Western Balkan economic integration with the EU: Time for more ambition

14 October, 2021

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Western Balkan economic integration with the EU: Time for more ambition

The Western Balkans has a very long-term development problem, going back at least 200 years (if not much longer), but this was materially compounded by the wars of the 1990s and a late start on EU integration. Whereas the eight countries of Central and Eastern Europe (CEE) that joined the EU in 2004 had a decisive heard start in attracting large-scale FDI inflows to build-up of a sophisticated, high-value manufacturing sector and full access to the bloc’s budget (in some cases accounting for net inflows equivalent to 4-5% of GDP per year), the Western Balkans mostly missed out. Instrument for Pre-Accession Assistance (IPA) funding can’t compare to full access to the EU budget. Many Western Balkan countries have been successful at attracting increased amounts of FDI in recent years, but in per capita terms it still lags behind most of EU-CEE. Moreover, this FDI does not always result in positive spill-overs to the domestic economy.

Regional integration: Disappointing economic results

The EU’s strategy for the Western Balkans has placed great emphasis on regional cooperation, including in the economic sphere. This reflected an assumption that increased economic integration and interdependence will help to solve political problems between countries. In a study done by wiiw and the Bertelsmann Stiftung last year, we found the various regional economic integration initiatives (especially CEFTA) increased trade flows between the Western Balkan countries. However, the degree of integration is uneven between countries; Serbia in particular has tended to integrate relatively more outside of the region than within it). Moreover, in terms of broader economic development and convergence, the results are disappointing.

The Western Balkan countries are among the poorest in CEE, and all else being equal poorer countries should grow faster than rich ones. Yet over the past 20 years, most Western Balkan countries have converged more slowly with Western Europe than almost all EU-CEE countries. This strongly suggests that the prevailing economic development model, including the EU’s strong focus on regional economic integration, has not worked. Meanwhile many of the region’s youngest and best-educated people have left, and the economic footprint of non-EU outside actors has grown. China in particular has started to fill the infrastructure financing gap that could and should have been taken care of by the EU, with sometimes problematic results.

Why didn’t it work?

There are three main reasons why regional economic integration efforts have not produced more impressive results.

First, the economic fundamentals are not especially supportive of regional integration. Although it is not true to say (as some do) that there is no complementarity in regional production structures, the small size and low level of economic development of the region’s economies severely limits the upside that integration will bring. The six economies combined have a GDP roughly equivalent to Slovakia, or 1% of pre-Brexit EU GDP.

Second, successful regional economic integration requires functioning institutions. This matters for example in the harmonisation of legislation to ease the trade of goods and services across borders (a long-standing issue in the region). Clearly, the Western Balkans have a problem here. Data such as the World Bank Worldwide Governance Indicators show a persistent gap in institutional quality versus the EU member states of the region, even those in Southeast Europe that joined the EU more recently such as Bulgaria, Romania and Croatia.

Finally (and many would argue, most importantly), the process of regional economic integration in the Western Balkans has never had sufficient elite buy-in. Although surveys such as the Balkan Barometer show high levels of support among citizens for regional cooperation in a broad sense, this has often not translated to the political level. Countries have continued to compete with each other to attract FDI, and leaders have often failed to invest political capital in initiatives that would truly deepen regional economic integration. Serbia’s role here is particularly important: it has built increasingly deep economic relations not only with the EU, but also Russia and China, reinforcing its prioritisation of economic links outside rather than within the region.

So what to do about it?

When formulating policy recommendations based on the above conclusions, I start with two underlying assumptions. First, that the Western Balkans is on a path of political and economic integration with the EU, including eventual membership, and all efforts must be undertaken with this in mind. Second, that the Western Balkans’ economic convergence performance with Western Europe has been generally disappointing, and new strategies must be considered to speed it up. More of the same is not an option. I see four main priorities for local and EU policymakers.

First, do more to achieve deeper regional integration and improve the economic development level. This includes important initiatives such as the MAP REA.

Second, accept that regional economic integration initiatives will not work well without direct political breakthroughs. An obvious example of this was Kosovo’s 100% tariffs on imports from Serbia and Bosnia and Herzegovina in 2019, which more or less ceased all trade between those countries. Here, both the EU and the US must take a decisive role. Economic integration initiatives only have a chance of real success against the background of a clear, consistent, internationally-sponsored process of solving the territorial and constitutional disputes that continue to plague the region.

Third, particular attention should be paid to Serbia, the region’s most important economy. Serbia’s size and international relationships give it options and incentives that are often fundamentally different to the other five economies in the region. It is not clear that Serbian elites are fully invested in either the process of deeper regional economic integration or EU accession. Yet without Serbia, true regional integration has no chance of success. The EU must think deeply about how to change the calculations of Serbia’s elite for the benefit of the whole region.

Fourth, the main priority must be greater economic integration with the EU. Western Balkan regional economic integration is complimentary to, rather than a substitute for, the integration of the region with the EU. Yet the latter is simply more important, considering the size of the EU market relative to that of the Western Balkans 6. Considering that EU accession seems to be still some way for most or all of the Western Balkans, an interim step in economic terms needs to be considered. Many fear this, and understandably: it can look like second-class membership which could become permanent. Yet it is certainly better than the status quo, and could deliver many of the economic benefits of accession ahead of full membership, allowing the region to start to bridge the gap in economic development terms to EU-CEE. This could include fuller integration into the EU single market and customs union, greater access to the EU budget (with the necessary conditionality attached), and more direct EU support for industrial development in the Western Balkans (while the EU investment plan for the region announced at the end of last year is an unambiguously positive step, the pledged amounts do not seem to represent a game-changer on their own). Taking these steps could in fact spur the elusive deepening of regional economic integration: The Visegrad countries integrated much more strongly with each other after EU accession. This implies that a deepening of regional ties is more a consequence of, rather than prerequisite for, EU accession.

Conclusion: More ambitious steps towards EU integration

A huge amount of positive work has been done on regional cooperation in the Western Balkans in the last two decades, and the region is in many ways more economically integrated than it was 20 years ago. Yet the degree of economic integration varies widely between countries, and this has not helped to achieve decisive breakthroughs in the region’s most intractable territorial and constitutional disputes, nor has it spurred a very impressive economic convergence performance. This is often because the pre-requisites for more successful regional economic integration did not exist.

If EU accession is still a long way off, as seems reasonable to assume even 18 years after Thessaloniki, then it is time to think much more concretely about differentiated and phased integration of the region with the EU in economic terms. Failing to do so risks contributing to another semi-lost decade for the Western Balkans, driving increased frustration in the region, further large-scale outward migration, and opening the door for non-EU outsiders to increase their economic influence.

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