Reaching Out at a Time of Economic Crisis: External Anchors and Internal Dynamics in the Western Balkans

The celebration of two anniversaries that are being held in Europe this—the fall of the Berlin Wall 20 years ago and the first EU enlargement to postcommunist Europe five years ago—is being tempered by a deep and widespread economic recession. This recession has been disproportionately felt in the Western Balkans, Jens Bastian argued, which has obscured the path these countries are working hard to follow into the EU.

Throughout the region, countries that had experienced economic growth in terms of gross domestic product (GDP) performance over the past several years, are now facing a stunning economic decline. As a result of these adverse economic developments, beginning in August and September 2009, the governments of Southeast Europe are now facing dire financial and liquidity challenges. Currently, countries in the region receive very low levels of foreign direct investment (FDI), and are faced with lower remittances, due to a drop in employment of compatriots abroad. The reduction in remittances is highly problematic especially for a country such as Bosnia and Herzegovina, where remittances have comprised as much as 11 percent of the national budget. Moreover, because many countries in the region had achieved economic growth through easily accessible foreign currency lending (especially from Greece and Austria), the devaluation of Western currencies caused loans in the region to increase in value, resulting in high levels of indebtedness, coupled with a shortage of available capital.

Faced with government shortfalls and a credit crunch, Western Balkan countries are reliant on international financial institutions and the governments to bail them out. The good news, according to Bastian, is that international actors have developed and implemented new and effective coordination mechanisms to distribute aid to the region. The coordination is apparent in the division of labor practiced by each institution: the EBRD has offered capital support to commercial banks, which target lending programs; the IMF has offered budgetary support to governments who cannot meet their budgets; and the EU has financed grants which allow infrastructure development to continue during the economic downturn. These loans and grants provide the region with external anchors without which the region would face a dire situation.

Bastian concluded that it is important for the United States to remain active in the region through political engagement with the countries of the region; by encouraging FDI; and by using its leverage in IFIs to support lending activities to the Western Balkans.

Drafted by Elizabeth Zolotukhina, Program Assistant, East European Studies.