NATO Parliamentary Assembly
HomeDOCUMENTSCommittee Reports2011 Annual Session181 ESCEW 11 E rev. 2 final - THE BALKAN ECONOMIES: REGIONAL ROADBLOCKS, EUROPEAN DISTRACTIONS AND GLOBAL CRISIS

181 ESCEW 11 E rev. 2 final - THE BALKAN ECONOMIES; REGIONAL ROADBLOCKS, EUROPEAN DISTRACTIONS AND GLOBAL CRISIS

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JOHN SEWEL (United Kingdom), RAPPORTEUR



I.  INTRODUCTION 

II.  GROWTH, UNEMPLOYMENT, REMITTANCES, BALANCE OF PAYMENTS AND BUDGETS 

III.  THE EUROPEAN DIMENSION 

IV.  A SNAPSHOT OF NATIONAL CONDITIONS 
A.  ALBANIA 
B.  BOSNIA AND HERZEGOVINA 
C.  CROATIA 
D.  THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA 
E.  KOSOVO 
F.  MONTENEGRO 
G.  SERBIA 

V.  CONCLUSIONS 

BIBLIOGRAPHY 

 


I. INTRODUCTION 

1.  Over the past two years, this Committee has taken a particularly hard look at the global financial and economic crisis in order to explore its impact both on NATO member governments and the broader strategic environment in which its members operate. This has been the most severe global economic crisis in the post-war era, and in many areas the recovery remains fragile. Indeed, what began as a banking crisis and evolved into a severe global recession has now triggered a serious debt and fiscal crisis which has provoked grave uncertainties on both sides of the Atlantic. These matters are clearly dominating domestic politics in NATO and EU member countries, and deflecting attention away from conditions in countries lying outside the “membership space”.

2.  This is certainly the case for the Western Balkans, which were the object of central NATO concern in the course of the 1990s after a series of wars killed over 100,000 people. That region’s problems remain formidable, and the ultimate outcome of their political and economic transition is of direct interest to the West. The Western Balkans now must cope with a global economic downturn that has struck their economies in a belated and not inconsequential fashion. These countries lack the reserves, social safety nets, access to credit and financial leverage of many other European countries and so have had fewer options to cope with crisis. With many people already living in economically precarious circumstances, a crisis of this proportion invariably pushes many into poverty. Finally there are political fragilities in the Western Balkans, so economic downturns have the potential to undermine political stability.

3.  Although Western Balkan states are extraordinarily heterogeneous, they are confronted by a range of common challenges that are conditioning political life throughout the region. Each is in the midst of four different and daunting transformations: a post-communist transition; a postconflict reconstruction; social, economic and political modernisation requiring the mobilisation of civil society and the state in radically new ways for the region; and finally each aspires to deeper integration in EuroAtlantic institutions, although Serbia itself has indicated that it does not foresee applying for NATO membership, particularly given the low level of public support for such an eventuality. Although these are often considered complementary processes, they are nonetheless difficult to implement simultaneously; all the more so for relatively under-developed states that emerged out of a communist order and those which must build state institutions from scratch. Undergoing just one of these transformations, would, in itself, pose a serious challenge. Undergoing all four simultaneously is extraordinarily taxing, and it is not surprising that doing so has not been a smooth and easy process; yet in terms of economic growth over the past decade, the general trend for most of the region has been very positive with growth rates comparable to those of South-East Asia.

4.  The economic, social and political profile of the Western Balkans, however, is distinct from most emerging economies. Most of the region’s countries have universal primary education, high literacy rates, reasonably well-developed transportation links and public health systems, and relatively efficient agricultural systems. More importantly, their populations are rapidly ageing (Kosovo is an exception here, as half the population is under the age of 25), and because of high unemployment rates several Balkan countries are exporting both skilled and unskilled labour while importing capital (USAID). Their challenge is thus not so much to develop in the classical sense as it is to redevelop in a manner that puts scarce and long misallocated factors of production to far more efficient use (Slay). They must also develop a physical and human capital base that is appropriate for flourishing in a global market rather than in a centrally planned economy. This requires capital reallocation and in many important ways a cultural shift. Change is underway throughout the region but the process is slow and uneven, particularly in those countries most beset by political paralysis and corruption (Slay).

5.  There is an educational dimension to the challenge as well. Transforming the region’s university system so that it prepares young people to flourish in a global order, is an expensive and culturally challenging undertaking. Education reform is already a key challenge for many Western countries, but it is all the more so for those with very scarce resources, communist legacies, and even insufficient human capital to meet educational change. The old education systems in the Western Balkans strongly emphasised vocational training and industrial engineering. A decade of war and instability delayed the reform of these institutions.

6.  Unlike more developed countries, the countries of the Balkans lack fiscal reserves and access to the kind of credit that their Western counterparts enjoy. They thus enjoy less of a cushion in the face of external shocks. The global economic crisis has thus struck the regional economy, and as a result, most of the Western Balkans countries have undergone a recession - some deeper than others. The problem is that conditions prior to the crisis, although clearly improving, were nonetheless difficult. Unemployment throughout much of the region was very high, while rapid and sustained growth and labour market reforms had long been seen as essential to driving down joblessness. Social safety nets throughout the region are not particularly robust, paradoxically often discourage rather than encourage work, and are now a target for reform. Of course, undertaking such fundamental systemic transformations becomes far more difficult during a downturn, particularly as the risk of political backlash mounts.

7.  As suggested above, the Western Balkans bears a far more burdensome transition legacy than does Central Europe. The former Yugoslav state had papered over but never reconciled fundamental ethnic and sectarian schisms. The ensuing Balkan wars exacted a huge toll on all sides, for which the people of the region are still paying a very high price. It is now recognised in EU circles that Europe’s reluctance to mobilise its power and resources for the sake of peace in the region in the early 1990s was very much part of that tragic narrative. In the wake of these terrible wars, great strides were made to remedy this particular deficiency. Years after NATO had intervened to halt violence in Bosnia and later in Kosovo, the EU’s Thessaloniki Summit finally endorsed the goal of integrating the Western Balkans into the European family of nations. Seven years later, the countries of the region are now on the path to eventual accession, although they are positioned in a staggered fashion. At the same time, membership aspirations have become a common organising principle for the region’s governments and a force for reconciliation among them. In many, but not all respects, the lessons of the 1990s have been learned and internalised in Europe and in the region.

8.  The road to membership, however, is rocky, and only Croatia is on the cusp of achieving the basic qualifications to that end, as it has been given an accession date of 2013 subject to monitoring of implementation of agreements. The others face challenges, which have been made all the more daunting due to the global economic crisis and internal tensions within the EU itself. These include the sovereign debt crisis, problems of governance and corruption in several new member states, and enlargement fatigue among some EU governments and their publics. Leading parties in Germany and the Netherlands, for example, have recently called for an indefinite halt to enlargement after Croatia’s expected accession (EIU). Governance and corruption problems across the West Balkans, ongoing ethnic tensions, unsatisfactory levels of media freedom, weak state institutions, the persistence of pre-modern clan structures that undermine modern notions of citizenship and a true sense of the state among ruling elites, structural rigidities, corruption and pervasive organised crime are all militating against the rapid integration of this region into the European Union. These shortcomings remain a source of concern in Euro-Atlantic circles.

9.  Finally, much work still needs to be done to sort out the wartime legacy. This is particularly evident in Bosnia and Herzegovina and in Kosovo. In both cases, large minorities have refused to reconcile themselves to authorities governing where they are settled, thus challenging their fundamental legitimacy. Serbia itself has adamantly rejected the secession of Kosovo, and this led to some diplomatic roadblocks. Adding to this particular problem is the fact that not all EU members have recognised Kosovo. Political leaders from all three large ethnic communities in that country sometimes seem intent on fostering inter-community suspicion rather than reconciliation and continue to use deeply-held ethnic fears to mobilise political support.

