkans will only further their unfortunate legacy of violence and poverty for decades to come.
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