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Return of the Balkans: Challenges to European Integration and U.S. Disengagement

Return of the Balkans: Challenges to European Integration and U.S. Disengagement

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For the first time in modern history, the entire Balkan Peninsula has the opportunity to be included under one security and developmental umbrella combining NATO and the European Union. Unfortunately, this historic vision is being undermined by a plethora of political, social, economic, ethnic, and national disputes and the shortcomings of Western institutions in eliminating potential security challenges.
For the first time in modern history, the entire Balkan Peninsula has the opportunity to be included under one security and developmental umbrella combining NATO and the European Union. Unfortunately, this historic vision is being undermined by a plethora of political, social, economic, ethnic, and national disputes and the shortcomings of Western institutions in eliminating potential security challenges.

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03/24/2015

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The EU is wracked by internal confusion and in-
decision, which will have a direct impact on Brussels’
policy toward the Western Balkans and the member-

114

ship prospects of each state. While the immediate
concern is the future of the Monetary Union—the

feasibility of a fscal union, and eventually a political

union—the ultimate danger is runaway debt that can
generate a deeper economic and social crisis. In stark

fgures, government debt as percentage of GDP has

ballooned to unmanageable proportions in several

countries. In Greece, the fgure stands at 165 percent;

in Italy, 120 percent; in Portugal, 108 percent; and in
Spain, almost 70 percent and growing.178

Meanwhile,
the Union as a whole appears to be heading toward
prolonged recession, as even the larger economies re-
main stagnant.

On June 18-19, 2012, EU leaders agreed at the G20
Summit in Mexico to construct a more integrated
banking system. This was an effort to stem a debt
crisis that threatens the survival of the euro and un-
dermines the global economy.179

Although Germany
and several Eurozone partners laid out concrete steps
toward fnancial integration, EU President Jose Man-
uel Barroso asserted that it would take time for the

17 Eurozone capitals to agree on establishing a fscal

union. Moreover, countries that are fearful of losing
their sovereignty will resist such measures.
German Chancellor Angela Merkel has been sup-

portive of closer fscal integration that would involve

ceding sovereignty over national budgets to a central
authority in Brussels. Other leaders, including French
President Francois Hollande, have doubts about trans-

ferring fscal powers but support the issuing of Euro

bonds that would involve a sharing of debts—a plan

that Berlin opposes. Meanwhile, fnancial markets are
desperate for an EU roadmap leading to closer fscal,

banking, and political integration necessary to make
the single currency a viable long-term proposition.
Without assurances that the Eurozone is planning to

115

“mutualize” the debt owed by all members, bond in-
vestors will accelerate their departure from the strug-
gling Mediterranean economies.

As European governments ponder, the fnancial

crisis is deepening, economic performance is dete-
riorating, and the common currency is in danger of
unraveling. In addition to the Greek economic melt-
down, investors and depositors have lost faith in other
weak economies, especially those of Italy, Spain, and
Portugal. This has raised anxieties about government
debt defaults amid preparations for rescue packages
from the European Stability Mechanism (ESM), estab-
lished in 2011 to shield heavily indebted governments
but whose funds remain limited.
The majority of voters in Germany and most West
European states oppose further EU bailouts for Greece
or other Mediterranean economies, as they feel they
are carrying too much of the fnancial burden. How-
ever, economic stagnation in the larger Mediterranean
economies such as Spain and Italy will also hurt Ger-
many, as it will scale back demand for German exports

on which Berlin’s fscal strength depends. In addition,

demand for EU imports is weakening global markets.
If the European-wide recession deepens, north Eu-
ropean leaders will experience more problems in ac-

quiring the fnances necessary to contribute to fscal

lifelines to southern Europe. Conversely, accelerated
borrowing will only buy limited time for confronting
the spiraling debt.
Deep spending cuts and austerity measures may
be the only way to avert even more catastrophic debt
that will be passed on to the next generation and ne-
cessitate huge tax hikes, drastic cuts in public expendi-
ture, and lower living standards.180

The fnancial crisis

has resulted in increased borrowing, especially in the

116

south European economies, and the accumulation of
massive debts to stimulate economies out of recession.
Unfortunately, this may be a short-term palliative dis-

guising a long-term fscal disaster.

EU governments are also curtailing spending to
stymie ballooning national debts, but deeper austerity
will raise unemployment levels across the Eurozone.
The International Labor Organization, in its 2012
report on global trends, warned about mass unem-
ployment because of cuts in government spending.
It forecasts that 4.5 million more jobs could be lost in
the Eurozone over the next 4 years and that the total
number of jobless will reach 22 million.181
A growing army of unemployed, combined with
unsustainable government debt, will fuel social unrest
and political turmoil in the years ahead. Defcit spend-
ing cannot continue indefnitely where debts exceed

productivity, borrowing becomes prohibitive, de-
faults are threatened, and investors abandon unproft-
able countries. To become competitive in an increas-
ingly complex global market and to ensure steady
economic growth, the EU needs to stimulate business.
The southern part of Europe, in particular, needs to
undergo a business revolution to emerge from auster-

ity and restore economic confdence. Politicians need

to dispel the false dichotomy between austerity and
growth, as the most sustainable solution necessitates
both budgetary discipline and the stimulation of pri-
vate enterprise.

Europe’s fnancial crisis and economic underper-
formance have contributed to the economic downturn
in the Western Balkans by diminishing direct foreign
investment, international aid, and diaspora remit-
tances. Economic prospects for the region as a whole
remain uncertain. Financial sector vulnerabilities con-

117

stitute the biggest risk, because much of the banking
system is foreign owned and most countries are reli-
ant on funding from abroad. Economic activity in the
region continued to weaken throughout 2012.182
The Greek crisis is also having a direct impact on
several Western Balkan banks, which are either Greek-
owned or exposed to Greek debt. If they collapse, this
will have a visible impact on business and the avail-
ability of credit in the region. If the EU’s economic
malaise, driven by the sovereign debt crisis and the
necessity of protracted governmental austerity mea-
sures, persists, this will usher in an era of economic
stagnation in the Western Balkans as fewer resources
will be available for non-EU countries.

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