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From ‘Ifs’ To Rational Choices

Promoting regional economic integration in the Western Balkans not only echoes the rationale behind EU economic integration, but also promises to stimulate economic growth, attract FDI and accelerate the region’s EU accession. However, a sustained political commitment and effective government implementation are vital to overcoming present challenges, including lingering political issues between Serbia and Kosovo

Regional cooperation has been an important condition for evaluating the progress of the Western Balkan countries in their EU accession process for several decades, as part of EU conditionality requiring countries to demonstrate their willingness to implement regional cooperation with neighbouring countries in various policy areas. Drawing on the experience of regional cooperation among Western European countries in the post-World War II period, the aim of regional cooperation is to promote the political stabilisation and economic development of the Western Balkan countries through intensified intra-regional cooperation. Regional cooperation has been incorporated into the Stabilisation and Association Process that has been helping integrate the Western Balkans into the EU. The two processes of economic integration – with the EU and with each other – are mutually reinforcing, as regional integration within the Western Balkans aims to prepare them for smoother future entry into the EU.

Although the Western Balkan countries were initially reluctant to implement regional cooperation, fearing that focusing on the region as a whole would delay EU integration, many regional projects have since been implemented successfully. The trade liberalisation process among the Western Balkan countries, which started in 2001 and led to the 2006 CEFTA agreement, has been fundamental to increasing regional trade. The Berlin Process, launched in 2014, has stimulated interconnectivity and intra-regional cooperation among the Western Balkan countries. The Multi-annual Action Plan for a Regional Economic Area, adopted in 2017, and the Common Regional Market project, agreed at the Berlin Process summit in Sofia in 2020, have led to the implementing of a number of regional projects, further promoting regional trade, investment, labour mobility and digital integration. A number of regional infrastructure projects – in transport, energy, environment, digitalisation – are contributing to improving interconnectivity. The EU’s Economic and Investment Plan for the Western Balkans (October 2020), which is providing nine billion euros of grants and aims to attract another €20 billion in loans, includes flagship projects in the areas of transport, energy, environment and climate, digitalisation, private sector development and labour markets. It will further contribute to connecting the Western Balkan countries and creating a larger regional market. At the November 2022 relaunch of the Berlin Process, leaders from the region approved several agreements that will increase citizens’ mobility (travel within the region on the basis of ID cards, mutual recognition of higher education qualifications and professional qualifications). Additional green and blue lanes, aimed at reducing waiting times at borders between the Western Balkans and the EU, have been established. The October 2023 summit of the Berlin Process in Tirana further reinforced the commitments of the Common Regional Market.

Regional cooperation in the Western Balkans is vital for faster economic development and EU convergence, with the European Commission’s Growth plan emphasising it as a key pillar that fosters accession and attracts substantial financial support

Regional cooperation in the Western Balkans has gained importance in recent years, following the February 2022 Russian invasion of Ukraine and the return of EU enlargement to the Brussels agenda. The Growth plan for the Western Balkans, officially proposed by the European Commission on 8th November 2023, places a strong emphasis on regional cooperation, as one of the four pillars that should facilitate the faster economic development of the Western Balkans and its convergence with the European Union (in addition to gradual integration into the EU’s Single Market, the acceleration of fundamental reforms and additional financial assistance of €6 billion – two billion in grants and four billion in loans). Being one of the fundamental elements of European Union conditionality, regional cooperation can clearly contribute to speeding up the EU accession of the Western Balkan countries and facilitate major inflows of financial resources to the region from both public and private funds.

Regional cooperation initiatives have had important beneficial effects for the economies of the region. The process of liberalising trade among Western Balkan countries has helped economic recovery and contributed greatly to the expansion of regional trade. A number of recent studies have identified strong beneficial effects of trade liberalisation. Intra-regional merchandise trade has been increasing steadily over the 15 years since the signing of CEFTA, though the impact has been uneven across individual countries. Whereas the relative share of intra-regional exports in total exports has fallen slightly over the past decade, to around 15% by 2018, the trend has since reversed. Moreover, if we consider the Western Balkan countries’ merchandise exports to other countries in the region, in value terms (million US$), a variable performance after 2009, due to the global crisis, was followed by the strong recovery of intra-regional exports from 2015 onwards – from a value pf around US$4.5 billion in 2015 to US$7.5 billion in 2021. Although the Western Balkan countries have often regarded trading with neighbours as a “second-best” solution, current limited competitiveness on EU/global markets make the possibility of exporting to more liberalised markets around the region an important opportunity.