10.  The very structure of certain states is part of the legitimacy problem. In the eyes of many outside observers, the constitutional structure put together at Dayton for the purpose of ending an appalling war now seems entirely unworkable as a framework for building a functioning and legitimate state and thus totally unsuitable for moving Bosnia and Herzegovina towards selfsufficiency and EU accession. These deficiencies make reconciliation all the more difficult. One of the features that distinguish at least several Western Balkan candidate countries from Central European countries like Hungary and Poland is that these countries are still in the process of fundamental nation-building. Croatia and Serbia are two partial exceptions. Nation-building itself is an historic undertaking, and most European countries have had centuries to develop their national identities, political cultures and institutional structures. The Western Balkans, however, are on a far tighter schedule. Although the Euro-Atlantic Community is providing a great deal of support and encouragement, such highly complex and multifarious processes cannot simply be imposed from above or from beyond. Finally these countries must now also contend with grave economic uncertainties, some of which are subjecting core EU programmes, including enlargement, monetary union and the Maastricht criteria for public deficit and debt levels, to renewed scrutiny. Hence the barriers to full Western Balkan participation in the life of Europe remain formidable and the target at which these countries are aiming may, itself, be a moving one.

 


II. GROWTH, UNEMPLOYMENT, REMITTANCES, BALANCE OF PAYMENTS AND BUDGETS

11.  In Central and Eastern Europe, the process of abandoning Communist models of economic organisation invariably precipitated serious recession. This was the inevitable cost of moving toward more efficient allocative models. Of course, the Balkan wars and economic sanctions delayed and then distorted this vital phase of transition. In economies dominated by warlords and subject to international sanction, for example, criminal groups and cronies of the political establishment, rather than genuine entrepreneurs, managed to seize the means of production and gain a stranglehold on trade routes and commerce. The economic toll on the region was extraordinarily high, not only due to the legacy of criminal engagement in national economic life, but also because transition itself was delayed.

12.  Despite this very tragic start to the transition process prior to the explosion of the global financial and economic crisis in 2008, most Western Balkan economies were enjoying relatively strong growth rates of between 5 and 7%. Between 2005 and 2007, the average annual growth rate for all the Balkan countries was higher than that of the EU. Montenegro was the region leader, growing at about 10% per annum in that period. In 2008 when a number of EU countries began to slip into recession, the Western Balkan economies continued to grow although at a slightly lower level, approaching 5% as compared to an EU average of 0.7% (Lessenski). The delayed arrival of the crisis simply reflected the fact that the region is not deeply integrated in global financial markets and that its banks were not engaged in the kind of practices that first triggered the crisis in the West. Eventually and indeed unavoidably, the crisis did strike the region, and its impact has been particularly harsh. The crisis transmission mechanism, however, was not the banking and financial system as such, but rather the serious decline in export markets in Europe, the precipitous fall in remittance payments – or those wages and savings repatriated by West Balkan émigré communities living in Europe – and the collapse of foreign direct investment, which has under girded demand growth in the region.

13.  Only in 2009 did the full force of the global crisis strike the Western Balkans. All countries in the region returned to growth in 2010 except for Croatia. The region’s economic recovery is expected to strengthen in 2011.

14.  It will take time before the region returns to growth rates achieved in the run-up to the crisis and this will hinge on continued reform and a return to growth in the rest of Europe. These economies need robust growth to converge with their European neighbours, generate jobs and fulfil the rising expectations of their people.

15.  Of course, raw growth figures only give a crude picture of economic conditions in each of these countries. Other numbers are perhaps of even greater social and political consequence. Unemployment statistics are particularly important in this regard, as the Western Balkan countries have poorly funded and generally inadequate social safety nets including unemployment support and public health care systems. High unemployment not only imposes burdens on struggling families and breeds political discontent, it can also push economic activity into the grey and black markets and exacerbate inter-ethnic relations. Modernising the institutional framework that governs a national economy becomes all the more difficult when a significant portion of the national economy has “gone underground”. In fact, the jobless rate was already high in the period of growth prior to the crisis. In the former Yugoslav Republic of Macedonia* nearly one-third of the work force is currently unemployed. The numbers are 25% for Bosnia and Herzegovina and 47% for Kosovo. About 17% of the work force is unemployed in Croatia and Serbia (Lessenski).

16.  Emigration is a critical safety valve for the unemployed in the Western Balkans as well as a source of vital foreign exchange. Yet, migrants are frequently the first to lose their jobs when crisis strikes. Unemployment rates have jumped in Western Europe and the level of job creation coming out of a financial sector induced recession is not expected to return the EU quickly to the status quo ante (OECD Briefing 2011). This has implications for the Western Balkans as it will only add to the unemployment rolls in the region and reduce essential remittance payments which are a crucial source of foreign exchange. In 2008, remittance constituted 14.8% of Bosnia and Herzegovina’s GDP, 12.2% of Albania’s, 11.1% of Serbia’s but only 2.3% of Croatia’s and 4.3% of the former Yugoslav Republic of Macedonia (Lessenski). The downside is that this has also left the region vulnerable to downturns in European economies. More than 600,000 Albanians have been working in Greece, and their repatriated earnings have constituted an important component of that country’s GDP. Remittance payments fell from US$141,496 million in 2008 to US$1,275 million in 2009 in Albania, and from US$ 2,735 million in 2005 to US$2,210 million in 2009 in Bosnia and Herzegovina (Lessenski).

17.  Virtually all of the Western Balkan countries were running balance of payments deficits prior to the crisis and doing so at rates higher than the EU average. Payments deficits are quite normal for emerging countries in the midst of strong growth spurts and are frequently driven by strong inflows of investment, capital goods and equipment. As the European prospects for the region brightened and as trade restrictions in the region were lifted, the availability of financial capital to the region increased. Significant capital inflows have helped finance those deficits, which in several cases were substantial. In 2008 the trade deficit as a percentage of GDP stood at 32.9% in Albania, 38.4% in Bosnia and Herzegovina, 22.9% in Croatia, 27.7% in the former Yugoslav Republic of Macedonia, 68.5%.in Montenegro, and 21.9% in Serbia (EIU, Chief Economist’s Report, Central Bank of Montenegro 2008). These deficits substantially exceeded EU averages but it is important to note that these economies were also growing faster than Europe and importing high levels of goods and capital. 

18.  Foreign Direct Investment (FDI) to the Western Balkans had risen substantially prior to the economic crisis. In 2007, for example, Foreign Direct Investment in Montenegro stood at 21.8% of GDP as compared to 6% for Albania, 13.5% for Bosnia and Herzegovina, 8.2% for Croatia, 8.5% for the former Yugoslav Republic of Macedonia, 4.4% for Serbia and 12.6% for Kosovo. The crisis has considerably slowed the influx of investment into the region, although FDI in 2009 rose in both Albania to 7.6% of GDP and 35.77% of GDP in Montenegro (Lessenski). While the deepening relationship with the EU, including the signing of Stabilisation and Association Agreements (SAA), has helped galvanise foreign investment and credit flows into the region, corruption, political instability and the ubiquity of organised crime have rendered the investment climate less predictable and thus riskier than it would be were these problems properly tackled. The World Bank has given the region only a moderately business friendly rating and notes that these factors as well as outstanding judicial problems continue to act as a break on the region’s development. It is worth noting that in the period 2003 and 2008, Romania and Bulgaria attracted substantially higher inflows of investment capital in comparison with the Western Balkans, reflecting, in part, their more propitious prospects for European accession (Cutrini et al. and Chief Economist’s Report, Central Bank of Montenegro 2007, 2009.)

19.  The crisis has also exacted a toll on government budgets throughout the region. Slowing growth has lowered government tax receipts while welfare and unemployment payments have risen, compelling governments to go to capital markets to make up shortfalls. This has also created new pressures for structural reform. Debt levels have accordingly risen. In 2009 debt levels as a percentage of GDP in the region stood at: Albania 59.40%, Croatia 47.40%, Bosnia and Herzegovina 43%, the former Yugoslav Republic of Macedonia 25.5%, Montenegro 38% and Serbia 37% (CIA Factbook). In several cases, the IMF has provided emergency credits to shore up government balances and defend exchange rates. Serbia and Croatia have seen an important increase in foreign debt and their profiles in this regard are similar to that of new member states. Overall debt levels are also driven by rising public debt in both countries (Gligorov and Landesmann).

