Financing the Balkans: The Critical Role of EU Development Finance in Bringing the Western Balkans Closer to Europe

The EU’s development finance institutions strengthen Western Balkan economies and help spread the EU’s influence throughout the region.
Source: Håkan Dahlström

In times when much of the conversation surrounding the European Union (EU) centers on the rise of Euroscepticism and growing doubts about the Union’s future, it is easy to forget the large swaths of Europe steadfastly making their way towards accession to the EU. Specifically, six countries situated in the Western Balkans are still working to join the Union: Serbia, Bosnia & Herzegovina, the Former Yugoslav Republic of Macedonia, Kosovo, Albania, and Montenegro, collectively referred to as the Western Balkan 6 (WB6).

Enlargement represents a path towards enduring peace and prosperity for this region. The WB6 are steadily progressing towards this goal with the committed pre-accession help of various EU institutions, with EU development finance organizations playing a pivotal role in this process.

This region of the Southeastern European peninsula still suffers from economic stagnation that began with the downfall of Yugoslavia in the 1990s. Severe brain drain and persistent youth unemployment rates have plagued the countries of the former Yugoslavia since, highlighting the urgent need for job growth and opportunities. These changes are only attainable through sufficient reform and investment in the area.

In 1999, the Stabilisation and Association Process outlined the EU’s official stance of working towards the eventual accession of ex-Yugoslav countries and their neighbours into the EU through the promotion of trade and regional cooperation, contractual agreements, and strategic financial assistance.

The role of EU development finance institutions in the enlargement process cannot be understated. Their magnitude and mandate to strengthen national economies make them crucial partners in helping the WB6 countries overcome decades of slow growth. They also occupy an important role in spreading the EU’s influence and soft power throughout the region.

In order to coordinate investments and maximize the impact of these institutions in the region, the Western Balkans Investment Framework (WBIF) was formed in 2009. The WBIF is a group of institutional investors working together to promote socioeconomic development and accelerate the accession process of enlargement countries by providing financing and technical assistance to key energy, transport, environmental, and social sector projects. Members include the European Commission, the European Investment Bank, the Council of Europe Development Bank, and the World Bank Group.

Improving connectivity within the Western Balkans and with the EU is a priority for the Union. The WBIF made significant investments in strategic transport and energy infrastructure projects in the region. It financed the extension of the Trans-European Transport Core Network into the Western Balkans to bring economic growth, employment, and ensure freedom of movement with the EU. It also backed the development of important energy projects (called Projects of Energy Community Interest) to ultimately integrate WB6 countries into the single internal EU energy market.

Developing the private sector and encouraging small and medium enterprises (SMEs) in the region is another goal of the EU, which led to the founding of the Western Balkans Enterprise Development and Innovation Facility (WB EDIF) in 2012 in collaboration with WBIF partners and the European Investment Fund (EIF). The WB EDIF seeks to improve access to finance for underfinanced SMEs of the region, by strengthening local venture capital and promoting regulatory reform to facilitate growth.

Apart from development finance, the EU also promotes the economic development of the region through other initiatives: EU-REPARIS, an effort spearheaded by the World Bank and the WB EDIF, seeks to help the enlargement countries align their financial reporting practices with the EU acquis communautaire. Ellen Goldstein, World Bank Country Director for South East Europe, reinforced the importance of such initiatives for the WB6 by explaining that “transparent and accurate financial reporting is a pre-requisite for serious investors and improves access to credit for expansion and job creation.”

Furthermore, the EU has pushed for the six enlargement countries to enter into a unified market. Johannes Hahn, the EU’s enlargement commissioner, called for “a single space for economic development” between the WB6 countries at a recent summit in Sarajevo. Such a market would accelerate their accession by removing barriers to trade, aligning regulation between the WB6 and with the EU, and would potentially mitigate the risk of rising political unrest. Additionally, it would help curtail destabilizing foreign influence from “further east”, Hahn mentioned.

Indeed, while large investment from the EU is a necessary step in modernizing the WB6’s infrastructure and social systems, it also acts as a bulwark against foreign powers seeking to establish themselves in the region. The EU is not alone in making substantial investments into Western Balkan economies. Chinese firms have become important investors in infrastructure projects of the region in recent years, and trade between the WB6 and China reached $50 billion by 2014.

Chinese investment in the region is adopting an increasingly strategic role. Sinisa Malus, communications manager for the Chinese Southeast European Business Association (CSEBA), explained how “the Chinese strategy to become an important player in the [enlargement countries] might secure Beijing’s long-term presence in the region and a continuing cooperation with the enlarged EU in the future.”

While China’s rationale for investing in comparatively inexpensive, future EU countries seems straightforward, concerns have been raised about their investments. China’s projects in the region have been criticized as potentially being “Trojan horses” designed to allow the country to gain a foothold in the WB6’s fragile institutions and exert undue influence on the EU in the future. Chinese firms’ proclivity to flout environmental standards when picking investments is another source of concern for the EU.

Despite these longstanding efforts at rapprochement between the WB6 and the EU, the Union still has a long way to go to legitimize its presence in the area. This was evidenced by the anti-EU jeers that welcomed Federica Mogherini, the EU’s foreign policy chief, on her visit to the Serbian National Assembly in March 2017. Additionally, recent instability in the region shows that concerns about the resurgence of conflict are not unjustified: a controversial independence referendum in the Serb entity of Bosnia & Herzegovina and ethnically-motivated political crisis in Macedonia, both moves decried by the EU but supported by the Russian government, reveal the fragile state of the Western Balkans.

With that in mind, the EU must imperatively continue working towards the accession of the enlargement countries. Ivan Krastev, chairman of the Centre for Liberal Strategies think tank in Bulgaria, expresses skepticism at the effectiveness of current EU efforts in thwarting foreign influence in the region and preventing armed conflict, claiming that “just throwing in some more money and making some more promises is not going to be enough.”

Critics like him believe the EU cannot rely solely on soft power and fostering economic development to keep foreign influence at bay in the Western Balkans and protect its own interests in the region. While it may be true that the EU has to demonstratefirmness in standing up both for Europe’s interests and for its democratic principles” beyond simply winning over the hearts and minds of the Western Balkans, as described by Kurt Bassuener of the Democratization Policy Council, promoting development through finance and other means is a crucial element of the EU’s foreign policy in the Balkans and must remain a priority for the Union.

Indeed, thanks perhaps in part to these coordinated investment efforts, all WB6 governments have continuously expressed their commitment to enacting the reforms needed to become full EU members. Furthermore, public opinion of the EU is generally positive in enlargement countries: according to a 2017 poll, nearly half of all Serbian citizens supported EU membership. It wouldn’t hurt to publicize the EU’s commitment to the Western Balkans even more: only about 20% of Serbs correctly recognized the EU as its largest development aid donor, with many misidentifying Russia, China, and even Japan as the top contributor. Nevertheless, the EU’s persistent efforts and substantial investment in the Western Balkans, crucial in bringing economic and democratic reforms to the region, seem to be paying off.