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The Transmission of European Debt Crisis on the Region of Western Balkans: Some Stylized Facts

BaşlıkThe Transmission of European Debt Crisis on the Region of Western Balkans: Some Stylized Facts
Publication TypeConference Proceedings
Year of Publication2012
AuthorsGanić, M
Conference NameElectronic International Interdisciplinary Conference 2012
Date PublishedSeptember 3 – 7
PublisherInstitution of the University of Zilina
Place PublishedZilina, Slovak Republic
ISSN Number978-80-554-0551-3
Other NumbersISSN 1338-7871

This paper aims to analyze economies which are affected by the European debt crisis most by examining the effects on the Western Balkans countries reflected by Foreign direct investments flows of selected countries, trade performance indicators of Western Balkans and remittances from abroad. The analysis comprises the following countries: Albania, Bosnia and Herzegovina, Croatia, Macedonia, Montenegro and Serbia. The data set used in the analysis has been extracted from the following databases: UNCTAD, World bank, Eurostat, World Trade Organization, from National statistics.

Structure of the paper is given as follows: Section 2 deals with new economic trends and new developments in the countries of Western Balkans from the moment of their independence.

Section 3 discusses the recent developments in the foreign trade for the last decades between European Union-27 and Western Balkan also it describes the main specific features of the overall trade performance indicators of Western Balkan for last two decades. Section 4 compares and analyses the implications of debt crisis in European Union-27 on the economies of Western Balkans during current debt crisis.

Our findings show that the debt crisis in European Union-27 has indeed affected the countries of Western Balkans to a particular degree through financial and trade linkages.

Full Text

                                                                                                                                                                 I.           Introduction

Four years ago the whole world was concerned about the global crisis since global economy was affected by adverse developments in the United States. At a time when the global economy began to show positive signs of recovery European Union-27 (EU-27) has remained on the sidelines. As opposed to defuse the situation and improve the atmosphere in the rest of the world the EU has remained rough area with a lot of chronic problems and acute debt crisis.

The crisis apparently has deeper roots than those seen on the surface. In other words, European debt crises has had a far wider range and complexity of the problem than it has been discussed for years. The general atmosphere of inherited and created disputes and wrong economic decisions only made the EU -27 more divided. Year 2008 marked as beginning of the debt crisis in EU-27 caused collapse of the banking system in Iceland. The transmission of the crisis to other EU-27 countries, including Greece, Ireland and Portugal in 2009 further multiplied the negative impact of the crisis for EU market, but also in countries that are more integrated with the region. The crisis has reached its first peak in early 2010 as a result of major structural problems with the deficit in Greece increasing cost of financing government debt. By its nature the current debt crisis in EU-27 is structural. The causes of European debt crises are complex but related to series of obvious abuses in fiscal and economic policies. It turned out the previous history of European integration that the membership of a number of countries in the euro area and EU with different levels of economic development constitutes an obstacle to the harmonization of economic policies. There is a significant gap between the EU-27 countries in terms of GDP per capita expressed in purchasing power parity (PPP). Data released by the Eurostat show that the indicator of PPP for the 16 euro area countries amounted to 108 percent of average EU-27 by the end of 2010. It was noted that this indicator was only 72% in Slovakia, 78% in Portugal and Malta, 86% in Slovenia, 95% in Greece and 98% in Cyprus. In this context it must be mentioned that not all members of the euro area successfully adopted an innovative model of development, which would provide a guarantee that European countries continue to maintain a competitive advantage. The causes can be found in the fact that in some countries on the periphery of the EU-27 that have not been able to transform its uncompetitive economy and adapting them to conditions of globalization. Some countries used membership in the EU-27 and the euro area to take advantage of improving the living standards of their citizens, for example, in the framework of a supranational regional policies, and not to exploit any synergistic effects (such as national companies access to new markets, selling or developing cooperation in the field of production) .

