Blog Post

The (economic) ties that bind: The western Balkans and the EU

The western Balkan economies are already closely integrated with the EU; the EU is their largest trade partner, their largest source of incoming foreign investment and other financial flows, and the main destination for outward migration. Monetary and financial systems in the region are strongly dependent on the euro. Progress in EU accession can further strengthen economic ties between six western Balkan countries and the EU, with benefits for both sides.  

By: and Date: March 14, 2018 Topic: European Macroeconomics & Governance

The European Commission’s February 2018 communication on ‘A credible enlargement perspective for and enhanced EU engagement with the Western Balkans’[1] calls for a redoubling of efforts from countries in the region to ‘…address vital reforms and complete their political, economic and social transformation, bringing all stakeholders on board from across the political spectrum and from civil society’.

The communication also sets an indicative deadline (2025) for admission to the EU of the two most advanced candidates – Serbia and Montenegro. This new political impulse could incentivise all western Balkan countries to remove domestic political obstacles to EU accession, solve conflicts with neighbours, speed up reforms and accelerate economic growth.

For its own part, the EU and its Member States must not overlook the strategic importance of the western Balkan region. Geographically, Western Balkan countries form a land bridge and the shortest transit route between the south-east flank of the EU and its central European core. The importance of this transit route was demonstrated during the 2015-16 refugee crisis.

Close economic partnership

In this blog post, we review the economic linkages between the western Balkans and the EU. It is worth noting that western Balkan economies are already closely integrated with the EU; the EU is their largest trade partner, their largest source of incoming foreign investment and other financial flows, and the main destination for outward migration. Monetary and financial systems in the region are strongly dependent on the euro.

These close economic relations have been boosted by, among others, the Stabilisation and Association Agreements between the EU and individual western Balkan countries, which also include provisions for a Deep and Comprehensive Free Trade Area. Implementation of these provisions means elimination of tariffs and non-tariff barriers, liberalisation of trade in services and investment regimes, and far-reaching harmonisation of various trade and investment-related regulations and institutions – especially in the areas of competition policy, state aid and public procurement.

The agreement with Macedonia entered into force in 2004, with Albania in 2009, with Montenegro in 2010, with Serbia in 2013, with Bosnia and Herzegovina in 2015 and with Kosovo in 2016. In addition, the EU has promoted a network of horizontal free trade agreements between candidate countries using the umbrella of the Central European Free Trade Agreement, which currently involves all six western Balkan countries and Moldova.

Monetary regimes

In the second half of the 1990s and the early 2000s, currency pegs to the German mark and then to the euro helped Croatia (already an EU member), Macedonia, Bosnia and Herzegovina, and also Montenegro and Kosovo to disinflate quickly, given their legacies of high inflation/hyperinflation in the early 1990s.

Since then, Kosovo and Montenegro have taken up the euro as their currency, Bosnia and Herzegovina has a euro-denominated currency board, and Macedonia pegs to the euro (in a relatively narrow horizontal band). Exchange-rate regimes in Albania and Serbia can be characterised as managed floats, and both countries have declared inflation-targeting frameworks.

Apart from official euro-isation, all western Balkan countries – regardless of their declared and actual monetary regimes – experience far-reaching, spontaneous euro-isation of their financial systems (Table 1; note this data does not include euro or dollar cash holdings). Spontaneous euro-isation is not a problem in Kosovo and Montenegro, where the euro has been adopted as the official national currency, but it is a serious vulnerability in other countries.

Furthermore, despite successful disinflation and repeated recommendations from the IMF, there has been no visible progress in reducing euro-isation (Table 1) in favour of assets and liabilities in national currencies. From that perspective a hard peg (unilateral euro-isation or a credible currency board) can be seen as the factor that increases financial stability (thanks to the elimination of currency depreciation risk) and recognises the high exposure of the region to euro-denominated transactions in trade, tourist services and remittance flows, among others.

