WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

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By Branimir Jovanović

A slightly adapted version of this text was first published by the European Policy Institute in Skopje.

• The EU’s New Growth Plan correctly identifies the economic and political challenges facing the Western Balkans.
• However, the suggested measures are underwhelming.
• The plan should commit diplomatic efforts to resolving political disputes in the region.
• It should expand its scope to encompass common economic and social policies.
• It should assist local companies in obtaining EU export documentation.
• It should eliminate EU border controls for companies from the region.
• It should streamline work permit requirements for citizens of the Western Balkans.
• And it should increase financial support to the region.

Introduction

The New Growth Plan for the Western Balkans (Growth Plan) that the European Commission (EC) presented in November 2023 starts on a promising note. The plan’s foundations rest on four pillars, which seem to be precisely what the Western Balkan countries of Albania, Bosnia and Herzegovina, North Macedonia, Montenegro, Kosovo and Serbia need to achieve enhanced growth rates, economic convergence with the EU, and social progress.

The first pillar supports economic integration within the region via the existing Common Regional Market (CRM), essentially aiming to develop a single market for the region inspired by the EU’s single market model. The second pillar seeks to extend this integration to the level of the European Union (EU), enhancing the region’s economic links with the EU’s single market. The third pillar is focused on providing additional financial assistance to the region to facilitate integration efforts and incentivise the necessary reforms. The fourth pillar is designed to expedite the essential reforms required for the region to meet EU standards, serving as a stick to the carrot of financial support. Collectively, the pillars address the critical challenges the region is currently facing, such as weak institutions, insufficient reforms, the imperative for investment in infrastructure and public goods, the need to improve economic and political cooperation in the region, and the limited scope of the regional market.

However, a closer examination of the four pillars reveals that they are largely lacking in substance, fail to tackle the primary issues within each area, and do not address the critical flaws of previous assistance packages. Consequently, the four pillars represent more of the same rather than being a gamechanger.

Pillar 1 – The Common Regional Market

The first pillar focuses on the CRM, an initiative that has existed for some time. Fundamentally, it is a good idea, as it aims at creating a common market for the Western Balkans inspired by the EU single market. This would facilitate the free movement of goods, services, capital and people within the region, effectively serving as a preparatory step for the Western Balkan countries’ eventual accession to the EU single market. A notable change now is that the EC has clearly anchored the CRM within the EU integration process for the region. Although this process previously could have been viewed as an alternative to EU membership, it is now explicitly framed as a prerequisite for accession. Thus, this change in the EC’s approach is a step in the right direction.

However, despite seeming good on paper, the initiative has failed to make a significant impact, which can be attributed to at least two causes. The first is the unresolved political disputes in the region, particularly the Belgrade-Pristina dialogue. These have served as a major obstacle so far because politicians have used them as an excuse to obstruct decisions related to the initiative. Without addressing these issues, no major progress should be expected in terms of advancing the CRM. While it is clear that the new Growth Plan cannot promise to resolve these complex issues directly, it could recognise them and commit diplomatic efforts to address them.

The second issue regarding the CRM is the need to expand it to areas beyond the four freedoms of movement, such as common economic and social policies. Rather than being exclusively defined by freedom of movement, a common market also requires common rules, meaning common regulations and common economic and social policies. Moreover, the region’s most critical challenges – such as severe poverty, inequality, unemployment, high rates of emigration, and inadequate education and healthcare systems – cannot be effectively addressed solely through the facilitation of free movement. Addressing these concerns will require increasing social expenditure on poverty reduction, education and health care; raising minimum wages; implementing more progressive taxation; and adopting policies to attract foreign direct investment (FDI) that highlight the region’s advantages beyond just cheap labour and low taxes. This, in turn, will require the adoption of common regional policies or, at a minimum, policy coordination among countries to prevent any incentive for a ‘beggar-thy-neighbour’ approach and to avoid a race to the bottom.

