The Greek Economic Crisis and Its Effects on Serbia

Südosteuropa 58 (2010), H. 4, S. 612-619

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GORAN CETINIć

Abstract. Two crises of different nature have recently dominated the Serbian economy: the global economic recession of 2008-2009 and the Greek crisis of 2010. Both crises overshadowed, at least in the public discourse, the country’s own very serious long-term economic crisis. Serbia’s economy, along with the Ukrainian one, ranks as one of the worst in the ex-socialist countries of Europe. Whereas the world crisis seriously affected the already badly damaged Serbian economy and society, the Greek crisis produced more modest consequences.

Goran Cetinić is an independent economic consultant and analyst for research agencies and international entities such as the World Bank, the UN Industrial Development Organization, and USAID. He is based in Belgrade.

The Greek Economic Crisis – Basic Facts

The strong economic growth performance of Greece (close to 4 % per year vs. 2 % annually in the Eurozone) in the last decade was based on unsustainable factors. The driving forces of this growth were: a domestic demand boom, in particular in consumption and residential investment; high real wage increases that consistently outpaced productivity gains; and rapid credit growth, sup- ported by a liberalization of the financial sector, low real interest rates, and a loose fiscal policy. At the same time, exports as a proportion of the gross domestic product (GDP) decreased from 25 to 19 percent between 2000 and 2009, weakening Greece’s international competitiveness. As a result, external imbal- ances quickly increased. Economic results routinely fell short of fiscal targets due to systematic overspending, habitual tax evasion, and overoptimistic tax projections. In April 2010, Greek authorities officially asked for financial assistance. On May 26, 2010, after a short but heated political debate, the European Union, in cooperation with the International Monetary Fund (IMF) and the European Central Bank (ECB), produced the “Economic Adjustment Program for Greece”. Greece agreed to implement budget cuts of 30 billion euros, at which point it Serbia 613 will receive a 120 billion euro, three-year bailout loan from the Eurozone and the IMF. In the longer run, Greece is expected to reduce its budget deficit to the EU target of 3 per cent by 2014.1 These austerity plans triggered expected protests, which were well-covered by the global media; nationwide, Greek workers expressed strong resistance, with strikes closing down airports, government offices, courts, and schools. The weight of the measures, critics say, falls on low-income earners, which is said to be the main reason why they provoked such massive protests.

Serbia as a Specific Case – Basic Facts

The Serbian economic and social crisis has little to do with the 2008-2009 global recessions, and even less to do with the 2010 Greek crisis. The Serbian economic crisis’ specific characteristic is its endurance: It started in 1990 with the wars and the collapse of socialist Yugoslavia, but the driving force was applied in 1993, when Serbia experienced one of the worst periods of hyperinflation in history. Since then, the country has not managed to overcome its economic crisis, and along with Ukraine it is one of the rare ex-socialist European countries that has yet not reached the level of development it enjoyed 20 years ago. In 2009, Serbia’s real GDP was about 30 % lower than in 1989. According to Eurostat and CIA World Factbook sources, its public debt in 2008 was 37 % of the GDP; the UNI Credit Group estimated its foreign debt at 65 % of its GDP in the same year. In the decade and a half between 1993 and 2008, Foreign Direct Investment (FDI) inflow into Serbia was only 13 billion euros, one third of that in Bulgaria and also less than in Croatia, where it was 21 billion. Per capita this amounts to 1,700 euros, as compared to 4,500 euros in Bulgaria and 4,700 in Croatia. In 2008, Serbia’s exports comprised only 17 % of its GDP and were thus the lowest of all European ex-socialist countries (Bulgaria 35 %, Slovakia 71 %). The unemployment rate jumped from an already high 24 % of the work force in 1995 to 31 % in 2008.2 The drama of the long-term Serbian crisis is illustrated by the following graph:

1 A monitoring mission of the EU, IMF and ECB visited Greece to evaluate the implementation of these draconian measures and assessed the situation positively. Equally constructive is the Greek government’s requirement that the commercial banks boost lending to businesses and households in return for access to a new, 25-billion-euro liquidity package. Greece’s big- gest lenders agreed to participate. The Economic Adjustment Program For Greece, European Commission Directorate-General for Economic and Financial Affairs, Occasional Papers no. 61, 26 May 2010; cf. Completing Plan B for Greece Will Take a Few Glasses of Ouzo, Financial Times, 29 May, 2010; Greek Lenders Set for More Pain, ibid. 2 Wiener Institut für Internationale Wirtschaftsvergleiche (WIIW), Database on Serbia, available at ; European Bank for Reconstruction and Development (EBRD), Recovery and Reform. Transition Report. 614 Goran Cetinić

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100

0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Figure 1. Indexes of industrial production in Serbia 1990-2009. Source: Republički zavod za štatistiku, Indeksi industrijske proizvodnje [Indexes of industrial production], March 2010. 1990 = 100.

