Begegnungen
Schriftenreihe des Europa Institutes Budapest, Band 28:105–113.

TAMÁS NOVÁK

The Possibilities of Accession of Southeast European Countries to the EU

Economic Conditions,Ttrends of Development

The Stabilisation of the Southeast European Region

The stabilisation of the economy can be regarded as a general phenomenon in the former socialist countries of the Southeast European region in the past four or five years. The rates of growth of the GDP are relatively high on the one hand, inflation is being reduced or it is relatively low, and there has been an increasing dynamism in the size of foreign direct investments because of the decreasing regional risk and the production costs that are lower than in Central European countries. Despite similar processes these countries **i**cannot be regarded as forming a uniform region **/i**either economically, or from the perspective of international integration (such as the level of contacts maintained with the European Union), for there are significant differences among them in respect of development, the transformation of the economic structure as well as the future economic and political risks. The present level of intra-regional contacts is limited despite the primarily externally encouraged initiatives of region-formation (the process of stabilisation and association, including attempts at developing regional free trade), and there is little manifestation of complementariness among production structures. The countries of the region that are in a disadvantageous position to get closer to the EU have distorted economic structures, in some countries (such as Bosnia-Herzegovina, Albania) the obsolescence of the means of production makes the modernisation of the economic structure rather difficult, because the interest of foreign investors is deteriorated by the extremely big capital demand. The situation of **i**Romania**/i** and **i**Bulgaria**/i****i** **/i**is relatively favourable in terms of economy if compared to the region, partly because transformation had begun earlier and partly due to the growing pressure for adaptation as the process of EU integration has been progressing. As far as the economic situation is concerned, the Western Balkans is a region requiring relatively similar ’handling’ (with Croatia outstanding in this group by its economic development, and the stability of the market economy structures).

Currently the business cycle takes a shape which is different from that of the Western and Central European countries. Catching up with the developed Western European countries usually sets off a significant process of convergence in the countries of the Central and Southeast European region, which includes the synchronisation of the growth processes, too. The Southeast European region is at the beginning of this convergence, and this is favourable to the business opportunities of the area, for it can provide growth impulses to countries or companies that can build intensive economic relations here or have significant productive capacities here even at the time of slump in developed countries.

In view of all these framework conditions the economic prospects are relatively favourable for the coming years. Investment expectations are positive in all the countries of the region, the reason being the above-mentioned general economic stabilisation, the favourable cost factors, and the available conditions for market enlargement providing opportunities to large foreign enterprises. In some cases even the elements of privatisation offer are promising.

The majority of the Western Balkan countries depends almost entirely on foreign countries, and an efficient transformation of the economy using internal resources is hopeless for the time being, therefore the **i**pro**/i**cess of stabilisation and association, and the support policy coordinated by it as well as the creation of the background to the transformation of the economy may exercise decisive influence on the economic processes that would be realised in the coming years.

The Processes of Growth

The level of the development of the Southeast European region greatly lags behind that of the Central European countries. Data calculated on purchasing power parity (PPP) are more favourable, their size relative of the EU–25 average extends from the Albanian 20% to the Croatian 47% (**i**Tab**/i**le 1).

The low level of development of those countries is even more obvious when calculated on exchange rate value. Based on 2005 data and without Croatia the per capita GDP was between 6.5 to 11% of the average of the EU–15 (**i**Table 2**/i**).

The majority of these countries could not reach their own GDP level prior to the transformation even by 2005, it was accomplished only by Albania, Romania and Croatia, whereas Bulgaria and Macedonia are approximating it, but Serbia and Bosnia are very far from it (these two countries suffered the greatest setback in the mid-1990s, but their growth processes do not exceed those of the other Southeast European countries, therefore their position does not improve compared to the latter ones).

The **i**growth rate**/i** taken as the average of the past five years is above 5% in the case of Romania and Albania, whereas it approached this level in Bulgaria, Serbia, Macedonia and Bosnia-Herzegovina. The simple data of growth, however, hide many factors which significantly modify the assessment of the quality of growth processes in some cases.