Pillar 2 – Access to the EU single market

The second pillar aims to bolster the economic integration of the region with the EU single market – a novel initiative that merits praise. Opening the EU market to companies and individuals from the Western Balkans represents a significant opportunity, as it is poised to bring numerous business and non-business benefits and thereby enhance prosperity. However, a detailed examination reveals a focus on areas of lesser importance or limited impact that overlooks critical issues requiring more substantive attention.

Concretely, the pillar targets seven areas: free movement of goods; free movement of services and workers; access to the Single Euro Payments Area (SEPA); facilitation of road transport; integration and decarbonisation of energy markets; a digital single market; and integration into industrial supply chains. Of these, the most important ones are the first two: the free movement of goods as well as of services and workers.

Regarding the free movement of goods, companies from the Western Balkans currently encounter two main challenges when exporting to the EU. The first is the complexity and high cost of obtaining the certificates and documents needed to comply with EU standards and requirements. The second is the lengthy customs procedures at EU borders, which are still in place despite the elimination of most tariffs.

The Growth Plan acknowledges these two primary concerns but falls short of proposing measures that will effectively mitigate or resolve them. Specifically, regarding the free movement of goods, the Growth Plan outlines agreements, first, on conformity assessment to unlock the single market for goods manufactured in the Western Balkans following alignment with the relevant horizontal EU product acquis and, second, on improved customs and tax cooperation to streamline customs procedures and reduce waiting times at borders through a range of measures, including prior exchange of information and similar actions.

The two agreements are challenging to read, let alone understand. My interpretation of the first is that it aims to establish additional agreements between the EU and the Western Balkan countries for the recognition of certificates and other necessary documents for exports to the EU. However, this recognition would be contingent upon the Western Balkans’ adopting the requisite EU legal standards. Thus, the Western Balkan countries would first need to harmonise their laws with EU regulations, and only then could they negotiate with the EU for recognition of their national certifications. This implies that the process could take ages and that, until then, there would be little to no change for companies from the Western Balkans looking to export to the EU. My understanding of the second agreement is that it genuinely does intend to simplify customs procedures, but through an agreement on cooperation, which would include improved information exchange and other related measures. So, again, the approach hinges on reaching agreements that may take time to materialise, and not much will change for Western Balkan companies until that happens

Instead of, or in addition to, the currently proposed measures, the Growth Plan could have suggested providing direct support to companies, both financial and technical, to assist them in obtaining the certificates and documents required to export to the EU. This approach could have an immediate impact and potentially open up the EU market to many companies from the Western Balkans. At the same time, it could have considered the complete elimination of customs procedures and border controls.

Regarding the free movement of services, the Growth Plan specifically highlights e-commerce, parcel-delivery and tourism services. However, it does not address other sectors, such as transport, finance, insurance, IT, and professional and consulting services, which are undoubtedly much more important than the three services that it does address. By way of illustration, while the three included services only constitute around 10% of GDP in the Western Balkans, services as a whole make up about 60% of the region’s GDP. Thus, including these additional services could greatly amplify the plan’s impact on economic growth.

In terms of the free movement of workers, the Growth Plan focuses on the recognition of skills and qualifications between the EU and the Western Balkans. However, it lacks provisions for eliminating or simplifying work permits for individuals from the Western Balkans seeking employment in the EU. Thus, it is difficult to consider this a move towards the free movement of workers, as people from the Western Balkans would still be required to go through the same complicated bureaucratic procedures to obtain work permits as they are doing now. This situation compels many from the Western Balkans to work illegally in the EU and thereby face a range of risks, including exploitation, a lack of legal protections, and the constant threat of deportation.

Additionally, the complexity of legal employment has led to a surge in individuals from the Western Balkans acquiring passports from countries like Bulgaria as a workaround to gain employment in the EU without having to surmount the normal legal hurdles. In addition to mitigating these issues, enabling the free movement of workers would also benefit the Western Balkans by enhancing the transfer of knowledge and skills, reducing unemployment and fostering a more dynamic labour market. Workers could respond more readily to labour demands within the EU, promoting economic growth and creating opportunities for professional development.

