Debt in the super-periphery: the case of the Western Balkans

ABSTRACT

The article covers the evolution of external and public debt in six Western Balkan countries in the context of their regional position as a super-periphery of the EU. Stemming from the core-periphery relationship, we find that the region’s external and public debt position has increased to alarming levels since the onset of the economic and financial crisis of the eurozone. In response to the crisis effects, international financial institutions and the EU have recommended policies of fiscal consolidation and structural reforms. However, ruling parties in the super-periphery have been reluctant to apply such measures, as the growth of public debt has supported widespread practice of clientelism and patronage to maintain public support in the face of increased unemployment and rising inequality. Only more recently has the increased level of debt forced governments of the region to apply austerity measures to overcome external imbalances. However, the implementation of such largely unpopular measures has also been associated with a drift towards illiberal democracy and more authoritarian forms of governance.

KEYWORDS:

• External debt
• public debt
• Western Balkans
• core-periphery relations
• super-periphery
• eurozone crisis

Acknowledgements

We would like to acknowledge the useful comments provided by two anonymous referees that greatly assisted to improve the quality of this article.

Notes

1. The Western Balkans consists of a set of countries in South East Europe that are candidate or potential candidates for EU membership. The candidate states are Albania, Macedonia, Montenegro and Serbia, while the potential candidates are Bosnia and Herzegovina, and Kosovo.

2. Murgasova et al., The Western Balkans.

3. For analysis of the contribution of external factors to the depth of the crisis in Western Balkan countries see Panagiotou, “Effects of the Global Economic Crisis on South-East Europe”; Bartlett and Prica, “The Variable Impact of the Global Economic Crisis in South East Europe”; “The Deepening Crisis in the European Super-Periphery”; Cocozza et al., “The Impact of the Global Crisis on South-East Europe”; Sanfey, “South-Eastern Europe”; Štiblar, “The Global Crisis and the Western Balkans”; Causevic, “What Type of Fiscal Policy for the Western Balkans during the Crisis”; Petreski and Lazarov, “Analysis of Transmission Channels and Mechanism of the Global Economic Crisis from Developed to South-East European countries”; Pula, “Effects of the European Financial and Economic Crisis in Kosovo and the Balkans: Modes of Integration and Transmission Belts of Crisis in the ‘Super-Periphery’.”

4. The deleveraging process would have led to a worse outcome were it not for combined action by the IFIs through the ‘Vienna 1’ and ‘Vienna 2’ initiatives which encouraged the banks to slow down the pace of deleveraging (Bennett et al., Economic and Policy Foundations for Growth in South East Europe).

5. Bennett et al., Economic and Policy Foundations for Growth in South East Europe, 16.

6. See Kovtun et al., “Boosting Job Growth in the Western Balkans.”

7. Green field FDI related to global value chains has also been attracted by favourable conditions in tax-free Special Economic Zones in Macedonia and Serbia (OECD, Tracking Special Economic Zones in the Western Balkans; Bartlett et al., Study on Special Economic Zones in the Western Balkans).

8. Sinn shows how external debt built up in the inner periphery countries of the Eurozone well before the 2009 crisis hit those economies. Their capacity to borrow increased dramatically once they were inside the eurozone, as interest rates converged to inner core levels and investor confidence sharply improved.

9. Budget surpluses were recorded in Bosnia and Herzegovina, Macedonia and Montenegro in 2007.

10. Chen et al. emphasise differences in competitiveness, while Lapavitsas et al., emphasise differences in unit labour costs and the greater success of core countries in squeezing workers’ pay and conditions than those in the periphery.

11. Sinn, The Euro Trap.

12. Ibid.

13. Bartlett and Prica, “Interdependence Between Core and Peripheries of the European Economy.”

14. Schweiger and Magone, point to the ‘emerging divide of the EU into a eurozone core with increasingly differentiated peripheries, depending on the level of integration’ (261), while Galgozi, draws attention to the ‘two peripheries’ of Europe represented by the countries of Southern Europe and the countries of Central and Eastern Europe.