While some of those countries show a relatively stable development, the growth rate is characterised by vigorous fluctuation in the case of others, either depending on external boom, or on domestic economic policy (privatisation, encouraging domestic demand). After stabilisation in 1997 Bulgaria set itself on a balanced track of growth, just as Romania did after 2001. Albania and Bosnia-Herzegovina have been developing relatively fast and without major fluctuations during the past years, but these countries have been the poorest and least developed in the region. In contrast the Serbian and Macedonian economy (particularly the latter one) have shown great fluctuations, an adverse domestic phenomenon or an international effect may derail the stable processes to a large extent. In 2004 the aggregated growth of the region was highly favourable, record levels of expansion were achieved in several countries, but the year 2005 was characterised by a slowdown of the rate of growth (**i**Table 3**/i**).

Sustainability

The key issue of future development is the sustainability of the present growth in the region. **i**External factors**/i** (first of all the realisation or specific promise of EU-membership) also play a decisive role in it besides the adequate domestic economic policy, as well as the preparedness of the society and the set of institutions, their ability and willingness to change. Therefore this problem does not affect every country to the same extent, for the growth of Bulgaria or Romania – not the least also because of the tangible proximity of EU-membership – is based on more solid foundations than, for instance, that of the successor states of the former Yugoslavia. There may be fewer problems in countries where growth is based rather on the dynamic expansion of export and investments than in places where it is primarily built on domestic demand, even if it is occasionally artificially promoted. Growth decisively based on internal consumption has extremely great risks in such small countries either because of the rapidly growing deficit of the budget or of the current balance of payment becoming impossible to finance.

During the past years the **i**consumption of the population**/i** has vigorously grown in Bulgaria, Croatia and Romania. This has, however, not squeezed out (private) investments, for they were partly nurtured by foreign capital inflow, and partly by a restricted state budget (a significant narrowing of budget expenditure). At the same time difference in the structures of investments is remarkable: while Bulgaria and Romania have been able to acquire capital to more significant productive investments, the investment activities in Croatia were focused almost entirely on tourism and motorway construction, while the renewal of the technological level of the economy was slow.

High and occasionally very high **i**unemployment**/i** is characteristic of all the countries under survey, which, with a few exceptions could not be reduced as yet even by the vigorous economic growth. Unemployment data are not very reliable, and aggregates done by different methodologies show significant differences. That much, however, can be stated, that in Bosnia, Macedonia and Serbia unemployment is between 30 and 45%, and this level may be approximated in Albania, too (**i**Table 4**/i**). It refers to the lack of domestic production capacities and a failed change of structure, as well as to the weak ability of the private sector to create jobs. The relatively low official data observable in the different countries does not so much reflect successful adjustment but much more the continuous postponement of structural reforms, which would bring about a significant growth of unemployment in the future (this effect will be of particularly large proportions in Romania).

While the unmanageability of unemployment is a daily task for economic policy, the consequences of the **i**demographic situation**/i** are not less grave in the longer run. They derive from the decreasing population, a rapid growth of the proportion of the elderly, and from the spectacular emigration of the young. The opposite process cannot be managed any easier, as it was experienced by Serbia which had to receive and settle down (mostly without offering employment opportunities) about seven hundred thousand refugees. Though these problems would emerge mostly in the longer run the difficulties due to pension reforms already cause grave problems or would do so in the coming few years.

The situation is better regarding the changes of the **i**inflationary processes.**/i** Hyper-inflation could be successfully stopped everywhere, and the rate of price rises has become a one-digit figure in the majority of cases during the recent years, but its sustainability is doubtful because of several reasons (**i**Table 5**/i**). On the one hand, the moderation of inflation was not accompanied by structural reforms. On the other hand, several central price controls have been retained, which will have to be eliminated sooner or later (the later it is done the larger price explosions can be predicted). Thirdly the over-valued local currencies extend temporary protection against imported inflation in a large part of the countries in the region. The question is how much longer this condition can be maintained, for it is already obvious that it hinders export and the development of competitive production, but has an adverse effect even on the development of the sector producing for the domestic market (because of the import prices kept artificially low).