20.  The general fiscal and debt crisis in the euro area, particularly among several more vulnerable EU member countries, has compelled the Commission and national governments to reexamine the assumptions behind monetary integration and the conditions candidates must fulfil in order to reassure current members that they are prepared to participate fully in the life of the Union. The Commission will seek to ensure that the budgets of incoming states are properly structured and sustainable. This, of course, will raise the bar for prospective members and further complicate the enlargement process for these states. There is a sense in some EU member governments, and perhaps an even more acute sense among many citizens that there are limitations on how much “solidarity” Europe can show for countries that are not able to keep their budgets and debts under control. This concern could well fit into a broader sense of “enlargement fatigue”. Several European governments seem increasingly reluctant to enlarge their Union further given the already substantial problems governing the existing union (Daborowski et al.). It is worth noting that most Western Balkan countries have generally done a good job on the budgetary front, although sometimes with resources that have only been temporarily available. Even a relatively low performing economy like that of Bosnia and Herzegovina enjoyed a budgetary surplus prior to the economic crisis, and the region as a whole had deficit levels below the EU 27 average (6.8% of GDP).

 


III. THE EUROPEAN DIMENSION

21.  At the 1993 Copenhagen European Council meeting, the EU agreed that associated countries in Central and Eastern Europe were eligible for membership and that accession would transpire for each country when they were prepared to assume the obligations of membership by satisfying the economic and political conditions required. It then laid out the so-called Copenhagen criteria for membership which require the countries to have achieved:
- stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities;
- the existence of a functioning market economy as well as the capacity to cope with competitive pressure and market forces within the Union;
- the ability to take on the obligations of membership, including adherence to the aims of political, economic and monetary union.

22.  At the Madrid European Council meeting in December 1995, it was decided that membership criteria should also require that the candidate country develop appropriate administrative structures conducive to integration. While it is important that European Community legislation is transposed into national legislation, it is even more important that then legislation is implemented effectively through appropriate administrative and judicial structures as a prerequisite of the mutual trust required by EU membership. These criteria remain unchanged and they are the standard with which the countries of the Western Balkans must contend in order to qualify for full accession to the Union.

23.  Prior to the explosion of the global financial and economic crisis in 2008, the economies of the Western Balkans generally showed strong signs of improvement and made impressive progress in forging closer bonds with the EU and NATO. The EU has now signed or is on the verge of signing SAA covering most of the Western Balkans with the exception of Kosovo. Croatia put itself on the fast track to European integration through dedicated reform, serious economic and institutional progress and a new-found willingness to co-operate with the International Criminal Tribunal for the former Yugoslavia (ICTY). The Serbian government, which after the fall of Milosevic announced its accession ambitions, has also taken essential steps to deal directly with the criminal legacy of the Milosevic regime in the face of very harsh resistance of political extremists and shadowy criminal networks.

24.  Having peacefully won its independence from Serbia in 2006, Montenegro also moved quickly to establish its European qualifications. It attracted a huge influx of foreign investment in the process. These funds triggered an economic boom in that country which endured until 2009. The former Yugoslav Republic of Macedonia would likely have been admitted to NATO along with Albania and Croatia in 2010, had it and Greece managed to settle an extremely frustrating (at least for the international community) dispute over the country name issue. Albania too enjoyed a fairly robust growth rate and was admitted to NATO in 2009.

25.  But critical problems in the region persist and these are clouding the prospects for European accession over the near to middle term. The government of Bosnia and Herzegovina has been paralysed politically due to ever decreasing co-operation among the leaders of the three largest ethnic groups. The constitution of that country has been inadequate to the task of encouraging reconciliation, co-operation and decent governance. The Serb and Albanian communities in Kosovo also remain fundamentally polarised, while Serbia refuses to recognise Kosovo’s status. In Bosnia and Herzegovina and Kosovo internal divisions pose fundamental challenges to the legitimacy and viability of the governing system. In both Kosovo and Serbia, the central governments are weak and, at times, bordering on dysfunctional. The region remains beset by corruption, organised crime, political fiefdoms that militate against genuine democratic dialogue between political leaders and civil society, and creaky and often overstocked civil service structures where political connections rather than merit are the basis for hiring and promotion.

26.  As suggested above, the Western Balkans remain highly dependent on recovery in Europe, where the region conducts most of its commercial trade. Recovery also hinges on each government’s capacity to advance political, institutional and economic reform. Europe is providing models and rules of the game, but it cannot create the time, participate in the essential domestic dialogues and forge from outside the attributes of patience and tolerance that will be needed for these countries to modernise fully. Those are the responsibilities of the region’s leaders and their people. That said, of course Europe is extraordinarily important to the transformation of the Western Balkans. It is a key generator of incentives. Its markets and credit are vital to the area, its standard of living and democratic peace are worthy of emulation, and it offers a model of peaceful integration that could help bury the legacy of internecine strife, violence and impoverishment that have characterised the Western Balkans’ recent history.

27.  Although the trade partners for each country in the region vary somewhat in terms of relative order of importance, Germany, Italy, Austria and Slovenia are generally the region’s most important trading partners. But intra-regional trade is also increasing. Thus in 2009, while 27.43% of Croatian exports went to Italy, 18.54% went to Bosnia and Herzegovina. Although Germany purchased 15.23% of Serbia’s exports in 2009, Bosnia and Herzegovina purchased 17.76% and Montenegro 14.63% (Lessenski). Western Balkan countries thus hold a shared stake in each other’s success, despite the rhetoric to the contrary sometimes proffered by the region’s ultra-nationalists. This is good news as it provides a genuine foundation for reconciliation and a very healthy context for European integration.

28.  Lastly but importantly, it must be recognised that the prospects for the entire region’s integration into the EU have grown more remote in the midst of the global economic crisis. Concerns in EU countries about accepting members that are not convincingly aligned to European norms and standards in political, institutional and economic terms have raised the stakes for the region. The economic crisis in several EU countries as well as signs of deeply embedded corruption in others has fed into these sentiments and is being instrumentalised by those opposed to further enlargement.

 


IV. A SNAPSHOT OF NATIONAL CONDITIONS

29.  As noted earlier in this report, it is misleading to speak only in generalities about the Western Balkans. Indeed the region is very diverse even though most of it, Albania excepted, once lay within the boundaries of the old Yugoslavian state. Many of these differences are real. Some are imagined, but pervasive nationalist mythmaking has rendered them widely accepted and politically consequential. These distinctions, real and perceived, invoke historical, cultural, linguistic, orthographic, political, economic, social and anthropological factors. Collectively they point to a narrative lending weight to the notion that these countries are unique and indeed, in many ways, they are. For this reason, any study of economic conditions in the region needs to include an analysis of specific national conditions.

 

A.  ALBANIA

30.  Albania, of course, is unique in the region because it was not part of the Yugoslav Federation. Its experience during the Cold War was one of harsh totalitarianism and utter isolation – a legacy that continues to exact a heavy toll on the Albanian people, who have worked diligently to transcend that difficult legacy. Albanian society has had no modern democratic tradition to draw on to guide its transition, and its post-Communist experience has, at various times, been characterised by political instability, insecurity, and economic collapse as well as some progress in building state institutions. The absence of a liberal democratic tradition is a factor in the persistent prominence of traditional clan networks in organising national political and economic life – a phenomenon which can complicate building loyalties around a modern state.

