Outlook

Any economic forecast for the Balkans is currently fraught with considerable uncertainty in both downside and upside directions. The best these countries can hope for during 2009/10 are some green shoots emerging. But they will have to continue identifying the necessary remedies in order to manage ongoing economic and political volatility. Each country has weaknesses that could hamper a long-term economic recovery in the region.

Exports and foreign direct investment flows, critical for many markets in the Balkans, are still anaemic in the second quarter 2009. Export capacity to EU countries has been particularly hurt by the downturn. Countries in the Balkans have relatively small domestic economies that can hardly compensate weaker demand from Germany, Austria, Italy and France.

Rising budget deficits in places like Albania, Serbia, Romania and even Bulgaria limit the fiscal space available to policy makers to stimulate their economies. Moreover, industrial production in Balkan economies has not rebounded, nor have levels of retail sales shown any signs of bottoming out.

Technically, most countries may be moving out of recession in 2010. But the trend growth rate of most countries in the region will be much closer to one to three per cent than five to eight per cent in the coming years. Such levels constitute a major re-adjustment of GDP growth expectations in the Balkans! This will have consequences for foreign direct investment and the business plan priorities of Greek banks in the region.

The broader concerns across the region are twofold. One is political. How will different constituencies react to economic lean times and a perception that their hard-earned gains have been erased? Voters, forced by recession to live more leanly, are irate as was evidenced in the recent EU parliamentary elections in Romania and Bulgaria as well as the general election from last week in Albania.

The second issue concerns where and how the recovery will come from? Governments and the international community have started to implement emergency lending programs in order to confront short-term requirements. But they are nowhere near recognising what will need to be done medium-to long-term in Belgrade, Bucharest, Sofia, or Tirana. This endeavor includes re-thinking how governments in the region can generate additional fiscal space without having to rely so strongly on emergency funding from abroad.

The social implications of the crisis also require re-evaluating the pillars of the social safety net. This is exactly the time when the importance of having a decent social safety net is driven home to everybody in the Balkans.

In sum, thought-provoking choices about the nature of their political economies will have to be made after the crisis and before the recovery.

*Jens Bastian is a Senior Economic Research Fellow at the Hellenic Foundation for European and Foreign Policy, ELIAMEP, in Athens.