Trade

Figures 1 and 2 show that the EU and western Balkan neighbours are the dominant trade partners of each western Balkan country, accounting together for at least 70% of their total trade. For western Balkan countries’ exports, this dominance is even stronger. Evidently, then, the region is already closely integrated with the EU in terms of trade links, even if the EU’s share has declined slightly compared to 2006.

Among other partners, Russia has played some role in supplying the region, especially Serbia, Macedonia and Bosnia and Herzegovina, with energy resources (oil and gas) – but Russia’s role has gradually diminished over time (despite Russia’s interest in the western Balkan energy sector and the Druzhba and Adriatic pipelines). Russia is also one of the destinations for Serbian exports, but not exceeding a small percentage of the total.

The shares of China and Turkey are also limited and concentrated on the import side. However, the growth in imports from both countries is very high, so their shares might increase in future.

Outward migration and labour remittances

Not surprisingly, a large proportion of the western Balkan population has emigrated to more developed countries (in particular to western and northern Europe), as a result of the violent conflicts of the 1990s, lower income per capita and chronic high unemployment, especially of young people (see Dabrowski and Myachenkova, 2018). Mass emigration started in the 1960s from the former Yugoslavia and in the early 1990s from Albania.

In 2015, according to the UN data, Bosnia and Herzegovina and Albania had the largest shares of their nationals living permanently abroad – 46.7% and 38.4% respectively. Other countries accounted for smaller but still substantial shares of outgoing migrants. In Macedonia it was 24.8% of the population, in Montenegro 22.0% and in Serbia 10.9% (data for Kosovo is missing).

As a result, personal remittances (originating largely in the EU) play an important economic and social role in all western Balkan countries except Macedonia (Table 2). They help to finance large trade deficits and diminish current account deficits.

In Kosovo and Bosnia and Herzegovina, these remittances as a share of GDP exceed 10%; in Albania, Montenegro and Serbia they amount to slightly less than 10%. Since 2000, their relative importance has gradually decreased in Bosnia and Herzegovina, Kosovo, Albania and Macedonia, while it has increased in Montenegro and remained broadly stable in Serbia.

Foreign direct investment

Most foreign direct investment (FDI) in western Balkan countries, except Kosovo, originates from the EU (Figure 3). Progress in EU accession might bring even more European FDI (Stehrer and Holzner, 2018).

Other major sources of FDI in the western Balkans include Switzerland (entire region), Canada (Albania), Serbia (Bosnia and Herzegovina, Montenegro), Russia (Montenegro, Bosnia and Herzegovina, Serbia), Turkey (Albania, Kosovo, Macedonia) and Norway (Serbia) (Hunya and Schwarzhappel, 2016).

Despite the lost decade of the 1990s, FDI inflows into western Balkan countries accelerated in the 2000s and 2010s, including the period following the 2008-09 global financial crisis (Table 3). As a result, the cumulative stock of inward FDI relative to GDP exceeds the average in transition economies (Figure 4). Montenegro is the absolute leader, with the stock of FDI in 2016 equal to 113.0% of GDP.

FDI has mainly been directed at the financial sector, telecommunications, the energy sector, wholesale and retail, construction, real estate and manufacturing (Estrin and Uvalic, 2016; Hunya and Schwarzhappel, 2016).

Banking sector at the forefront of integration with the EU

The region’s banking sector is owned largely by foreign investors, predominantly from the EU. Many banks in western Balkan countries are part of pan-European banking groups. This concerns, for example, Raiffeisen Bank (Austria), which has its daughter banks in Albania, Bosnia and Herzegovina, Kosovo and Serbia; Intesa Sanpaolo (Italy), with subsidiaries in Albania, Bosnia and Herzegovina and Serbia; National Bank of Greece, owning subsidiaries in Albania and Macedonia; UniCredit (Italy), in Bosnia and Herzegovina and Serbia; Societe Generale (France), in Albania, Macedonia and Serbia; Nova Ljubljanska Banka (Slovenia), in all western Balkan countries except for Albania; and Pireaus Bank (Greece), in Albania and Serbia.