31.  The country has made progress over the past decade and this was acknowledged when it joined NATO in 2009. But the road to EU accession is proving more challenging. The country is beset by social problems, an enduring political crisis, a low level of technology, institutional inefficiency and environmental problems. The persistence of criminal gangs involved in serious crimes like people trafficking and drug smuggling remains a concern, and there have been charges made in a December 2010 draft report to the Council of Europe’s Parliamentary Assembly by the Swiss parliamentarian Dick Marty that organ trafficking operations also took place on Albanian territory. That report noted that: “According to the information gathered by the Assembly and to the criminal investigations now under way, numerous concrete and convergent indications confirm that some Serbians and some Albanian Kosovars were held prisoner in secret places of detention under KLA control in northern Albania and were subjected to inhuman and degrading treatment, before ultimately disappearing… Numerous indications seem to confirm that, during the period immediately after the end of the armed conflict, before international forces had really been able to take control of the region and re-establish a semblance of law and order, organs were removed from some prisoners at a clinic in Albanian territory, near Fushë-Krujë, to be taken abroad for transplantation” (Marty). An EU taskforce will investigate these allegations.

32.  An ongoing political crisis, which has triggered a number of demonstrations is distracting political elites from dealing with several important structural challenges. The EU, US and OSCE Ambassadors in Tirana recently felt compelled to call for calm in the wake of street demonstrations against the government and an escalation of rhetoric between government and opposition parties. The Socialist Party continues to challenge the legitimacy of recent parliamentary elections and demonstrations in January 2011 resulted in four deaths. A government inquiry, criticised by the EU and other observers, sought to demonstrate that the unrest represented a failed coup d’état. An OSCE/ODIHR report on the 2009 elections noted the progress the country has made on voter registration and the legal structures of elections, vote counting and adjudication of election disputes, but nonetheless stated that the country is not meeting internationally recognised election standards due to excessive politicisation of the technical aspects of election management and because actions taken by the parties undermined public confidence in the election process (OSCE/ODIHR 2009). Albania’s political reform process has indeed been relatively slow and fitful, and over the course of a number of elections, international monitors, in the past, have expressed their concerns about voting procedures and perpetual challenges to the legitimacy of results, including opposition boycotts of the political process and the Parliament itself. Unfortunately, this very same drama is repeating itself.

33.  The EU has signed an SAA agreement with Albania, which receives funds through the Instrument for Pre-Accession Assistance (IPA). EU officials, however, continue to express deep concerns about the political situation in that country. The EU is putting off membership talks due to Albania’s ongoing problems with the rule of law and what it sees as a sub-standard effort to combat organised crime and corruption (Brunwasser). The EU Council has called for more constructive dialogue between political parties and stakeholders and accelerated reform.

34.  Electoral problems are only one dimension of a set of challenges related to civil liberties; media freedom, institutional efficiency, corruption and organised crime are also of great concern. These are problems that Albania must address and their seriousness is reflected in the Freedom House 2010 reports, which characterised Albania as only “partially free”. Transparency International has suggested that corruption in Albania is pervasive and that weak property rights undermine an economic climate that has generally improved over the past two decades. The EU has communicated to the country that it must advance judicial reform and make further progress in the fight against corruption and organised crime. But none of these issues are likely to be seriously addressed if the political situation is not improved and if there is no genuine dialogue and a modicum of co-operation between opposition and government parties.

35.  In recent years, Albania’s economy has shown signs of dynamism. From 2004-2008 that economy grew by 6% per year while inflation remained low. It is estimated that the Albanian economy grew at 3.5% in 2010 and just under 3% in 2011 due to falling domestic and export demand. Because past infrastructure investments are now set to come on line, the IMF estimates that Albania’s economy will grow by 4% in 2012 - a rate that is still below the growth rates over the previous decade. Per capita income is still only 25% of the EU average (Stojkovski). Growth has essentially been driven by remittance payments largely from Italy, Greece, Germany and Switzerland, investment in construction particularly along the coast, tourism, pre-accession programmes sponsored by the EU, and natural resource extraction and agriculture. All have suffered as a result of the European recession; yet Albania has managed to weather the global crisis in ways many European countries have not. Growth has continued throughout the crisis and the banking sector has remained fairly robust.

36.  Albania’s budget has been under pressure for the past two years. The deficit is projected to rise to 4.6% in 2011 and to 5% over the medium term. Albania will need to engage in further fiscal consolidation to ensure that this deficit does not get out of control. Over-optimistic forecasting has been part of the problem, and more realistic economic assessments are essential; this would prevent the need for mid-year budgetary corrections which have become the norm in Albania. Consolidation measures should aim at reducing the consumption component of government spending. Too many resources are underwriting wages, entitlements and interest payments (two thirds of the total) and too few are underwriting the kind of investments that might boost productivity over the longer term. The government will also need to focus on attracting foreign investment to ensure that growth remains strong over the longer term.

37.  Monetary policy has been disciplined by inflation targeting while a flexible exchange rate mechanism has clearly helped the country weather the impact of external shocks. Loose fiscal policy is a concern as government borrowing threatens to drive up interest rates and this, combined with the Central Bank’s inflation targeting strategy could ultimately take a toll on the economy. Strong bank regulations were instrumental in limiting the damage from the banking crisis in the West but continued close monitoring of the situation is needed as Albanian banks adopt more innovative financial strategies.

 

B. BOSNIA AND HERZEGOVINA

38.  Bosnia and Herzegovina bears the heaviest war burden of any country in the region. Over 100,000 Bosnians were killed or vanished during that conflict, roughly 50% of the country’s inhabitants were driven from their homes, and damage to infrastructure continues to cost the national economy. The Dayton Peace Accords marked the end of the war but have also institutionalised the country’s profound ethnic and sectarian divisions. That settlement created a Byzantine government structure with two territorially distinct entities, the Rebublika Srpska and the Federation of Bosnia and Herzegovina, each administering a wide array of governing institutions. Indeed, there are 14 governments in Bosnia and Herzegovina, one state government, two entity governments (Federation of Bosnia and Herzegovina and Republika Srpska), one government of the District of Brcko and ten cantonal governments in the Federation. With myriad municipal administrations and courts, the system is effectively riddled with veto points where policy can be and often is blocked. Not surprisingly the central state is weak and incoherent. Competing layers of government not only undermine effective decision-making, they also facilitate corruption and discourage reconciliation, which in any case, is actively resisted by leading political figures in the country (Hirsch). This gravely complicates efforts to move forward on reforms needed to lay the foundations for EU membership. A recent European Court of Human Rights ruling suggests that the Constitution expressly denies representation of smaller minority groups and thus violates European human rights law. The Constitution has thus bequeathed the country a highly inefficient governmental structure which seems to perpetuate ethnic hostilities rather than foster reconciliation. Despite these structural problems, the lack of political will to solve the county’s core problems is probably an even more consequential source of the country’s difficulties.

39.  Ultimate authority for the interpretation of the civilian aspects of the Dayton Peace Accords still rest with the UN’s Office of the High Representative, a position created in Dayton to ensure implementation of those agreements. This has become something of a Catch 22 as such a deep limitation on national sovereignty can discourage responsible politics. Yet irresponsible and often xenophobic politics perpetuate the need for a High Representative in a country that some analysts still see as a potential tinder box. The political stand-off among the three largest sectarian groups and the related institutional crisis is militating against economic development and integration with the rest of Europe.

40.  Corruption is also a very serious impediment to economic development and Bosnia and Herzegovina ranks 99th of 180 countries surveyed in the Transparency Corruption Perception Index (Transparency Int. CPI). Civil service hiring is premised on cronyism and ethnicity and the level of professionalism and capacity is low, further undermining public faith in government institutions. A history of wartime smuggling and organised crime is a plague on the national economy and gravely undermines governance. Fighting organised crime is virtually impossible given the incoherence of state institutions, the fragmentation of law enforcement, and the protection to criminal groups afforded by a state penetrated in places by organised crime. Investigative journalism could potentially help check the infiltration of organised criminal groups into public institutions, but this is impeded insofar as ownership and/or control of the media is often in the hands of those with a vested interest in the status quo; several are very close to the country’s political parties.

