Introduction Stiftung Wissenschaft und Politik German Institute for International and Security Affairs Comments The EU and the Western Balkans: So Near and Yet So Far WP S Why the Region Needs Fast-Track Socio-Economic Convergence with the EU Matteo Bonomi and Dušan Reljić The European Commission will unveil its new EU Enlargement Strategy on February 6th, 2018. Since relations with Turkey have deteriorated markedly, only the Western Balkan states remain candidates for EU membership. The EU High Representative for Foreign Affairs and Security Policy, Federica Mogherini, has stated the European Commission’s intention to ensure that the Western Balkan countries are on an “irreversible” track to membership in the Union before the end of its mandate in 2019. Unless the new En- largement Strategy offers a realistic plan to tackle the lack of economic growth and social progress in the region, it will be another futile institutional exercise because democracy, the rule of law and other basic distinctions of “Europeanness” cannot make lasting inroads into the enduring poverty in the Western Balkans. In the past two decades, the Western Bal- economies, foster democratic institutions kan countries have largely enacted the and pave the way for EU membership. fundamental economic reforms requested Things have turned out differently from by the European Union (EU), the World the transition blueprint that was envisaged Bank and the International Monetary Fund for the Western Balkans, however. The (IMF) under the so-called “Washington expectations that these countries would consensus”, following the matrix previously gradually converge towards EU economic created for Central-Eastern Europe (CEE). standards and become consolidated democ- They have opened their markets to the EU, racies have not been met. privatised and liberalised their economies, Without doubt, the transition in CEE has and imposed austerity policies during the not been a complete success story either. post-crisis period. The idea behind the Leaving aside political considerations about “Washington consensus” was for the re- the state of democracy in some CEE coun- forms, in combination with the progressive tries, and in purely economic terms, it is adoption of EU laws, principles and activi- evident that only those in the CEE region ties in the framework of the EU’s enlarge- that started from better economic condi- ment policy, to create functioning market tions, notably the Czech Republic and Dušan Reljić is Head of Brussels office of SWP. SWP Comments 53 Matteo Bonomi was visiting scholar at the Brussels office of SWP in 2017 December 2017 1 Slovenia, have come close to reaching the formance and loss of reform momentum. living standards of the poorer countries of Yet such a narrow focus is not entirely Western Europe. The economic perfor- adequate, since it does not take into ac- mance of the Western Balkans has been count the long-term causes of the current particularly disappointing, even when economic, social and political situation. compared to the relatively modest results When in the early 2000s the international in CEE. strategies towards the Western Balkans Western Balkan states such as Bosnia region changed dramatically, the overall and Herzegovina and Serbia are in the political and economic conditions in the group of countries that are worst off in region were far worse than in CEE in 1989. terms of income inequality and recovery of The legacy of a disintegrating Yugoslavia their pre-transition GDP. These two coun- and the ensuing wars in the 1990s meant tries, together with Montenegro, have not that potential EU candidates in the Balkans yet reached their real 1989 GDP level. If we adopted the EU integration path, with look at the average GDP per capita in Pur- rapid market opening and economic inte- chasing Power Parities (PPP) in 2016, the six gration with the EU. This path was em- Western Balkan countries had not reached barked upon despite devastated industrial 28 per cent of the level in the old EU mem- capacities, thriving shadow economies, ber states (the so-called EU15), while CEE extremely weak states marked by dysfunc- was at around 60 per cent of the EU15 tional public administrations, widespread average. corruption and unsatisfactory education The Western Balkans’ inability to benefi- and health systems and other socio-eco- cially integrate with the EU economy can nomic flaws. be illustrated by their limited overall ex- While economic performance did im- ports, particularly of manufactured goods. prove, the strong growth during 2001-08 Exports of goods and services as a share of was primarily based on the inflow of for- GDP represent a low 30 percent on average eign capital without leading to profound in the Western Balkans. This is far below economic restructuring and modernisation. the 80 percent averaged by similar-sized The institutions that governments tried to transition economies now in the EU. More- put in place to regulate the markets