Eastward Enlargement of the EU and the Western Balkans
Yoji Koyama
Introduction
Post socialist countries in Central and Eastern Europe were admitted to the European Union
(EU) from 2004 to 2007. As the Western Balkan countries are yet to be admitted to the EU, the
process of eastward enlargement of the EU has not been completed. Reflecting historical
circumstances, South Eastern Europe (the Balkans) has had difficulties which cannot be
compared with those in Central Europe and Baltic States. In this paper1 first I will explain
characteristic of the Balkans, especially the Western Balkans. As Bulgaria and Romania already
joined the EU in 2007, here I focus on the Western Balkans. Secondly, I will explain ethnic
conflicts as well as movements in Western Balkan countries toward the EU accession and
challenges these countries are facing. Thirdly, I will explain the structural weakness of
economies and impact of the global financial crisis. Finally I would like to mention the prospect
of the region.
For this workshop we have a guest from Montenegro.
In order to activate our discussion I
would like to talk about Montenegro in somewhat provocative way.
1. Characteristics of the Balkans
The Balkans were historically called ‘Powder keg’ of Europe. The ‘Balkans’ has a connotation
something like a group of small countries which have been at strife with each other. After the
collapse of socialism, instead of the ‘Balkans’, the ‘Central and Eastern Europe’ is more often
mentioned. As for religions, in northern part of the Balkans (Slovenia and Croatia) Catholic is
predominant while in the Southern part Orthodox and Islam are predominant. More concretely,
in Romania, Bulgaria, Serbia, Montenegro and Macedonia Orthodox is predominant. In Bosnia
and Herzegovina Islam, Catholic and Orthodox corresponding respectively to Muslims, Croats

Yoji Koyama is Professor Emeritus at Niigata University.
This paper is written on the basis of my presentation made at the EUSI Tsuda International
Workshop “The Eastern Enlargement of the EU and the Balkans”, which was held in Tokyo on
January 29, 2012. In this workshop Mr. Martin Podstavek, Counsellor at the Embassy of the Slovak
Republic, presented on the topic “The Eastern Enlargement of the EU and Independence of
Countries”, and Dr. Elena Dzankic (Jean Monet researcher at the EUI Robert Schuman Center)
presented on the topic “Citizenship in Montenegro and the EU”.
1
and Serbs prevail. In Albania Islam is predominant but believers of Catholic and Orthodox also
exist. In Kosovo and the northwestern part of Macedonia where Albanians live Islam is
predominant.
Even during the socialist period the Balkans lacked the unity. The Balkan countries during
that period are classified into the following three groups:
A Bulgaria and Romania: Soviet bloc (COMECON and Warsaw Treaty)
B Former Yugoslavia (Socialist Federal Republic of Yugoslavia: SFRJ)
C Albania: antipathy toward the Soviet bloc and SFRJ, pro-China from the late 1950s to mid
1970s and then internationally complete isolation.
As Bulgaria and Romania were already admitted to the EU in 2007, I will not talk about
these two countries in the following discussion. For the same reason, I will not talk about
Slovenia which was admitted to the EU in 2004.
Unique Position of SFRJ
The former Yugoslavia (The Socialist Federal Republic of Yugoslavia: SFRJ) was a
multi-national state across Central Europe and South Eastern Europe (the Balkans). From
cultural, religious and historical viewpoint, Slovenia belongs to Central Europe. Croatia is
eligible to be called a country of Central Europe. It is at the same time a Mediterranean country.
The northern part of SFRJ, i.e., Slovenia and Croatia, was under the rule of the Habsburg
Empire. The southern part was under the rule of the Ottoman Empire. In mid 19th century the
Yugoslav (which means South Slavs in Slavic languages) movement began. In order to escape
from the Habsburg Empire, leaders in Croatia and Slovenia held up a goal to establish a country
of South Slavs. The independence of Serbia and Montenegro was recognized by the great
powers at the Berlin Congress in 1878. It was not until the defeat and collapse of the Habsburg
Empire in 1918 that Croatia and Slovenia acquired their independence. In November 1918 they
established a country with a long name ‘Kingdom of Serbs, Croats and Slovenians’. This was a
first Yugoslavia. In the newly-established country the initiative was taken by Serbia which
became independent earlier and had a certain level of military strength. This situation caused
dissatisfaction and disappointment in Croatia and Slovenia.
