Against a backdrop of heightened regional and global tensions, deepening the integration of the Western Balkan economies with the European Union is the only path to shared prosperity and economic convergence, writes Matteo Rivellini.
Matteo Rivellini is Head of the Western Balkans and Turkey Division at the European Investment Bank and participated in the Berlin Process Forum of Economic Ministers held in Tirana.
The EU accession process allows countries in the region to anchor their structural reform programs and access additional financing to support much-needed investments.
Against the backdrop of a challenging environment for domestic and foreign businesses, declining productivity, weak governance and unfavorable demographic prospects, strengthening ties with EU countries can create new opportunities for growth and broaden the scope of private investment.
Over the past two decades, foreign direct investment (FDI) in the Western Balkans has been a key driver of growth, supporting integration into European and global value chains, creating new jobs, introducing new technologies and production process and opening new opportunities for local companies.
The total stock of FDI in the Western Balkans amounted to €87 billion at the end of 2022, of which 60% came from EU countries. This capital was primarily channeled into basic manufacturing, construction, and other labor-intensive activities.
Climbing the value added chain
The region must escape the “middle income trap”: sectoral specialization in activities with low added value to guarantee further progress. To this end, it is essential to make real progress in strengthening institutions and the rule of law, improving the skills of workers to meet the changing needs of the labor market, advancing the green transition and improving transport, digital and energy connectivity.
The findings of the EIB Recharging the Batteries report indicate that countries in the Western Balkans (and more generally in the wider CESEE region) often specialize in economic sectors with low added value. Caught in a functional “specialization trap,” they tend to serve as “factory economies” in European production networks, as opposed to the “headquarters economies” found in Western Europe.
Furthermore, the economic activity of these countries is hampered by the weak rule of law and governance framework, the high degree of informality of the economy and the poor quality of infrastructure, as indicated in the last BEI-EBRD-BM survey of businesses. Most businesses cite informality as the main barrier to doing business (19%), followed by high tax rates (14%) and political instability (14%).
Insufficient access to finance is another persistent problem for businesses in the Western Balkans, with around 32% of loan-hungry small and medium-sized enterprises (SMEs) reporting facing credit constraints (a proportion that varies from 18% in Albania to 47% in Albania). % in Montenegro).
Strengthening competitiveness through structural reforms and better connectivity
Looking ahead, new structural bottlenecks – including worsening labor shortages and an aging population – could further weaken the competitive advantage that underpins the region’s success in IDE so far.
In this context, gradual convergence towards EU income levels will depend on stronger institutions, better infrastructure and investments in advanced education and training, which will help to increase foreign investment in the sectors of high technology.
Simplifying regulations, taking advantage of the digital transition, strengthening competitiveness by stimulating trade, increasing the role of the private sector and accelerating the deployment of renewable energies will also be essential to nourish sectors with higher added value and promote diversified investments. .
Successfully completing this transition would lead to more resilient economies, better living standards and continued income growth for people in the Western Balkans region.
These issues were highlighted during the economic ministerial meeting held in Tirana as part of the Berlin Process Summit, an initiative focused on regional economic cooperation and integration. At the event, regional ministers called for enhanced cooperation with the EU to build on current landmark examples such as the CEFTA – Transport Community initiative introducing intra-Western Balkans greenways, their extension to border crossing points with the EU and the initiative on reducing roaming costs between the Western Balkans and the EU.
They also welcomed the EU’s decision to extend its trans-European transport network to the region and the adoption of the Safe and Sustainable Transport Program.
They hope that the Action Plan for a Common Regional Market will further boost regional growth and bring it closer to the EU. Ministers recognized the importance of opening the European Union’s Single Euro Payments Area (SEPA) to non-EU countries, as this represents a unique opportunity to significantly reduce the costs of payments within of the region and with the EU.
European funds dedicated to the region
Facilitating the convergence of European countries was the main motivation that led to the creation of the European Investment Bank (EIB) around 65 years ago. The EIB was designed as an instrument intended to deepen European economic integration. And we continue this tradition under our new dedicated arm, EIB Global. In the Western Balkans, it has invested nearly 11 billion euros since 2009 to support the deployment of strategic infrastructure and connectivity projects, such as in the trans-European energy networks, or to finance local SMEs. These investments have strengthened physical and economic ties between the Western Balkans and the European Union while accelerating convergence.
In Albania, BEI Global supports the expansion of the railway network to Montenegro and the construction works of Corridor VIII to North Macedonia. Last year, the Bank approved one of its largest loans to date to invest in the Corridor X railway in Serbia and will continue to widely support the construction of Corridor Vc in Bosnia and Herzegovina.
To support private sector development – a key driver of growth – the EIB Group has dedicated around 44% of relevant funds to improving access to finance, particularly for SMEs and startups that drive innovation and deploy new technologies.
These objectives are part of the broader mandate of the European Commission’s Economic and Investment Plan and, more recently, the Global Gateway, which involves a substantial mix of funding, grants and technical assistance.
The plan has already approved some €4.3 billion in subsidies which will mobilize €15.9 billion in overall investment. Furthermore, the Commission announced a new growth plan for the Western Balkans to accelerate the region’s socio-economic convergence with the EU single market. As part of EIB Global, the bank intends to play a key role in supporting these initiatives in the region and creating a more open, competitive and greener common market.
