WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

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By Mario Holzner

The six Western Balkans (WB6) countries – Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia – continue to demonstrate economic resilience, which sets them apart within the broader Central, East and Southeast Europe (CESEE) region. While global headwinds persist, the WB6 economies are navigating a complex landscape of opportunities and challenges, which warrant closer attention from investors and policy makers alike. 

Outperforming Regional Peers 

First, the WB6’s growth performance and prospects currently outpace those of many of their regional peers. This resilience stems partly from a less developed starting point and several paradoxical advantages.

First, there is the sub-region’s smaller manufacturing sectors and lower degree of integration into global value chains. In an era of escalating tariff wars and geoeconomic fragmentation, the WB6’s relative insulation from complex international production networks has provided a buffer against the kind of trade shocks that have more severely impacted highly integrated economies.

Second, demographic decline – often viewed solely as an economic challenge – is generating positive effects. Labour scarcity is driving wage growth and thereby stimulating domestic consumption even more than in other parts of CESEE. Moreover, it could function as a productivity whip, making investment in automation and robotisation profitable. This dynamic is reshaping the sub-region’s economic model, with rising wages fostering stronger internal demand and potentially attracting higher-value economic activities. 

The third paradox in support of the WB6’s outperforming growth dynamics is the fact that the sub-region is a latecomer in terms of adopting the CESEE’s growth model driven by foreign direct investment (FDI). During much of the 1990s and 2000s, the sub-region’s conflicts and political fragmentation made it unattractive to foreign investors. It is only now that prospects of EU accession as well as geopolitical needs for near-shoring are attracting investment. 

WB6 Leading in FDI Inflows 

The WB6 stands out in terms of attraction of FDI. Relative FDI inflows to the sub-region are more than double those recorded in the European Union countries of Central and Eastern Europe (EU-CEE), underscoring the sub-region’s continued appeal to international investors. The sub-region’s net FDI inflows in recent quarters stood at about 5-6% of GDP. 

However, this positive trend masks an important shift: FDI inflows have been declining across CESEE since Russia’s full-scale invasion of Ukraine in February 2022. The geopolitical shock has frightened investors and made them more cautious about whether and where they choose to invest in the region. Figures for 2025 have declined even further, including in the WB6. 

Sectoral FDI Composition: Well-Positioned for Future Challenges 

It is worthwhile to take a closer look at pledged greenfield investment in the WB6 sub-region. The sectoral profile is particularly encouraging. The biggest greenfield investments are concentrated in software and IT services as well as renewable energy – a sectoral mix well-aligned with the challenges and opportunities of the coming decades. 

Software and IT services accounted for 21% of pledged greenfield projects in the WB6 in 2024, the highest share among CESEE sub-regions. Renewable energy investments represented 14% of projects but commanded 46% of pledged capital, reflecting the capital-intensive nature of these developments. This combination puts the Western Balkans in a favourable position for both the digital and green energy transitions, which together will strongly determine Europe’s economic future. 

The Shadow of ‘Cold War 2.0’

Despite these strengths, overall greenfield investment is declining across the WB6, mirroring a broader trend driven by global uncertainty. The number of greenfield projects announced in the Western Balkans fell by 26% in 2024, while capital pledged dropped by 58% year-on-year. This deterioration reflects growing investor wariness in what some analysts are calling ‘Cold War 2.0’ – a period of intensifying great power competition and geoeconomic fragmentation. 

Traditional investor countries, such as Germany and Austria, have significantly reduced their greenfield-investment activity in the sub-region. This pullback raises questions about the sustainability of the WB6’s recent success in attracting FDI. What’s more, the figures already available for 2025 show a declining trend, as well.

The Rearmament Factor: A New Investment Driver 

Despite this uncertainty, a new economic force is emerging: the European rearmament race. This development could fundamentally reshape investment patterns across the wider region, including in the WB6. 

German industrial production of weapons and ammunition now exceeds Cold War peak levels from the late 1980s by as much as 100% – and this surge has occurred even before major procurement programmes have fully commenced. Companies like Rheinmetall are actively investing in new production capacities across the wider region, signalling a potential new wave of defence-related industrial investment. 

For the Western Balkans, this trend presents both opportunities and policy challenges. The sub-region’s industrial base, skilled labour force and strategic location could attract defence-related manufacturing investments. However, policy makers must carefully consider how to balance such opportunities with broader economic development goals and regional security dynamics. 

Conclusion

The Western Balkans finds itself at a crossroads. Its economic dynamics remain comparatively strong, its sectoral investment focus is well-aligned with future trends, and its relative FDI performance make the WB6 a leader in the broader region. However, the declining trajectory of greenfield investments and the uncertainty of ‘Cold War 2.0’ will require strong policy responses. 

Although the emerging rearmament economy may offer new opportunities, sustainable growth will ultimately depend on deepening EU integration and preserving the sub-region’s attractiveness for high-value FDI in digital and green sectors, offering the potential for leapfrogging. In addition, promoting domestic investment and developing distinctive national industrial policies could help the WB6 to better meet the challenges ahead. The coming years will test whether the sub-region can leverage its current paradoxical advantages while navigating an increasingly complex geopolitical and economic landscape. 

Finally, it should be noted that the fate of the sub-region’s convergence process is determined primarily in Berlin. German governments, which have traditionally been fiscally conservative, have for decades led both the German and euro-area economies to follow a mercantilist path based on wage restraint while neglecting public investment and thereby acting as a drag on wider continental growth. Recent changes in German fiscal policy, including the introduction of special-purpose funds for defence and infrastructure, may mark a turning point for broader European growth dynamics as well as for the CESEE and WB6 countries, which typically grow at twice the rate of those in Western Europe. In other words, stronger growth in Western Europe would also translate into higher growth in Eastern Europe and, in particular, the Western Balkans. Thus, Germany’s policy shift towards increased public spending, which is expected to stimulate growth across Europe, is something from which the Western Balkans should benefit the most.