The eurozone crisis, economic developments and policy challenges in the Balkans: what prospects for growth?

7 June 2012

High oil prices, reduced capital inflows, banking sector consolidation and the eurozone crisis are all limiting global growth prospects, said Željko Bogetić, lead economist for the Western Balkans at the World Bank.

The pace of recovery in the Balkans has been very slow and growth is expected to average just 1% this year, Bogetić warned, presenting a new World Bank report on the region.

Rising public debt will make these countries vulnerable unless fiscal consolidation plans are put in place, he cautioned.

The region’s labour market is a significant problem and unemployment is very high. However, the credit market is improving and the banking system is performing well: capital levels remain relatively high, the World Bank official said.

Meanwhile, the region is yet to fully exploit its export potential, he said.

One cause for optimism is the region’s increasing integration with Western Europe, which should boost trade and investment, he said. But ageing and shrinking workforces represent a major challenge, he warned.

In the short term, Balkan countries must tackle rising public debt, tackle unemployment, boost credit markets and alleviate poverty. In the long term, they must reform labour markets and public sectors, Bogetić concluded.

Enlargement is a “win-win” scenario for Balkan countries and the EU itself, which would benefit economically from fully open trade with the region, said Peter Polajnar, a policy coordinator at the European Commission.

“Almost all the foreign direct investment in the Balkans is from the EU and many Balkan citizens hold savings in euros,” Polajnar said.

Reform in preparation for EU membership brings political benefits too, while boosting the rule of law would improve the business environment. Delivering the macroeconomic stability that allows a market economy to flourish is the basis for progress across the region, the Commission official argued.

“Political reform strongly influences economics, so fighting corruption and organised crime – and protecting the rule of law – would impact positively on the region’s economic health,” he said.

“We finance investment in support of EU policies, to both the public and private sectors. We look at the socio-economic benefit in deciding whether to finance,” said Alessandro Carno, a managerial advisor and head of unit at the European Investment Bank (EIB).

“Convergence towards EU standards has been a crucial driver of reform,” said Carno, particularly regarding the labour market, rule of law, corruption and the economy.

He said the region’s banking sector was mostly dominated by subsidiaries of EU banks, which he described as an asset but also a liability if the EU banks run into trouble.

“Many of the region’s problems are similar to the EU’s, despite differences in the absolute numbers. Unemployment is likely to increase. Private sector investment can help, whether FDI from the EU or the BRIC countries, or from local private-sector sources – but then you need a strong local financing system,” Carno said.

The EU’s ‘Europe 2020’ strategy can play a key role in boosting economic and social development in Balkan countries too, but the challenge lies in bringing its targets to the region without creating additional EU accession criteria, said Lidija Topić, an adviser in the Brussels Liaison Office of the Regional Cooperation Council.

She identified justice and home affairs and the rule of law, energy and infrastructure projects, private sector development and SME access to finance, public administration reform, smart growth and IPR protection, and fundamental rights among priority areas for policymakers to focus on.