In October, the Western Balkan countries will join the European semester, though not in its complete form. This a new development in the EU accession process which the European Commission revealed last year when presenting its new enlargement strategy. The reason is that the countries from the region, struggling with deep systemic problems, have entered a vicious circle – without strong state institutions and political reforms the economy cannot develop and vice versa – the bad economic situation hampers the implementation of deep structural reforms. During this year’s Croatia Forum in Dubrovnik, a milestone that gathered together the political elite from the countries of the region and the EU and analysts from all over Europe, a serious focus was put on the economy.
Vladimir Gligorov of the Vienna Institute for International Economic Studies said then that it was surprising that social stability had been maintained against the backdrop of the really severe economic situation. This region, according to him, was heavily hit by the crisis. But the EU does not change the economic dynamics neither through the process of integration nor through other conditionality. „The more economic opportunities in our region the less the pressure and arguments why the Western Balkans countries should not be part of the EU„, added the then foreign minister of Bulgaria Kristian Vigenin. And Tibor Navracsics, then still a foreign minister of Hungary and now a commissioner-designate with portfolio „Education, Culture, Youth and Citizenship“, admitted that the old EU member states view enlargement as a risky project in terms of the economy or in domestic political aspect. This is easily proved by the way the member states with the biggest flows of people seeking asylum for purely economy reasons reacted. They demanded the visa-free regime to be abolished.
That is why, Mr Navracsics said then, the EU’s biggest task should be to overcome the economic problems. The budget discipline needs to be enhanced and the market economies of the EU need to be recovered. And the candidate countries should prepare well, was the message of the former top diplomat of Hungary.
Last year’s progress reports on the countries of the region paid special attention to the economic problems and later on, the European Commission’s economic general directorate published a separate document on the economic situation of each of the countries from the enlargement process. This was the first in-depth analysis of their economic condition. In the spring, right after it published the country-specific recommendations (one of the key stages of the European semester), the Commission published another in-depth analysis of the economic condition of the countries in the region. At this stage, the only country the EU is expected to open negotiations with in the end of the year and which seems determined to implement reforms is Serbia. It is also the biggest economy in the region.
High indebtedness and huge unemployment
The economic recovery is fragile, with serious downside risks, the Commission’s analysis, published in May, says. The projected economic growth is mainly dependent on investment growth. The forecasts for such growth are based on the expectation that the increased EU accession perspectives of Serbia would make the country attractive for foreign investment. However, up to date, these expectations have not been met. Unemployment is huge – above 20% of the workforce is without a job. Another big problem is fiscal consolidation. In 2013, Serbia’s budget deficit was 5.0% of the GDP and was far exceeding the envisaged revenues. The Commission’s forecast is that the deficit this year, too, will be high – 5.5%.
These data reveal structural weaknesses that range from the public sector, poor infrastructure, rigid labour market, unfriendly business environment and insufficient competition in certain strategic sectors. The Commission believes that the Serbian authorities are completely aware of the magnitude of the needed changes, as well as of their urgency.
Not the state, but us
The government of centre-right Alexander Vucic (Serb Progressive Party) has been preoccupied in the past months mainly by two tasks – how to consolidate the public finances without too much pain and how to change the Serbs’ mentality. That is why, a large part of his interviews (quite frequent in Serbian media) are mainly focused on the need the Serbs to entirely change their national views. In his latest interview with the national RTS TV, he spoke for more than an hour that there are no easy solutions. If you want a normal state, if you want us to put our public finances in order you have to have a different attitude to the state, he urged. We are taught that the state will always be there for us, however, with market economy you should first ask „What have I done myself?“. He announced that Serbia is the first country in South-East Europe that is undertaking, on its own, without any pressure, measures that Lithuania, Portugal, Greece and Estonia undertook.
