No. 11 : May-August 2014

Mario Holzner

Integration Process of

the Western Balkans

Academic Foresights

How do you analyze the present status of the integration process of the Western Balkans?

The Western Balkans have experienced several attempts of authoritarian integration over the last 100 years, such as for instance within the Kingdom of Yugoslavia in the interwar period or after World War II within the Socialist Federal Republic of Yugoslavia. All of these forceful integration attempts ended in periods of bloody disintegration including widespread ‘ethnic cleansing’. For the first time in living memory the institutional framework of the European Union offers the option of a peaceful integration for the countries of the Western Balkans. After Croatia’s accession to the European Union in 2013, the Western Balkans comprise of Bosnia and Herzegovina, Serbia, Montenegro, Macedonia, Kosovo as well as Albania. Hence, the term Western Balkans is more of a political than a geographic designation for the region of Southeast Europe that is not part of the European Union.

At the European Council summit in the summer of 2003 the so called ‘promise of Thessaloniki’ was given. It was pledged to provide all the countries of the Western Balkans with the perspective of full membership in the European Union. Since then only Croatia made its way into the European Union. At present, Montenegro and Serbia are candidates negotiating membership, the former since mid 2012 and the latter since early 2014. Macedonia is an official candidate since back in late 2005. However, negotiations have never started as Greece is blocking them because it rejects the name ‘Macedonia’ which allegedly implies territorial ambitions towards Greece's own northern province of Macedonia. Albania is a potential candidate country that has submitted a membership application. Here a so called ‘Stabilisation and Association Agreement’ with the European Union is in force. The Stabilisation and Association Agreement is kind of an institutional waiting room for potential candidate countries. Bosnia and Herzegovina has an ‘Interim Agreement on Trade and Trade-related issues’ as the Stabilisation and Association Agreement was signed but never came into force since the country had not complied with a number of previous obligations. Finally, Kosovo started the negotiations for a Stabilisation and Association Agreement in late 2013 only.

In your opinion, how will the situation likely evolve over the next five years?

It took Croatia eight years since the start of the membership negotiations all the way to the European Union joining date. If this is taken as a reference, then realistically none of the Western Balkan countries can be expected to become member of the European Union over the next five years. This also implies that these countries will not benefit from the Union’s Common Agricultural Policy and Regional Policy funds in the foreseeable future. Net receipts from the European Union budget for member states from Central- East and Southeast Europe make about 1% to 5% of the local Gross Domestic Products. At the same time transfers from the ‘Instrument for Pre-Accession Assistance’ funds make up only around 1% of national Gross Domestic Products, on average per year. Thus, in each year that the integration process is prolonged the Western Balkans are missing substantial flows of income and investment which however would be much needed in one of Europe’s poorest regions.

By and large stony soils don’t allow for efficient agriculture and still they have to suffice to huge parts of the population for subsistence farming. Wide areas of the region are disconnected from modern transport infrastructure and powerful energy networks. Most of its highways are only along the route of the ancient Roman ‘Via Militaris’ from Constantinople to Aquileia. Regional roads have little capacities and are mostly in bad shape. The railway network is insignificant and long-time neglected. Electricity black-outs are not uncommon, especially in Albania and Kosovo. Hence, manufacturing industry is scarce in the Western Balkans. If at all it is mostly extractive industry and wage labour that exists. Spurts of broad industrialisation have so far failed mainly due to the dependence on foreign capital markets. This seems to be true also for the foreseeable future.

What are the structural long-term perspectives?

Historical data on Gross Domestic Product per capita at Purchasing Power Parities suggests that, compared to the material prosperity of the region’s technology and productivity leader Germany, there has been hardly any noteworthy economic catch-up process of the Western Balkans countries over the last six decades. In the early 1950s those countries were in a range of 15% (Kosovo) to 30% (Macedonia) of the German Gross Domestic Product per capita. In the 1960s and 1970s an increasingly foreign financed industrialisation lead to some catch-up. By the end of the 1970s Macedonia and Serbia had reached almost half of the income level of Germany and also Montenegro and Bosnia and Herzegovina almost a third. However, the second oil crisis of 1979 caused a strong increase of interest rates and the catch-up process came to an end. The following decade was marked by an economic downturn throughout the Western Balkans, with radical political consequences and disintegration in the 1990s. During the Yugoslav wars prosperity fell to some 5% (Bosnia and Herzegovina) to 25% (Macedonia) of the German level. A new boom, financed by foreign direct investment and credits, in the 2000s has alleviated the region’s economies’ prosperity levels up to a quarter (Kosovo) to a third (Serbia) of the German one. However, since the outbreak of the latest World financial crisis the trend went south again.

In order not to let the Western Balkans to be lost again in deep economic crisis, conflict and disintegration with substantial effects on mass migration flows, the European Union should have a self-interest to renew the promise of Thessaloniki, contrary to current ‘enlargement fatigue’. Additional efforts have to be made to support the economies of the Western Balkans in order to improve their infrastructure and to connect it to the ‘Trans-European Networks’. This should be done with the aim to make broad industrialisation of the region more likely. A sustainable development, especially of the manufacturing sector, is necessary in order to make the countries independent of volatile international capital markets. However, even if the European support should not be able to permanently improve the current accounts of the Western Balkans, funding could be used to compensate those economies for opening their markets to the products of the highly industrialised core of Europe. Should this strategy be pursued and additional funds provided there is a fair chance to escape the vicious circle of recurrent boom and bust in the Western Balkans, failing this will have fatal consequences for the region as well as Europe.

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Mario Holzner is Deputy Director and Staff Economist at the Vienna Institute for International Economic Studies (wiiw) and country expert for Albania and Kosovo. He is also a lecturer in applied econometrics at the University of Vienna, Department of Economics. His research focuses on income distribution and inequality, foreign trade, macroeconomic analysis and financial markets. He is coordinating a major research network within the Global Development Network Southeast Europe and maintains the Balkan Observatory website. He obtained his PhD at the Vienna University of Economics and Business in 2005.

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