Western Balkans: Chasing the EU Dream with Twists, Turns, and Trade

Launched in 2020, the EIP is backed by a significant financial commitment of €9 billion under the Instrument for Pre-Accession Assistance (IPA III). This funding is complemented by the Western Balkans Guarantee, which has the potential to leverage up to €20 billion in investments. The combined impact of these initiatives is expected to boost the region's GDP growth by approximately 1.3% per annum.

The EIP places a strong emphasis on enhancing the private sector, recognizing its crucial role in job creation and economic growth. A robust private sector is essential for the socio-economic development and regional integration of the Western Balkans. Small and Medium Enterprises (SMEs) are the backbone of this sector, representing 99% of all enterprises, generating roughly 65% of business sector value added, and accounting for 73% of employment. The EU plans to improve access to finance and risk capital for SMEs through various programs and guarantee schemes. Additionally, the development of a Common Regional Market is strongly encouraged, as it has the potential to deliver substantial economic benefits. According to a World Bank study, such a market union could result in an additional 6.7% GDP growth. The Plan dedicates 50% of EU private sector funding to innovation and green growth, emphasizing the importance of sustainable development.

The rule of law is a cornerstone for attracting foreign direct investments (FDIs) and fostering the economic recovery of the Western Balkans. The EU’s performance-based assessment adjusts funding based on reform progress. Effective implementation of reforms aligns countries closer to the EU, providing accelerated access to the EU market and participation in EU programs.

Key reform areas include the free movement of capital, reduction of tax burdens, and affordable cross-border payments. Preparations for joining the Single Euro Payment Area (SEPA) are underway. Additionally, initiatives like trade liberalization, regional e-commerce, a unified tourist package, and upgrading automotive value chains aim to attract further FDI.

One of the most pressing issues in the Western Balkans is the significant brain drain, particularly among the youth. With a historical context of high unemployment rates, the region has seen substantial emigration, especially from Bosnia and Herzegovina, Kosovo, and Albania. Young workers, facing two to three times the unemployment rates of their older peers, are particularly vulnerable.

The EU’s plan addresses youth brain drain by focusing on the needs of young people. Modeled after the EU Youth Guarantee scheme, it aims to provide quality employment, ongoing education, apprenticeships, and traineeships. This not only offers solutions and perspectives for young people but also addresses the Not in Employment, Education, or Training (NEET) rates. This approach aims to provide solutions and perspectives that can counter the brain drain and ensure a more prosperous future for the region's youth.

The Western Balkans is a region of geostrategic importance for the EU. Despite recent challenges in the integration process, the EU remains committed to supporting the region's path towards EU membership. The EU Foreign Affairs Council has repeatedly emphasized the region's strategic importance and urged progress on EU-related reforms.

The Council called for the advancement of accession processes for Albania and North Macedonia and expedited EU integration for Serbia and Montenegro. It also pressed for the swift resumption of the Belgrade-Pristina dialogue and urged on solving political issues for submission EU Reform agenda and advancing the EU reform pace in case of Bosnia and Herzegovina achieved from 2022.

The EU Investment Plan has already seen substantial progress, with several flagship projects underway. For instance, the Peace Highway between Niš (Serbia) and Pristina (Kosovo) is being constructed to enhance regional trade and mobility (more info here: Flagship Endorsed Investments).

Both the EU Economic and Investment Plan (EIP) and the New Growth Plan place a strong emphasis on green investments, recognizing the critical role of sustainable development in the future of the Western Balkans. The plans envision substantial investments in renewable energy projects, such as wind farms and solar power plants, particularly in North Macedonia, Albania and Bosnia and Herzegovina in cooperation with EU development banks, guarantees and other available instruments etc.. These initiatives aim to reduce the region’s carbon footprint and transition to cleaner energy sources. Additionally, the plans allocate significant funding to improve energy efficiency, support the development of green infrastructure, and encourage the adoption of sustainable practices across various industries. By prioritizing green growth and innovation, these EU initiatives aim not only to address environmental challenges but also to create new economic opportunities, making the Western Balkans a competitive, environmentally sustainable, and resilient region.

The EU New Growth Plan, adopted in 2023, aims to further accelerate the region's path towards EU membership by focusing on reforms, increased financial assistance, and sustainable economic growth. It aims to bolster sustainable economic development, enhance competitiveness, and create jobs in the Western Balkans, ultimately facilitating their path towards EU membership. A key component of this plan is the gradual integration of Western Balkan countries into the EU single market in specific areas, providing them with early access to some of the benefits of full membership. This phased approach targets critical sectors such as the free movement of goods and services, road transport, energy, electricity, and the digital economy, including e-commerce and cybersecurity. By incrementally aligning these sectors with EU standards, the plan seeks to bridge economic gaps, stimulate growth, and foster regional cooperation, accelerating the convergence of the Western Balkans with the broader European market.

The EU adopted the New Growth Plan further accelerates the region’s path towards EU membership, focusing on four key objectives:

• Accelerating Reforms - Strengthening governance, rule of law, justice, and public administration.
  
• EU Membership Path - Enhancing integration benefits like access to certain EU single market areas.
• Sustainable Economic Growth - Promoting investments in green and digital transitions while fostering regional cooperation.
• Increased Financial Assistance - Introducing the Reform and Growth Facility, providing grants and concessional loans with support of IFI’s and commercial banks.New Growth Plan Funding: €6 billion in grants and loans Additionally, the region's economic development is constrained by factors such as limited infrastructure and a lack of competitiveness.Hence, the EIP focuses on several key sectors that are crucial for the region's economic growth and development:
• Agriculture and Food Processing: The Western Balkans has a strong agricultural sector, but it faces challenges such as low productivity and limited access to markets. The EIP aims to support the modernization of the agricultural sector and promote value-added food processing.
• Tourism: The region has significant tourism potential, but it needs to invest in infrastructure, marketing, and sustainable tourism practices. The EIP supports the development of tourism infrastructure and the promotion of the region's cultural heritage.
• Mining and Minerals: The Western Balkans is rich in mineral resources, but the mining sector faces challenges such as environmental concerns and corruption. The EIP promotes responsible mining practices and supports the development of value-added industries based on mineral resources.
• Manufacturing: The region has a growing manufacturing sector, but it needs to diversify and improve its competitiveness. The EIP supports the development of manufacturing clusters and the promotion of innovation and technology.
• Services: The services sector is a major contributor to the region's economy, and it has significant growth potential. The EIP supports the development of the services sector, particularly in areas such as IT, business process outsourcing, and tourism.

The journey toward EU integration is complex and requires overcoming political instability, corruption, and ensuring strong institutional capacities. By addressing these challenges and effectively implementing these plans, the Western Balkans can achieve sustainable economic growth and accelerate their convergence with the EU.