By Aleksandar Đokić
Political Scientist
The efficiency of integration in leading European countries is perhaps best illustrated anecdotally by the announcement that on December 16 of this year, a high-speed rail line between Berlin and Paris will be opened. At the same time, news came that Germany was reinstating border document checks with all neighbouring countries.
This means that the train journey from Berlin to Paris, covering a distance of 880 kilometres, will take around eight hours, while the trip from Paris to Marseille, a distance of 660 kilometres, lasts about three hours. Thus, it turns out that rail travel within France is significantly more efficient than pan-European travel, as the speed of a French train would cover the Berlin-Paris route in just four hours.
Symbolically, it seems that the concept of a Europe of nation-states is outpacing the idea of an integrated Europe, as can be seen in election results, particularly in France and Germany, where both the radical right and the radical left are challenging centrist options that underpin both the political and economic model of a united Europe.
Serbia, however, despite the pro-Chinese rhetoric that often comes from official Belgrade, is in fact inextricably linked to the European economy. It’s true that direct investments from China have increased in recent years, with China now ranking first with 1.37 billion euros in investments. Of course, methodologically, these figures would look different if investments from all EU member states in Serbia were aggregated rather than viewed separately, country by country, as they are now.
Viewed in this way, the EU is both the largest investor and the largest foreign trade partner of Serbia. The European Union accounts for about 60% of Serbia’s total trade or around 39 billion euros. In comparison, trade with CEFTA countries amounts to about six billion euros, and trade with China is around 5.6 billion euros. There is no doubt, therefore, that Serbia is predominantly oriented toward the European market.
Even other non-European countries, such as China, invest capital in Serbia primarily because our country has a free export agreement with the EU market. In this way, Chinese capital participates in the European economy through Serbia, which has bilateral free trade agreements not only with Europe but also with China, Russia, and a number of other countries. Only when Serbia becomes an EU member, a date that is still not near, will it have to relinquish all such agreements, as it will become part of the unified European market.
Europe keeps pace with the U.S. thanks to Eastern, not Western Member States
Serbia’s natural connection to the European economy is a double-edged sword—when the EU grows, Serbia’s economy follows; when EU growth slows, Serbia’s economy mirrors this negative trend.
The GDP of all current EU members, measured by purchasing power parity, was almost equal to that of the United States immediately after the Cold War. Although the U.S. experienced an internet revolution and the rapid rise of tech giants in the meantime, Europe’s GDP is still at about 96% of the U.S.’s GDP. Overall, Europe is not seriously lagging behind America, but a closer look reveals that much of Europe’s economic growth is driven by its eastern rather than its western regions. Poland, as the first economic miracle, followed by the Czech Republic, Romania, and the Baltic states, and finally Hungary and Slovakia, are raising the European average.
These are the countries that, while Serbia was sponsoring wars or participating in them (in)directly, reformed their economies and moved forward. It can be said that of all the post-communist countries in Europe, excluding us—warriors without a cause and our closest warring surroundings—all, except Bulgaria, have made significant leaps forward.
Current European economic growth has dropped to minimal levels, and from July to September, it slipped into negative territory by 0.1%, marking Europe’s entry into a “shallow” recession. To be fair, global economic growth has also slowed, including in the U.S. and China. Furthermore, Europe has been grappling with the war between Russia and Ukraine for over two and a half years, which has significantly driven up energy prices. German industry, in particular, was highly dependent on cheap Russian energy, thanks to former Chancellor Angela Merkel’s strategy.
The United States boosted its economic growth during Biden’s administration through generous government subsidies to private companies in the manufacturing sector. These stimulus measures were accompanied by increased tariffs on many Chinese products, aiming to improve the competitive position of U.S. manufacturers in the domestic market. All of these measures are part of a growth policy aligned with the U.S.’s foreign policy strategy, which increasingly sees China as a dangerous rival.
In contrast to the U.S., Europe has been reluctant to adopt policies of subsidizing its businesses. There has been no political will for it, partly due to fears that such subsidies might exacerbate inflationary pressures, although inflation in the EU has fallen from 4.9% in September last year to 2.4% in August this year. Meanwhile, the U.S. Federal Reserve recently decided to reduce the benchmark interest rate for the first time since the pandemic by half a percentage point, to between 4.75% and 5%, as it was estimated that the risk of a resurgence in inflation, which was 2.5% annually in August, was lower than the risk of stifling economic growth.
When the COVID-19 pandemic hit, Europe reacted in a united manner by creating the Solidarity Fund. However, when the period of slow growth arrived amid major geopolitical upheavals, European politicians turned their attention to internal problems and their national standings. Meanwhile, the U.S. took advantage of the war in Europe to become the world’s largest oil producer and also increased its gas exports to Europe. At the same time, the European Union is becoming increasingly paralyzed and less dynamic in making key decisions.