15. Bartlett and Prica, “Interdependence Between Core and Peripheries of the European Economy.”

16. The outer core overlaps the group of countries that form the ‘Euro Plus Pact’ (Bulgaria, Lithuania, Poland, Romania and Denmark) which Schweiger and Magone characterise as ‘a semi-periphery in the EU closely associated with the eurozone core’ (261).

17. The inner periphery group of countries is the group of eurozone countries conventionally regarded as having been most affected by the crisis (see e.g. Sinn, The Euro Trap).

18. This is the group of EU member states outside the eurozone that are not part of the EU core and had very large current account deficits before the onset of the eurozone crisis.

19. The term was coined by Sokol, who argued that the acceding countries of Eastern Europe are a ‘super-periphery’ of the EU. Since then, these countries have joined the EU and so we reserve this title of the Western Balkan countries and other members of the EU ‘neighbourhood’.

20. Országhová, “EU Enlargement.”

21. See Prica, “Trade in Services in Western Balkan Countries.”

22. Kosovo is not recognised as a sovereign state by five EU member states and other countries, and so has difficulties accessing international capital markets, making it something of a special case.

23. In addition to the formal bailout mechanisms organised through the European Stability Mechanism, the eurozone countries also benefit from ‘hidden’ transfers from the European Central bank through the TARGET II system (Sinn, The Euro Trap).

24. See Bartlett and Prica, 2013

25. Edmunds argued that illiberal practices of clientelism and patronage had not been eliminated in Serbia following the fall of the Milošević regime in 2000, warning that illiberal resilience was rooted in Serbian political culture. These practices were submerged in the 2000s but have returned to the fore in the aftermath of the economic crisis during the 2010s.

26. Günay and Dzihic, “Decoding the Authoritarian Code.”

27. See Sinn, The Euro Trap.

28. Zestos et al., “Causality Within the Euro Area?”

29. Primary income encompasses compensations of employees, dividends, reinvested earnings, interest on investments, investment income of policy holders in insurance, standardised guarantees and pension funds, rent on use of natural resources, taxes and subsidies on products and production (IMF, Balance of Payments and International Investment Position Manual).

30. The source of data on remittances is World Bank World Development Indicators online database.

31. Zestos et al. develop a vector error correction model to demonstrate that causality runs from the current account deficits to the growth of external debt and not the other way round. Kaelberer emphasises the obvious policy implications of viewing the crisis as consequence of current account imbalances rather than of profligate public expenditure.

32. See Sinn, The Euro Trap.

33. Kaelberer, “Sovereign Debt or Balance of Payments Crisis?”; see also Sinn who argues that the dividend derived from a lower debt-service burden between 1996 and 2007 should have been used to pay off debt: ‘[t]he lower interest rates were an opportunity to repay at least some of their debt without making undue sacrifices, but they preferred instead to borrow even more’ (65). By 2012 Spain’s external debt alone had reached a staggering €941 billion.

34. Based on data supplied to the authors by EBRD. Note that net debt of the inner periphery was far lower at just 93% of GDP in 2015, since some of these countries, notably Ireland, also have large overseas lending positions that offset gross borrowing (calculated from Eurostat online data, variable code [tipsii20].

35. Kartsonaki, “Twenty Years After Dayto.”

36. Albania’s external debt to GDP ratio was adjusted upwards in 2016 due to a revised GDP calculation and the transition to new international financial standards known as BMP6. In 2012, the adjusted debt to GDP ratio was 51.6%, rising to 63.3% in 2015. For the sake of comparability with earlier years, the original unadjusted data is shown in Figure 4.

37. The external debt of Montenegro is not shown in Figure 4 as it is off the scale, but a similar increase in the external debt to GDP ratio is evident, increasing from 145% in 2011 to 163% in 2015. The data for Kosovo, with external debt to GDP ratio of just 12% in 2015 is also not represented in Figure 4.