The following serious objection is that the international statistics formally even put several troubled EU countries in group of developed countries, simply because they are EU members. However, in terms of productivity, they are lagging far behind the leading European countries. Poor quality of education, which is common of southern Europe, also indicates a low level of human capital, and the slow process of assimilation and integration of population in modern information technology developments. A number of countries on the periphery of the EU-27 has lived for years beyond their means, because wages are generally growing faster than output per person employed. The adverse consequences of sustained large budget deficits, troubling social security system and inefficient administration worsened the social situation (A. Dynkin, 2010, pp. 7-9).

This brings us to the following causes of the crisis, and that is the fiscal aspect. A couple of years before the crisis erupted the euro area members, including their leaders, have begun to breach the Maastricht criteria and budget discipline. In addition there was not effective mechanism to sanction violations of budgetary discipline. These criteria are supposed to play a crucial importance for all members during the transition to the euro, but some member states like Hungary and Greece have never been fulfilled. If we know that the euro area member states were obliged to maintain a balanced budget over the medium term as it is tolerated, then all? Also, initiators of the reform of the Stability and Growth Pact in 2005 France and Germany have experienced failure of their ideas. Namely, many members of euro area have been in violation of the Maastricht criteriawithout facing sanctions. Furthermore, in order to understand seriousness of the situation it's important to point out that in 2009 the level of EU-27 budget deficit stood at -6.8%, and at the level of the euro area (EU 16) -6.3% (Eurostat, 2011, p.66).

The main objective of the study is to analyze the certain economic variables in order to have a bigger picture about effects of European debt crisis on the region of Western Balkans (WB). Countries of the WB are strongly associated with the EU-27 through trade, investment and banking market. The European Union's most important export destination for all the observed countries. This study uses a cross-country comparison methodology and examines the following aspects: Foreign direct investments (FDI) flows of selected countries, Trade performance indicators of WB as well as migration remittances. In our analysis we use annually data series which are sourced from the following databases: UNCTADstat, World bank, Eurostat, from National statistics. The data covers the period between 1997-2010 and included 6 countries of Western Balkan: Albania, Bosnia and Herzegovina, Croatia, Former Yugoslav Republic of Macedonia (FYR Macedonia), Montenegro and Serbia.

                                                                                II.         The starting point of new developments in the Western Balkans

There are some basic facts that characterize the direction of economic trends in the WB and that they have a lot in common. From the moment of independence this countries have chosen to become democratic societies followed by other advanced transition countries. All countries of the WB have accepted the market economy as the basic orientation and long-term perspective of their social and economic development. This fact-constant of the new economic reality in the WB countries had certain significance to their further development. The second element that must be borne in mind are the objective conditions, internal and external-under which the emerging countries of former Yugoslavia in order to begin with its own political independent life and a breaking with socialism looking for new solutions in a market economy. The process of trade and capital-account liberalization enabled countries to gradually integrate into international trade and financial flows at the end of the 1990s. The effects of such processes have been demonstrated in increased inflow of foreign direct investments, increasing international trade and increasing foreign exchange reserves. Over the last decade of transition, two dominant tendencies of macroeconomic trends emerged that marked this period between 2001-2010:

a) The relatively high average annual rate of real GDP growth of 3.75% did result in significant economic policies in transition economies taking initial conditions and policies as well as the cyclical movement of the world economy. Economic growth was mainly driven by domestic demand, where the personal and public consumption generate GDP growth, while the inflow of investment and export growth was insufficient to faster rate of economic growth and increased employment.

b) rapid growth in domestic final demand throughout the transition period was offset by higher volumes, and the growth of merchandise trade deficit which has caused the deficit in current transactions. A significant portion of the merchandise trade deficit was financed through inflows of remittances, foreign direct investment and the income from privatization.

