Conference on: THE EU AND THE BALKANS: ASSESSMENT AND PERSPECTIVES Charles Kovacs Vice Chairman, Committee on Non-Member Economies, Business and Industry Advisory Committee to the OECD Jean Monnet Chair – Universite de Montreal 30 March 2005

FROM 1990 TO KOSOVO INTRINSIC INSTABILITY OF YUGOSLAVIA SLOWER LIBERALIZATION THAN IN NORTHERN PART OF EASTERN EUROPE STRONGER, LESS FLEXIBLE COMMUNIST PARTIES AND OLIGARCHIES EXPLOITATION OF NATIONALISM BY THE “LEFT” FOR SURVIVAL/SLOWING OF REFORMS = SECESSIONIST WARS IN YUGOSLAVIA

FROM 1990 TO DAYTON ABSENCE OF COMMON EUROPEAN POLICY TOWARDS WARS UNILATERAL RECOGNITION OF SLOVENIA AND CROATIA WAS DECISIVE FOR THE FUTURE FAILURE TO CONTAIN VIOLENCE WITH UN/EU FORCE THROUGH 1994: ATROCITIES, MASSACRES, GENOCIDE, SREBRENICA US/NATO INTERVENTION IN BOSNIA- HERZEGOVINA: DAYTON ACCORDS IN 1995

FROM DAYTON TO KOSOVO TEMPORARY PEACE CEASARISM IN CROATIA AND SERBIA STABILITY ONLY IN SLOVENIA UNREST IN MACEDONIA AND ALBANIA BEGINNING OF REFORMS IN ROMANIA AND BULGARIA DEMONSTRATIONS IN BELGRADE FROM 1996 START OF CLASHES WITH ALBANIANS IN KOSOVO IN 1997

FROM KOSOVO TO THE PRESENT NATO/EU AIR WAR AGAINST SERBIA FOR KOSOVO: AMBIGUOUS SETTLEMENT WITH SERBIA; FUTURE STILL UNKNOWN STABILITY PACT FOR SE EUROPE TO ENCOURAGE PEACE, STABILITY, REFORMS FALL OF MILOSEVICH; DEATH OF TUDJMAN CONSISTENT GDP GROWTH IN MOST COUNTRIES $3 BILLION OF FOREIGN INVESTMENT P.A. SINCE 2000 NATO MEMBERSHIP FOR BULGARIA, ROMANIA PROMISE OF EVENTUAL EU MEMBERSHIP FOR ALL

Global FDI Trends Figure 1: Global FDI Trends

FDI inflows in CEE countries,

FOREIGN DIRECT INVESTMENT IN SOUTH EAST EUROPE FDI inflows into select SEE countries, 2002, 2003

FOREIGN DIRECT INVESTMENT IN SOUTH EAST EUROPE FDI stock, select SEE countries, 2002, 2003

Rankings by Freedom House, CEE countries, 2003

Rankings of the business climates, select CEE countries,

Rankings by Transparency International, SEE countries, 2003

SE European Countries Split in Two Tiers FDI Concentration in Romania, Bulgaria, and Croatia BiH, Albania, Macedonia each with only cca. $1 Billion of FDI Serbia and Montenegro in limbo (pending resolution of political issues, but attractive for privatization transactions)

EU ACCESSION THE EU IS NOT A MONOLITH BUT AN INSTITUTION OF COMPETING OF STATES AND INTERESTS AMONG WHICH IS ITS OWN BUREAUCRACY THE SPECIFIC TERMS OF THE ACCESSION TREATIES ARE OF GREATER IMPORTANCE TO THE NEW MEMBERS THAN TO THE EU THE ACCESSION PROCESS IS A CLASH OF MANY INTERESTS

ELEMENTS OF ACCESSION POLITICAL ECONOMIC TECHNICAL/JUDICIAL ACCESSION = MAJOR CHANGES IN POWER AND ECONOMIC RELATIONS, THEREFORE: –Each has its own overt and hidden dimension –Overt and hidden dimensions have both national and international/EU elements and committed actors/special interests

POLITICAL ELEMENTS OVERT Representation in EU Acceptance of acquis Cross-border migration HIDDEN Representation = Balance of power within EU: North vs. South? Rich vs. Poor? Left vs. Right? Pro-USA vs. Anti-USA?

HIDDEN ELEMENTS (continued) Acceptance of acquis = Accretion of power to EU Fear of competitiveness of new members EU fear of alternate political models Cross-border migration = Immigration Disliked by old and new members, promoted by the EU Impact on local politics Threat to national guilds, political class

ECONOMIC OVERT Contributions to EU budget Agricultural subsidies Regional assistance payments Acceptance of EU trade regime HIDDEN Contributions = Higher taxes or deficits in net contributor countries, where –Taxes are already too high –Welfare states are in crisis Agricultural subsidies = An impossible political dilemma –Powerful special interests –˝Agrolobby

TECHNICAL/JUDICIAL OVERT Harmonization of laws Derogation Implementation HIDDEN TECHNICAL/JUDICIAL Harmonization = Opportunity for: Covert changes/modernization at national level –Expansion of national civil service –Political exploitation –Movement towards common currency

SITUATION IN SOUTH EAST EUROPE THE GOOD NEWS SOUTH EAST EUROPE INVESTMENT COMPACT – MONITORING OF REFORM EFFORTS IDENTIFICATION OF TOP PRIORITIES: PRIVATE INVESTMENT ENTERPRISE AND SME DEVELOPMENT PUBLIC AND PRIVATE GOVERNANCE, INCLUDING REGULATORY REFORM SUSTAINED GDP GROWTH OF 4%+ P.A. FOREIGN INVESTMENT OF $3 BILLION+ P.A. SINCE 2000 COMMITMENT AND PROGRESS TOWARDS MARKET ECONOMY STRUCTURES INCREASING TRADE AND EXPORTS

SITUATION IN SOUTH EAST EUROPE THE BAD NEWS VERY SLOW PROGRESS ON INFRASTRUCTURE UNEVEN PROGRESS: INCREASING GAPS BETWEEN THE TIERS CONCENTRATION OF FDI IN THREE COUNTRIES LIMITED REGIONAL COOPERATION SLOW RESOLUTION OF YUGOSLAV SUCCESSION ISSUES ADVERSE POLITICAL DEVELOPMENTS IN SEVERAL COUNTRIES DECREASING US/EU INTEREST DUE TO CHANGING PRIORITIES SLOW PACE OF STRUCTURAL REFORMS

EU ACTIONS AND OUTLOOK Membership for Bulgaria, Romania in 2007 Croatia and Serbia: political problems with both; may join in 2009 at earliest Pre-accession discussions/reviews with second-tier countries, no membership before 2012 Actual expansion will be in affected by: – EU experience with current round of 10 new members – Constitutional developments – Military and security implications – East European members’ views – Fate of agricultural and regional support programs – The specter of Turkey – Realization that East Europe+Balkans+Turkey will result in a new EU