41.  In 2007 Bosnia and Herzegovina was experiencing strong GDP growth of 6.1% and FDI inflows equivalent to 13.5% of GDP. By the following year both growth and FDI fell to 5.7% of GDP (EIU) and in 2009 growth to -3.3%. Growth in Bosnia and Herzegovina had previously been driven by domestic demand and financed by foreign credits. Significant government spending increases, particularly on public wages, also triggered rising inflation, unsustainable levels of public debt, and a burgeoning current account deficit. The global financial crisis then struck Bosnia and Herzegovina’s exports and sharp reductions in foreign capital inflows. Although the current account deficit has been cut in half due to precipitously falling imports, financing even that short fall has proven difficult as credit sources have dried up. The country has moved from a fiscal balance to a sharp deficit (approaching 30% of GDP) in that same time period. Both the Republika Srpska and the Federation delayed key austerity measures until after the elections and each now needs to rein in fiscal spending under the terms of a stand by IMF loan of euro 1.2 billion. These credits are to be used to prop up the currency board, cushion the effects of the global crisis, strengthen the banking sector, and help redress fiscal imbalances. The IMF is also pushing for further structural reforms and privatisation. In the long run it is unlikely that the state will be able to meet expensive social obligations like veterans payments which have proven to be a serious burden on public finances. This is a potentially explosive issue (Ralcehv, BiH).

42.  The economy began to recover slowly in 2010 and 2011. But growth prospects are limited by fiscal consolidation which is needed to curb both inflation and the current account deficit. Budget restraint will have to be made a structural feature of the economy rather than a temporary anticrisis measure (IMF review).

43.  That two-thirds of Bosnia and Herzegovina citizens support the country’s integration in Europe is a positive development in an otherwise rather bleak outlook. The relationship with the EU deepened in 2010, and the European Commission recently eliminated visa requirements for short-term travel – a move that should provide a much needed outlet for the country’s young people in particular. The SAA with the EU will lower duties on a range of EU imports and this will be both a boon to consumers and a source of competition for domestic producers. Despite this formal progress, the prospects for European accession remain very remote because of persistent political and institutional problems, chronic corruption and because Europe cannot move forward if Bosnia and Herzegovina is unable to manage its very serious domestic and inter-communal problems.

 

C. CROATIA

44.  In terms of its economic and institutional development, Croatia has made important political and economic progress since establishing its independence. Progress in closing chapters of accession negotiations which have made a 2013 invitation to EU membership likely, co-operation with the ICTY, and a strong push to establish viable anti-corruption rules have some in Brussels arguing that full EU membership will be achieved soon (“Croatia set to complete EU talks this year”, Reuters, 29 May 2011). On the twelfth of July 2011 the ECOFIN Council formally closed Croatia’s EU Accession negotiations. Paradoxically, although elites remain deeply committed to joining the EU, the public has shown increasing scepticism about enlargement. The ICTY sentencing in April 2011 of Ante Gotovina and Mladen Markac, who were given 24 and 18-year prison terms respectively for war crimes committed during Croatia’s war with Serbia has helped galvanise anti-EU sentiments in the country. The percentage of Croats opposing EU membership approached 60% in April 2011 (Pop). These sentiments set Croatia apart from other countries in the region and suggest a need for public discussion about the benefits and costs of membership (EIU).  Negotiations on the drafting of the Accession Treaty are expected to be concluded in time for signature before the end of 2011. The anticipated date of Croatia’s accession is 1 July 2013, on which day the Treaty shall enter into force, providing that all 27 member states and Croatia’s instruments of ratification have been deposited.

45.  Croatia has achieved a high degree of institutional development compared the rest of the region. Its economy has made impressive gains, and the government has responded with agility to the global financial and economic crisis by keeping its budget on sustainable foundations. This helped put it on the road to recovery by the second quarter of 2010. The government has also undertaken important initiatives to confront the legacy of the war including the decision to cooperate with the ICTY in the arrest of Ante Gotovina, the Croatian General indicted for war crimes. Although there have been complications on the road to European accession, including hesitations about co-operating with the ICTY as well as border disputes with its neighbours, Croatia moved quickly into the Euro-Atlantic orbit and joined NATO in April 2009. It recently settled a dispute with Slovenia over a maritime border, a matter that was holding up EU accession talks. An EU appointed arbitration board is now working to settle several outstanding land border disputes.

46.  Croatia has performed well in building a more open and democratic society. Freedom House rates Croatia as a “free” society and has upgraded its assessment of political rights there, giving it a top score of 1 on a scale of 1 to 7. This is due, in part, to improved treatment of the Serbian and Roma minorities. The Roma, however, remain marginalised in Croatian society as they are in much of South-Eastern Europe. There are also lingering concerns about the situation for the Serb community. According to a generally positive 2010 report by the Council of Europe’s Commissioner for Human Rights, large parts of Croatia’s territory, including agricultural land and forests, still need to be demined to create conditions promoting the safe return of those who were forced to flee the country during the war. There are also matter to be addressed related to lost or damaged property and the rights of former occupancy/tenancy right (OTR) holders who either do not wish to or cannot return to Croatia to benefit from the housing care programme (Hammarberg).

47.  Corruption continues to be a problem, and, as is the case in several countries which suffered through the wars of the 1990s, there are sometimes unhealthy ties among elements in the state security sector, business and politics. Several assassinations have been purportedly linked to these shadowy networks (Freedom House). The EU is calling for continued judicial and administrative reform and wants the fight against corruption advanced. Croatia was ranked 66 out of 180 countries surveyed in Transparency International’s 2010 Corruption Perceptions Index, the best grade for any Western Balkan country. In general, Croatia has made good progress on corruption matters and has even taken on high placed officials, purportedly with criminal links. In December 2010, the Croatian governments issued an arrest warrant for the former Prime Minister Sanader on corruption charges. He was subsequently detained in Austria and has undergone several hearings regarding his extradition to Croatia (AFP).

48.  The economic crisis has slowed growth in Croatia, but the government maintains that its institutional and reform agenda remains on track. The economy was hit by a fall in export demand, lower rates of FDI and tighter credit conditions. Demand for imports fell more than the fall of exports, due, in part, to strong fiscal measures to contain the budget deficit, and this has actually led to an improvement on the trade balance. Real GDP grew by 1.3% in 2011 and is expected to rise to 1.8% in 2012 (IMF World Economic Outlook April 2011). But borrowing has been used to conduct fiscal consolidation measures, and this is not sustainable in the medium term. Government emergency actions in 2009 helped maintain liquidity in the economy while prudent monetary management has helped narrow spreads on bond issues. Domestic demand contracted through 2010, and this noticeably struck the labour market. Croatia has a relatively narrow export base and, according to the IMF, this lowers the potential for it to rebound along with its most important trading partners. The country’s medium term growth prospects are not particularly favourable due to persistent structural rigidities and competitiveness shortfalls. The labour market is rigid and uncompetitive in comparison to the rest of the region and this is a factor in the country’s unsatisfactory unemployment level and in the country’s export performance. The wage structure remains quite rigid and salaries are relatively high given the level of productivity and national income. The government has recently made some headway in adjusting pension rules and laws on civil service employment. Productivity growth has been slow and this is partly due to the fact that privatisation is still not complete. Finally Croatia’s business sector is heavily regulated and this adds significant cost to enterprises operating in the country. Budget deficits and debt have risen in recent years and the country has a fairly large stock of foreign currency denominated debt which leaves it vulnerable to external shocks. High commodity prices and the potential of an economic downturn in Europe arising out of the sovereign debt crisis in Greece and elsewhere are two potential downside risks for the economy. On the upside the prospect for European accession could accelerate inward investment, particularly if Europe avoids a sovereign debt crisis (IMF, 16 May 2011).