Keeping the **i**deficits of state budget**/i** within limits is another element which can be regarded as favourable for longer term development in the countries of the region (with the exception of Croatia). The relatively balanced budget may be attributed to giving up an autonomous exchange-rate policy (Bulgaria), or the postponement of structural reforms (Romania, Serbia-Montenegro), and often to the pressure for meeting the demands of international financial institutions. Excessively rapid cuts in the deficit, however, may easily have unfavourable effects, and the policy of deficit reduction may result in yet another growth of deficit (particularly if reduction is not realised jointly with structural reforms – see the Croatian example). At the same time fiscal consolidation plays a decisive role in the handling of the high deficit of the current balance of payments in the entire region. This is, however, a fruitless stabilisation policy without the implementation of structural reforms, for it is often accompanied by the slowdown of growth. It remains a question how the acceleration of growth could be promoted without the pulling effects related to the successful structural transformation (reforms). Finding harmony between issues of balance and growth is well represented by the divergent experiences of countries in the region: while in Bulgaria growth remained rapid after the budgetary deficit was pushed back due to the structural reforms, in Macedonia stabilisation was accompanied by slow growth, and in Croatia the growth of imbalances has been simultaneous with the slowing of GDP growth (**i**Table 6**/i**).

One of the most characteristic features of the growth processes in the region is the high and growing **i**foreign trade deficit. **/i**The deficit of foreign trade turnover is above 50% of the GDP in Bosnia, it approximates 30% of the GDP in Serbia-Montenegro but it has been as high as 20–25% in Albania, Croatia as well as in Macedonia; and it is around 10% in Bulgaria, Romania and Croatia. Foreign trade deficit does not mean sensitive limitations to growth until it can be financed out of other incomes (or by the increase of external debt without risk). The highly unfavourable changes of the foreign trade balance are not reflected in identical dimension in the current balance of payments in most of the countries. Some countries have significant incomes from services (Croatia, but Bulgaria is also gaining increasingly significant incomes from tourism), while in other cases it is incoming foreign capital that represents the decisive source of financing. The imbalance is mitigated also by the size of the unilateral transfers deriving decisively from the remittances of people working abroad, from foreign aid and loans. In Serbia, Albania, Macedonia, Bosnia-Herzegovina and Albania transfers of this type make up 13–25% of the GDP, which suggests that this factor plays a decisive role in the current, relatively rapid growth (**i**Table 7**/i**).

We may risk the statement that without a significant quantity of the inflow of **i**foreign direct investments **/i**the deficit of trade and balance of payment cannot be maintained in the medium term. Moreover, even if this condition is present a smooth progress is only probable if capital increasingly launches export-oriented developments and does not focus on activities in the internal market. Though the size of capital inflow has been growing as a result of general stabilisation and a decreasing political risk during the recent years, a real breakthrough has been achieved only in Bulgaria, Romania and Croatia, in places where accession to the EU by itself demands significant market adjustment, and highly favourable investment opportunities have evolved due to certain sectoral conditions (**i**Table 8**/i**). For the time being capital inflow in other countries has not been able to bring about renewal in the productive capacities, and it is rather certain segments of the servicing sector, and branches or companies of exceptionally good condition that have become target areas of capital investment.

A common problem of the countries in the region is the revaluation of **i**domestic currencies**/i** as well. In some countries this process is partly the result of catching up, and it is primarily related to the development of a more competitive economic structure. The growth of foreign capital inflow (direct investments, portfolio investments) also strengthens domestic currency. The most important cause of currency appreciation is, however, the difference between the levels of domestic and foreign inflation. This difference has not been neutralised by currency devaluation in any of the countries, for one of the most important aims of economic policy is to fight inflation and the maintenance of price stability in this region, particularly as a consequence of the periods of hyperinflation in the 1990s. It results in a **i**pegged exchange-rate regime **/i**in several countries**i**, **/i**and those maintaining currency councils (Bulgaria, Bosnia) practically do not even have an autonomous exchange-rate policy. In the future this situation may influence the flow of international capital, for an appreciating currency, particularly if it is accompanied by rapidly growing production costs, may weaken the capital attraction capacity of the individual countries. This may primarily exercise a negative effect on the production and export of wage-intensive goods (an example of this is Croatia where the wage levels are already high).

Essentially all the countries of the region stress balanced growth in the long run and their commitment to transformation necessary to it. It is visible, however, that the implementation of reforms continues to depend on the rigorous conditionality in most countries. It means either adjustment to the EU (Romania and Bulgaria), whereas in the case of the other countries it is only the pressure of international organisations (IMF, various donor-coordinating organs) that can force them to fulfil the various conditions. In addition, the often ambiguous privatisation policy and mistrust towards the role of foreign capital may represent risk and restrict medium-term growth.