Challenges in the Economic Development of South-East Europe

22 Mar 2012

James Kilcourse

The economic challenges facing South-East Europe and the solution for overcoming these challenges have been the theme of two events at the IIEA this month. At a seminar on the economic development of South-East Europe, two regional experts, Peter Sanfey and Mary O’Mahony, discussed the difficult economic situation in the region and the efforts of international donors to increase the effectiveness of their financial assistance. At a roundtable discussion, Slavtcho Neykov from the Energy Community Secretariat highlighted the importance of regional cooperation for investment and security in the field of energy.

Peter Sanfey, a Lead Economist in the European Bank for Reconstruction and Development (EBRD), drew on the EBRD Transition Report of 2011 to assess the growth prospects of the region. The Report shows that South-East Europe has been hit hard by the global economic crisis in ways that are not revealed by official GDP data alone. The Life in Transition Survey (LiTS), which analyses how the crisis has affected individuals and households, forms the core of the 2011 Transition Report and it reveals that, in comparison to West European states and to other countries in the transition region, households in South-East Europe felt hardest-hit by the crisis. This subjective perception of the impact of the crisis indicates that households have been harder hit than official economic indicators suggest. This is in a region that, according to the Transition Report, is already lagging behind the rest of Europe. Most South-Eastern European countries (except Croatia, Romania and Bulgaria) have a GDP (PPP) per capita that is less than 40% of the EU average.

In terms of future prospects, the Transition Report predicts that South-East Europe will experience the lowest levels of economic growth in the transition zone in 2012, with growth forecasts due in April expected to be revised down even further. Consumer confidence indicators are well below EU levels and the banking sector faces a range of vulnerabilities. Credit growth and exports, which were in an upward trend until the Eurozone crisis began to affect South-East Europe, have been declining since 2011.  According to Mr. Sanfey, the reduction in remittances from countries like Greece, where many immigrants from the region work, is likely to be the major crisis transmission channel in the countries of South-Eastern Europe. Taking all of this into consideration, Mr. Sanfey stated that 2012 is expected to be a year of minimum growth in the region and it will continue to be difficult to attract private investors to South-East Europe.

Mary O’Mahony, Head of the IFI Coordination Office for the Western Balkans and Turkey, argued at the same seminar that the difficult economic situation has led to a growing awareness among international donors, and particularly in the European Commission, of the need to better coordinate financial assistance in the region. The drastic decline in foreign direct investment in the region as a result of the global economic crisis also provides an incentive for better financial coordination, according to Ms. O’Mahony. There has been a sustained effort by DG Enlargement to improve coordination between the European Commission and other international donors in the region. The solution arrived at by DG Enlargement was the Western Balkans Investment Framework (WBIF), which aims to better coordinate the support from the Commission, IFIs and bilateral donors in the region; to identify and focus on priority investments in the region; and to ensure that these investments are in line with the accession process and national strategies.

The WBIF provides European Commission grants to help prepare loans (by providing funding for feasibility studies, technical assessments and environmental impact assessments) or to accompany a loan that is already in place (in order to boost the necessary administrative capacity). It covers all of the Western Balkans, including Kosovo, and is devised as a partnership approach with the countries of the region, which participate in the project’s Steering Committee. The European Commission is involved, with DG Enlargement at the helm, as well as a number of IFIs: the EBRD, the Council of Europe Development Bank and the European Investment Bank. Last June, the World Bank became an associate member, which, according to Ms. O’Mahony, brought additional expertise and knowledge to the project. The remaining participants are nineteen donor countries, who use the WBIF to pool their resources into a dedicated trust fund for the region.

The WBIF focuses on key sectors of the beneficaries’ economies including energy, environment, transport, social infrastructure and private sector development. Since December 2009, it has approved one hundred and twenty-two grants with a value of €186 million. The latest call for proposals resulted in fifty-two project requests from the participant countries. One very positive trend, according to Ms. O’Mahony, is the increase in the number of proposals for regional projects, where the European Commission wants to see more resources invested. While the instinct may be to apply for national projects, she argued, the importance of regional infrastructure is beginning to be understood in South-East Europe. Ms. O’Mahony said that South-East Europe is an extremely interconnected region, and an extremely important region for the EU in terms of transport and energy supply to and from major markets. One of the objectives of the WBIF, therefore, is to give priority to those projects that have the greatest regional impact.

Regional cooperation in South-East Europe was the focus of another speaker at the IIEA in March: Slavtcho Neykov, Director of the Energy Community Secretariat. The Energy Community Secretariat works closely with the IFI Coordination Office, and they are currently cooperating to support the implementation of energy efficiency commitments in the region. The Energy Community was established in October 2005 to extend the EU internal energy market to South-East Europe on the basis of a legally binding framework. It also aims to create a stable regulatory and market framework in the region in order to attract investment in energy networks and to enhance the security of energy supply. Mr. Neykov stressed the importance of thinking about investment and energy security in a regional perspective. The scope of investments in the energy sector are so large that it makes more economic sense to focus on attracting investment at a regional level rather than treating energy as a purely national issue.

The biggest achievement of the Energy Community since the concept was first proposed in 2002 is, according to Mr. Neykov, the change in the way South-East European countries think about energy issues. He noted how remarkable it is that countries that were at war with each other in the 1990s are now sitting around a table discussing common projects and planning a common future in the field of energy policy. He focused in particular on the Regional Energy Strategy, an idea that was initially launched by Serbia and is expected to be adopted in late 2012. This strategy will identify key energy targets for the region and establish concrete criteria and priorities for regional investment projects. While this provides a good example of Balkan countries embracing a regional approach to energy policy and taking ownership of the Energy Community process, Mr. Neykov also discussed some of the challenges facing the organisation. He noted that laws transposed into national legal systems are not always implemented in practice and that there is a shortage of administrative capacity in the region. All in all, however, there has been a positive change in how the countries in the region work together for the sake of more investment and greater security in the energy sector.

The overarching message to emerge from these two roundtables is that, although the region may face very difficult economic circumstances now and in the medium-term, the key to the development of South-East Europe is in improved coordination both at the international and regional level. Foreign investment in the region is crucial for economic growth and for the development of essential infrastructure. There is an increasing awareness in South-East Europe that improved coordination of public investment, currently being carried out by the WBIF, and regional endeavours to attract private investment, exemplified by the Energy Community, will be beneficial to the economic development of all countries in the region. 

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