South East Europe Regular Economic Report (See Rer) No. 2

66 Pages Posted: 9 Jul 2012 Last revised: 28 Dec 2012

See all articles by Zeljko Bogetic

Zeljko Bogetic

World Bank

Borko Handjiski

World Bank

Evgenij Najdov

World Bank

Agim Demukaj

World Bank

Lazar Sestovic

The World Bank

Damir Cosic

World Bank

Abebe Adugna

World Bank

Erjon Luci

World Bank

Caterina Ruggeri Laderchi

World Bank

Dilek Aykut

World Bank

Ronald Hood

affiliation not provided to SSRN

Kenneth R. Simler

World Bank - Poverty Reduction Group

Aleksandra Iwulska

affiliation not provided to SSRN

Alexandru Cojocaru

World Bank

Dusko Vasiljevic

affiliation not provided to SSRN

Danijela Vukajlovic

affiliation not provided to SSRN

Date Written: June 5, 2012

Abstract

After they achieved 2.2 percent growth in 2011, early indications are that the economies of the six countries in South East Europe (the SEE6: Albania, Bosnia and Herzegovina (BIH), Kosovo, FYR Macedonia, Montenegro, and Serbia) are slowing drastically and can expect just 1.1 percent growth in 2012. Economic conditions in the Eurozone are holding back economic activity and depressing government revenues in SEE6 countries. With both public debt and financing pressures high, most countries in the region need to embark on major fiscal consolidation programs if they are to reverse their adverse debt dynamics and avoid financing problems down the road.

The good news is that in general the SEE6 financial sectors are still relatively well placed, despite elevated risks and vulnerability to adverse shocks, especially the possibility of contagion if the Greek crisis should intensify. In SEE6, levels of non-performing loans (NPL), though high, seem at least to be stabilizing, capital buffers and provisioning look solid, and liquidity is adequate in most of the region. But given the significant risks in the Eurozone associated with the Greek crisis, it cannot be overemphasized that the authorities must continue to demand that banks build up their buffers to make the sector more resilient.

The bad news is social: SEE6 countries have the highest unemployment and poverty rates in Europe. Moreover, what growth there was during the nascent recovery in 2010-11 was largely jobless. At about 23 percent, the average unemployment rate in SEE6 is more than twice the Western Europe average, and is highly concentrated among youth and long-term unemployed, with devastating impact on human capital. Pre-crisis poverty reduction gains are being reversed, and after large shocks and depleted household buffers and savings, the middle class has become more vulnerable. With growth prospects much more moderate than before the crisis and with social pressures high, it is urgent that SEE6 country governments adopt a more ambitious structural reform agenda for growth and jobs.

Yet even with the difficult short-term situation, SEE6 countries now have historic opportunity to board the European “convergence train” and over the long term reduce their per capita income gap with developed European Union countries. All earlier entrants were able to “catch up quickly.” In principle, the same “convergence train” is now pulling into the EU candidate countries in SEE6; but these gains are not automatic, they will materialize only if country policies and reforms facilitate them. The long-term SEE6 structural reform agenda must leverage greater trade and financial integration and reform labor markets and the public sector.

Keywords: South East Europe, Albania, Bosnia and Herzegovina, FYR Macedonia, Kosovo, Montenegro, Serbia

JEL Classification: E63, P52, H60

Suggested Citation

Bogetic, Zeljko and Handjiski, Borko and Najdov, Evgenij and Demukaj, Agim and Sestovic, Lazar and Cosic, Damir and Adugna, Abebe and Luci, Erjon and Ruggeri Laderchi, Caterina and Aykut, Dilek and Hood, Ronald and Simler, Kenneth R. and Iwulska, Aleksandra and Cojocaru, Alexandru and Vasiljevic, Dusko and Vukajlovic, Danijela, South East Europe Regular Economic Report (See Rer) No. 2 (June 5, 2012). Available at SSRN: https://ssrn.com/abstract=2102535 or http://dx.doi.org/10.2139/ssrn.2102535

Zeljko Bogetic (Contact Author)

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Borko Handjiski

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Evgenij Najdov

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Agim Demukaj

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Lazar Sestovic

The World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Damir Cosic

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Abebe Adugna

World Bank ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Erjon Luci

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Caterina Ruggeri Laderchi

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Dilek Aykut

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Ronald Hood

affiliation not provided to SSRN

Kenneth R. Simler

World Bank - Poverty Reduction Group ( email )

1818 H Street, NW
Washington, DC 20433
United States

Aleksandra Iwulska

affiliation not provided to SSRN ( email )

Alexandru Cojocaru

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Dusko Vasiljevic

affiliation not provided to SSRN

Danijela Vukajlovic

affiliation not provided to SSRN

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