All data show that the Serbian economy has been stagnating for almost 20 years, which makes it a unique case in Europe. The two decades have to be qualitatively distinguished, however. During the first period, Serbia waged several wars and suffered from hyperinflation, sanctions, and other non-regular economic events. After the shift to democracy in 2000, in spite of an influx of more than 70 billion U.S. dollars (USD) through net borrowing, net transfers, and FDI, the GDP grew only minimally. Today, the country, “junkie-like”, de- pends on foreign capital inflow to sustain the economy.3 In this manner, Serbia is comparable to the Greek case. Serbia possesses a similar potential for financial collapse, not because it has been adversely affected by either the Greek or world economic crises, but because both Serbia and Greece treated public spending as a limitless source for the fulfillment of unreasonable ambitions. Recent data corroborate such a prediction: Inflation is threatening to grow out of control, reaching 10 % in the first eleven months of 2010. By the end of 2010, Serbia, together with Ukraine, had the highest inflation rate in Europe. The current account deficit is projected at 2.5 billion euros, or around 8 % of the GDP, which is less than in the pre-crisis period, when it reached 18 % of the GDP. The dramatic diminution of capital inflow created huge problems regard- ing the financing of the deficit. As a consequence, foreign exchange reserves are falling rapidly, with the dinar exchange rate deteriorating. Unemployment is

October 2010, available at . All websites were accessed on 8 February, 2011. 3 Mlađen Kovačević, Srpska kriza nije ni grčka ni svetska, ona je samo naša, Novi Standard, 21 May 2010, available at . Serbia 615 still growing, but since the second half of 2010 this growth has slowed its pace. The number of people living beneath the poverty line has risen from 6.1 % in 2008 to 8.8 % in 2010. As a positive trend in Serbia in 2010, exports grew by 8 % in the first eight months of 2010. Yet, it must be noted that in 2009 the export rate dropped around 20 %. By the end of October 2010, Serbia’s public debt was over 38 % of its GDP and indicates further large increase. This development has a strong impact on foreign debt, which equals approximately 80 % of the GDP. The rapid growth of public debt has had a negative influence on the country’s credit rating, ensuring rising interest rates on foreign loans. The Emerging Markets Bond Index (EMBI) for Serbia is twice the average for European transitional countries.4 In November 2010, Transparency International noted that corruption is and will remain the greatest obstacle on the Serbian road to the European Union.5

Economic Interactions between the Two Countries

Greece began to increase economic and political activities in the Western Balkans in the post-1989 era, when Greek investment began to enter the region. Greece’s big food producers, small food retailers, clothing and textile producers targeted Bulgaria, Macedonia and Albania. Major investments in the construc- tion, telecommunications and energy sectors of Romania, Bulgaria, Serbia, Macedonia, Kosovo and Albania have followed. Over the last 15 years, Greek banks have become involved in the banking systems of the Balkan countries. By 2007, seven major Greek banks had established a network of roughly 20 subsidiaries in the region with around 1,900 branches, employing approximately 23,500 people. Greek money lending is concentrated mainly in Romania and Bulgaria, but as a major investor in the region since 1989 it is the second largest lender in Serbia as well. Greece is also a donor and host to several hundred thousand economic migrants from the region, particularly from Albania. After strengthening its economic ties with the Balkan countries in this way, Greece became an important foreign trade partner to several of them. Greece began to promote the integration of the Western Balkans into the Euro- pean Union due to its geographic proximity to and economic relationships with the region. In 2002, Greece launched a massive development initiative known as the “Hellenic Plan for the Economic Reconstruction of the Balkans” (HiPERB),

