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The Deepening Crisis in the European Super-periphery

2013; Routledge; Volume: 15; Issue: 4 Linguagem: Inglês

10.1080/19448953.2013.844587

1944-8961

Will Bartlett, Ivana Prica,

Post-Communist Economic and Political Transition

AbstractIn this paper we argue that the Western Balkans form part of a 'super-periphery' of Europe, being highly vulnerable to the effects of the Eurozone crisis, yet lacking support from the European Union (EU) bail out funds and policy instruments that are available to ease the impact of the crisis on the 'peripheral' EU member states. In the Western Balkans the crisis has been transmitted through several channels including exports, remittances, foreign investment and bank credit flows. The paper investigates the impact of the Eurozone crisis on the region and questions whether the EU accession process continues to offer hope of economic prosperity in the future or whether the countries of the super-periphery should rely more on their own resources, new alliances and regional cooperation to support future economic growth. AcknowledgementsEarlier versions of this paper were presented at the 75th anniversary conference of the Faculty of Economics of the University of Belgrade 'From Global Crisis to Economic Growth: Which Way to Take?' on 23–25 September 2012, a conference on 'Economic Institutions as a Condition for Social and Economic Development of Transitional Countries', University of Montenegro, Kotor, 5–6 October 2012 and a workshop on 'Moving the Balkans and Bosnia Forward: A Post-Dayton Roadmap' at the Atlantic Council, Washington, DC on 13–14 November 2012. The authors are grateful to the participants at these events for their useful remarks and to the insightful comments of an anonymous referee. All remaining errors or omissions are, however, the responsibility of the authors.Notes [1] See Ivana Prica and Marko Backović, 'Financial liberalisation and stability in the Balkans', paper presented at the AISSEC conference 'Growth and Development Patterns: The Role of Institutions in a Comparative Perspective', Perrugia, Italy, 25–27 June 2009. [2] We include the following countries in our analysis: Albania, Bosnia and Herzegovina, Croatia, Macedonia, Montenegro and Serbia. We do not include the case of Kosovo in this paper due to a lack of reliable data. While EU member states such as Bulgaria and Romania could also be considered part of the super-periphery, we do not cover these cases as our main focus is on the Western Balkans. [3] W. Bartlett, 'Economic development in the European super-periphery: evidence from the Western Balkans', Economic Annals, LIV(181), 2009, pp. 21–44. [4] See, for example, Paul De Grauwe and Yuemei Ji, 'Self-fulfilling crises in the Eurozone: an empirical test', Journal of International Money and Finance, 34, 2013, pp. 15–36. [5] The core–periphery model used here should not be confused with that of 'world-systems theory' which focuses on the way in which hegemony over the global economy shifts between different core states over time (see Christopher Chase-Dunn and Peter Grimes, 'World systems analysis', Annual Review of Sociology, 21, 1995, pp. 387–417). [6] Montenegro and Kosovo have adopted the euro as legal tender, while Bosnia has a currency board that ties its currency to the euro. The Croatian kuna and the Macedonian denar are pegged to the euro. Only Serbia and Albania have managed floating exchange rates, around a narrow band to the euro. [7] Alexandre Chailloux, Franziska Ohnsorge and David Vavra, 'Euroisation in Serbia', Working Paper 120, European Bank for Reconstruction and Development, London, 2010. [8] Martin Brown and Ralph De Haas, 'Foreign banks and foreign currency lending in emerging Europe', Economic Policy, January 2012. [9] As is well known, economic policies of austerity in Greece and other peripheral Eurozone countries have led to a persistent economic recession and enormous social hardship (see Vassilis Monastiriotis, 'A very Greek crisis', Intereconomics, 48(1), January/February 2012, pp. 4–9).[10] International Monetary Fund, 'Growth resuming, dangers remain', World Economic Outlook, April 2012.[11] Eurostat, 'Euro area unemployment rate at 11.2%', News Release, No. 113, 31 July 2012.[12] Statistical Office of the Republic of Serbia, 'Labour Force Survey April 2013', 28 June 2013.[13] Agency for Statistics of Bosnia and Herzegovina, 'Labour Force Survey: final results', Thematic Bulletin, TB10, November 2012, Table 3. Data refer to the unemployment rate for persons aged 15–24.[14] Statistical Office of the Republic of Serbia, 'Labour Force Survey April 2013', Bulletin, No. 172, 2013, Table 7.[15] Montenegro Statistical Office, 'Labour Force Survey 4th Quarter 2012', Release, No. 76, 25 March 2013.[16] Croatian Bureau of Statistics, 'Labour Force Survey', First Release, No. 9.2.8, 14 June 2013, Table 3.[17] Eurostat online data series [une_rt_a] accessed August 2013.[18] < http://www.paragraf.rs/dnevne-vesti/090512/090512-ostali2.html>.[19] < http://www.blic.rs/Vesti/Drustvo/247023/Za-predugo-studiranje-krivi-su-profesori>.[20] Montenegro's deteriorating export performance is spelt out in the Central Bank of Montenegro's Chief Economist Report, Q3, 2012.[21] These data are taken from the World Bank 'World Development Indicators' database.[22] World Bank data on remittance flows.[23] Gian-Maria Milesi-Ferretti and Cédric Tille, 'The great retrenchment: international capital flows during the global financial crisis', Economic Policy, April 2011.