The second Yugoslavia was reestablished after World War II on the route to socialism. It had
a pseudo market economy under decentralized self-managed socialism. It was based on
non-alignment and neutralism. It was unified by the League of Communists of Yugoslavia
(LCY), which enjoyed strong prestige because of its devotion to the liberation war against Nazis
Germany and Italy. In June 1948 the country was expelled from the Cominform2 due to
2
This was an informational organization for Communist Parties in the Soviet Union and Eastern
Europe as well as two influential Communist Parties in Western Europe (France and Italy). In fact it
confrontation with the Soviet Union. Its relation with the Soviet Union improved, but threat of
intervention by the Soviet Union remained, fortifying the unity of nations.
There were seven enigmas, which were not real enigmas but well explained characteristics
of the former Yugoslavia: The country borders on 7 countries; 6 Republics (from north to south,
Slovenia, Croatia, Bosnia and Herzegovina, Serbia, Montenegro and Macedonia); 5 nations
(counting only main nations neglecting minorities: Slovenians, Croats, Serbs, Montenegrins and
Macedonians); 4 languages, which were used as official languages: Slovenian, Croatian, Serbian
and Macedonian. Why 4? I was told that Montenegrins speak Serbian; 3 religions: Catholic,
Orthodox and Islam; 2 types of writing: the Latin alphabet and the Cyrillic alphabet; In spite of
such diversity, they have one country, or one President.
Table 1 Basic indicators of Western Balkan countries
Population
GDP
GDP
GDP
(million)
Per capita
Per capita
in millions of
(EUR at
(EUR at
US dollars
exchange rate)
PPP)
end-2008
2009
2009
2009
Albania
3.2
2,800
6,600
11.8
Croatia
4.4
10,300
15,100
45.9
Bosnia and Herzegovina
3.8
3,200
6,600
17.1
Macedonia
2.1
3,200
8,000
9.2
Montenegro
0.7
4,800
10,000
4.1
Serbia
7.5
4,300
8,700
42.6
Source: Podkaminer et al. (2011), Current Analysis and Forecasts, wiiw.
As for languages, I noticed more similarities rather than differences among the four languages:
They are all Slavic languages. I went to a language school in Belgrade for 8 months from
October 1978 to learn Serbian. At that time the language was officially called Serbo-Croatian.
The textbook was The Beginning Course of Serbo-Croatian. After returning home, I learned that
in mid 1960s Croatian linguists insisted Croatian being a separate language. In my opinion, the
difference between the two languages is smaller than that between the Tokyo dialect and the
Osaka dialect3. In the former Yugoslavia, even when Croatian people speak in Croatian Serbian
served as a tool of the rule of Eastern Europe by the Soviet Union.
3
Fortunately enough, in Japan we have standard Japanese and we can communicate with each other.
But if native Aomori people talk in the pure Aomori dialect Kagoshima people cannot understand
what they talk at all.
people understand what they speak and vice versa. My Serbian friend said, although he cannot
speak Slovenian he passively understand Slovenian and can enjoy watching Slovenian TV
programs. In the case of the former Yugoslavia in a region or city where different ethnic groups
live together, for example, Sarajevo or Zagreb, in my opinion, people speak in the Sarajevo
dialect or the Zagreb dialect of Serbo-Croatian. After the breakup of the former Yugoslavia and
independence of Republics, however, a new language like Bosnian was invented, although its
substance has not changed. Maybe so was Montenegrin.