4 Foundation for the Advancement of Economics (FREN) (ed.), Quarterly Monitor of Economic Trends and Policies in Serbia. Belgrade 2010, available at . 5 Transparency International: Korupcija u Srbiji problem za EU, seebiz.eu, 23 October 2010, available at . 616 Goran Cetinić which so far has allocated 163.4 million euros worth of aid to improve public infrastructure and to organize community projects in seven Balkan states. This plan was part of Greece’s strategy for boosting the Western Balkans’ European aspirations, which gained momentum after the Greek EU presidency in 2003.6 In Serbia, there are about 80 Greek companies active on the market and around 150 have cooperative ties with Serbian enterprises. The most important economic ties between the two countries are in the banking sector. In Serbia, Greek banks control 15-16 % of the assets. As for the FDI, which in Serbia decreased by 60 % in 2009, the Greek share still stood at around 46 million euros, hence as high as the year before. Back in 2007, Greek investments were much higher – 336 million euros. According to the National Bank of Serbia, the cumu- lative value of Greek investment in Serbia is 2.2 billion euros, mainly in hotels, trade, infrastructure, agriculture and the food-processing industry. Greek firms were also active in the privatization of Serbian state-owned companies. These data illustrate that Greece was one of the largest foreign investors in Serbia. As an export market, Greece is not very important for Serbia. In 2009, Serbian exports to Greece amounted to 156 million USD, and imports reached 214 million USD. Roughly 30 % of trade in both directions was in foodstuffs, mainly fruits and vegetables. Since there are not many workers from Serbia in Greece, the Greek crisis did not affect remittances to Serbia as significantly as those to other countries, especially Albania.

To What Extent Did and Could Serbia Suffer from the Greek Crisis?

In the banking sector, although Greek banks are important players in the Serbian market, there is little chance that they would actually withdraw their resources, even if the head offices in Greece should call for such a move due to capital shortages. The Greek banks in Serbia are part of the Serbian banking system, and as long as they can work profitably on the Serbian market they will see no reason to curtail their activities. As Thomas Mirow, president of the EBRD pointed out, Greek bank subsidiaries in the Balkans have behaved well so far. He said that the EBRD “is in talks with the International Monetary Fund to identify ways to protect the rest of Southeast Europe from any spill-over from Greece, for instance by providing Greek bank subsidiaries with capital and liquidity.”7

6 Ministry of Foreign Affairs, Greece in the World: HiPERB, available at . 7 Southeast Europe Vulnerable to Greek Contagion, BBC News, 6 May 2010, available at . Cf. Will Bartlett / Vassilis Monastiri- otis (eds.), South East Europe after the Economic Crisis: a New Dawn or Back to Business as Usual?. London, November 2010. Serbia 617

The conclusion is clear: Serbia does not need to worry that the Greek crisis will endanger the 16 % of Greek-owned banks in its banking system. With regard to Serbia’s export enterprises, it certainly could expect a contrac- tion of Greek import demand after the implementation of the EU measures. The announced cuts to public employees’ salaries, along with the two-percent increase in the value added tax almost certainly will result in lower consumption and hence lower import demand. Because Serbia exports mainly fruits, vegetables, and other food products, exports possibly will contract. Yet Serbian exports to Greece have always been very low, which means that the overall effect on the Serbian economic or social situation would be marginal. In recent years, exports from Serbia to Greece comprised approximately 2 % of total Serbian exports, while import of goods from Greece equalled 1.5 % of total Serbian imports. More serious consequences would result if Greece cancelled planned investments in Serbia (and the Balkans more generally). The crisis will most likely force Greece to renounce or at least postpone some of the announced projects. Serbia most urgently needs Greek support in the completion of Corridor 10, the road system that would connect Austria and Hungary with Bulgaria and Greece, crossing Slovenia, Croatia, Macedonia, and Serbia. An overall dimin- ishing trend of Greek investments in the Balkan region is to be expected over the next several years. In the mentioned Greek plan HiPERB, 79 % of the total budget is devoted to the public sector; it includes projects, actions, studies, and activities officially proposed by the governments of the recipient countries. The total available sum for the implementation of public investments/projects in all of the recipient countries was 421.8 million euros. As less than half of this sum was engaged before the Greek crisis, it remains to be seen how this project will proceed, but it is highly probable that it will slow down. Because Corridor 10 is an important infrastructural project for Serbia, its economy would be negatively affected by such a development.8

Similarities and Differences

Public Spending

There are several similarities between the Serbian and Greek cases. The strongest similarities are to be found in the area of cultural paradigms, i. e., concepts, values, and practices that constitute a common way of viewing real- ity. This comparison appears particularly apt when comparing the common

