SOUTHEAST EUROPE AND THE EUROPEAN UNION Daniel Daianu Budapest –4 April 2005

1. Overall remarks the big “game” in Europe is joining the EU; there is a variety of conditions in Southeast Europe (SEE): EU accession prospects vary; stage of reforms; institutional (monetary and exchange rate arrangements); income per capita, etc dynamics in the EU condition prospects for new admissions; EU’s main challenge is how to manage increasing complexity

2. Southeast Europe’s economic conditions 2.1 Common positive traits: inflation is down considerably… there has been major advance in creating market- driven financial systems; some economic recovery (GDP growth) has been under way in recent years; financial stability has been enhanced by hardening of budget constraints (the role of privatization) there is some growth of regional trade, though it is still hindered by political factors…

2. Southeast Europe’s economic conditions 2.2 Concerns for Eastern Balkans (Bulgaria and Romania) rising trade imbalances, that are offset increasingly by remittances… rapidly rising current account deficits premature capital account opening?(EU provision) excessive appreciation of the domestic currency: a Dutch disease in the making? fiscal pressures owing to implementation of the Acquis (are rising CA deficits sustainable?) public administration strains (institutional fragility) The EU anchor can mitigate the concerns, but domestic policies need to be wise…

2. Southeast Europe’s economic conditions 2.3 Concerns in the Western Balkans, though conditions vary here too and prospects for EU accession are not similar… unusually high unemployment (even when corrected by unregistered employed people); high dependency on foreign assistance weak state syndrome (criminality); low investment ratios (gross capital formation); depletion of human capital (migration)

3. Major challenges creating conditions for sustainable growth (is/are the EU anchor/prospects enough?) job creation; how to deal with disenfranchised people (abject poverty); how to strengthen state capacity to enforce the rule of law and provide essential public goods fiscal pressures EU involvement in the Region…(more well calibrated aid is needed)

4. Caveats for economic policy: shun fundamentalism (be pragmatic) full privatization of public utilities and poor regulation can make things worse; there is need for effective regulation of markets (finance, energy, etc); financing of SMEs and agriculture… do not open the capital account prematurely;

4. Caveats for economic policy: shun fundamentalism (cont.) try to obtain safeguards from the EU when it comes to protecting local industries (preferential trade arrangements); this fits into a developmental approach on structuring the relationship between the EU and South East Europe; the development of infrastructure cannot be undertaken via public-private partnerships on a grand scale (EU funds need to play a major role in this field) a “grand bargain” with the EU concerning labor movement: a win-win situation