Progress in EU accession

Progress in EU accession can further strengthen economic ties between six western Balkan countries and the EU, with benefits for both sides.

Montenegro is the most advanced in this process. It started membership negotiations in 2012 and, by December 2017, it had managed to open 30 out of 35 negotiation chapters of the acquis communautaire (the body of EU law). The non-started chapters are competition policy, economic and monetary policy, environment and climate change, institutions and ‘other issues’. Three chapters (science and research, education and culture, and external relations) have been already provisionally closed.

Serbia is less advanced. It started membership negotiation in January 2014. By December 2017, it had managed to open negotiation on only 12 chapters (public procurement, company law, intellectual property law, enterprise and industrial policy, judiciary and fundamental rights, justice, freedom and security, science and research, education and culture, customs union, external relations, financial control, and ‘other issues’) and had provisionally closed only two chapters – on science and research, and education and culture.

Macedonia and Albania wait to start membership negotiations, while Bosnia and Herzegovina and Kosovo – have yet to obtain EU candidate status.

[1] https://ec.europa.eu/commission/sites/beta-political/files/communication-credible-enlargement-perspective-western-balkans_en.pdf

References

Dabrowski, M. and Y. Myachenkova (2018) ‘The Western Balkans on the road to the European Union’, Bruegel Policy Contribution, No. 04/2018, 22 February, available at http://bruegel.org/wp-content/uploads/2018/02/PC-04_2018.pdf

Estrin, S. and M. Uvalic (2016) ‘Foreign direct investment in the Western Balkans: what role has it played during transition?’ Comparative Economic Studies 58(3): 455-483

Hunya, G. and M. Schwarzhappel (2016) FDI in Central, East and Southeast Europe: Slump despite Global Upturn, FDI Report 2016, The Vienna Institute for International Economic Studies, available at https://wiiw.ac.at/slump-despite-global-upturn-dlp-3899.pdf

Stehrer, R. and M. Holzner (2018) ‘Western Balkan countries knocking on EU’s door’, News & Opinions, The Vienna Institute for International Economic Studies, 5 February, available at https://wiiw.ac.at/n-282.html


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

View comments
Read article More on this topic More by this author

Opinion

Ubu ou Machiavel?

L'administration Trump veut imposer une approche transactionnelle des relations économiques gouvernée par le rapport de force bilatéral en lieu et place du contrat multilatéral. Un défi d'une ampleur inédite pour l'Europe.

By: Jean Pisani-Ferry Topic: Global Economics & Governance Date: July 6, 2018
Read about event

Upcoming Event

Sep
3-4
08:30

Bruegel Annual Meetings 2018

The 2018 Annual Meetings will be held on 3-4 September and will feature sessions on European and global economic governance, as well as finance, energy and innovation.

Speakers: Maria Åsenius, Richard E. Baldwin, Carl Bildt, Nadia Calviño, Maria Demertzis, Mariya Gabriel, Péter Kaderják, Joanne Kellermann, Jörg Kukies, Emmanuel Lagarrigue, Philippe Lespinard, Montserrat Mir Roca, Dominique Moïsi, Jean Pierre Mustier, Ana Palacio, Jean Pisani-Ferry, Lucrezia Reichlin, Norbert Röttgen, André Sapir, Jean-Claude Trichet, Johan Van Overtveldt, Margrethe Vestager, Reinhilde Veugelers, Thomas Wieser, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Brussels Comic Strip Museum, Rue des Sables 20, 1000 Brussels
Read article More on this topic More by this author

Blog Post

US tariffs and China's holding of Treasuries

China has the biggest bilateral trade surplus vis-à-vis the US but is also a top holder of US government bonds. While China has started to counteract US trade tariffs, economists have been discussing the case of China acting on its holdings of US Treasuries. We review recent contributions.