49.  Croatia urgently needs to implement a consistent set of macroeconomic, structural and financial sector policies to ensure sustained growth in the future. The Croatian economy has been slow to pull out of the recession and the IMF is calling for labour market and public sector structural reforms and a general push to drive down the costs of doing business in that country. The IMF is concerned about fiscal consolidation and has argued that the budget problem worsened last year. It is calling on Croatian authorities to prevent any additional rise in budget deficits. The 2011 budgets foresees a general deficit of 5% of GDP but the IMF argues that it will be 5.75% with public debt rising to 47% of GDP. Croatia’s GDP fell 1.25% in 2010 and is projected to expand modestly by 1% in 2011. Inflation is slated to rise at 3.25% this year and external financing requirements could rise to 30% of GDP. The prospects for accession will likely stimulate further investment in the country, and the government is hoping to engage the investor community in major infrastructure upgrades.

50.  Finally, last year the government adopted a comprehensive reform agenda to address several of the outstanding structural shortcomings that handicap the national economy. These included laws to equalise the statutory retirement age of men and women, measures to discourage early retirement, and a reduction of some unemployment benefits that were discouraging the return to work. Privatisation efforts are again underway, but a number of other reform measures have been delayed because some social groups are sharply opposed thereto.

 

D. THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA

51.  Although the former Yugoslav Republic of Macedonia was not directly caught up in the Balkan wars of the 1990’s, those conflicts have had a strong impact on the country. Armed violence did briefly break out in 2001 between members of the minority Albanian and the majority communities, but the international response was swift, and a peace arrangement was quickly brokered. Indeed, the Former Yugoslav Republic of Macedonia’s greatest achievement perhaps has been to avoid wide-spread violence among its ethnic communities in a region which tragically failed to show such restraint. Although tensions between the majority and Albanian communities persist, the Ohrid Framework Agreement was signed to manage these relations and hasten the Albanian community’s integration into the life of the state and economy. Freedom House categorises the country as partly free and cites corruption, a politicised media with political leaders owning television stations and human rights problems in prison as among the reasons for this less than stellar rating. The politicisation of the judiciary and public administration is also serious, and European Union officials have been at pains to explain that this discourages direct investment and penalises the entire economy. Within the public administration system, hiring is a politicised and opaque process, and corruption is widespread (Stojkovski). The European Commission, however, has cited some recent progress in addressing several of these concerns but has also criticised hiring procedures, patronage and general party influence over what should be a politically neutral and meritocratic civil service.

52.  The former Yugoslav Republic of Macedonia continues to conduct a bitter dispute with Greece over the name issue, and this has held up its accession to NATO. As in much of the region, there are serious problems with organised crime, which has penetrated some sectors of the state and parts of the old enterprise structures (Stojkovski). Crime groups in the country are also engaged in drug and people trafficking. A recent Europol reports noted that the region as a whole is the central point for trafficking to and from the EU. Multinational criminal groups are also active in Kosovo and Albania (Europol). The country’s relations with both Kosovo and Albania remain complex because of ties between those countries and the former Yugoslav Republic of Macedonia’s minority Albanian community. That said, relations with Albania and Kosovo have improved markedly in recent years and the level of exchange, cross-border activities and international agreements has increased. Serbia remains a strong trading partner, despite tensions precipitated by the former Yugoslav Republic of Macedonia’s border delineation agreement with Kosovo. Finally, the economic crisis has put the economy into mild recession, and this gives the 31% of its workforce currently on the unemployment rolls few job prospects (EIU). In the long run, serious political and institutional reform and deeper integration with Europe will be the key to addressing this particular problem.
 
53.  After growing 5% in 2008, the country’s economy shrank by 0.9% in 2009 and in 2010 grew at an estimated 1.2%. This is expected to rise to 3.5% in 2011. The recovery is driven by rising exports, new investment and consumption. Remittances and an improved trade balance have led to an improved balance of payments situation and the payments deficit will be a manageable 3.5% of GDP in 2011. The IMF has suggested that the banking sector has been well-regulated and was sufficiently insulated from the effects of the global banking crisis. The government has also met its fiscal deficit targets of 2.5% of GDP by cutting expenditures as revenue fell. The Central Bank has reduced interest rates from 9 to 4% to help kick start economic growth. Government policy has thus been prudent and this has helped it navigate through a difficult period. There are nonetheless outstanding risks of contagion, particularly if the European economic situation were to worsen due to a sovereign debt crisis. Its relatively strong balance of payments position, however, provides a certain cushion in that event (IMF).

 

E. KOSOVO

54.  Kosovo has had to cope with the fundamental challenge of building governmental institutions from scratch. It has also confronted consistent challenges to its legitimacy launched by the Serbian state and from a sizeable Serbian minority. It is first important to note that four NATO member countries - Greece, Romania, Slovakia and Spain - do not recognize the sovereign status of Kosovo.  The International Court of Justice, acting at the request of the UN’s General Assembly, has recently ruled that its February 2008 declaration of independence did not violate international law. Since the Court handed down that ruling, there has been a more concerted effort to move Serbia and Kosovo toward a kind of practical reconciliation. Talks between Kosovo and Serbia began in March 2011. The two sides have been strongly encouraged to focus on areas of practical potential co-operation even though fundamental problems between the two persist. To date, six rounds of talks have been held focusing on a range of issues including freedom of movement, civil registry books, cadastral records, and customs stamps.  However, the Dialogue has not been without obstacles. The round scheduled for July was cancelled after Serbia would not accept the proposal for Custom stamps.  Kosovo’s response, banning all products from Serbia and moving Kosovo’s police to two day customs gates in Northern Kosovo to reinforce it, led to a stand-off with the local Serb population until KFOR brokered a deal with Kosovo and Serbia (Barlovac Bojana, 15/06/2010).

55.  A recent Council of Europe Report authored by Dick Marty has charged that senior Kosovo officials, possibly including Prime Minister Hashim Thaci, were involved in organised criminal activities including human organ trafficking during the war. The Legal Affairs and Human Rights Committee of the Council’s Parliamentary Assembly unanimously approved that report on 16 December 2010 and in January 2011, the entire Assembly called for a full investigation of these alleged war crimes. Both Kosovo and Albania have agreed to co-operate with the investigations. The Marty report describes KLA involvement in political assassinations, and their direct responsibility for illegal organ trafficking and the murder of hundreds of prisoners. These allegations are consistent with similar claims made by Carla del Ponte, the former Chief Prosecutor of the ICTY. These are now to be investigated by the EU Rule of Law Mission in Kosovo (EULEX) (Human Rights Watch). In May 2010 EULEX Prosecutor Johannes van Vreeswijk announced another investigation of eight ministers for corruption and organised crime links. The EU has now charged that Kosovo has no viable crime reduction strategy in place and, for example, lacks a witness protection law, which makes investigation of high-level crime virtually impossible. The government is expected to pass a protection programme this year which for the moment is being run by EULEX.

56.  It is not the purpose here to explore these highly controversial allegations. Yet, that they are being taken very seriously in diplomatic and legal channels is emblematic of the dire challenges Kosovo confronts: it suffers a high level of corruption, is beset by organised crime, continues to be saddled by serious problems in its administrative and judicial systems and remains highly segregated along ethnic lines. Governance is further eroded by the prevalence of clan leadership structures which block the full blossoming of civil society – an essential component of any viable democracy.  The EU has identified these as matters that must be addressed (European Commission; 14/10/09).

57.  Some improvements have nonetheless been registered. The most recent Freedom House report has raised Kosovo’s political rights rating from six to five, its civil liberties rating from five to four, and its status has moved from “Not Free” to “Partly Free” due both to municipal elections that were generally deemed to be in compliance with international standards, and greater recognition of minority rights. But overall the human rights situation is not up to standard, while the stand off between the Albanian majority and the Serbian minority along the Ibar River remains frozen.

