How do you analyze the present situation of the European Super-Periphery ?

The European super-periphery consists of countries in the Balkan region that are not yet EU member states but which have achieved a significant degree of economic integration with the EU. All are candidates, or potential candidates for EU membership. The economies in these countries are characterised by a high degree of “Euro-isation” that has made them highly vulnerable to all the negative effects of the Euro-zone crisis. Montenegro and Kosovo have unilaterally adopted the Euro as legal tender, while Bosnia and Herzegovina has a currency board which formally ties its currency to the Euro. Other countries in the region have a large proportion of domestic liabilities are denominated in Euro. This makes it difficult for them to adjust to improve economic competitiveness through exchange rate adjustment. Yet, despite their strong link to the Euro, the countries of this region are not supported by any of the EU bail-out funds such as the European Stability Mechanism (ESM), nor by the European Central Bank bond-buying programme, nor through other policy instruments that are available to ease the impact of the crisis on the ‘peripheral’ EU Member States such as Greece, Ireland, Italy, Portugal and Spain.

While the Eurozone crisis has had a damaging effect on its weaker Member States in the EU periphery, it has not been widely recognised that the crisis has had an even more damaging effect on countries outside the EU, especially those in the volatile European ‘super-periphery’. In several of these countries unemployment currently exceeds that in Greece or Spain. In Macedonia the unemployment rate is 31.2%, in Bosnia and Herzegovina it is 28%, and Serbia it is 25.5%. Youth unemployment is also at historically high levels (at over 50% in each of these three countries). Countries in the super-periphery are especially vulnerable to the effects of the Eurozone crisis due the high degree of Euroisation. In Serbia, for example, more than four-fifths of all private sector loans are denominated in a foreign currency, with similar levels in other countries. Euroisation makes it hard for countries in the super-periphery to achieve a real devaluation, and so internal devaluation through domestic recession and reduction of unit labour costs is the only way to restore international competitiveness. In doing so however, these countries must manage without support for debt reduction from the Eurozone institutions, and so must impose even harsher austerity programmes than those attempted in Greece.

The intensification of the Euro-zone crisis throughout 2011 and the first half of 2012 has had a predictable impact on the European super-periphery. Already weakened (1) by the effects of the global financial crisis on external trade, FDI inflows and remittances, they have been badly affected by the renewed slowdown in the Euro-zone, which has severely worsened the economic crisis in the region. For example, in the third quarter of 2012 the Serbian GDP fell by 2.2% with prospects for a further fall in the fourth quarter, heralding a new recession at a time when unemployment is already above 25%. The situation is also extremely serious in Croatia, a country that is about to become a new EU Member State in July 2013. There, the economy has been in recession for four years; GDP contracted by 1.8% in the first half of 2012, compared to the same period in the previous year, mainly due to a fall in exports to the Eurozone. Croatia’s gross external debt exceeds 100% of GDP and unemployment reached 14.5% in the second quarter of 2012.

In your opinion, how will the situation likely evolve in the next five years?

The future economic development of the European super-periphery depends significantly on evolution of Euro-zone crisis. If the Euro-zone crisis deepens, as seems likely, and if the region’s trading partners such as Greece and Italy experience continued economic stagnation over the next five years, which also seems likely given the magnitude of the adopted austerity programmes, there will inevitably be magnified spill-over effects to the super-periphery. Moreover, it seems likely that banks from Austria, Greece and Italy that own up to 95% of banking assets will continue to “deleverage” their positions, withdrawing capital from the region to shore up their threatened capital base at home. This will place further stress on the economies of the super-periphery, as credit will continue to be in short supply. The share of non-performing loans, already at historical highs, will further increase.

Later this year, Croatia will join the EU, which will bring a large inflow of assistance funds and lead to more intensive structural reforms. This may help to turn round its recession-hit economy. If other countries make progress with their EU accession processes this will also assist their economic recovery. From 2013, the EU’s “IPA” pre-accession assistance programme will be opened to all countries in the region.  This is a move in the right direction, though more needs to be done, including enabling access of these countries to the EU bailout funds including the ESM. Yet, even with these developments the outlook over the next five years remains bleak.

What are the structural long-term perspectives?

The rapid economic growth that took place in the super-periphery before the onset of the global economic crisis was based on large inflows of external resources in the form of rapid growth in foreign direct investment and foreign bank credit. This pattern is unlikely to be repeated. The crisis of the global financial system has made EU banks and foreign investors far too risk averse to sustain such outside financing. If the economies of the region continue to stagnate, the social situation is likely to deteriorate and social unrest and renewed ethnic conflict may erupt. The EU perspective holds some hope, but as presently constructed it is too slow a process, with the next enlargement perhaps a decade away. The alternative would be some diversification of export and investment partnerships to Russia, Turkey and even further afield. Indeed, competition over energy infrastructure between Russia and the USA appears to be an emerging theme regional economic development.

Inevitably, future economic growth will need to be based on a more effective use of the region’s own resources to a far greater extent than in the recent past, including on increased savings and improved human capital. This will require a change in the policy process, focusing less on rent seeking by local political and economic elites and more on promoting productive entrepreneurship and the stimulation of real competition on domestic markets. Structural reforms are needed that could underpin renewed economic growth, which is the only way to escape the vicious circle of debt, austerity and recession. The reform of the education systems is especially important to improve human capital resources. Vocational education at secondary level, better linked to the needs of industry, needs to be more attractive to students.  In-company training schemes and appropriate curricula responsive to the changing needs of the economy need to be developed. Remittance flows from migrant workers could also play an important role if better incentives were in place to channel these into productive investment. Regional cooperation on infrastructure projects could stimulate economic growth. Yet, neither faster EU integration nor much progress in the field of regional cooperation seems very likely. This suggests that the future perspective is not bright, despite the undoubted long-term economic potential of a region rich in mineral and other natural resources, with an educated population and located close to major European markets.

Notes:

1. (1)See Will Bartlett and Ivana Prica, The Variable Impact of the Global Economic Crisis in South East Europe, LSEE Papers No. 4, European Institute, London School of Economics and Political Science, 2012.
   

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William Bartlett is Senior Research Fellow in the Political Economy of South East Europe at the LSEE research unit of the European Institute, London School of Economics and Political Science, UK. He holds an MA from the University of Cambridge, an MSc from the University of London and a PhD from the University of Liverpool. He has written widely on issues of economic and social development in South East Europe. His book Europe’s Troubled Region: Economic Development, Institutional Reform and Social Welfare in the Western Balkans was published by Routledge in 2008.

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