8 Joint Works on Corridor 10 to Strengthen Greek Ties, New Europe, 30 March 2009, available at ; Serbia: Works on Bujanovac-Vran- je Corridor 10 Section to Begin Soon – Most Likely Be Completed by Mid-2012, Balkans. com – Business News, 14 December 2010, available at . 618 Goran Cetinić attitude toward limitless and shameless public spending. In earlier times, state financing had been supervised by authorities that prevented both the ignorant expenditure of the public budget and non-justifiable spillovers of budget funds into private consumption. In the last few decades, public spending had been progressively manipulated by political parties, which used taxpayer money to attract voters. This represents a worldwide and not specifically Balkan trend. The misuse of budget capital under political pressure has become the rule rather than an exception. The Greek example is particularly instructive. The wage bills of the Greek government increased by almost 100 % between 2000 and 2008, comprising 11.4 % of the GDP in 2008. Over the same period, the nominal GDP increased by only 74 %. The public wage bill continued to increase by 7.5 % in 2009, to constitute 12.4 % of the GDP. Serbia, however, surpasses Greece on this measure. In Serbia, from 2005 to 2008 the wage bills of the general government increased by 110 %; i. e. they more than doubled in a period of economic stagnation. This unreasonable and dangerous move was prompted exclusively by pre-election fears of the politicians in power. Thus, Serbian politicians matched the profligacy of the Greek government, which had taken nine years to double wage expenditures, within four years. The pre-election growth of salaries in Serbia, especially in the period from May 2006 to May 2007, included a 20 % jump in the manufacturing industry, 42 % in the social and health sector, and 55 % in the insurance sector.9 Behind such populist moves lies a long-term attitude of irresponsibility towards public obligations and a betrayal of public and taxpayer interests. In Serbia, such habits proliferated in the last twenty years, undermining public finance and providing for the long-term stagnation of the economy. As a matter of fact, spending state money for private purposes is not a new phenomenon. Both Greek and Serbian politicians have used forged or non- transparent data to allow for uncontrolled public spending. Perhaps the Greek and Serbian politicians should heed the independent state of Dubrovnik’s initiative: In the 16th century, a carved stone stood above the entrance to the senate room that read: Obliti privatorum publica curate – “Forget about the private; care for the public”.

Non-transparency

Greece’s forgery of statistical data to maintain the inflow of EU funding is a unique case, however. In Serbia, the lack of transparency in public institutions, in spite of efforts of different civic institutions to improve such practices, lies at the root of the problematic data. Budget expenditures are particularly opaque.

9 International Monetary Fund, Serbia’s Unsustainable Wage Increase – Who Will Pay? September 2007. Serbia 619

Budget data is not only inaccurate, but it is misused. In September 2010, a State Secretary at the Serbian Ministry of Finance officially announced that Serbia was about to overcome its economic crisis. The argument behind such a claim was that statistics showed that Serbia recorded a BDP growth of 1.5 %, is spite of the fact that the BDP had experienced a huge decline in the previous year. Quite often, similar government announcements promise future economic improvements, such as rising rates of employment and improved living standards. The long term data clearly deny any such optimism, as improvements cannot be attained without serious reform in the economic sector. As yet, such reforms have not been announced.

Long-term Absence of Development

The third strong similarity between the two countries’ economic practices is forced consumption and the account of real economic growth. Any stagnation in industrial production and export numbers has serious long-term consequences for their socioeconomic development. The latest appeal of the Greek government to invest in economic enterprises is a sign that some (economic) wisdom is being exercised. Serbia needs to realize that with a further drop in industrial production and with investments only in consumption, rather than serious greenfield investment in industry and agriculture, it is doomed to repeat Greece’s mistakes: the Serbian government will lack funds to finance economically unsustainable consumption. The members of the Serbian government continue to dispute the appropriate economic driving forces. Those ministers who predominantly focus on short-term goals continue to insist on a demand-driven economy stimulated by borrowed foreign funds. As a consequence, the following characteristics at- tributed to Greece are valid for Serbia as well: „Due to many years of irresponsible politics, but also due to other specificities, Greece literally rolled into economic debt and social crisis, which in the cir- cumstances of world recession obtained the proportions of a big drama. Due to irresponsible top politicians and an unproven make-belief in good perspectives, Greece for years spent much above its real possibilities, and the difference was covered with foreign indebtedness.“10 Instead of investing in the development of the real sector, both countries have devoted all their efforts to finding money to support present spending. This led to the worst of errors: Development efforts were replaced by (much easier) borrowing efforts. The fallacy in this approach has recently become apparent in Greece. Still, Serbia would suffer much more from the loss of Greece’s sub- stantial political support in its efforts to approach the EU than from the modest damage caused by the spillover of the economic crisis.

10 Kovačević, Srpska kriza nije ni grčka ni svetska (see fn. 3).