The Western Balkans
The region, which consists of Albania plus Successor States of the former Yugoslavia minus
Slovenia, is called the Western Balkans. There is a striking contrast in situations between the
Western Balkans and rest of the Central and Eastern Europe. In the 1990s movement of ‘Return
to Europe’ and the European integration proceeded in Central Europe, the Baltic States and the
Eastern Balkans (Bulgaria and Romania) while people suffered from ethnicity conflicts in the
Western Balkans (especially former Yugoslavia)4.
2. Ethnic Conflicts in the 1990s
As long as the economy continued developing different ethnic groups in the former Yugoslavs
were able to live together peacefully. An economic crisis surfaced in mid 1979 and continued
for more than 10 years. Accordingly the prestige of the League of Communists of Yugoslavia
(LCY), which bound nations into a country, declined gradually. With the Kosovo problem as a
trigger, confrontation among Republics became intensified, leading to split of the LCY in
January 1990 and collapse of the self-managed socialism. A factor which contributed to the
breakup of the SFRJ was changes in the international environment such as the end of the Cold
War, democratic changes in the Eastern Europe, disappearance of threat of the Soviet Union,
and progress in the European integration.
Kosovo was an Autonomous Province of the Republic of Serbia of the SFRJ. A majority of
the population was Albanians, and their share of the total population was increasing. Albanians
wanted that the Province would be promoted to a Republic, but their desire was not accepted. In
1981 riots in Kosovo were suppressed. People’s dissatisfaction deepened. Then harassment was
directed toward Serbian inhabitants (they were minorities) in Kosovo. Serbian people who fled
the Kosovo strongly requested protection by Serbian authorities. Although speeches and
behavior which aimed at instigating inter-ethnicity hatred were strictly prohibited by the regime
of the 1974 Constitution, ‘ethnicity’ came to be used politically in Serbia. It was Slobodan
4
For more detailed information, see Koyama (2003) and Koyama (2008).
Milosevic who came into power by inspiring people with Serbian nationalism. Politicians who
were critical to Milosevic were ousted from their offices. This move was called
‘Anti-Bureaucracy Revolution’ by followers of Milosevic. In practice, it meant negation of
Tito’s regime. In the late 1980s Slobodan Milosevic, the top leader in Serbia, ruthlessly
suppressed Albanian inhabitants in Kosovo. Milosevic’s nationalistic policy and request to
strengthen the Federation’s power to overcome the economic crisis repelled other Republics. In
1990 free elections under multi-party system were successively conducted in all Republics, and
nationalistic parties gained power in all of them. Slovenia and Croatia declared independence in
June 1991. It was the beginning of the breakup of the Yugoslav Federation.
Secession of these Republics did not proceed in a peaceful way (unlike the case of
Czecho-Slovakia in 1993) and resulted in ethnic conflicts in Bosnia and Herzegovina and other
Republics (1992-95), and subsequently the Kosovo war (1999). In December 1991, applying
mechanically ‘the right of national self-determination’ to a multi-national state of the former
Yugoslavia, Germany accorded both Slovenia and Croatia diplomatic recognition. In January
1992, other EC countries followed suit with Germany. In my opinion, this premature recognition
of these countries escalated the ethnic conflicts in the former Yugoslavia. In short, the tragic
ethnic conflicts in the former Yugoslavia were caused not only by collapse within, but also
worsened by the fact that the international community had accelerated this process from outside.
The Dayton Peace Accord in November 1995 did not treat the Kosovo problem. The
problem lay tranquilly as if it were a time bomb. In the 1990s there was non-violence resistance
led by Ibrahim Rugova in Kosovo. However, the international community did not pay attention
to this movement. In 1997 the KLA (Kosovo Liberation Army) appeared with use of force and
since then often clashed with Serbian security forces. Until February 1998 the US government
regarded the KLA as a terrorist group.