These measures include a significant cut of pensions and wages in the public sector, as well as a change of the attitude of the state toward state-owned enterprises. By 2017, the budget deficit has to be reduced from 2.5 billion euros to 1 billion, recently said Serbia’s Finance Minister Dusan Vujovic, who is preparing a radical revision of the Serbian 2014 budget. Wages and pensions will be cut progressively to spare the poorest, say one after the other the prime minister and the minister of finance. Wages will be cut by 10% as the threshold will be 25 000 dinars (around 211 euros) below which there will be no cuts. A similar progressive reduction will be introduced with the pensions as well – unaffected will remain the lowest pensions (between 20 000 and 25 000 dinars). This measure will affect some 744 000 people out of 1 million and 752 thousand pensioners. Each month, 45% of the budget spending are allocated for pensions, Alexander Vulin said, minister of labour and employment.
Prime Minister Vucic explained that in the past years irresponsible governments increased pensions and wages without any economic logic. He showed on TV tables of the growth of the public debt, which in 2012 was 60.9%, in 2013 – 62.7% and this year it is expected to reach 75.7%. The European Commission writes in its analysis from May that the Serbian government debt has entered the „danger zone“ and is likely to reach 70 per cent of the gross domestic product this year – much higher than set in the national reforms programme of Serbia. „Someone behaved that irresponsibly to our future. Just for the sake of more votes or to form a coalition, that someone has killed our future„, the premier added without naming anyone in particular. He himself was a first deputy prime minister in the previous government led by Ivica Dacic (now a first deputy prime minister and minister of foreign affairs).
Therefore, responsible for the reduction of wages and pensions are those who behaved extremely irresponsibly, who were not serious. They worked against the state and against the Serbian people, the premier added in one of his usual long monologues, uninterrupted by presenters. According to him, the real budget deficit was covered up for years, including from the Skupshtina. All this led to high yields on new debt. All envisaged measures will be painful, both the prime minister and his financial minister reiterate frequently, but if they are enforced then in 2016 Serbia will be a normal and successful country with very strong economic growth, Mr Vucic pledged. The spending of all ministries have been cut, state subsides for state-owned companies, including the railways will be reduced and Srbijagaz will not be able, as of 1 January, to provide free oil to anybody.
Alexander Vucic also urged for a radical change of the Serbs attitude to bills. They mean a hospital, a school, a park, a highway, he explained. „If we do not take the bills there will be nothing of this„. We should change ourselves, again said the Serbian prime minister and quoted Switzerland. If today I announce in Serbia that the electricity bills should no longer be paid, everyone will adore me. If I say this in Switzerland, though, they will call 112, he described the Serb national mentality.
The Serbian Progressive Party has a solid majority in Parliament, although it is ruling in a coalition with Dacic’s Socialists, so the chances the reform package to pass in the Skupshtina are significant. They will enter into force a week after being approved by the MPs. According to the minister of finance, the draft legislation will be sent for debate in mid-October and it is realistic to expect that it could be voted by November. If there are no significant amendments in the proposed budget revision, this will be the first huge test for Alexander Vucic’s government in the first year of his rule. With such a reform, Mr Vucic will seriously challenge neighbouring Croatia, often given as an example of European integration in the Western Balkans. Croatia, too, has serious economic issues caused by the same post-Yugoslav legacy – too much state in the economy and a lack of conscience for personal responsibility.
Even if they are approved in time, however, the envisaged reforms will not come into the European Commission’s spotlight immediately. Usually, the Commission publishes the progress reports in mid-October. This year that will happen under the old Commission because Juncker’s Commission is expected to start in November if there are no serious problems impeding its approval by the European Parliament. This will coincide in time with the sending of the draft law on the revision of the Serbian budget. Still, it will be important how will the European semester start for Serbia – will there first be only carrots and then sticks or there will be plenty of both. It would be good if the Commission does not miss the chance to praise the Serbian government’s zeal for reforms because this will serve as a strong sweetener for the painful austerity that is to ensue.
Adelina Marini, Zagreb