Since the beginning of the 1990s, the main focus of the most of these countries was directed to the higher degree of integration and convergence with the intention to one day become EU members. In 1999, the EU has extended autonomous trade preferences for the five WB countries focusing on Stabilization and Association Process. Stabilization and Association Process has taken important step in developing wider cooperative and approaching the countries of the region after the war events in the early 1990's. This cooperation has been established through a network of bilateral free trade agreements (G. Wittich, 2005, p. 2). The conclusion of these agreements was preceded by the signing of a Memorandum of Understanding (MoU) with the intention to liberalize trade between Albania, Bosnia and Herzegovina, Bulgaria, Croatia, FYR Macedonia, Romania and Serbia and Montenegro (C. Grupe and S. Kušić, 2005, p.10). MoU regulates the issues of tariff rates for the abolition of at least 90% of all tariff lines and tariff liberalization in order to cover at least 90% of bilateral trade by value. (The European Institute Foundation, 2004, p.23) From an economic point of view, the past decade has shown that all the WB countries largely depend on their cooperation with the EU, either through foreign direct investment, loans or grants. The following table presents the inflows and outflows of FDI over the period 2005-2010 for the WB. Among the countries in Table I, in the period between 2009-2010 FDI outflows increased only in Bosnia and Herzegovina and Serbia. Between 2005 and 2010, in absolute terms, the largest FDI inflows in the region, have been received by two countries: Croatia and Serbia.



Table I.  The Western Balkans: FDI flows of selected countries, 2005-2010 (Millions of dollars)

Source: Derived from the UNCTAD, FDI/TNC database


The presence of foreign investors and the growth of inflow FDI in WB was motivated by many factors including:

a)       geographical proximity to EU market that allowed favorable conditions for attracting foreigninvestors who relocated part of its production to countries with cheaper labor and less stringent work regulation. In previous years it has been shown that the effect of geographic proximity is an important factor that influenced on high level trade exchanges with the EU gave companies from EU a major competitive advantage in initiating the international expansion of their activities in neighboring countries.

b)       opportunity to expand their market share to the organization of production in WB (and thereby reducing transportation costs) or to use in the production of these countries as a platform for expansion into larger markets in other regions. Thanks to the reforms and the promising economic outlook region of WB become a place where investors with regional ambitions had the greatest potential for cross border expansion. This is especially important in the context of the region's aspiration to join the EU.

                                                                                                   III.        Trade performance indicators of Western Balkans

The trade integration of the WB countries with the EU-27 is high. Even more, the trade with the EU-27 remained for all countries of the WB more significant than intraregional trade in terms of exports and imports. The decade of 2000-2008 is undoubtedly one of the most important period of trade expansion in the WB region. Greater integration with the EU internal market implies also the need of countries of WB that  its policy of economic development harmonize with the EU strategy of economic development. The aim of these countries is that in the near future become full members of the EU. Since 2000 Europe's Preferential Trade Agreements provides countries of the WB preferential access to the EU market through reduced tariffs creating a strong stimulus to the rapid growth of trade. Among these countries exports from Croatia and Macedonia in the period between 2000 - 2010 was more than doubled, Bosnia and Herzegovina's exports is quadrupled.


Figure 1.  Percentage Import Growth Rates for Selected economy, 1997-2010

              Source: International Trade Statistics 2011 , Authors calculation.

While in 2011 the average share of EU-27 in total exports of WB amounted to 70.5% the average share of EU-27 in total imports of WB amounted to 68% (See Fig. 1). It is indicative that average intraregional import share in total imports amounted only 15.2% for all countries of the WB (included Bulgaria and Romania) indicating a high degree of similarity of productive structure of countries in the region, rather than complementarities (S. Kathuria, 2008, p. 37). The data indicate that income inequality is very much present and ranges from 2 728 € in Albania to 10 367 € in Croatia. While Albania GDP in 2010 was still only 72% of the 1989 level (mainly due to lower statistical basis), B&H, Montenegro and Serbia are still in arrears to catch up with their 1989 level of GDP. The only exceptions are Croatia and Macedonia that have managed to get back up.