By: Silvia Merler Topic: Global Economics & Governance Date: July 2, 2018
Read article

Blog Post

Trading invisibles: Exposure of countries to GDPR

This blog post identifies provisions of the EU’s General Data Protection Regulation (GDPR) that affect foreign companies, and discusses implications for trade in services with the EU. The authors provide a novel mapping of countries’ relative exposure to these regulations by a) measuring the digital maturity of their service exports to the EU; and b) the share of these exports in national GDP.

By: Sonali Chowdhry and Nicolas Moës Topic: European Macroeconomics & Governance, Global Economics & Governance Date: June 28, 2018
Read about event More on this topic

Past Event

Past Event

Trade war trinity: analysis of global consequences

Analysis of the long-term impact of the trade war and its three key players: EU, US, and China.

Speakers: Alicia García-Herrero, Ignasi Guardans and Carl B Hamilton Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 28, 2018
Read article Download PDF More on this topic

Policy Contribution

Cryptocurrencies and monetary policy

Can cryptocurrencies acquire the role of money? And what are the implications for central banks and monetary policy? Read the policy contribution to understand what challenges cryptocurrencies have to overcome to replace official currencies.

By: Grégory Claeys, Maria Demertzis and Konstantinos Efstathiou Topic: Finance & Financial Regulation Date: June 28, 2018
Read article More on this topic

Blog Post

China’s strategic investments in Europe: The case of maritime ports

The EU is currently working on a new framework for screening foreign direct investments (FDI). Maritime ports represent the cornerstone of the EU trade infrastructure, as 70% of goods crossing European borders travel by sea. This blog post seeks to inform this debate by looking at recent Chinese involvement in EU ports.

By: Shivali Pandya and Simone Tagliapietra Topic: Global Economics & Governance Date: June 27, 2018
Read about event More on this topic

Past Event

Past Event

EU-LAC Economic Forum 2018

The second edition of the EU-LAC Economic Forum, a high level gathering for in-depth research-based exchanges on economic issues between European, Latin American and Caribbean (LAC) policy makers and experts.

Speakers: Angel Badillo, Federico Bonaglia, Maria Demertzis, Sylvie Durán, Guillermo Fernández de Soto, Alicia García-Herrero, Elisa Grafulla, Gonzalo Gutiérrez, Bert Hoffmann, Juan Jung, Emilio Lamo de Espinosa, Carlos Malamud, J. Scott Marcus, Neven Mimica, Fabio Nasarre de Letosa, Detlef Nolte, Anne Sperschneider and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 26, 2018
Read about event More on this topic

Upcoming Event

Oct
3
09:00

International trade and the EU-Japan Economic Partnership Agreement

This event; jointly organised by Bruegel and the Graduate School of Economics, Kobe University, will discuss the EU-Japan trade deal and asses its impact.

Speakers: Marco Chirullo, Gabriel Felbermayr, François Godement, Hiroo Inoue, Sébastien Jean, Yoichi Matsubayashi, Tamotsu Nakamura, André Sapir, Cécile Toubeau, Agata Wierzbowska and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Past Event

Past Event

State of transatlantic trade relations

A conversation on transatlantic relations with Michael Froman.

Speakers: Michael Froman, André Sapir and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 21, 2018
Read article More on this topic

Blog Post

European bank mergers: domestic or cross-border?

As the European economy recovers from the global financial crisis, bank mergers are back on the agenda. While cross-border mergers have been predicted before, most European bank mergers have been domestic until now. What are the odds of cross-border mergers in the upcoming bank-consolidation wave?

By: Patty Duijm and Dirk Schoenmaker Topic: Finance & Financial Regulation Date: June 21, 2018
Read about event

Upcoming Event

Oct
11-12
20:00

Policy responses for an EU-MENA shared future

In the third edition of the "Platform for Advanced & Emerging Economies Policy Dialogue" we will discuss trade flows and trade policy between Europe and MENA, integration of developing economies into global value chains, and regional energy relations.

Speakers: Karim El Aynaoui and Guntram B. Wolff Location: Rome
Load more posts