Around May 1998, however, the US Government did a
complete about-face in its policy on the Kosovo problem and decided to overthrow the
Milosevic regime in Serbia and support the KLA. For 78 days from March through June 1999
the NATO bombarded Serbia and Kosovo. This war ended with the NATO’s victory and the
Serbian army was obliged to withdraw from Kosovo.
Movements toward the EU Integration
The Kosovo war was a turning point in the EU’s policy toward the Balkans. The EU felt it
necessary to give the Balkans a brighter prospect that if people in the region endeavor the EU
accession will not be an issue of the distant future. The Stabilization and Association Process
(SAP) combines regional approach with the EU integration. The Stability Pact for South Eastern
Europe (June 1999) has been a pillar of the process.
The European Council held in Brussels in March 2003 stated, ‘The Future of the Western
Balkans is in the European Union’. The European Union concluded Stabilization and
Association Agreements with Macedonia (2001), Croatia (2001), Albania (2005), Bosnia and
Herzegovina (2008), Montenegro (2008) and Serbia (2008). In October 2005 accession
negotiations with the European Commission started5. In the meanwhile Croatia was admitted to
the NATO in April 2009. Croatia has been requested by the EU to implement reforms in
administrative system and judiciary. The European Council, held in June 2011, decided that
Croatia would be admitted to the EU in July 2013. Bosnia and Herzegovina, and Albania are
potential candidates.
3. Economic and Political Developments in the Western Balkans
Macedonia
This country has had very strong ties with Serbia in the economic area. Though not committed
in the ethnic conflicts in the former Yugoslavia, the country was negatively affected by them.
For example, the UN sanctions against Serbia in the first half of the 1990s and the Kosovo war
in 1999. Many Albanians live in the northwestern part of the country adjacent to Kosovo. A
flame of the Kosovo problem leaped to Macedonia. In spring 2000 a group named the ‘National
Liberation Army’ (NLA) began to operate secretly in the northwestern part of the country, and
since spring 2001 the NLA often clashed with the Macedonian police. There emerged a situation
immediately before a civil war in June – August 2001. This difficult situation was saved by
mediation of the EU (represented by Mr. Xavier Solana) and both parties concluded the Ohrid
Framework Agreement in August 2001.
However, there remains another problem, i.e., name Issue. Ethnic Macedonians live outside
the country too: Western Bulgaria and Northern Greece. When Macedonia became independent
in 1992 this country named itself ‘Republic of Macedonia’. Greece opposed Macedonia’s
independence from a fear that the naming of ‘Macedonia’ might mean an intention to build a
greater Macedonia including Macedonians of Slavic origin who lived in Northern Greece. After
a compromise was reached in April in 1993 that the name should be ‘Former Yugoslavia
Republic of Macedonia’, Macedonia gained membership to the UN. Even later, however,
Greece was reluctant to support Macedonia and imposed a blockade (1994-95) on Macedonia.
Although the economic relations between both countries are increasingly deepening, the dispute
over the name issue continues6. Therefore, Macedonia’s accession negotiations with the EU
5
In December 2008 the negotiations were deadlocked due to Slovenia’s veto (a dispute over
demarcation of territorial waters). In September 2009 the negotiations resumed as Slovenia
withdrew its veto by mediation of Sweden, the EU Presidency at that time.
6
For more detailed information, see Gligorov (2011).
have not begun yet, forestalled by Croatia7.
Kosovo
Since June 1999 Kosovo has been under the rule of UNMIK, i.e., practically a protectorate of
the UN. Talks on Kosovo’s status between Serbia and Kosovo (with mediation of the Contact
Group) continued since 2006, but the gap in their opinions was too big to be filled up. In
February 2008 the Parliament of Kosovo unilaterally declared Kosovo’s independence. As of
July 2010 the number of the states which have recognized Kosovo as a state is only 698. Kosovo
is not admitted to the United Nations yet. Kosovo has a very fragile economic structure. In 2005
its total exports amounted to about €50 million while its total imports € 1.18 billion. The total
export was only 4.1 percent of the total import. Kosovo heavily depends on assistance from
outside, especially remittance from abroad (about 15 percent of GDP) and Donors’ assistance
(about 43 percent of GDP). Kosovo is facing difficult challenges such as building of
multi-national society, rule of law, return of displaced people, formation of sustainable
economic foundation, etc.