In international trade region of the WB has achieved a step forward in terms of increasing exports has achieved important progress in terms of the increasing volume of their exports. Strengthening export oriented economy is based on the use of the advantages of preferential exports to the EU market. Comparative data on export and import show that there are significant differences between countries of the region.

As illustrated in Fig. 2, during the period between 1997-2010 exports grew by an average annual rate of 18.05% in Albania, Serbia (11.10%) and Bosnia and Herzegovina (9.65%). On the other hand, over the same period, the highest recorded average annual growth rate of imports was in Albania (16.30%) and Bosnia and Herzegovina (11.15%).

Figure 2.  Percentage Export Growth Rates for Selected economy, 1997-2010


Source: Derived from the International Trade Statistics 2011 , Authors calculation.



Figure 3.  Export Coverage of Imports in %  for selected  economy, 1997-2010

Source: Derived from the International Trade Statistics 2011 , Authors calculation.

Although exports of goods and services increased in the period 1997 - 2010 coverage of imports by exports is still remained unsatisfied. Thus, for example, coverage of imports by exports in the case of Bosnia and Herzegovina more than doubled with the average annual growth rate of 5.94%, while in Macedonia the average growth rate was -2.17%. Also, it is indicative that the average coverage of imports by exports of goods (fob) ranged between 25.5% (in Albania) to 62.3% in Macedonia (Fig. 3).

Overall, the following figure summarizes the average distribution of GVA providing the percentage contribution of agriculture, industry, and services to GVA for countries of WB over the period 1991-2010. An analysis of growth trend and changing structure of gross value added (GVA) over the reference period shows the domination of service sector (Fig. 4). Within the services sector, the highest share in services has been telecommunications, trade and financial sectors. The presented data of individual participation in the creation of GVA indicate significant changes that have occurred in the last decade. And yet this important trend is almost invisible if we look at overall GVA. In 2001, the average GVA by main sectors amounted to 14.63% (agriculture sector), 26.1% (industry sector) and 59.3% (service sector).

In all of this is indicative that the structure of their economy is becoming more similar the structure economies of EU-27 where agriculture has declined as the manufacturing and services sectors have grown. According to the calculated average value of GVA for all countries of the WB in 2010, agriculture contributed 10.5% of GVA, while the industrial and agricultural sectors contributed 24.8%, 65.62% respectively.

Figure 4. Gross value added by main sectors, 2010 (% share of total gross value added)

Source: Derived from the EUROSTAT database, Authors calculation.


The weighted average share of the services sectors in the region's GVA increased from 59.3 % in 2001 to 65.62 % in 2010. At the same time, the highest share services to GVA were in Montenegro 71.3%, at least share services to GVA in FYR Macedonia 60.9%. It is obvious that structure of GVA by sector during the reference period showed significant differences between countries.

The share of exports in GDP is modest. There were large differences in these ratios across countries. The lowest growth rates of exports during this period were recorded in Montenegro (29.1%) and highest growth rates of exports in FYR Macedonia 58.9 %. On the other hand, over the same period, the lowest share of imports in GDP was in Montenegro 35.7%, and highest in FYR Macedonia 94.8% (Table II). It is shown over the reference period that growth rate of exports has been greater than imports with the exception of Macedonia and Montenegro. The share of imports in GDP in all selected countries exceeded the share of exports due to which merchandise trade balance of WB was in a deficit.

In recent years it has been shown that the FYR Macedonia, Serbia and Bosnia and Herzegovina have the most trade openness in the region (column 2 and column 4). In contrast, Montenegro is most closed in terms of imports or exports in total GDP.

TABLE II.  Trade performance indicators of  selected countries

       Source:Derived from the EUROSTAT database, National statistics, Authors calculation (column 2  and column 4).


       IV.        What are the implications of the debt crisis in the European Union on the economies of the Western Balkans?

In the previous section, it has pointed out existing trend in the development of trade in countries of WB as well as differences in their development. Given the current level of economic relations with the EU is not difficult to understand that countries of WB are heavily dependent on EU. That provokes the following question: How current debt crisis in the EU affecting on economic trends of WB?

