After 20 years of soft pushes for reform and poor prospects for actual enlargement, the EU unveils a new economic support plan for the Western Balkans.
Given Russia’s war in Ukraine and China’s increased influence in the region, the EU offers fresh money and access to its market in exchange for substantial reforms.
However, lingering rule of law issues, widespread corruption, and the unresolved Serbia-Kosovo conflict remain significant risks to regional security and stability.
Implications for International Business
Regional economic growth is set to accelerate, while access to the EU single market will boost investment prospects. The region offers an opportunity for European businesses to diversify their supply chains, supported by public funding.
Uncertainty around the Serbia-Kosovo conflict weakens this improved business outlook, and sustained reforms are key to long-term macroeconomic growth.
State of Play
The Western Balkans: The long road to EU integration
The six Western Balkan countries are at different stages of EU integration. Most countries continue their efforts to join the EU through their commitment to economic and political reforms. However, challenges such as corruption, respect for the rule of law, minority rights, and bilateral disputes persist. Albania is praised for its economic reforms and alignment with the EU’s foreign policy, but further reforms are needed on corruption and minority rights. Bosnia-Herzegovina needs major efforts in socio-economic and judicial reforms to establish a functioning market economy. Kosovo has made some progress regarding the economic criteria; however, the normalization of relations with Serbia is a pre-condition for its European path. After a period of political instability following an inconclusive election in June, Montenegro is likely back on track after recently forming a new pro-European government (which relies on the support of a minor pro-Russian party, though). In North Macedonia, the government shows a high level of dedication, improving the business climate and embarking on further judicial and constitutional reforms. In Serbia, the dispute with Kosovo and pro-Russian foreign policies are the two main obstacles to EU accession.
The overall business climate follows a positive trend. Increased investment openness and corporate access to finance, new energy policies, and growing use of digital payments have created a friendlier environment for firms. All six economies have recovered to pre-pandemic levels. After slowing down in 2023, regional economic growth is expected to increase by 3% in 2024, followed by 3.5% in 2025. Despite such progress, challenges to business remain. The Western Balkan economies record slow progress towards convergence with EU levels. Deeply rooted structural hurdles, barriers to competition and regulatory transparency, a stagnant informal economy, and high levels of corruption impact the ease of doing business.
Key Issues Geopolitical pressure now drives EU enlargement…
Russia’s war against Ukraine has put the integration of the Western Balkans back on the EU agenda, after increasing investments from China, in particular in infrastructure had already raised concerns in recent years. With this, priorities have shifted: If, in the past, Brussels prodded the countries to gradually reform and resolve their disputes, now it is a question of them not drifting into the Russian or even Chinese orbit. Russian interest is focused on maintaining political influence through business ties, which it uses to hinder the region’s Euro-Atlantic integration. Especially in Serbia and Bosnia-Herzegovina, Moscow is strong in energy, with Belgrade recently securing a three-year Russian gas deal at a favorable price. Also, over 5.000 Russian companies have registered in Serbia alone since the start of the war in Ukraine. China has invested in infrastructure projects, telecommunications, and energy (€32 billion between 2009 and 2021). This has created new dependencies: In 2021, the construction of a Chinese-funded highway outside Podgorica resulted in Montenegro’s debt rising to more than 100% of GDP. The China-Serbia FTA is expected to have wider economic implications, such as increasing Chinese trade access to neighboring EU countries, in particular in the technology, automotive and aluminum sectors at a time when the EU tries to reduce its reliance on Beijing. Moreover, the region, suffering from organized crime and informal sectors which often exceed 25% of GDP, has become a gateway for illicit financial flows, with funds emanating from Russia to avoid international sanctions being a key source.
To at least diffuse one potential source of conflict, the EU has upped its efforts to negotiate a solution to the Serbia-Kosovo standoff. The conflict between Serbia and Kosovo remains the number one threat to the region's security. A former province of Serbia that was last to declare its independence following the break-up of former Yugoslavia in the 1990s, Kosovo has fought for international recognition since 2008. However, its efforts are stalled not just by Serbia’s allies, Russia and China, blocking its possible membership of the United Nations, but also by the non-recognition from five out of 27 EU member states – Cyprus, Greece, Romania, Slovakia, and Spain. While Kosovo has an overwhelming Albanian majority, its northern part is largely Serb-populated, leading to – sometimes violent – tensions both within the country and with neighboring Serbia. So far, negotiations between the two parties, jointly mediated by the EU and the United States, have failed to reach progress, especially after a clash in the Serb-majority region of north Kosovo. Now, upcoming elections in Serbia are likely to delay any progress.
...in a region holding significant economic potential.
As European businesses try to diversify their supply chains and relocate them closer to home, the Western Balkans region offers near-shoring opportunities thanks to its proximity to European markets and low labor costs. The Commission’s plan to offer these countries access to the EU single market in exchange for reforms, and the new €6 billion investment package for the period 2024-2027 are expected to boost economic growth and create investment opportunities. Businesses will also benefit from the reduced cost of cross-border payments and the region’s integration into European industrial supply chains. Other advantages of the six countries include a young and skilled workforce, and an influx of EU subsidies, particularly in sectors such as renewables, agribusiness, and financial services.
Another key factor for investors is that the Western Balkans boast low statutory restrictions on foreign direct investment (FDI) and a resilient financial sector. In 2022, the region’s current account deficit reached 6,8% of GDP. In 2023, FDI inflows are expected to fully finance the respective deficits in Albania, Kosovo, and Serbia. In addition, the region’s labor markets continue to strengthen: In mid-2023, average employment reached 47,8%, a historic high – even though the high share of informal employment (between 18,1% in North Macedonia and 33% in Montenegro) remains a growth risk. Nevertheless, Montenegro being most advanced in accession talks marks a promising long-term investment opportunity. Serbia, in turn, tries to balance Russia-friendly economic and energy ties with trade commitments to the EU.
In fact, the improved business climate faces several challenges. The pace of reforms, such as the management of endemic corruption, will determine the unlocking of EU funding. A lack of European financial support, in turn, will leave the door open for further Russian and Chinese economic expansion. Finally, an escalation in the conflict between Serbia and Kosovo would not only threaten regional stability and security; worst, political unrest could damage the prospects of economic growth and lead European businesses to give up their investment plans. European companies would therefore fare well in steering clear of investments in the border area of northern Kosovo and southern Serbia. Executives should prioritize safeguarding sensitive information and valuable materials in their Balkan sites as the region might further become a pawn for the big players, especially in industries like energy. That said, with robust risk mitigation strategies and scenario planning in mind, the business potential of the Western Balkans remains to be seized.