Serbia: Post Milosevic Era
With the collapse of the Milosevic regime in October 2000, FR Yugoslavia (Serbia plus
Montenegro) returned to the international community. The country started (or resumed)
transition to a market economy and the European integration with 10 years lag. Serbia had
complicated relationship with Montenegro. An anti Milosevic group in Montenegro led by Milo
Djukanovic (President of the Democratic Party of Socialists of Montenegro) boycotted the
Presidential election and general elections at the Federal level in September 2000. Therefore, a
Serbian reformist group DOS was obliged to form a coalition government at the Federal level
with SNP (Socialist People’s Party), who was a faithful cooperator with Milosevic and the
Opposition in Montenegro. Such a situation caused two economic systems in a country. Then
Serbia and Montenegro formed a State Union in February 2003. Montenegro finally left the
State Union and gained independence in June 2006.
Among Serbian people repellence to the NATO has been very strong due to the
bombardment in 1999. The Serbian Radical Party (This party is anti West and insists the
maintenance of Kosovo) got strong support from people. A coalition government with
Democratic Party as a center argues for the EU accession. In 2010 the Serbian Radical Party
split. Mr. Nikolic, Head of the SRP established the Progressive Party and radically turned the
7
For more detailed information, see Koyama (2011).
The Japanese Government recognized Kosovo as a state in March 2008 and the both countries
established diplomatic relations in February 2009.
8
line toward the EU integration.
Montenegro: A Second Greece?
Montenegro is a very small country with the population of 700 thousand. This country is almost
comparable to Tottori-ken, the smallest Prefecture in Japan. Many revolutionaries (political
leaders), for example, Milovan Djlas, Svetozar Bukmanovic-Tempo, Veljko Vlahovic, etc.
appeared from this county during the liberation war. Despite being a small Republic, it had a
strong political voice in the Yugoslav Federation. In SFRJ all Republics (and even Provinces in
the regime of 1974 Constitution) were treated on an equal footing, and important posts at the
Federal level (President of the Federal Presidium, Prime Minister, President of the
Confederation of Trade Unions, etc.) were allocated on a rotation basis. Montenegro was the
biggest beneficiary in this regime.
During the period of SFRJ Montenegro always formed a united front with Serbia. In the
late 1980s in concert with ‘Anti Bureaucracy Revolution’ in Serbia, young politicians became
top leaders of the League of Communist of Montenegro. In February 1991 Milo Djukanovic (29
years old at that time) became Prime Minister. In the last years of the Milosevic era, however,
leaders of Montenegro strengthened its orientation toward independence. For example,
Montenegro adopted Deutsche Mark and later Euro as the legal tender. The West supported
Montenegro actively in order to overthrow the Milosevic regime. Now that the Milosevic
regime collapsed in October 2000, the EU did not want appearance of another small
independent country any longer. With momentum gained, however, Montenegro’s orientation
toward independence never stopped
Table 2
Montenegro’s Export and Import in Goods and Services
2004
2005
2006
2007
2008
2009
2010
-268.4
-318.1
-652.3
-719.1
-1,086.5
-567
-320
Export in Goods
452.1
460.6
648.3
543.4
519.1
363
440
Import in Goods
868.6
974.3
1,497.7
1,702.7
2,008.7
1,310
1,180
Export in Services
249.5
329.8
418.0
674.1
754.3
680
710
Import in Services
101.4
134.2
220.9
233.9
351.2
300
290
Trade Balance
Source: Gligorov, et al. (2010), p.121.