38. The high share of private debt in Kosovo reflects the large unresolved legacy debt from the former Yugoslavia, which Kosovo refuses to recognise.

39. In 2012, government expenditure as a share of GDP was 48.9% in Bosnia and Herzegovina and 49.2% in Serbia compared to 49.3% in the EU (Bennett et al., Economic and Policy Foundations for Growth in South East Europe). In Albania the ratio was just 28.6% and in Macedonia 33.7%.

40. Data from Eurostat [cpc_ecgov].

41. Sanfey observes that ‘[a]t the start of the crisis, there were fears that an economic downturn would trigger severe social unrest’ and asks, ‘Why has the extent of popular discontent been so limited to date?’ He suggests this is because people understood that the crisis was driven by global forces rather than by the incompetence of local politicians. It seems to us that the distribution of public resources through clientelistic practices and the patronage of loyal supporters may be a more likely explanation.

42. As Koczan observes: ‘In the aftermath of the crisis, the Western Balkans experienced difficulties in regaining control of their public finances … In particular, public sector wage-bills and pensions … proved to be very rigid’ (473).

43. Eurostat online database, variable label [cpc-ecgov].

44. Kosovo is not universally recognised by the international community. Five EU Member States have not yet officially recognised Kosovo as an independent state.

45. While institutions of clientelism to achieve political support may also be found in the core countries, it is not a major feature of the political culture in the core, while it is a major feature of the political culture in the super-periphery, see Günay et al., “Decoding the Authoritarian Code.”

46. See IMF press release No. 12/45. In contrast, in the EU countries that were hit by the crisis, immediate efforts were put into cutting the public deficits and reducing the ratio of public debt to GDP. The best example of this is Ireland where the ratio of pubic debt to GDP increased to 122% in 2012–2013 but was cut to 75% by 2016.

47. See IMF press release No. 15/67.

48. See IMF press release No. 14/81. In Macedonia, a 24-month Precautionary Credit Line was agreed with the IMF for €476 million in 2011. Funds drawn under the loan were repaid early in 2015, as the country turned to the international capital market for further loans.

49. Günay and Dzihic argue that ruling parties have secured support through the redistribution of state resources, and that ‘participation in the ruling parties’ clientelistic reward networks has helped create pro-party interest blocs and dependent clients at different levels’ (534).

50. Vladisavljević et al., “Public-Private Wage Differences in the Western Balkan Countries.”

51. Prica, “Effects of the Global Financial Crisis on the Social Sector in Serbia.”

52. Stanojević et al., “Actors, resources and mechanisms of clientelism in Serbia,” 59.

53. Günay and Dzihic, “Decoding the Authoritarian Code.”

54. In 2015, the Gini coefficient in Serbia was 38.2 and in Macedonia 32.7 compared to 31.0 for the EU-28. The Gini coefficient is a measure of income inequality, and the Serbian coefficient was the highest in Europe.

55. An account of democratic backsliding in Macedonia and Serbia is given in Günay and Dzihic, Decoding the Authoritarian Code.

56. Calculated as an unweighted average across countries.

57. Estrin and Uvalić, “FDI into Transition Economies.”

58. Shimbov et al., “International Production Networks and Economic Growth.”

59. Bartlett et al., Study on Special Economic Zones in the Western Balkans.

60. Baumol, “Entrepreneurship.”

61. See Mujanović, Hunger and Fury.

62. In our view, the austerity programmes advocated by the IMF through Stand-By Arrangements and the EU through Economic Reform Programmes for the region tend to rely too much on fiscal consolidation, which depresses demand, and too little on the expansion of growth through public sector investment in infrastructure, health and education. While these policies may increase public deficits, the resulting returns to investment would raise future tax revenues and lead to balanced and sustainable public finances in the long run.