On July 7, the European Commission announced that the GDP of the European Union will fall by 8,3% in 2020. This represents an additional downward revision of the decline in the economy of this bloc compared to earlier forecasts. It was announced that four Mediterranean countries, strongly dependent on the tourism sector, will have a double-digit decline in GDP, among which is Croatia, whose economy will decrease by 10,8%.
Two days later, the Government of Montenegro adopted the "Macroeconomic and Fiscal Policy Guidelines for the period 2020-2023", in which it stubbornly sticks to the claim that GDP will fall "only" by 2020% in 6,8, despite the catastrophic decline in activity in the tourism sector of over 90% compared to last year. Precisely in this most recent example, one can see a transparent but clear simulation of the real situation in the economy of Montenegro.
If we make a parallel of this micro example to the bigger picture, it is interesting to ask the question: what does it mean for Montenegro in economic terms and how much does it cost to simulate negotiations with the EU? Let me remind you that Croatia, which of all the new members negotiated for EU membership for the longest time, managed to complete the negotiation process in eight years (started in 2005) and enter the EU in 2013. At this pace, Montenegro, which is in the negotiation process started in 2012. was supposed to become a member of the EU in this year. In other words, what are the repercussions of stagnation in the EU integration process, which is evident in the case of Montenegro?
Billions of euros in missed benefits from EU funds
First, significant grants would be available to Montenegro to fight the crisis caused by the Covid-19 virus. Namely, on Monday, the EU responded to the crisis caused by the Covid-19 virus through a total package that is "heavy" 1,8 thousand billion euros. I put special emphasis on Next Generation US, an extraordinary and temporary support instrument of the European Commission which is "heavy" in total 750 billion euros, of which even 390 billion euros will be allocated to member countries in the form of grants, while 310 billion euros will be placed through loans with favorable repayment terms. The largest part of the instrument's assets Next Generation US (more than 80%) will be used to support public investments and key structural reforms in member countries, concentrated where the impact of the crisis is strongest and economic needs are greatest.
According to estimates, and taking into account Croatia's experience, as a member of the EU, Montenegro would be entitled to at least one billion euros financial support (grants and loans with favorable repayment terms) for recovery from the economic crisis. For small Montenegro, this amount of funds would represent a powerful instrument for dealing with the crisis, but also a strong flywheel for the much-desired diversification of the economy with an emphasis on the green economy and digitization.
Secondly, under normal circumstances, Montenegro would have available over one billion and five hundred million euros from structural and investment funds of the EU (ESI). The significance and size of the five ESI funds can best be observed also through the example of Croatia. During the period 2014-2020. Croatia was allocated slightly more than 10 billion euros from ESI funds that could be invested in various areas: from research and innovation to employment, education and training, social inclusion, public administration and civil society, as well as infrastructure and environmental protection.
In the same period, Montenegro annually had around 30-40 million euros available from EU funds. If Montenegro were a member of the EU, it would have access to much more generous funds that could be used to improve citizens' living standards faster.
The facts are inexorable: Montenegro as a member of the EU would have a direct benefit from membership estimated at 3 billion euros through a combination of grants, structural funds and soft loans.
Losses due to not belonging to the single EU area
The European Union rests on a common internal market, which is based on four freedoms: the freedom of movement of goods, services, people and capital. Non-belonging to the single EU area, as in the example of Montenegro, is best illustrated through the structure of foreign tourists and foreign direct investments (FDI).
In the context of the current situation, belonging to the single EU space would reduced the decline in income from tourism. A few days ago, the EU closed the borders to Montenegro, which de facto ruled our summer tourist season, which, let me remind you, generates at least 1,1 billion euros in revenue. If Montenegro was a member of the EU, the borders between Montenegro and EU countries would probably be open today. This would mean that hotels and catering facilities would be significantly fuller than now, while tourism revenues would be much higher. Unfortunately, according to official data, only 8% of tourists stay in Montenegro today compared to the level of last year. A very concrete benefit of membership in the EU from the point of view of tourism is the example of Croatia, where tourist traffic today is at the level of 50% of last year's; the largest number of foreign guests comes from the EU.
While in the foreign trade exchange of Montenegro, over 80% of the value takes place with EU and CEFTA member countries (primarily with neighboring countries), we do not have such an analogy in foreign direct investments (FDI). If we look at the geographical structure, the largest FDI in Montenegro actually they don't come from EU member states. For example, from 2015 to 2019, FDI from Germany amounted to only 121 million euros or a modest 6% of total FDI. In the same period, FDI from the USA, a key foreign policy ally of Montenegro, amounted to only 50 million euros, or 2,5%. On the other hand, FDI in Montenegro mostly comes from countries that are not members of the EU, so the main investors in the lucrative fields of construction, tourism and hotel industry come from the UAE, Turkey, Azerbaijan, Russia, as well as off-shore destinations.
Paradoxically, although Montenegro is declaratively in favor of EU integration, and in the region it has advanced the most in this sense, we are the least "dependent" on FDI from EU countries. For example, Montenegro is the only country in the region where the majority of FDI is not owned by one of the EU countries.
Strengthening of Chinese economic influence
At the end of 2014, Montenegro made one of the biggest geo-economic mistakes by contracting the priority section of the Bar - Boljare highway, which, in the financial sense, represents a noose around the neck of the current and every subsequent government.
At the same time, with this move, Montenegro pushed itself into economic dependence on China, which, as an undoubtedly new global power, strongly permeates the new world order through its "Belt and Road" project. The fact that it is mentioned even in official reports from "high level" security conferences (Munich Security Conference 2019) speaks volumes for how much the highway project "raised the spirits" of high circles in Western Europe and America.
China, on the other hand, continues to build and strengthen its presence in Montenegro, through the already controversial Možura wind farm project (part of the aforementioned "Belt and Road Initiative"), but also through the provision of the Pljevlja TPP overhaul, through a favorable credit arrangement. In the foreseeable future, it is very likely that Chinese state-owned companies will strengthen their presence in new energy projects, in order to take advantage of Montenegro's exceptional potential in the field of renewable energy. In this way, Chinese energy companies very easily use the benefits of the strategic submarine cable project between Montenegro and Italy (a project of common interest of the European Commission), which has made Montenegro a regional energy hub.
A clear task for all actors in society
Covid-19 has caused severe disruptions on a global scale. Montenegro, as a small open economy, with limited capacity to respond to strong external shocks, has no choice: all the actors of this society must direct all their capacities towards the fast and efficient integration of Montenegro into the EU.
If Montenegro continues to simulate negotiations as it has done so far, future generations of its citizens will look enviously at the EU, while they will finance their peripheral development through the limited capacity of credit debt, which is accompanied by an additional collapse of their living standards.
The author is iCEO of Fidelity Consulting
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