It is amazing that a small country such as Montenegro became independent, but I am worried
about its economic viability. In the EU there are smaller countries: Luxembourg, Malta and
Cyprus. The most important is whether a country concerned is economically viable or not. It is
well known that Montenegrin people have been very brave. It was 1979 that I visited
Montenegro for the first time. From Dubrovnik together with my family I made a bus trip to
Lovcen where we visited the Museum for Petar Petrovic Njegos, one of the greatest heroes in
Montenegro. A curator said, “The number of the Turkish flag that we have is very great, next to
only Turkey because Montenegrin warriors have fought against Turkish armies and often
captured their flags”. Although having beautiful coast, the country is composed of mostly
mountainous regions. Flatlands are very small. Manufacturing industry has been very weak.
When I made a short visit to Montenegro in 1998 I discussed with several Professors at Faculty
of Economics of the University of Montenegro. They said, “Our people are very brave but not
so good in producing goods. Our people are good in obtaining high quality goods from foreign
countries and reselling them to others”. I raised a question about feasibility of Montenegro’s
independence. A Professor replied, “anything can occur in the Balkans”. In 2008 total imports in
goods was four times as much as than total exports in goods. Exports in service (predominantly
tourism) have been significant, and total exports in service were 2.15 times as much as total
import in service. The foreign trade in service earned surplus of € 403 million, which was not
enough to cover deficit of € 1,490 million in foreign trade in goods (see Table 2). Montenegro
was hit hardest by the global financial crisis. The budget balance deteriorated quickly and the
amount of national debt increased. I am afraid that even if Montenegro is admitted to the EU the
country might face the danger of becoming a second Greece.
Bosnia and Herzegovina
This country experienced a fierce civil war from April 1992 to the Dayton Peace Accord in
November 1995. It suffered from the biggest damage among the Republics of the former
Yugoslavia in terms of the number of victims and injuries and physical damages. It consists of
main three ethnic groups: Muslims (Bosnjak), Croats and Serbs. Bosnia and Herzegovina (state),
in fact, consists of two Entities: Federation of Bosnia and Herzegovina, and Republic Srpska.
The power of the state remains weak. The most important is High Representative Office of
Bosnia and Herzegovina (HRO) which is given strong power, representing the international
community. According to the latest news, recently (January 12, 2012) new Prime Minister of the
government at state level was finally elected after 15 months political vacuum from the general
elections in October 2010 (Asahi Shimbun, Jan. 14, 2012). As hatred among ethnic groups has
not completely disappeared yet and the country remains politically unstable, it is necessary for
the HRO to stay here for a period of time. Although the reconstruction has been made to a
certain extent, its economy is still fragile. This country has been heavily depending on support
from the international community. It would be an important task for this country to make good
use of the foreign assistance and furthermore build an economy which will develop without a
huge amount of assistance in the future.
Albania
In 1991 the regime change and transition to a market economy occurred. At the same time, the
country opened door. Generally speaking, there was a lack of knowledge on market economy. In
mid 1990s pyramid schemes promised high return and gained a huge amount of deposit. 75
percent of the people participated in them. There was a boom of the pyramid schemes. They
collapsed in 1997 causing widespread unrest and the country was placed on the brink of civil
war. The public order was restored by a multinational forces mainly composed of Italian troops.
Since 1998 the economy has been steadily growing.
From external world new things flooded into the country. For example, automobiles,
Coca-cola, internet, democratic institutions, etc. In appearance the country has drastically
changed, but in my opinion people’s way of thinking and behavioral patterns inherited from the
past would not change so easily. If a transition country joins the European Union, as required by
the Copenhagen Criteria there should be democracy and rule of law, a functioning market
economy and capacity to cope with competitive pressure and market forces, and administrative
ability, etc. These points are questionable in Albania. Rule of law has been in a serious condition.
There has been an intense political rivalry between the Democratic Party and the Socialist Party.
Often opposition parties boycott the Parliament. The evil originates in the political culture in
which power is closely connected to economic interest and every time government changes
public servants including employees at the lowest level are replaced. Orderly political dialogues
between the ruling parties and opposition parties are essential9.