There are several channels through which the debt crisis of the EU transmits to the rest of the world. First, the crisis led to a decrease of economic growth in Europe. Its market is one of the largest in the world and accounts for 15.05% of total world exports and 16.55% of total world imports. (International Trade Statistics 2011, p.25). Second, it is noticeable weakening of the euro against other currencies, the decline in profits from the export business in the euro area. Third, and perhaps most important, the debt crisis was a blow to many sensitive and poorly capitalized the financial institutions. Among European countries, except of Greece, Spain and Portugal and other peripheral EU-27 countries such as Slovenia are in line to help their financial institutions (NLB banking group). Debt crisis in the euro area countries is transmitted to WB via two transmission channels - channel of trade and channel of foreign direct investment. 

First channel through which debt crises may affect to WB countries are trade linkages between main trading partner countries of WB such as Austria, Germany, Italy, Slovenia. Trade is certainly one of the main sectors countries of WB that may be affected in case of further deepening the crisis and financial disturbances in the euro zone. Just as a reminder, we should not forget that last-global financial crisis has had its negative repercussions in terms of decline in exports of the WB in EU-27 by 14.7% (S. Dimitrova, 2011). The importance and interconnectedness of these two regions may be best illustrated by the fact that in 2010 the average value of exports to the EU-27 amounted to 59.42% of total exports of WB (Eurostat, 2012). In addition, the trade linkages between the euro area countries and regions, are very strong, a leading cooperation with Germany, Austria, Italy and Slovenia. The volume of trade and investment between the WB and the EU is important because Europe remains the largest trading partner of the WB. The EU market is essential for the export-oriented sector WB countries. Therefore, the deepening debt crisis and greater instability in EU may have serious consequences for the Western Balkans, of which the exporters have suffered the most damage. The EU consumes nearly 70 % of total exports of WB and holds in ownership more than 90 % of banking assets in these countries. Table III shows that in the period between 2007-2011, the highest shares EU-27 of total imports selected countries were recorded for Albania (69.62%) and Macedonia (66.2%) and lowest in Croatia (63.42). In contrast, its share in total exports was the highest in Montenegro and Albania (89.15 and 81.9% respectively). If a more detailed analysis of trading volume and its relationship between EU-WB it can be concluded that already feel the effects of debt crisis in trade between the two regions.

Table iii.                 EU -27 Share of total Import and Exports selected countries (%)

Source: Derived from the EUROSTAT database

From the beginning EU debt crises EU- 27 share of total imports countries of WB declined on average from 69.42% to 66.86%, while EU- 27 share of total exports countries of WB declined from 75.42% to 72.3%. Based on the analysis of the situation in the region of WB it can be noted that the crisis most felt FYR Macedonia, where is recorded declined share of total exports. Albania is an exception, because it exports about 90% of its products in the EU, but more than 75% of exports is directed to EU crisis-affected economies: Italy and Greece. Furthermore, except for Bosnia and Herzegovina and Serbia exports of other countries in the EU experienced fall in the period between 2008 - 2010. As it  can be seen in the table III the level of integration of the WB with the EU internal market can be expressed using two indicators: EU-27 share of total exports and EU-27 share of total imports selected countries of WB.

Most integrated country of the WB in terms of trade (imports and exports) with the EU 27 over the period between 2007-2010 was Montenegro. On other side, Croatia was at least integrated country with the EU-27 in terms of trade. Available data for reference period indicate that EU-27 share of total exports of Croatia was 63.4%, while EU-27 share of total imports of Croatia was 61.5%.

The second channel through which effects the debt crisis of the EU are transmitted to the region of WB in the decline of FDI flow. Germany, Austria and Italy are the countries that are most invested capital in the form of Greenfield investments. More than 60% of the FDI were directed towards the labor-intensive sectors (manufacturing sector), such as automotive, electronics, etc. but also in the service sector such as banking, insurance and telecommunications. In absolute terms, the largest FDI flows in the region, have been received by Croatia more than twice that of Serbia in second place. However, Croatia, which next year becomes a full member of EU already the facing  with effects of debt crisis and a significant decline in FDI inflows.

