17. Apr 2013  |  Western Balkans  |  Policy briefs

There are two big pieces of news about EU enlargement in 2013 – a good and a bad one. The good news is that the euro crisis has not killed the enlargement process. On the contrary, without much fanfare, the accession process of the Western Balkans to the European Union is steadily moving ahead, albeit at a slower pace. The pivotal event this year will be Croatia becoming the 28th member-state on July 1st, as a deal with Slovenia over a prolonged banking dispute cleared the final obstacle for formal entry. The bad news is that the first EU enlargement since the euro crisis will be also be the last in this decade, at least for South-Eastern Europe.

Croatia’s case deserves more attention. It will be the first EU country with a recent legacy of war and large-scale ethnic violence. Gerald Knaus and Kristof Bender of the European Stability Initiative remind us that to qualify for membership, Zagreb not only adopted hundreds of new laws and regulations but also radically changed its political culture.1 It stopped disrupting statebuilding in neighbouring Bosnia, allowed the return of Croatian Serb refugees, engaged a Serb minority party into a government coalition and completed the extradition of all of those indicted by The Hague war crimes tribunal. The main outstanding issues in the European Commission’s final report on Croatia are the need to continue the fight against corruption and human trafficking. These are by no means alarming: similar demands could be made to a number of EU memberstates. This transformation would not have been possible without the EU enlargement process, and without an early go-ahead for the membership negotiations in 2005. The question is how the EU’s transformative power can be sustained for this fragile corner of Europe that is gradually emerging from its troubled history – and how this “incomplete mission”can be kept on the EU’s political agenda at a time when it is undergoing its own great transformation.

Although the pace of enlargement is slow, it can still generate turning-points.2 Last June, the EU opened membership negotiations with Montenegro. In June 2013, the European Council might decide to set a date for opening negotiations with Macedonia and Serbia.

This decision will be based partly on two special reports that the Commission is expected to present on April 16th, just before the GLOBSEC 2013 conference. Macedonia’s case still depends on solving the name issue with Greece, and Serbia’s on finding a durable means of coexistence with Kosovo. Both are hard issues to solve, and American diplomacy continues to play a crucial, if less visible role “from behind”, as it does in Bosnia and Herzegovina – the most complex trouble spot in the region.

The Commission’s report on Serbia will be presented in co-ordination with the EU’s High Representative, Catherine Ashton. In early April, under her facilitation,the Prime Ministers of Serbia and Kosovo came very close to rewriting history, pondering an agreement on the future administration of Serb-run northern Kosovo. The hope is that both sides will find a last-minute compromise. Time is running out and without a deal the Council will not approve the start of membership talks with Serbia in June. Germany, the key decision-making player, needs at least eight weeks to get parliamentary approval.

Last but not least, this year has started in a promising way for Europe’s relations with Turkey, the largest and most important country in the enlargement process. After a three-year break, the Irish EU Presidency is taking advantage of French President Hollande’s softer line on Ankara to open new chapters in the membership negotiations.

Under the most positive scenario, however, full EU membership even for the most credible aspirants is not realistic before 2020. First, if we accept that Turkey is a special case, Montenegro has the greatest chances of entry, but is still at the start of the accession process which took Croatia more than eight years to complete. Second, due to lessons learned from the last round of enlargement to Bulgaria and Romania, and under the pressure of enlargement-sceptic EU members, the whole accession process has become more difficult and rigorous. Strict emphasis is now placed on the rule of law and the fight against corruption, with more benchmarks along the way and more opportunities for member-states to block the process. The third reason is due to Europe’s own crisis: no-one knows what the EU will look like in a year from now, never mind a decade.

One thing is clear: as EU membership for the other Balkan countries becomes a distant prospect, stagnation
trends as well as public disenchantment with the EU are going to be reinforced.

Four important trends and challenges can be observed:

