IHS Markit perspective
Outlook and implications
- The six nations of the Western Balkans that are not members of the EU agreed to form a common economic area and co-operate more closely at an EU summit in Trieste, Italy.
- Although the deal improves co-operation in certain sectors, notably transport, it does not address key internal and bilateral disputes in the region.
- Political instability and corruption, which were not addressed at the summit, will remain key obstacles to foreign direct investment in the foreseeable future.
Government instability; Policy direction; External affairs
Sectors or assets
The leaders of Albania, Bosnia and Herzegovina, Kosovo, the Former Yugoslav Republic (FYR) Macedonia, Montenegro and Serbia agreed to form a common regional economic area at a summit organised and hosted by the EU in Trieste, Italy. The agreement will effectively serve as an extension of the Central European Free Trade Agreement (CEFTA), which is already in place. The summit was attended by German chancellor Angela Markel, French president Emmanuel Macron, and Italian prime minister Paolo Gentiloni, signalling the importance that the EU has attached to the security environment in those countries. EU Enlargement Commissioner Johannes Hahn said that a common market has the potential to generate "more than 80,000 jobs" in the region in the next few years. However, lack of political will due to a series of bilateral and internal disputes will significantly challenge the implementation of the agreement and strongly mitigate its effects.
A stepping stone to EU membership
The agreement of the six nations to form a common economic area is the culmination of a series of summits held since 2014, the professed aim of which is to deepen regional integration as a stepping stone to eventual European Union (EU) membership.
Concretely, the new agreement builds on CEFTA by eliminating several non-tariff barriers to trade, focusing on technical issues such as the mutual recognition of professional qualifications. The six nations also signed the Transport Community Treaty, which aims to facilitate greater co-operation on infrastructure projects.
To buttress the deal, the EU, the European Investment Bank (EIB), and the European Bank of Reconstruction and Development (EBRD) pledged an additional EUR194 million to improve local transport links. Only Bosnia did not sign, due to a veto from the Bosnian Serb entity Republika Srpska (RS), which has opposed EU demands for greater fiscal constraints.
Outlook and implications
French president Emmanuel Macron, Italian prime minister Paolo Gentilone and German chancellor Angela Merkel at the summit in Trieste on 12 July 2017.
Notwithstanding some of the positive steps that are likely to be made in terms of harmonising national laws pertaining to transport , the agreement still falls short of the initial objective of its organisers. The creation of a customs union was left out of the deal due to resistance from Kosovo and Montenegro, which depend heavily on import tariffs to raise revenue. Visa restrictions and cumbersome visa procedures for certain countries, in particular Kosovo, will also preclude full utilisation of the deal as it impedes the mobility of skilled workers. Those barriers will complicate the implementation of the free-trade area. The agreement is also unlikely to lead to massive job creation, as suggested by Hahn. Trade has already been liberalised to a large degree through the CEFTA framework, limiting the effect that the new agreement will have on economic growth.
The deal also does not address major bilateral and internal disputes in the region, such as Serbia's refusal to recognise Kosovo's statehood, or Bosnia's incipient constitutional crisis. Political instability in and between these countries, rather than a lack of trade liberalisation, is the main deterrent to foreign direct investment (FDI). This lack of political will, which is in large part driven by differing economic incentives and interests, including varying degrees of dependence on tariffs to plug budget deficits, will persist for the foreseeable future and remain the biggest obstacle to the smooth implementation of the deal. At the EU level, internal crises or pressing issues such as Brexit, economic growth in the Eurozone, and security threats will prevent the bloc from offering the Western Balkans anything more tangible in terms of integration until at least well into the next commission's mandate. This will make it more difficult for the EU to retain the same degree of influence in the region as previously, and will leave open the window of opportunity for other actors present in the region, in particular China, to increase their influence at the expense of the EU.