58.  The economic situation in Kosovo, is challenging although the economy is growing. Many of Kosovo’s most serious economic problems arise from the very apparent deficiencies in its institutional structure and political culture, both of which are partly the product of decades of political marginalisation and war. Corruption and serious governance problems foster a climate of uncertainty and discourage investment. Kosovo has also become highly dependent on foreign assistance. As of 2009 it had received 25 times more international aid per capita than Afghanistan, but this assistance has failed to genuinely galvanise the national economy or to help create an institutional structure that in turn might facilitate economic takeoff. Kosovo has an unemployment rate approaching 47%, and according to the IMF, average per capita income stands at euro 1,726 or 6.9% of the EU 27 average. The economy itself is based on three very weak pillars: EU donations, remittance payments from the Albanian Diaspora, and mining, which is a highly undercapitalised industry. Remittances and aid represent about 10% of GDP each and the share of the mining sector, while rising, is still relatively low as most major mining operations remain moribund. Zinc, nickel and fabricated metal products are Kosovo’s primary source of export earnings. The presence of EULEX and KFOR also injects liquidity in to the economy, but this is hardly a foundation for future growth (Stojkovski). Perhaps the most telling indicator of its economic weakness is the unemployment rate which drives citizens into the black and grey markets or abroad. The level of unemployed 1524-year olds was 73% in 2009 (Collaku).

59.  Kosovo has adopted the euro which allows it to import a degree of monetary discipline from the EU space. The downside is that it places the burden of adjustment on the domestic economy. The government had been fairly prudent with its budget and has a very limited capacity to issue debt. Since 2008 the budget deficit has expanded as the government has tapped into cash stocks, donor support and asset sales to bolster spending and particularly public sector wages. The IMF has expressed concern that this is not sustainable and interrupted a Stand-By Arrangement it had in place. Kosovo had moved quickly from a budget surplus approaching 7% of GNP to a deficit of 2.6% in 2010. The IMF projects the economy to grow by 5% in 2011 and 2012 driven by remittances, credit growth and public investment which are all underwriting domestic demand growth. The current account deficit will likely rise to 25% of GDP financed by FDI and other capital inflows and inflation could rise to 8% due to high import prices. If European growth were lower than projected, remittance earnings would be hurt and this would slow growth in Kosovo (IMF, 30 May 2011). Over the longer term, remittance payments may prove a less reliable source of income as expatriate Kosovars become more integrated in their host countries.

60.  The government is undertaking a series of reforms, and the hope is that these will create structures for development and eventually for economic takeoff. The government’s “Doing Business Taskforce” will recommend measures to move the country up the World Bank’s index measuring the business climate with the goal of moving into the world’s top 40. Several privatisations are being prepared by the newly-created Ministry of Economic Development. If successful, they will make it more difficult for political actors to effectively “colonise” the economy through public ownership. There is much to be done. The judicial and administrative systems are not reliable, workers skill levels are modest, and wages are not properly aligned with the low level of productivity.

61.  In short, the real economic story of Kosovo lies in the ongoing weaknesses of its institutions, the failure of its governing elite and two largest communities to breach the ethnic divide, the twin problems of corruption and organised crime and the poor relations with Serbia. Its weak economy cannot be expected to take off and its European ambitions will never be fulfilled until these issues are squarely addressed (Ralchev). The international community, including the EU, can do more to support good governance, anti-corruption and anti-crime and help put the economy on a sustainable footing. Underwriting consumption is only buying time, while what the economy of Kosovo needs is to be put on a sustainable footing.

 

F. MONTENEGRO

62.  Montenegro has only enjoyed full sovereignty since its secession from Serbia in 2006. It had prepared for that moment by pursuing an ever more independent economic policy. Years before formal secession, it had adopted first the Deutsch Mark and then the euro as its official currency and lowered barriers to trade. From that moment it essentially cast its lot with Europe. Since gaining independence, its economy has taken off due to its openness and the huge flow of foreign investment into the country’s coastal regions. There are concerns, however, that growth premised on real estate markets is not sustainable and eventually the conditions will have to be laid to build a more competitive national economic structure. This will require political and institutional reform, the full establishment of the rule of law, judicial reform and measures to counter organised crime and corruption which are serious challenges to the country’s long-term political and economic health.

63.  Montenegro has signed a SAA with the EU as well as an interim agreement on trade.  In December 2010, Montenegro was granted candidate status and is currently working towards meeting the criteria that the European Commission has laid out.  It is expected to set a date for opening accession negotiations by the end of the year.  In December 2009 the European Council liberalized the visa system with Montenegro.  The Commission, however, has stated that further deepening of the relationship will hinge on political reform and more progress in the fight against organised crime and corruption. The state sector is overstaffed, inefficient and subject to bribery. Montenegro received a score of 3.7 from Transparency International’s 2010 Corruption Perception Index which ranks it 69th in the world – behind Croatia but ahead of the other countries in the region.

64.  The economy has been among the fastest growing in the world in recent years. Growth is largely driven by high levels of FDI, mass privatisation as well as the fairly liberal economic environment. Foreign investment has helped finance high levels of imports and consumption, but this condition is not likely to persist as only so much money can be poured into beach front property. Foreign investment in infrastructure has not achieved the levels that the government anticipated.

65.  In the longer term, Montenegro could suffer painful adjustments stemming from the collapse of property markets. Lending to the private sector slowed considerably in the midst of the crisis and growth fell from 6.9% in 2008 to -5.7% in 2009 (Stojkovski). It returned to slow growth of to 2.5% in 2010, a level of output below its 2008 level (IMF, May 2011). In 2010 the country enjoyed a strong tourist season and metal and electricity production generated rising export earnings after two years of contraction. Inflation and wages fell markedly in 2010, and the current account deficit halved to 26% of GDP. Falling costs have been an important factor in the improving current account balance. The budget deficit has also fallen and the government goal is to move from the current deficit of 3.48% of GDP in u 2011, as per most recent official projections, and that budget balancing is expected in 2013. The IMF is calling for the government to continue with fiscal consolidation to encourage greater flexibility in the labour market and to improve the State’s capacity to generate accurate economic statistics so that policymakers are acting on reliable information (IMF, May 2011).
G. SERBIA

66.  Although Serbia clearly suffered from the leading role the government of Slobodan Milosevic played in fomenting the Balkan wars of the 1990s, it has subsequently emerged from its isolation and has made progress on a number of fronts. Relations with Brussels and Washington have improved markedly. A major barrier to deepening ties with Europe was lowered when Radovan Karadzic was turned over to the ICTY in 2008, and the recent arrest of Ratko Mladic and Goran Hadzic promises to open new doors for Serbia. Speaking in Brussels in June 2011, Serbia’s President, Boris Tadic called for all crimes against humanity in the region to be pursued relentlessly, arguing that this is essential to ultimate reconciliation. He indicated that full investigations are also needed of allegations of human organ trafficking in Kosovo. In that same speech, Tadic called on Europe to take the next step and begin accession negotiations with Serbia. “Serbia now looks Europe in the eye, and says ‘we have done what we said we would do. Will the European Union do the same?” (EPC S52/11).

67.  In any case, Mladic’s arrest as well as the recent capture of Goran Hadzic, have created an opportunity not only for regional reconciliation but also broader political and economic reform. If Serbian authorities can assume this kind of responsibility, so the argument goes, surely they will allow the country to take the difficult decisions needed to guide it into the EU. This will ultimately require it to engage constructively with Kosovo and it has been doing so in talks that began in March 2011 (Buzek). President Tadic has recently suggested that solutions to the problem “must achieve lasting reconciliation between Serbs and Albanians, both of whom have legitimate interests that must be respected. It must be a winwin solution. This is possible and should not be sacrificed on the ‘altar of agendas’ that do not reflect regional realities.” (EPC). It is worth noting here that Serbia has also taken a number of measures to improve relations with minority groups throughout the country. The government and the majority of the Serbian people are dedicated to one day joining the EU. A SAA was signed with it in 2008 and is now in the final stages of ratification. Some nationalist forces oppose that agreement, arguing that it could complicate the Serbian goal of re-establishing sovereign authority over Kosovo.