Two further measures from the pillar of the EU single market deserve mention: granting the Western Balkan economies access to the Single Euro Payments Area (SEPA), which would simplify and reduce the cost of money transfers, and eliminating roaming charges. While these initiatives are positive and would simplify some aspects of daily life, they are unlikely to significantly impact the region’s overall development.

All in all, the pillar on access to the EU single market for the Western Balkans represents a symbolically positive shift by discussing the opening of the EU market to the Western Balkan economies, but it falls short of offering any tangible measures that would produce any real change. Consequently, it appears likely that the situation will remain unchanged for the foreseeable future.

Pillars 3 and 4 – Increasing financial assistance to the region and accelerating reforms

The third and fourth pillars are interconnected, drawing on the well-known metaphor of the carrot and the stick. They propose offering the region a larger carrot through increased financial support, while also wielding a larger stick by implementing greater conditionality for disbursing funds. This approach aims to motivate regional authorities to undertake the challenging and often uncomfortable reforms needed to enhance living standards in their countries and to come into closer alignment with the EU while also rewarding them for their efforts so as to amplify the positive outcomes.

However, a closer examination of the Growth Plan quickly leads to disappointment. The proposed carrot amounts to just EUR 6 billion for the entire region over a four-year period, with EUR 2 billion in grants and EUR 4 billion in loans. This sum is modest compared to the Economic and Investment Plan for the Western Balkans launched in 2020, which totalled around EUR 30 billion (EUR 9 billion in grants and EUR 20 billion in loans). Despite its larger scale and the fact that it has already been in place for three years, the Economic and Investment Plan has yet to yield significant results. Thus, one cannot help but wonder how the financial support from the new Growth Plan, which is smaller and comes with much stricter conditions, would make a difference.

Moreover, the grant component totals merely EUR 500 million per year for the entire region. This amounts to just about 0.3-0.4% of the region’s annual GDP. It’s challenging to envision how an amount that might be considered a statistical margin of error could significantly impact living standards or motivate politicians in the Western Balkans to implement difficult reforms that could potentially hurt them and their allies.

To further underscore the small scale of the financial assistance, consider Croatia, which has a population four times smaller than that of the Western Balkan countries taken together. It is set to receive over EUR 6 billion in grants from the NextGenerationEU fund alone. On a per capita basis, this is 12 times more than what the Western Balkan countries are expected to receive.

At the same time, the bigger stick is that each Western Balkan country will have to prepare a reform agenda, which will be agreed upon together with the EC, and its fulfilment will serve as a basis for disbursing the money. In essence, if the countries fail to implement the reforms they have pledged to undertake, they will not receive the additional financial support. Although this strategy seems reasonable in theory, the carrot on offer is too paltry to truly motivate politicians from the Western Balkans. Consequently, it is highly probable that no substantial changes will occur.

Conclusion

Overall, the Growth Plan has its merits. In addition to introducing fresh elements to the discussion, thereby acknowledging the need for a revised EU approach towards the region, it also accurately pinpoints the primary challenges faced by the Western Balkans. Based on the latter, it proposes four pillars that could form a strong foundation for further expansion.

However, the specifics of the plan and the concrete measures it suggests are somewhat disappointing. To put it bluntly, it falls short in converting the opportunities it creates into goals. Key areas where the Growth Plan could be improved include: stepping up diplomatic efforts to resolve ongoing political disputes in the region; broadening the scope of the CRM to encompass common economic and social policies; providing direct financial and technical assistance to Western Balkan companies in acquiring the export certificates and documentation needed to access the EU market; eliminating border controls for entering the EU for companies from the Western Balkans; reducing or preferably eliminating work permit requirements for citizens from the Western Balkan countries seeking employment in the EU; and significantly enhancing the financial proposal to the region, possibly by providing access to the EU budget.

If these improvements are made, the plan could truly be turned into a gamechanger for the Western Balkans.