5. Structural Weakness of Their Economies and Impact of the Global Financial Crisis
Although unemployment rates were decreasing until the global financial crisis in 2008, in all the
countries except Croatia they record double digit. Especially in Macedonia the unemployment
rate exceeds 30 percent. It is an informal economy that has been supporting lives of unemployed
and poor people. The size of their informal economies is quite large. Saving rates are quite low
in this region. All countries have chronic trade and current account deficits. They are heavily
dependent on foreign savings (FDI and portfolio investment), and most of them (except Croatia)
are at the same time heavily dependent on remittance from abroad.
Their exports are mainly inclined to goods in labor-intensive industries. As their economies
are developing in recent years the wage levels are increasing, leading to an increase in unit labor
costs. In recent years East Asian countries, especially China has been increasing their exports to
Europe with their low wages as weapons. The Western Balkan countries have to fight a tough
9
For more detailed information on Albania, see Koyama (2012).
game on the EU markets. Now the Western Balkans is in ‘middle-income country’s trap’. A
World Bank report (Kathuria, ed., 2008)
says that these countries have to shift their emphasis
to production of high value-added goods.
Reflecting historical circumstances, Balkan countries have traded with neighboring
countries less and, in contrast, they tend to trade directly with EU countries more often. The
amount of their trade with EU countries has been much larger. The Western Balkans has almost
same size as Romania in terms of population, but the region is divided into seven small
countries. Whenever goods pass through borders, troublesome procedures are repeated. Such
practices take a long time and considerable costs, harassing business people. If the Western
Balkans becomes a single market, the region as a market and a destination of investment would
gain enhanced attractiveness.
Table 3 Unemployment Rates in the Western Balkans
2004
2005
2006
2007
2008
2009
2010
2011
Forecast
Croatia
13.8
12.7
11.1
9.6
8.4
9.3
10
10
Macedonia
37.2
37.3
36
34.9
33.8
34
33
33
Albania
n.a.
n.a.
n.a.
13.5
13.1
13.1
15
14
Bosnia and Herzegovina
n.a.
n.a.
31.1
29
23.4
24
27
27
Montenegro
27.7
30.3
29.6
19.3
17.2
19
20
20
Serbia
18.5
20.8
20.9
18.1
13.6
16.1
20
20
Source: Gligorov et al.(2010)
Bilateral Free Trade Agreements were concluded after 2001. Foreign trade among the region did
not increase as rapidly as expected due to red tape of custom offices in each country. Then use
of the framework of CEFTA (Central European Free Trade Agreement) was conceived. The
CEFTA was a waiting room for the EU accession for Central European countries. Original
members have graduated when they joined the EU. In April 2006 the Western Balkan countries
and Moldova agreed that CEFTA should become a new multilateral free trade agreement
embracing them. The CEFTA-2006 started to function in a full-fledged way only in the end of
2010. It is expected that the emergence of a single market embracing 24 million inhabitants will
enhance the attractiveness of the region for investment. Especially Macedonia, an inland small
country, is very much interested in this new framework of foreign trade.
Impact of the Global Financial Crisis
The Western Balkans was not immediately affected by America’s 2008 financial crisis because
it held few U.S. assets and trade participation was low. The secondary repercussions nonetheless
soon reached their shores. Transmission channels were as follows: a) Contraction of foreign
trade with EU countries; b)Tightened international financial markets and sudden stop to credit
growth c)A rapid fall in inflow of FDI; d) A rapid fall in remittance from migrant workers. Most
countries experienced negative growth in 2009. Only Albania experienced positive growth. In
spite of its small size, the ratio of foreign trade is still low. Macedonia was less damaged by the
global financial crisis (see Table 4). The weight of the financial sector is small in both countries,
and they have been relatively insulated until recently from international financial markets.
