The Future of the Western Balkans in the EU

Friday, May 16

Presenter
Frank Moss, Director General, Director General International & European Relations, European Central Bank

Panelists
Ellen Goldstein, Country Director for Southeast Europe, Europe and Central Asia, World Bank
Alfred Lejsek, Deputy State Commissioner and Section Chief, Section Financial Markets, Austrian Federal Ministry of Finance
Doris Ritzberger-Grünwald, Director, Economic Analysis and Research Department, Oesterreichische Nationalbank

Summary
Mr. Moss pointed out that income levels in Southeastern European countries had been converging to the EU average in the early 2000s, but the remarkable catching-up process stalled after the global financial crisis. Thus, despite the earlier achievements, Western Balkan countries have to overcome significant challenges to reignite economic growth. Countries in the region have important external and internal imbalances, such as double-digit current account deficits and unsustainable fiscal policies, with high deficits and fast accumulating public debt. Financial stability concerns also persist, especially related to asset quality and foreign exchange lending. Most Western Balkan countries lag behind Central and Eastern Europe in the quality of institutions and governance.

In order to achieve higher and sustainable long-term growth, Mr. Moss noted that the Western Balkan countries should continue far-reaching economic reforms. In his opinion, growth could be accelerated by improving fiscal administration and implementing medium-term fiscal frameworks, increasing the independence of central banks, and boosting competitiveness by structural reforms that would strengthen the corporate sector and improve the education system. Banks’ balance sheets need to be strengthened, including by reducing high non-performing loan ratios. The EU pre-accession period, he stressed, could be a window of opportunity for reforms that fundamentally improve institutions and policies.

The panel reinforced and complemented Mr. Moss’ views. Ms. Ritzberger-Grünwald also emphasized the significant challenges the Western Balkans face in the financial sector: a large share of non-performing loans, low demand for credit, and large exposures of banks and households to exchange rate risks. On the positive side, she pointed to high trust both in EU institutions and the euro that is evident in all Western Balkan countries, according to the most recent OeNB Annual Survey. Mr. Lejsek stressed the positive impact of significant institutional reforms at the European level for macroeconomic and financial stability. However, complex EU integration procedures, including conforming to the requirements of the EU Banking Union, would pose challenges for candidate countries. To support Southeastern European countries in these challenges, the EU would provide significant training and technical assistance. Ms. Goldstein noted that the Western Balkans might still need decades of rapid growth to reach EU living standards. She saw macroeconomic and fiscal stabilization, improved competitiveness and connectivity, enhanced skills and labor productivity, strengthened governance, and anti-corruption among the top reform priorities. The event concluded with a rich discussion on the various challenges and proposed reforms.

Maksym Ivanyna, Economist, JVI

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