and over, manufacturing exports of the Western safeguard competition were inefficient, Balkans are less sophisticated, since the often leaving tycoon capitalists a free hand region still confines itself to labour and to exercise quasi-monopolistic power. At resource-intensive products. Whereas in the same time, foreign investors mainly CEE, the early arrival of foreign direct targeted the non-tradable sectors, contrib- investments has favoured the transfer of uting to deindustrialisation, insufficient capital, know-how and modern technology, job creation and widening trade deficits. thereby also facilitating re-industrialisa- The unsustainability of the growth tion, in the Western Balkans, most coun- model in the Western Balkans became fully tries have experienced almost three decades apparent when the global financial and of continuous deindustrialisation. economic crisis in 2008/2009 hit the region badly. The Balkan countries were particu- larly affected by the crisis due to their al- Closer Economic Ties to the EU, ready strong integration with the EU. As a but with Negative Results result, the growth of the last ten years has Faced with these sobering results, the IMF, been nullified, while during the same peri- World Bank and other international orga- od these countries accumulated a trade nisations usually point to “reform fatigue” deficit with the EU of 97 billion euro (2005- and vested interests within the Western 16) paralleled by increasing foreign debt. Balkans to explain the poor economic per- Whereas a substantial part of the Western SWP Comments 53 December 2017 2 Balkans’ GDP is transferred yearly to core further reforms required by the EU acces- EU countries such as Germany and Italy sion process depends on it. Yet the chal- through trade deficits and the repayment lenges facing the Western Balkans are com- of loans to Western banks, Western Balkan plex and formidable. To date, even under countries, unlike the new EU members, do the most optimistic economic forecasts, the not qualify for the EU structural funds or expected average Western Balkans’ GDP other grants that would alleviate the im- growth rate of around 3 percent is insuf- pact of the economic crises and foster ficient to accelerate the process of catching- growth. Funds from the EU’s Instrument up and convergence. A recent estimation for Pre-accession Assistance range from by the World Bank indicates that at current around 40 million euro a year for Monte- growth rates, it would take about six de- negro to 200 million euro for Serbia and cades for average per capita Western Balkan are directed almost entirely to supporting income to converge with the EU average. administrative and other institutional re- With faster growth of 5 to 6 percent, con- forms, without sufficiently taking account vergence could be achieved by the end of of the enormous development gap between the 2030s. the Western Balkans and the EU. This means that by then, broad sections All in all, almost two decades of EU- of the population would have spent over Balkan economic integration have led to a half a century in poverty and precarious pronounced dependency on the EU. Today, socio-economic conditions. It should there- from a socio-economic perspective, the pre- fore come as no surprise that the “EU accession countries in the Balkans already model” is being questioned by a considera- appear to be part of the European club – ble part of the populace, who are less and but with many disadvantages and no voting less convinced that this model is the univer- rights. The Western Balkans have 73% of sal remedy for all political and economic their total goods trade with the EU within troubles. This view is at odds with the domi- an almost completely liberalised trade nant political discourse, both in the region regime. Between 75-90% of their banking and among external Western actors. This systems are foreign-owned (mainly by Ger- disparity opens inroads for other political man, Italian, French, Austrian and Greek and economic concepts that, as a rule, tend banks). Almost all countries have adopted to be populist and authoritarian. fixed exchange-rate regimes, formally or The current political and economic de- de facto linking their currencies to the euro bate focuses on the need for a new growth or using the euro (Kosovo, Montenegro). model for the Western Balkans and insists However, close economic ties with the EU on the need to reform domestic institu- have not helped economic modernisation tions. However, it is far from clear what this to take hold or the Western Balkans’ capaci- means in terms of concrete policies. Inter- ty to develop. Despite being so close to the national organisations such as the World EU, the region remains a long way from Bank and the IMF have advocated a further achieving stability and prosperity and thus reduction in the size and role of the state, firmly embarking on the road to successful usually pointing to the need for the West- European integration.