[24] For accounts of the early effects of the global economic crisis in the Western Balkans, see Ivana Prica and Milica Uvalić, 'The impact of the global economic crisis on Central and South Eastern Europe', paper presented at the conference on 'Economic Policy and Global Recession', Belgrade, 25–27 September 2009; Will Bartlett and Vassilis Monastiriotis (eds), South Eastern Europe After the Crisis: A New Dawn or Back to Business as Usual?, LSEE, London School of Economics and Political Science, 2010; Will Bartlett and Ivana Prica, 'The variable impact of the global economic crisis in South East Europe', Economics Annals, LVI(191), 2011, pp. 7–34.[25]Croatian National Bank Bulletin, No. 183, 2012.[26] According to the EBRD, 'The short-term economic prospects for the SEE region remain weak, and vulnerabilities have increased as a result of the Eurozone crisis. Financial sector vulnerabilities are a particular concern, given that the vast majority of the banking system is foreign-owned and given the reliance in most countries on funding from abroad' (European Bank for Reconstruction and Development, Regional Economic Prospects, May 2012).[27] According to EBRD online data.[28] Predrag Ćetković, 'Credit growth and instability in Balkan countries: the role of foreign banks', Research on Money and Finance Discussion Papers No. 27, SOAS, University of London, London, 2011.[29] While the Vienna Initiative of 2009 was instrumental in preventing capital flight from banks in the region and thus significantly relieving the effects of the crisis, the second Vienna Initiative did not manage to gather sufficient backing from stakeholders, mainly due to the prolonged and increased Eurozone crisis.[30] International Monetary Fund, Croatia: Concluding Statement of IMF Staff Visit, 3 February 2012.[31] World Bank, South East Europe: Regular Economic Report, 5 June 2012.[32] European Bank Coordination 'Vienna' Initiative, Working group on NPLs in Central, Eastern and Southeastern Europe, March 2012.[33] Croatian National Bank, Financial Stability Report, January 2013, p. 42.[34] International Monetary Fund, 'New setbacks, further policy action needed', World Economic Outlook Update, July 2012.[35] World Bank, 'European bank deleveraging: implications for emerging market countries', Economic Premise, No. 79, April 2012.[36]The Financial Times, 22 November 2011.[37] The Bank for International Settlements (BIS) data for Macedonia show an anomalous increase in foreign banks' asset positions by 60 per cent over the period. However, according to the financial stability report of the National Bank of the Republic of Macedonia, funding from foreign parent entities of banks actually fell, while 'off balance-sheet' sources of funds surged by 57 per cent in 2011 (Financial Stability Report of the NBM, p. 82). Due to the non-transparent nature of the flows they are not reported in Figure 10.[38] According to the CESEE Deleveraging Monitor published by the staff of the international financial institutions participating in the Vienna Initiative, the external position of the BIS-reporting banks continued to decline vis-à-vis CESEE in the first quarter of 2013, with cumulative funding decline amounting to 5.5 per cent of GDP since mid-2010 (see CESEE Deleveraging Monitor, 26 July 2013, p. 1).[39] European Bank for Reconstruction and Development, 'Eurozone crisis impact spreads further East in the transition region', Regional Economic Prospects, July 2012.[40] This is similar to the effects of the global economic crisis, as shown in Bartlett and Prica, op. cit.[41] In Serbia, government expenditure ran out of control in the run-up to the 2012 elections leading to an excessive budget deficit; in Bosnia and Herzegovina policymaking has been paralysed by political instability.[42] The idea of regional cooperation is not new and has been actively promoted by the EU through its accession strategy for the region since at least the Thessaloniki declaration of 2003, and also through the instrument of the Stability Pact and its 'locally owned' follow-on institution, the Regional Cooperation Council based in Sarajevo. The most successful achievement of this approach has been the formation of the Central European Free Trade Agreement (CEFTA) 2006 regional free trade agreement. The EU has supported the Western Balkans Investment Framework to finance infrastructure projects at a regional level. However, the strategy of regional cooperation has not been accompanied by sufficient funds from the EU or by sufficient political willingness and initiative by the countries of the region themselves. In part, this is due to their adherence to the competing policy paradigm of national economic 'competitiveness' that sets one country against another in the international marketplace. The paradigm of economic competitiveness is promoted by numerous international organizations including the Organisation for Economic Co-operation and Development (OECD), the World Bank and not least by the EU itself in partial contradiction to its own strategy of regional cooperation. This also highlights another issue that is beyond the scope of this paper, namely, that the international organizations should have a more coordinated approach to advice and assistance they provide in the region.[43] Building further on and deepening the work of the Regional Cooperation Council and the Western Balkans Investment Framework.Additional informationNotes on contributorsWill BartlettWill Bartlett is Senior Research Fellow in the Political Economy of South East Europe at the European Institute, London School of Economics and Political Science.Ivana PricaIvana Prica is Associate Professor at the Faculty of Economics, University of Belgrade.