A strong incentive for faster integration of the economies of the Western Balkans into the EU market

Despite ongoing political and social tensions, the Western Balkans has managed to attract net foreign direct investment (FDI) averaging 6% of GDP over the last decade, predominantly from EU countries

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European Investment Bank (EIB), Photo: Shutterstock
European Investment Bank (EIB), Photo: Shutterstock
Disclaimer: The translations are mostly done through AI translator and might not be 100% accurate.

The global economy, although still fragile, is gradually recovering after four consecutive years of sluggish growth. During this period, we have experienced the unfathomable spread of disruptive digital technologies, geopolitical shocks, and the highest frequency of weather disasters caused by climate change so far. Despite increased competition and deepening conflicts, cooperation between governments and markets remains critical to solving multiple crises and fostering new opportunities for growth.

Being part of European value chains, the Western Balkans cannot be immune to external shocks. In addition, local economies rely on traditional labor-intensive sectors such as agriculture, mining and manufacturing, so opportunities for productivity growth and technological innovation remain limited. Given its fragmented and small markets, the region needs to avoid the middle-income trap, increase resilience and transition to a higher value-added economy. What could be the further path of progress?

Reforms are key to encouraging FDI inflows

Despite ongoing political and social tensions, the Western Balkans has managed to attract net foreign direct investment (FDI) averaging 6% of GDP over the last decade, predominantly from EU countries. Around 180.000 jobs have been created between 2010 and 2021 by greenfield FDI projects in the region, with the majority of them in manufacturing. These investments have also contributed to increased productivity and innovation, contributing to better management and technology transfer.

While some countries continued to record a stable inflow of FDI during 2023, such as Serbia and Bosnia and Herzegovina, others such as Montenegro and North Macedonia experienced a significant decline. To maintain an adequate level, the region must accelerate the adoption of fundamental reforms, including more transparent regulations, as well as improve legal certainty. Institutional reforms are necessary to improve governance and reduce bureaucracy. Strategic policies, such as investment incentives and public-private partnerships, can increase the region's attractiveness to foreign investors. In addition, better connectivity, upskilling the workforce, accelerating the green transition and digitization will continue to be key growth factors.

A new incentive for reforms through the Growth Plan

With EUR 6 billion of funds to be provided in the form of grants and loans, the Growth Plan for the Western Balkans has the potential to stimulate the convergence of the economies of the Western Balkans with the European Union (EU) and increase GDP per capita, which currently stands at around 38% of the EU average. The plan also envisages the opening of certain areas of the EU single market before accession, with the aim of providing free movement of goods, capital and services, access to new funds and programs, but also expansion to a much larger market that includes over 500 million consumers.

Since its launch in November, Plana has demonstrated an exceptional ability to deliver results. For example, the introduction of Green Lanes is expected to triple the waiting time at the borders, which will lead to greater efficiency and liberalization in trade, harmonized regulations, and therefore new investments. Access to the Single Euro Payments Area (SEPA) can also help reduce the cost of cross-border payments to the benefit of consumers and businesses.

At the Summit of Western Balkan leaders, which was recently held in Kotor for the Growth Plan, regional leaders expressed their commitment to meeting all the prerequisites for SEPA accession. With the help of the European Commission, there is a potential for the first accessions to take place this year. Together with the CEFTA Secretariat and the Transport Community, regional businesses will work on the finalization and implementation of the green belt road map with the aim of improving intra-regional trade, customs cooperation and modernization of border crossings.

The participants of the summit also undertook to provide functional regional institutions for the sake of creating a Common Regional Market and preparing for closer integration with the EU single market, given its great importance for domestic companies and workers because it will initiate a better business environment and faster exchange of goods, services and human capital, which will attract new foreign investments and contribute to economic growth. The World Bank Group estimated that a common regional market could increase the region's GDP by 10%.

In his recently published report "Much more than the market", Enrico Letta points out that carefully monitoring the expansion of the EU single market will be a key challenge in the years to come. It will be especially important to enable candidates who meet the Copenhagen criteria "to realize the benefits of specific elements of the single market long before accession, which exceeds what the existing agreements offer", while at the same time preserving the stability of the single market itself.

In this context and bearing in mind the current state of readiness, a gradual approach based on the implementation of clear reforms in accordance with EU values, especially the rule of law in order to preserve legality, freedom, democracy, equality and respect for human rights, as well as concrete progress with the creation of a regional common market , will be key to a successful enlargement process.

Key support for connectivity, green transition, digitization and upskilling

As a bank of the European Union, the EIB works closely with the European Commission, other financial institutions to launch new projects and bring the most favorable financial arrangements to the countries of the Western Balkans, often combining grants and technical assistance. Through EIB Global, which is dedicated to activities outside the EU, we are ready to support our local partners in advancing EU reforms, connectivity goals, energy transition, digitalization and improvement.

We recently signed investments for the improvement of regional connectivity in the framework of railway projects in Serbia, North Macedonia, Montenegro and Albania in the total amount of over 1,5 billion euros through loans and grants. In the area of ​​green transition, we help modernize the energy infrastructure and increase the intake of renewable energy sources, while ensuring positive outcomes of the transition. The EIB is currently financing the construction of a wind farm in the Travnik region of BiH and a solar photovoltaic plant near Pristina, and new investments in the energy sectors are expected to be signed for the Poklečani wind farm in BiH and the rehabilitation of hydroelectric plants in Serbia.

It is important to commit to the reforms in order to quickly feel the visible benefits

A successful move towards a digital and green economy also requires an appropriately skilled workforce and new education models for lifelong learning. In this sense, we help the countries of the Western Balkans to modernize their educational systems, both in terms of curriculum and in terms of equipment and infrastructure, in order to increase employment and ensure the adoption of adequate skills that meet the demands of the labor market. In Montenegro, we recently signed an EU grant of 11 million euros for the modernization, digitalization and equipping of kindergartens and schools throughout the country.

Despite progress in the transition from centrally planned to market-oriented economies, the Western Balkans still faces structural constraints and institutional weaknesses that hinder its ability to thrive. Economic reforms that focus on stability, private sector development and innovation are key to sustainable growth. Finally, a sustained commitment to reforms will pave the way for Western Balkan countries to integrate into the EU as part of a single, more competitive market.

The author is the head of the EIB Global department for the Western Balkans and Turkey

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(Opinions and views published in the "Columns" section are not necessarily the views of the "Vijesti" editorial office.)