Amid heightened regional and global tensions, further deepening the integration of the Western Balkan economies with the European Union offers the only way towards shared prosperity and economic convergence, writes Matteo Rivellini.
Matteo Rivellini is head of division for the Western Balkans and Türkiye at the European Investment Bank and participated in the Berlin Process Forum of Economy Ministers held in Tirana.
The EU accession process allows countries in the region to anchor their structural reform agendas and access additional financing to support much-needed investment.
Against the backdrop of a challenging environment for domestic and foreign businesses, declining productivity, weak governance and an unfavourable demographic outlook, fostering closer ties with EU countries can create new growth opportunities and expand the scope of private investments.
Over the last two decades, foreign direct investments (FDIs) in the Western Balkans have been a key driver of growth — underpinning integration into European and global value chains, creating new jobs, introducing new technologies and production processes, and opening up new opportunities for local companies.
The total stock of FDIs in the Western Balkans stood at €87 billion at the end of 2022, of which 60% originated from EU countries. Primarily, this capital was channelled into basic manufacturing sectors, construction and other labour-intensive activities.
Climbing the value-added chain
The region must escape the so-called “middle-income trap”: sectorial specialisation in low-value-added activities to ensure further progress. To this end, making real progress in strengthening institutions and the rule of law is paramount, upskilling workers to respond to evolving labour market needs, advancing the green transition, and enhancing transport, digital and energy connectivity.
The EIB report Recharging the batteries conclusions indicate that countries in the Western Balkans (and more generally in the wider CESEE region) often specialise in economic sectors with lower value added. Caught in a functional “specialisation trap”, they tend to serve as “factory economies” in European production networks, as opposed to the “headquarter economies” found in Western Europe.
On top of this, economic activity in these countries is hampered by the weak rule of law and governance framework, a high degree of informality in the economy and the poor quality of infrastructure, as indicated in the last EIB-EBRD-WB Enterprise Survey. Most firms quote informality as the biggest obstacle to doing business (19%), followed by high tax rates (14%) and political instability (14%).
Insufficient access to finance is another lingering issue for firms in the Western Balkans, with approximately 32% of loan-hungry small and medium-sized enterprises (SMEs) reporting to be credit-constrained (a swathe that ranges from 18% in Albania to 47% in Montenegro).
Enhancing competitiveness through structural reforms and improved connectivity
Going forward, new structural bottlenecks — including worsening labour shortages and an ageing population — might further weaken the competitive advantage underpinning the region’s success with FDIs so far.
In this context, the gradual convergence to EU income levels will hinge on stronger institutions, better infrastructure, and investments in advanced education and training, which will be instrumental to scaling up foreign investments in high-tech sectors.
Simplifying regulations, leveraging on the digital transition, enhancing competitiveness by boosting trade, increasing the private sector’s role and accelerating the deployment of renewable energy will also be essential to nurture higher value-added sectors and promote diversified investments.
Successfully navigating this transition would lead to more resilient economies, better living standards and continued income growth for the people in the Western Balkans region.
These issues were highlighted at the Economic Ministerial Meeting held in Tirana as part of the Berlin Process Summit, an initiative centred on regional economic cooperation and integration. At the event, regional ministers called for enhanced cooperation with the EU to build on current prominent examples such as the CEFTA – Transport Community initiative introducing intra-Western Balkans Green Lanes, their extension to the border crossing points with the EU, and the initiative on the reduction of the roaming costs between the Western Balkans and the EU.
They also welcomed the EU’s decision to extend its Trans-European Transport Network to the region and the adoption of the Safe and Sustainable Transport Programme.
They expect the Common Regional Market Action Plan to further spur regional growth and bring it closer to the EU. Ministers recognised the importance of opening the European Union’s Single Euro Payment Area (SEPA) for non-EU members as it represents a unique opportunity to significantly reduce costs of payments within the region and with the EU.
EU funds devoted to the region
Facilitating the convergence of European countries was the key rationale that led to the creation of the European Investment Bank (EIB) some 65 years ago. The EIB was conceived as an instrument for deepening European economic integration. And we continue with this tradition under our new dedicated arm, EIB Global. In the Western Balkans, it has invested close to €11 billion since 2009 to support the rollout of strategic infrastructure and connectivity projects, such as in the Trans-European energy networks, or to provide financing for local SMEs. These investments have strengthened the physical and economic links between the Western Balkans and the European Union while accelerating convergence.
In Albania, EIB Global is supporting the expansion of the railway network towards Montenegro and the construction works on Corridor VIII to North Macedonia. Last year, the Bank approved one of its largest loans yet for investment in the Corridor X railway in Serbia and will continue to extensively support the construction of the Corridor Vc in Bosnia and Herzegovina.
To bolster private sector development — a key engine for growth — the EIB Group has directed about 44% of the relevant funds to improve access to finance, particularly for SMEs and startups that boost innovation and deploy new technologies.
These goals are part of the broader mandate of the European Commission’s Economic and Investment Plan and, more recently, the Global Gateway, which entails a substantial share of blending of financing, grants and technical assistance.
The plan has already approved some €4.3 billion in grants that will mobilise €15.9 billion in overall investment. On top of that, the Commission has currently announced a new Growth Plan for the Western Balkans to accelerate the region’s socioeconomic convergence with the EU single market. Under EIB Global, the bank intends to play a key role in supporting these initiatives for the area and creating a more open, competitive and greener common market.