There are fears that the economic crisis and consequently this problem may cause that large investors from the EU firstly consolidate their position on the domestic market. This would mean to reduce their interest to do business with the region. As it can be seen from Table IV the debt crisis in the EU affected the decrease in FDI inflows.

Although the EU economy was hit by the global financial crisis impact on the countries of WB country was visible but limited. Until then, the economy of WB showed some resilience to withstand the pressure of the latest global crisis.

Table iv.                  Share of FDI in % of GDP, 2008-2010  inward  FDI as % GDP

 Source: Derived from theUNCTAD database

TABLE V.  Inward remittances, annual data – share of GDP

Source:World Investment Report 2011

The next important indicator which reflects the initial impacts of the debt crisis on the region WB are remittances from abroad. In last ten years the average weighted annual inflow of remittances and its share in GDP was 19% in Bosnia and Herzegovina and Albania 14%, while their share for other countries was below 10%. Given inward remittances especially for Bosnia and Herzegovina and Albania there is understandable concern how decline in inward remittances may be reflected on these economies.

Migrant’s remittances are for some economies of the WB proved stable source of foreign exchange earnings and means of covering the balance of payments deficit. Also, some countries of the WB as Bosnia and Herzegovina and Albania are much more exposed to the European debt crisis than other selected countries because of their higher dependence on EU remittances and more interconnectedness to the EU's financial systems. The European debt crises resulted in a decline in production and hence a decline in demand for labor migrants from Bosnia and Herzegovina and Albania so inward remittances decreased as income declined. Most of the remittances to WB are sent by migrants living in EU-27 (primarily from Austria, Germany, Italy and Slovenia). The inward of remittances from other regions except the U.S. and the Scandinavian countries is negligible. Workers’ annual average remittances as share of GDP over the period between 2000-2010 for selected countries are shown as in Table V. Of course, as current problems in the EU have a large impact on employment and living standards of its citizens, and ability of the diaspora to send money home is expected to be reduced. This means that if more people lost their jobs they will be faced with lower incomes while the transfer is likely reduced.

This is not just a hypothetical scenario. In fact, if you look at the data from Table VI significant downturn inward remittances in almost all WB countries in 2009 and 2010 can be concluded. In 2010, some countries experienced decline in inward remmitances ranging from -15% in Serbia and -12% in Albania to -11% in Bosnia and Herzegovina.

Table  VI.   remmitances – Annual change in % 

Source: World Investment Report 2011.


The tendency of deepening crisis in the EU-27 undoubtedly means a lot not only for the WB but for the rest of the world economy. Of course, these adverse changes in the countries of WB must not be underestimated. There are still masses of problems, many difficulties and obstacles to be overcome. There are still some danger places, such as channels of trade finance and trends in the financial sector that could create a lot of trouble. The main risks are hampering the fight with the debt crisis for the countries of the region are high current account deficit which expresses the structural imbalances in their economy, slowing GDP growth and exports, the slowdown in foreign capital inflow and the like. The European debt crisis although not in the some measure has affected all economies of WB. We also should not forget the WB country recorded a failure in the transition of its economy. In addition to the position of those countries in rankings by their competitiveness in recent years has been very unfavorable, and some of them recorded a further decline in competitiveness.

The effects of debt crisis in the EU-27 has been limited primarily to the direct transmission channels such as trade flows, FDI inflows and remittances decrease, while indirect effects may be manifested by reduced earnings growth in the domestic economy with a tendency to decrease in export earnings. Until now, debt crisis has shown limited effects on the economy development of the WB. Although the impact on the economy all the selected one of the reasons is certainly that to simplify a large percentage of foreign exchange with the EU, participation of the most affected countries such as Portugal, Greece and Spain's foreign trade with the region is small.



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