  1. The Croatia test. The entry of Croatia into the EU is a big test ofthe benefits that European integration can still bring to a stagnant Balkan country. The other Balkan candidates will pay close attention. Will the inflow of foreign direct investment to Croatia increase? Will EU funds help to create more growth and infrastructure development even though Zagreb’s fiscal space for co-financing is almost non-existent? Will Croatia be relegated to a second-class member state with little or no influence? Much will depend on the Croats themselves. Smart economic policy can seize on new trade and business opportunities inside the EU, turning them into growth and jobs. Smart diplomacy can reinforce Croatia’s ties with her non-EU neighbours (Serbia, in particular) laying ground for future trade and growth across the region. With good strategy and alliances inside the EU club, Zagreb can do a lot to keep the vision of the European Balkans credible and on the agenda. It is in Croatia’s interests to help its neighbours (among them its former enemies) to join the EU as soon as possible, but Croatia could also misuse its seat behind the EU table to score political points, reinforcing new divisions in the region and free riding on the huge credit and political investment behind its own EU membership. If Croatia is unable to leverage the opportunities EU membership brings, it would have wider repercussions for the region. The EU is now ill-equipped to afford another case like Bulgaria or Romania, and failure in Croatia could dramatically slow down further enlargement.
  2. Exclusion in a multi-speed Europe? The emergence of a multi-speed Europe has downgraded the value of EU membership, and relegated the Western Balkans to the “outermost circle” of European politics. Dimitar Bechev, Senior Policy Fellow at the European Council on Foreign Relations, calls it the “periphery of the periphery – countries that have an important stake in the current debate about the future contours of Europe but no real voice”.3 Their economies are closely interconnected with the EU, which is by far the most important source of their financial flows – either in the form of foreign direct investment or labour remittances from abroad. More than 90% of the banking sector in the Balkan countries is owned by banks from Austria, Italy, Greece and Slovenia, which have significantly deleveraged their loans and exposure in the face of huge problems at home. Montenegro and Kosovo use the euro, while Bosnia’s and Macedonia’s currencies arede facto pegged to it. Such interdependence exposes the region to the economic slump in Southern Europe, and to the ongoing problems in the euro zone.
  3. Long-term stagnation? After a sluggish recovery, Balkan economies are now struggling with a doubledip recession, characterised by a decline in outputs and sharp increases in unemployment. Serbia has an unemployment rate above 25%, Macedonia over 30% and Kosovo over 40%. Exports, foreign direct investment and remittances have all been hit in recent years. The World Bank, in its December 2012 report4, warned that no other region in Europe is experiencing greater shocks from the on-going crisis. It projected a drop of 0.6% in the combined real GDP of Albania, Bosnia, Kosovo, Macedonia, Montenegro and Serbia for 2012. Such troubles are to a large extent also due to policy failures at home – lack of competitiveness and reforms, strong monopolies with political patronage, and old infrastructure. New sustainable growth needs to be based on accelerated structural reforms, and on major infrastructure projects of regional significance (highways, rail, energy, gas, tourism). The European Investment Bank, the European Bank for Reconstruction and Development and the World Bank will help fund cross-regional infrastructure projects in a joint €30 billion scheme for 2013-14. New projects and business opportunities will be promoted at the 1st Balkan Infrastructure and Construction Summit in Vienna at the end of May 2013. In the long run, however, additional financing for growth will not be effective unless accompanied by smarter government policies along with tough fiscal adjustment. Austerity might be politically suicidal, as shown by recent protests in Bulgaria. But, according to the World Bank, a continuation of current policies could lead to a vicious cycle of low or negative growth, high debt and even higher risks of social upheaval.
  4. Strategic adjustment or desperation? The new Balkan approach is a combination of slow EU integration along with a search for new loans and investment from the East. Last year, Turkey was among the top three foreign investors in Croatia and Serbia, and among the top five in Bosnia. The Serbian government is courting new loans from Russia and Asia as it needs $6 billion this year to service its debt (25% more than in 2012). In addition, state assets in energy and agriculture are being sold to Arab sheiks and Azeri oligarchs. A new bridge over the Danube in Belgrade and 140 km of highways in Serbia are being built by Chinese companies. Such diversification of investment partnerships, now common across the region, reflects larger shifts in the global economy, but also shows a degree of desperation. In any case, it will make the EU a less dominant partner than before.

Although the EU is still referred as the “indispensable power” in the region, it might have to struggle more to impose its agenda in the near future. Deeper crisis could bring the Balkans region closer to Europe – but only if the EU keeps its door open and reframes the enlargement agenda in economic terms, as a credibleblueprint for sustainable growth and new jobs. More than new strategies, however, we first need to renew something fundamental: the ethos of shared responsibility, of Europe for the Western Balkans and of the Balkan countries for themselves.

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1 G. Knaus and K. Bender, “Why Croatia’s EU accession will strengthen the EU”, Rumeli
Observer blog, 19 October 2012, http://www.esiweb.org/rumeliobserver/2012/10/19/whycroatias-
eu-accession-will-not-weaken-the-eu-in-english/
2 For more detailed account of the EU enlargement prospects in 2013, see: T. Żornaczuk,
„The Prospect of the EU Enlargement to the Western Balkans in 2013“, Bulletin PISM no. 24,
8. March 2013, http://www.pism.pl/publications/bulletin/no-24-477

3 D. Bechev, “The periphery of the periphery: The Western Balkans and the Euro crisis”, European Council of Foreign Relations, August 2012,
http://ecfr.eu/page/-/ECFR60_WESTERN_BALKANS_BRIEF_AW.pdf

4 The World Bank, South East Europe: Regular Economic Report No. 3, December 18, 2012

Milan Nič is a Senior Fellow at the Central European Policy Institute (CEPI), a regional think-tank by the Slovak Atlantic Commission. This is a joint publication of the Central European Policy Institute, Centre for European Studies and the Konrad Adenauer Stiftung. This publication receives funding from the European Parliament. The Centre for European Studies, Konrad Adenauer Stiftung and the European Parliament assume no responsibility for facts or opinions expressed in this publication or any subsequent use of the information contained therein. Sole responsibility lies on the author of the publication.

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