EU accession key to Serbia’s economic future

EU accession key to Serbia’s economic future

Serbia hopes that European Union entry will lift it out of economic crisis and into prosperity. Deteriorating public finances and conflicts with neighbors, however, undermine confidence in a smooth accession.

The European Union has begun accession talks with Serbia, with the goal of finishing negotiations by 2018 and joining forces by 2020. The former Yugoslav republic hopes that joining the EU will help the nation emerge from two devastating recessions since 2009.

Serbia, the country at the center of Europe’s bloodiest conflict since World War II, sees a positive future alongside former EU and NATO foes. “The EU is not only the goal, but also the means by which we will modernise our system,” Serbian Prime Minister Ivica Dacic said at a meeting with the EU in Brussels.

While joining the 28-member EU is a surefire way to transform Serbia after nearly two decades of international embargoes and economic woes, many difficulties lie ahead. Serbian officials will have to renounce claims on their former province of Kosovo, and bring their approach to justice and economics in line with EU norms.

A nation of 7.2 million people, Serbia has struggled in recent years to lure foreign direct investment, secure growth, and drive down an unemployment rate of nearly 25 percent. And while government officials have taken aims at reforming the country’s bloated public sector, subsidies and sovereign guarantees for loss-making state enterprises could push the consolidated budget deficit up to 7.1 per cent of GDP this year.

Some ratings agencies have taken note of Serbia’s crumbling public finances, downgrading the country’s foreign and local currency default ratings to B-plus. The start of accession talks, however, has instilled optimism in foreign financial institutions. The European Investment Bank recently announced plans to loan 150 million Euros to small and medium-sized companies in Serbia, aimed at helping the Balkan state improve infrastructure as it integrates more closely with the European Union. Serbia is also set to resume talks in February with the International Monetary Fund, which froze its one billion Euro deal with Serbia in 2012.

Although the renewed confidence in Serbia’s economy from foreign financial institutions is a positive sign for investors, economic prospects in Serbia still remain relatively weak. According to Fitch Ratings, average growth over the next two years will remain below two per cent, which is far below the level needed to create jobs and fuel the economy.

Over the past two decades, Serbia has stood idly by as other ex-communist states joined the European Union and saw their saw their living standards surge. Serbia’s economy has grown at about a third of the EU average over the last decade. And while Serbia has seen increased commitments from foreign institutions in recent years, foreign direct investment in 2012 was less than half of what neighboring Bulgaria, the EU’s poorest member, lured in the same period.

Serbia chart

(Source: The World Bank)

The above chart shows merchandise exports over a two-decade period among Serbia and its neighbors, all of whom are EU members. Hungary, which began accession talks in 1998 and joined the bloc in 2004, saw their merchandise exports increase threefold as trade increased significantly with their new EU partners. According to a report by the World Bank, the remaining countries have all managed to pump up their exports-to-GDP ratios since joining the EU. Serbia, however, has remained stagnant in the face of increased opportunity.

Joining the European Union would give Serbia’s economy a much-needed export-led boost, helping to fuel a more sustainable growth model and attract foreign direct investment. While the benefits of Serbia’s accession into the EU are clear, Serbian officials face two main obstacles over the coming years.

First, while 50 percent of Serbs backed EU entry in a November Eurobarometer poll, anti-accession sentiment still simmers and is gaining momentum across the country. This is a major cause for concern since Serbia’s accession into the EU will first have to be approved by citizens in a public referendum.

Second, Serbia will have to eventually normalize relations with Kosovo, a former Serbian province, and recognize its statehood. This could prove particularly difficult, given that the controversy with Kosovo will be one of the first items screened in Serbia’s accession talks.

If Serbia can convince its citizens of the benefits of joining the EU, while making efforts to normalise relations with Kosovo and improve its economic infrastructure, prospects for joining the world’s largest trade bloc will remain positive. Investors take note: Serbia’s economic future is looking up.

Categories: Economics, Europe

About Author

Rami Ayyub

Rami is an analyst with a US Defense and Space firm, where he works in strategic planning and finance for Civil and Defense programs. He holds Bachelor degrees in Finance and Classical Music from the University of Maryland, College Park.