Extending the EU Semester Formula to the Balkans: Will it improve economic governance?

4 December, 2016

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Extending the EU Semester Formula to the Balkans: Will it improve economic governance?

In 2013, the European Commission added economic governance to the fundamentals of the European Union’s (EU) enlargement strategy. The new approach to economic governance was implemented for the first time in 2015 and became fully operational in early 2016. This is a welcome development, but will the new approach help to achieve more sustainable economic development in the Balkans?

The Commission’s new approach to economic governance is a response to the Balkans’ limited progress regarding economic reforms and catching up with the more developed parts of the EU. To achieve a faster economic restructuring, the new approach provides a fresh framework for economic policy-making in the enlargement countries. To some extent, it reflects the process of strengthened economic policy monitoring and multilateral surveillance that was developed in the context of the EU’s European Semester.

It thus establishes a strengthened economic dialogue between the EU and the enlargement countries. Governments are expected to prepare medium-term Economic Reform Programmes (ERPs), which outline national macroeconomic and fiscal stability frameworks, as well as priority structural reforms to boost competitiveness and long-term growth. While the Commission assesses the ERPs, the Economic and Financial Council provides targeted guidelines for the aspirants.

Although the new approach is leading to some relevant developments in the Balkan governments’ policy-making, in terms of a more strategic and longer-term stance towards macroeconomic policies and economic reforms, its overall influence on the region’s economies remains unclear. Under the present scenario, even relying on optimistic growth forecasts, convergence perspectives and catching up with EU countries remains uncertain and distant for the Balkan countries.

The European Commission’s new approach to economic governance is still far from delivering the promised results. A number of shortcomings are evident:

  • Important disagreements on the macroeconomic framework persist. Although some progress has been made in aligning EU and Balkan expectations regarding growth prospects and macroeconomic stability, divergences remain in the overall judgements of underlying structural weaknesses. While the Balkan countries highlight the positive growth impact of increasing domestic demand, the EU stresses the need to tackle key structural problems, particularly external imbalances and poor labour market performance. These differences should be swiftly ironed out by the Balkans and the EU. To this end, more concrete solutions on how to stimulate different sources of growth should be made available to the Balkan countries.
  • The EU lacks mechanisms to ensure fiscal discipline, which calls for more innovative thinking on the side of the Commission to engage with the Balkan countries in this field. Despite the greater attention paid by the Commission to fiscal consolidation, the role of the EU in this area remains weak, consisting chiefly of monitoring and advice, while it is the International Monetary Fund (IMF) that sets strict rules for fiscal discipline, and even then only for those countries relying on IMF loans.
  • Structural reforms have been launched, but in many areas they remain at an early stage. Like in the framework of the European Semester, national economic reform agendas often appear to be only formally aligned with the long-term priorities highlighted by the EU. Still, for the first time, the ERPs impose on the Balkan governments the need to better prioritise and coordinate different policy measures; something that is essential for improving their dysfunctional public administrations. However, these organisational changes must also be accompanied by adequate measures aimed at restructuring the Balkan economies.

In order to facilitate the implementation of a more effective economic governance framework, more has to be done by both the Balkan governments and the EU. In such times of multiple uncertainties within the EU, a more pragmatic engagement with the Balkans is pivotal for strengthening the credibility and transformative power of the enlargement policy.

The Balkan countries should strengthen the ownership, ambition and credibility of their national ERPs. All countries of the region should improve the coherence of their economic reform strategies, providing stronger links between macroeconomic analysis, budgetary planning and structural reforms. It is thus crucial that the Balkan governments continue to prioritise their structural reforms, providing better and more functional links between different areas. Moreover, this has to be grounded in a sound analysis of current structural weaknesses, and sustained by appropriate capital investments. Hence, it is also necessary that the Balkan countries develop a clearer assessment of their budgetary needs, providing a more efficient use of available government revenues.

The EU should provide more assistance in identifying the best-suited policy measures, and then support them through incentives, rather than (weak) rules. The EU should focus on specific projects, where a few priority measures ought to be clearly outlined and coherently backed by different EU bodies and member states, as well as incentivised through a (conditional) mobilisation of resources. From this angle, the progress achieved with infrastructure projects under the Connectivity Agenda, despite delays, offers a good example of how a more concrete and concerted approach can advance national regulatory frameworks while, at the same time, upgrading national capacities. Such an approach could be extended to other policy areas where fundamental changes are needed, such as industrial and competition policy, support for small- and medium-sized enterprises, or reforms in the areas of education, research and innovation.

The hurdles faced by the Balkan countries are multiple and complex. The new strengthened economic dialogue between the EU and the Balkans represents an important step forward in trying to identify common solutions for a more sustainable path of economic development, and in accelerating long-delayed economic reforms. However, finding specific policy measures that would ensure deeper restructuring of the Balkan economies, something that is absolutely fundamental for pursuing a more effective export-led growth strategy, is not a straightforward exercise, but one of the biggest challenges confronting both the EU and the Balkan aspirants. What is at stake for the EU is not only the possibility of significantly advancing the enlargement process, but also to prove that it is still capable of using economic relations as a driving force for the diffusion of wealth and prosperity, which is ultimately also in the interest of the Union and its members.

This is an adapted version of a longer text originally published by the European Policy Centre.

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