Germany torpedoes Mario Draghi’s proposal
Recently, Mario Draghi, the former Prime Minister of Italy and head of the European Central Bank, in collaboration with many leading economic experts from across the continent (with almost no contribution from economists from successful post-communist countries), presented a strategy for the economic recovery of the European Union. In this 400-page document, he proposes investments in the European economy ranging from 750 to 800 billion euros annually, or about five percent of the EU’s GDP.
Germany, of course, immediately torpedoed the proposal, as its Finance Minister, Christian Lindner, from the Liberal Party—which has been suffering electoral defeats across Germany—rejected subsidies and borrowing as a way to resolve economic issues. It’s worth recalling that Lindner is one of the main opponents of increasing public spending in Germany itself, so his stance is consistent both in Brussels and in Berlin. This is further reinforced by the German government’s position that the automotive giant Volkswagen should resolve its own issues, following the company’s announcement of a reduction of about 30,000 jobs in the manufacturing sector.
Aside from easing monetary restrictions and increasing subsidies, the European Union also needs to reform its migration policy to address the problem of labour shortages and an uncompetitive labour market. Migration is a pressing political issue in Europe, and what may seem easy to solve when looking only at the numbers is far more complicated when viewed through the lens of politics. The growing influx of labour from Africa and Asia is one of the key drivers of the rising popularity of right-wing populism.
The stagnation of the German economy is an alarming sign for Serbia’s economy, as entire production chains are tied to the state of the German economy and its market. Even Chinese companies engaged in ore extraction and processing in Serbia depend on the level of exports to the European Union, much of which is to Germany. Thus, even third-country investors, those from outside Europe, will not find it profitable to invest further in Serbia if their products are not needed by the European market.
A double blow to Serbia
Unfortunately, there is little Serbia can do to make the European, and particularly the German, economy more robust. All decisions in that direction are made in political centres of power beyond our reach. Since Serbia is not part of the unified European market, it cannot propose solutions or veto those that conflict with its interests. As a result, it is forced to wait outside the doors of the cabinet where economic issues—some of which, at least indirectly, concern us—are being discussed.
Similarly, Putin’s Russia, with its undiversified economy, largely depends on global oil prices. Russia, along with OPEC, can reduce oil production levels, but it cannot influence demand. Boris Yeltsin’s rule was partially affected by low oil prices, while the first decade of Putin’s rule, during which he was very popular, was marked by a surge in global oil prices, which facilitated the rapid development of the Russian economy.
Serbia offers preferential treatment to foreign investors through tax breaks and direct subsidies. This is done to remain competitive in the region, as neighbouring countries also seek to attract the same capital. However, this policy has its limitations, which become evident precisely during times of stagnation in the European economy and, consequently, demand.
If Serbia cannot “buy” investments or if doing so becomes unprofitable, and it cannot influence the strategy for resolving Europe’s economic problems, what can it do? The answer, as always, is to strengthen its institutional capacities. But this requires qualified personnel in the right positions within public administration and the willingness to avoid spending state capital on grandiose projects.
Even in areas where everything depends on us, the government does not excel. And how could it, when one party has been holding all the reins for over a decade? It’s about an entire army of party leaders and activists who need to be fed, clothed, housed—in short, settled. Misuse of funds serves to maintain this party army. Thus, Serbia faces a double economic blow: European economic growth is slowing, making Serbia less attractive for new investments, and the state continues to spend on stadiums and other similarly unnecessary projects.
Somewhat better news for Europe, and also for Serbia, is that inflation in the EU has normalized, real income is rising, and energy prices are falling, especially compared to where they were two years ago. Together, these factors promise a recovery of the European economy. However, without increased, targeted public spending and a greater influx of labour, this growth will remain limited.
A long-term solution, unfortunately, is still absent. Europe is not rushing toward a full-blown recession, but it is also missing a noticeable growth rate. Political tension, in the form of anti-democratic forces, only makes it harder to make important strategic decisions at the Union level. The German model of “stabilocracy” and economic management, established during the 2008 financial crisis, succeeded in achieving the goal set at the time—to maintain public financial stability and limit inflation growth. However, the time has already passed when that anti-crisis model should have been replaced with a developmental one. And every year that Europe loses means further lagging in the “friendly” race with the U.S. and the less friendly one with China.
As for Serbia, the only thing it can do is to observe all this from the sidelines, powerless to influence these currents in any way. The only way for it to gain its share of economic influence in Europe is to resolve all the issues created by Slobodan Milošević’s regime in the 1990s and to once again have a democratic government that can be replaced, respects the law, operates transparently, and manages public money and state assets rationally. Until then, Europe may slow down, while Serbia will continue to stagnate in the same place indefinitely.
(Radar, 07.10.2024)
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Publish date : 2024-10-07 06:43:00
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