Table 4
GDP Growth in the Western Balkan and Other Countries
2007
2008
2009
2010
2011
Croatia
5.1
2.4
-5.8
-1.2
1.0
Macedonia
6.1
5.0
-0.9
0.7
2.0
Albania
5.9
7.7
3.3
4.0
4.1
Bosnia and Herzegovina
6.2
5.7
-3.0
0.9
2.2
10.7
6.9
-5.7
0.5
2.0
6.9
5.5
-3.1
1.8
2.5
Hungary
0.7
0.9
-6.7
1.2
2.5
Estonia
6.9
-5.0
-13.9
3.1
5.7
Latvia
10.0
-4.2
-18.0
0.0
3.6
9.8
2.9
-14.7
1.3
5.0
Montenegro
Serbia
Reference
Lithuania
Source: Podkaminer el al. (2011).
Table 5
Changes in Current Accounts
2007
2008
2009
2010*
2011**
Croatia
-7.5
-9.1
-5.5
-1.4
-2.5
Macedonia
-7.1
-12.8
-6.7
-2.8
-6
Albania
-10.6
-15.5
-15.5
-11.9
-11.8
Bosnia and Herzegovina
-10.7
-14.2
-6.2
-5.5
-6.7
Montenegro
-40.2
-51.3
-30.1
-25.7
-21.9
Serbia
-17.7
-21.6
-7.2
-6.9
-8.0
Source: Podkaminer et al (2011).
*
preliminary
** forecast
Foreign direct investment went mainly to financial intermediary, real estate, wholesale and retail
trade and telecommunication. Contrary to the expectation by governments and business circles,
FDI inflows in manufacturing industry have been small. Around year 2000 foreign banks
advanced into the Western Balkans. Now foreign-owned banks possess about 90 percent of total
financial assets in each country. Banks actively gave loans to households, leading to a
consumption boom in this region.
As exports decreased in all the countries after the global financial crisis but imports
decreased more quickly, trade deficits as well as current account deficits decreased (see Table 5).
However, this tendency seems to be temporary. The Western Balkan countries have so far
attained the economic development mainly relying on foreign savings such as FDI, loans by
foreign-owned banks and remittance by migrant workers. The situation has drastically changed
after the global financial crisis in 2008. The amount of FDI inflow, which dropped sharply, will
not recover so quickly. Such an economic development model is no longer sustainable10. Their
economic development model is now required to be switched over.
Prospect
There seems to be asymmetric benefit from the integration of the Western Balkans into the EU.
From economic point of view, the Western Balkans will benefit very much from the integration
while the EU will benefit less. Why does the EU stick to this integration? The reason seems to
be political: Necessity for stabilizing the Western Balkans as a backyard of Europe. As long as
the region is left poor, it would remain a hotbed of organized crime and a route for smuggling
drugs and trafficking (especially Kosovo and Northwestern Macedonia), threatening the EU
itself.
Total population of the Western Balkans is only about 24 million. Even with a relatively
small amount of assistance to the region its effect would be significant. EU’s burden would be
much smaller compared with possible EU accession of Turkey, whose population is over 70
million. If this discussion was made before the onset of 2008 global financial crisis, it would be
OK. But, these countries have been suffering from chronic deficits of current account. Even if
they are admitted to the EU in the near future, they might face the danger of becoming a second
and a third Greece. After the global financial crisis in 2008, an economic crisis occurred in
Greece in 2009 and financial insecurity originating in fiscal crises in Southern European
countries such as Spain, Italy, Portugal, etc. have been violently shaking the Euro zone. I
wonder whether the EU will be able to accept new member states from the Western Balkans.
10
In this respect Jurcic and Vojnic (2009) is very suggestive.
A British journal says, “The EU, which has played an important role as power broker in the
Balkans over the past decades, is likely to see its influence fade, as enlarging fatigue and
growing domestic problems will constrain the bloc’s foreign policy in the region” (Emerging
Europe Monitor: South East Europe, Feb. 2012, Business Monitor International). I cannot
predict the near-term future of the Western Balkans.
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