Cause and Effect in European Politics and Law

Eurozone Debt Crisis Will Not Bypass the Balkans

Evelina Topalova, November 30, 2011

The South East European countries will not manage to stay away from the impacts of the crisis in the eurozone, which is the main trade partner of the region. Looking in the long term perspective, these economies should invest in education and R&D in order to boost economic growth, the World Bank says in its November report on the economic situation in six countries from the Balkans - Albania, Bosnia, Macedonia, Montenegro, Kosovo and Serbia (SEE6).

Experts of the bank forecast a GDP growth of 2.5% in 2011 for SEE6 and 2.1% in 2012 (just to compare - the six SEE economies have expanded between 6% and 10% prior to the 2008 crisis) and this assuming that the EU leaders will manage to find a way out of the crisis. Otherwise, forecasts would be more pessimistic. Some of the countries have already started slashing their GDP forecasts for next year in view of the dim outlook.

What is the possible solution to enhance growth in these economies, according to the World Bank?

The experts believe that the growth model should be based on deeper integration of the six with the EU in terms of finance, trade, labour markets and institutions.

National economies are dependent on the events in the eurozone because of trade, FDIs, foreign banks and remittances. The report notes that more than a half of total exports (52.8%) of the six economies in 2010 were to the EU. Export-oriented economies cannot stay immune, given the lower demand amid the crisis. The share of the foreign banks in the total banks assets amounts to 89%. Greek and Italian-owned banks have relatively high share which could lead to negative impacts in case of any further stresses in the respective parent banks. The ratio of NPLs is on the rise since 2009. At the moment, the banking systems in the six Balkan countries appear resilient, with high liquidity and significant capital buffers, the bank says.

The report recommends the authorities in these countries to get prepared for fiscal discipline and further consolidation of expenditures. The level of external debt has increased between 2008 and 2010 as governments sought to borrow to bridge fiscal gaps.

In addition to the eurozone's economic woes, another major challenge to the six SEE countries will be to boost employment efforts.

What is particularly worrying is the fact that unemployment rate among young population is very high. The report notes that despite the education provided in schools and universities it is not clear whether it actually gives the relevant skills so that these people could find a job on the labour market, hence to be competitive. To put it simple - skills are needed, not just diplomas.

As for the European integration of the region, the document notes that the EU agenda has been the main driving force for reforms among the SEE6 countries. Albania and Bosnia and Herzegovina have been dragging the most in their EU integration bid, as it was already mentioned in the European Commission progress report from October.

The World Bank believes that the SEE6 countries' long-term growth could be sustained, thanks to investments and boosting productivity with accent on innovations and R&D policies.

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