The potential to increase economic integration of the Western Balkans has been widely discussed. The benefits of economic integration are well known from the theory and practice of European integration. If the Western Balkans integrate their economies regionally, they could achieve stronger economic growth and be more competitive on EU markets. Eliminating various barriers to the free movement of goods, services, labour and capital will boost regional integration, thereby also increasing competition and leading to reduced costs and prices, thus encouraging industrial restructuring. Greater economies of scale will be realised on more integrated markets, since firms will operate on a larger market, while productivity gains would be achieved through easier transfers of technology and knowledge. These benefits could be even greater if we consider the current features of the Western Balkan economies: they are mostly small economies and remain at a low level of economic development (by 2022, only Montenegro had reached 50% of the average GDP per capita of the EU-27); they have relatively low export-GDP ratios and have been confronted by longterm problems on their labour markets that have caused the continuous emigration of young people and qualified professionals. The Western Balkans’ small economic size, regional fragmentation and lack of economies of scale remain important constraints for the inflow of additional FDI.

In order to enhance regional cooperation in the Western Balkans, it is crucial to actively engage in ongoing initiatives, acknowledge the costs of non-integration and address non-tariff barriers like administrative procedures, differences in fiscal regimes and technical obstacles hindering economic integration

According to the European Commission, the potential exists to increase benefits from further regional cooperation in the Western Balkans: boosting economic integration within the region through the Common Regional Market could potentially add 10% to their economies. This assessment is based on a recent World Bank study estimating that reforms of trade and transport policies in the Western Balkans that lead to waiting times at borders being reduced by just three hours are equivalent to removing a value-based tariff of two per cent. Furthermore, reform gains would be maximised if they were coordinated and implemented jointly, so cross-border coordination on the implementation of trade facilitation reforms would generate gains another eight per cent higher.

Despite the benefits of regional cooperation, recent economic integration initiatives have not resolved many economic problems of the Western Balkans. Increased regional integration has not fundamentally contributed to accelerating economic growth or narrowing the gap in economic development between the Western Balkans and the EU. However, slow economic growth and recovery from 2009 onwards cannot be attributed to the failures of regional cooperation, but rather to the general weaknesses of Western Balkan economies (such as a limited ability to attract FDI, inefficient industrial policies, a lack of spillover effects of foreign investment etc.).

What can be done to further increase regional cooperation in the Western Balkans? The further promotion of regional integration should be supported by contributing actively to ongoing regional initiatives and by understanding and recognising the costs of regional non-integration. Despite the various agreements signed by the Western Balkan governments and the removal of tariff restrictions, there are still a number of non-tariff (or institutional) barriers that impede the stronger economic integration of the region – administrative procedures at border crossings, differences in fiscal regimes, numerous technical barriers to trade (different norms regarding sanitary and phytosanitary standards, pharmaceuticals, food origin labelling, labour laws etc.). Creating more integrated markets requires that the Western Balkan countries remove these non-tariff barriers, which is precisely the intention of the Multi-Annual Action Plan for a Regional Economic Area.

In conclusion, the benefits of regional economic integration are based on rational arguments that have been at the basis of the process of European economic integration. In the Western Balkans, furthering the economic integration of the region will ultimately benefit the region’s consumers – through lower prices, better quality goods and a broader range of products. The liberalisation of regional markets can stimulate competition and economic growth, attract FDI and accelerate convergence with the EU. In order for these benefits to be realised, however, continued political will to support the agreed objectives is crucial, as is the ability of government agencies to implement them. Among the main challenges, political issues still impede the faster implementation of regional cooperation, particularly the unsettled issues between Serbia and Kosovo. The full implementation of the Ohrid Agreement and advancing of the Belgrade-Pristina dialogue therefore remain fundamental to the success of future regional cooperation initiatives, as well as to accelerating the EU accession of Western Balkan countries.

BENEFITS

Enhancing regional cooperation in the Western Balkans, particularly through the Common Regional Market, could yield significant economic benefits, potentially adding 10% to the countries’ economies.

CONSTRAINTS

Despite economic integration efforts, the Western Balkans still face challenges, while slow growth since 2009 is attributed to broader economic weaknesses rather than failures in regional cooperation.

EMIGRATION

The Western Balkan economies, which are mostly small and economically underdeveloped, face challenges such as low export-GDP ratios and the ongoing emigration of young professionals.

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