68.  Serbia inherited an essentially functioning state from the remnants of the former Yugoslavia; but its political parties essentially control parts of that apparatus and, in so doing, have rendered it less effective and accountable than it should be. Corruption and organised crime remain a serious concern, and the links between elements of the security apparatus with organised criminals and some extremist elements is an ongoing concern. Serbia’s public administration needs to be reformed and a greater distance must be established between it and political party bosses. A 2010 Transparency International study accorded Serbia a 3.5 rating on its 1-7 scale which places it 78th on its Corruption Perception Index, an improvement on previous scores. Worrying links among elements in the security sector, certain radical political groups and organised crime remain a serious concern both among democratic forces in Serbia and Serbia’s European partners. These shadowy groups have undermined the fight against crime and corruption and intimidated democratic activists and journalists.

69.  Economic growth in Serbia rose to 6.9% in 2007 and fell to 5.5% in 2008 (Rachev) but then sank to -3. % in 2009 as the effects of the global crisis took hold. In 2010, GDP grew at 1.75%, and is projected to accelerate further to about 3 % in 2011 (IMF No. 11/95). Growth has been driven by an influx of investment capital and credit as well as remittances which, in turn, have propped up domestic demand and driven up current account deficits. Growth began to slow toward the end of 2008 with export revenue and industrial production falling. The value of the dinar plummeted, and this worsened the country’s foreign currency denominated debt position, while raising food and energy prices in domestic terms. Widening external financing gaps led to a US$4 billion IMF Stand-By Arrangement which was approved in May 2009. That loan included provisions that required Serbia to put its financing on a more sustainable path by adopting a range of measures including drastic cuts in public spending, a freeze in wages, pensions and hiring in the state sector, and the introduction of an additional 6% tax on salaries and pensions to cope with the budget deficit (WSJ, 27/03/09). Some political forces wanted to use that credit to bolster government wages but this was stoutly resisted by the head of the Central Bank. As a condition for accessing these credits, Serbia has promised to keep the budget deficit below 4.8% of GDP and cut a number of government jobs and salaries.

70.  The country’s relatively low level of savings and high level of social obligations are thus a source of weakness and need to be addressed. The global crisis hit Serbia just as its economy was beginning to take off. Investment fell, banks slowed lending, production tailed off and unemployment reached 20% (EPC). Experts suggest that Serbia needs to grow at 6% to lower unemployment, but the official forecast for 2011 growth is only 3% (Barlovac). The country has a skilled and educated workforce and has made some progress in reinforcing its fiscal, regulatory and administrative produce to bolster competiveness. The government is also dedicated to deepening regional economic integration while seeking accession to the EU.

 


V.  CONCLUSIONS

71.  The governments of the Western Balkans have made their accession to the EU a core organising principle of political and economic life. The prospect for accession for some of these countries is fairly remote due to persistent institutional and political problems and enlargement fatigue in Europe itself. Ever closer ties between Europe and the region, however, are essential to the Balkan future. Creative ways must be unearthed to deepen these ties and thus to provide strong support for regional transformation even if the prospects are remote for rapid accession. Failure to bring this region fully into the life of Europe will condemn Europe to having to cope with a region on its borders perennially in crisis. Of course this is a two-way street. Without essential structural, legal and institutional reform, the countries of the Western Balkans will deter much needed investment and deny themselves the integration option.

72.  Every effort must be made to ensure that the region enjoys market access and many other benefits of membership even before they have formally acceded to the Union. The EU must not be expected to lower standards for full membership and needs to drive a hard bargain, particularly on matters fundamental to its values including the need for fully viable democracies, inter-ethnic peace and reconciliation and low levels of systemic corruption. Much can be done to motivate this region to adhere to the values of the Union and to learn the habits of participation in European life by, in fact, beginning that participation even before full membership is possible.

73.  Along these lines, the Euro-Atlantic community needs to focus on the corruption problem in the region. This is a poisonous practice that cannot be allowed to flourish, and strong incentives are needed to encourage these countries to cope with the problem.

74.  The introduction of visa free regimes is an important step and should help open these long closed societies to European influences which again will help foster conditions for deeper EuroAtlantic integration. Young people, in particular, will benefit enormously from travel. More support is needed to allow them to study and even work in Europe. Progress is indeed being made on this front. The expansion of the EU visa-free travel regime to all areas of the region except Kosovo sends a powerful message to the region and especially to its young people who have often felt hemmed in to their small corner of Europe. Visa-free travel will open new vistas for them and make Europe and its core values more of a reality and less of a pipe dream. At the same time, the region needs some assistance to help it meet European expectations regarding asylum, people trafficking and other transborder criminal activities.

75.  Montenegro and Serbia have taken important steps towards EU membership over the last year: Montenegro now has official candidate status, while Serbia has applied and submitted the questionnaire. Serious engagement from Brussels should follow. By bringing local law up to European standards, the accession process is helpful in and of itself. The region’s governments, however, must be clear-eyed about their own still formidable problems and what is required to solve them.

76.  Improved governance and rule of law are not only required to move closer to Europe, but will serve the interests of all seven governments in the region. All have work to do more on this front. Progress here will, by definition, also lead to progress in fighting highly corrosive corruption. It will constitute one component of a general effort to foster ever improving relations among ethnic groups.

77.  Efforts are needed to further galvanize regional political, diplomatic, economic, security and civil society links among the countries of this region. Of course, a great deal of progress has been made in many of these areas since the end of the wars in the region. But there is still much work to be done. The South-East European Co-operation Process was initiated in July of 1996 as a corresponding effort to sustain the Dayton Accords. It is a process initiated by the region’s governments. In 2000 member governments adopted the key goals of this process as enhancing political and security co-operation, fostering economic co-operation, enlarging co-operation by fostering human contact, democracy, justice and by combating illegal activities. The process is multifaceted and involves annual meetings of the heads of state/governments of the SEE countries, annual meetings of the foreign ministers, sectoral meetings of ministers, meetings of political directors of foreign ministries, and annual meetings of parliamentary speakers. These kinds of contacts are vital to developing a positive regional identity, forging ever closer relations, and lowering barriers to economic exchange. Using this process to develop transborder projects fostering integration would be an obvious next step. Importantly, this process engages countries beyond the Western Balkans, including Bulgaria, Greece, Moldova, Romania, Slovenia, and Turkey.

78.  Organised crime and corruption thrive where institutions are weak and politics are polarised. The Euro-Atlantic community has helped build a security and diplomatic context for these countries to overcome these serious challenges. But the battle is not yet won. There are still fundamental issues that need to be solved so that the region can dedicate all of its energy to focusing on the future rather than remain mired in its past:

* The problem of Kosovo must be resolved in a way that can be acceptable to Kosovo and Serbia. Failure here will mean that the issue will remain a source of regional tension and border dispute, which, in turn, will reduce the prospects for Euro-Atlantic integration for both Serbia and Kosovo.
* The name dispute between Athens and Skopje must be settled in a fashion acceptable to both countries. Perhaps this could be achieved by adding an adjective to the country’s official name, but ultimately this must be worked out so that it no longer constitutes an obstacle to integration into Euro and Euro-Atlantic Structures. This would certainly help accelerate the enlargement process both in NATO and in the EU along the lines of Greece’s Agenda 2014 initiative which is designed to further the region’s prospects for more rapid EU accession;
* Bosnia and Herzegovina needs a functioning central government, and this will ultimately require a constitutional revision. It is time to revise that country’s Constitution so that its citizens can enjoy better governance and so the country can better position itself for EU membership. But political leaders from all the communities there need to work with each other rather than negate the reality in which they live, in order for this country to function properly.

79.  None of these are easily solved problems, and all have cast a shadow over the region for more than a decade. But the status quo is unsustainable. Certainly the threat of armed conflict in the region is much diminished, but longer-term stability hinges on improved governance, EuroAtlantic integration and significantly improved inter-ethnic relations. Perhaps what is most important is that every encouragement is given to the countries of the region to abandon a legacy and rhetoric of mutual antagonism and suspicion and to recognise that is in the interests of the entire region, both politically and economically, to move towards greater co-operation built upon greater mutual confidence. The tragedy and the challenge is that this essential vision is not shared throughout the region, and, until it is, the region's relationship with the EuroAtlantic institutions will be compromised.
 


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_____________________
*   Turkey recognises the Republic of Macedonia with its constitutional name.


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