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

By Mario Holzner

image credit: Canva

This text is a translation of an article first published in the Austrian weekly “Der Pragmaticus” on 5 September 2022.

• The countries of the Western Balkans have been put off for years when it comes to EU accession. 
• The resulting frustration has allowed China to gain an economic foothold in the region through large infrastructure projects and, in the case of Serbia, considerable political influence. 
• This balance of power does not reflect the fact that the countries of the EU are the Western Balkans’ most important trading partners and investors. 
• But official Brussels invests far too little in creating prosperity and motivating these populations for a future in the Union. 
• This is short-sighted: With Serbia, China already has a geostrategic foot in the door to the continent. 
• In the event of a confrontation with the West, Beijing could take advantage of this.  
• However, the EU still has time to turn the tide. 

It was meant as a harmless joke, but it spoke volumes: when German Chancellor Olaf Scholz came to his first Western Balkans summit in June, Albania's Prime Minister Edi Rama introduced his North Macedonian counterpart Dimitar Kovacevski as head of the government of "Western Bulgaria". After all the country, which was called Macedonia at the time, had already changed its name once under pressure from Greece in order to be allowed to join the EU at some point. Now the Bulgarians are stonewalling the Macedonians because they see Macedonian not as an independent language but as a Bulgarian dialect. 

Historical mistake 

Flashback to 2003, when Brussels made a clear commitment within the framework of the so-called "Thessaloniki Agenda". Literally it stated: "The future of the Balkan states lies in the European Union." What followed, however, was merely inconclusive banter with the candidate countries. It could turn out to be a historic mistake to take the region's countries to the cleaners like this. China has long since stepped into this political vacuum and already has one foot on the continent, mainly thanks to its close ties with Serbia. 

Beijing's influence in the Western Balkans is still more ambition than reality. The European Union is still by far the largest economic partner of the Western Balkan states: More than 68 percent of goods exports from Albania, Bosnia and Herzegovina, Kosovo, Montenegro, Northern Macedonia and Serbia go to the EU, as our data at the Vienna Institute for International Economic Studies (WIIW) show. Around 61 per cent of foreign direct investment comes from the Union - in other words, when companies are bought or factories are built. As a rule, this is highly productive capital that supports the local economy. 

The EU is also the most important local financier of infrastructure projects. So what is the problem if Beijing also wants a small piece of the economic pie? 

The Balkans as part of the Silk Road 

It all started with a massive geostrategic mistake by the EU: in the aftermath of the euro crisis, heavily indebted Greece was famously pressured into various austerity measures, including the gradual sale of the Athens port of Piraeus to the state-owned Chinese operator Cosco. Since then, the People's Republic has been pursuing a targeted strategy to integrate the infrastructure of the Western Balkans into its Eurasian trade network, the "New Silk Road". 

With the planned upgrade of the Belgrade-Budapest railway line, the transport time between the capitals is to be halved to less than three hours, which is of course to be welcomed. But such large-scale Chinese projects also have some disadvantages for the population: The deals are prone to corruption, economically questionable, and most of the value added goes to Chinese corporations instead of the local economy. Workers and state-subsidised building materials are sent halfway around the world even if they are available locally. 

Between 2009 and 2021, around 32 billion euros flowed from China into the Western Balkans, 10.3 billion of which went to Serbia alone, according to a recent briefing for the European Parliament. 

This does not mean that Beijing is overburdening the region with costly investment projects that nobody needs. The motorway section in Montenegro, for example, was unjustly discredited. The construction of the first 41 kilometres of the route, which is supposed to run from the coastal town of Bar to the Serbian border at some point, cost over a billion euros. For this, the country of 620,000 inhabitants has run up enormous debts. The purpose of the project is clear: The popular tourist destination of Bar attracts mainly Serbs, who appreciate good roads through the mountainous terrain. But for a small country like Montenegro, such a project easily leads to high debts - no matter who finances it. 

Dangerous dependence 

More problematic is the dependence on China associated with open loans. Not much is known about these non-transparent contracts, but there are said to be clauses in them that provide for the transfer of land or facilities to Chinese creditors if Montenegro is unable to service the loans at some point. 

Unlike projects funded by the EU, Beijing does not make the terms of its involvement public. The deals are agreed directly between governments instead of putting them out to tender and negotiating with private bidders. However, it can be assumed that the projects are awarded at roughly market conditions. 

Having China as an infrastructure partner has advantages: Projects are handled quickly and easily. However, decision-makers and their confidants can also enrich themselves more easily. In addition, prestigious projects - especially important for politicians in pre-election periods - can not be set up so quickly with the European Investment Bank (EIB). While the European institution requires years of documentation and insists that all projects should be economically viable, Beijing can process politically opportune orders immediately - which of course does not rule out their profitability in principle. 

Of course, Europe also benefits from the many New Silk Road infrastructure projects. Mobile phones, teddy bears and plastic sandals reach consumers faster and thus cheaper, and the same applies to raw materials and components for European industry. 

Growth above all  

China is currently primarily concerned with good business and favourable conditions for its export industry. Furthermore, the People's Republic employs potentially unemployed citizens in the construction of power plants, bridges, motorways and railways abroad and, moreover, can easily sell overproduced steel, aluminium, cement and so on. 

Although these raw materials have to be subsidised by the state, annual growth targets are the top priority for China's government. In the case of Bosnia, the People's Republic even gives the impression of wanting to get rid of dusty technology by pushing the construction of a coal-fired power plant in Tuzla, which no longer even meets the applicable environmental standards in its own country. 

The special treatment of Serbia shows that Beijing has more than just an economic interest in the Western Balkans. The Chinese maintain closer relations with the largest country in the Western Balkans than with almost any other country in the world. 

Major projects such as the construction of the 45-kilometre-long Pupin Bridge over the Danube - completed in 2014 - are ceremoniously opened by large delegations. Serbia's President Aleksandar Vucic regularly meets his Chinese counterpart, whom he likes to call "Brother Xi". Most recently, the two heads of state met for the seventh time on the occasion of the opening of the Winter Olympics in Beijing in February. The intention to negotiate a free trade agreement between the two countries was announced. 

In 2019, China and Serbia even conducted joint police exercises, the last stage before joint military manoeuvres. This allowed some of the thousands of Chinese tourists who visit Belgrade's Old Town every year to meet their uniformed compatriots in the pedestrian zone. 

Moscow in the out 

In contrast to China's close ties with Serbia, its historically good relationship with Russia has deteriorated. Anyone who has followed the state-affiliated media in the Balkan state can see a change of mood since the Russian-inspired fighting in Ukraine in 2014: President Vladimir Putin is now seen as a traitor because by supporting the so-called Donetsk and Lugansk People's Republics he is setting a precedent for Kosovo: a minority in a state would have the right to declare independent an area in which it forms a majority - a red flag for Belgrade. 

At the United Nations General Assembly this year, Serbia voted with the West to condemn Russia's attack on Ukraine. However, Belgrade shies away from sanctions against Russia. The landlocked country is dependent on Russian oil and gas supplies. 

China, not the EU, has stepped into the gap left by Russia, although this was not obvious from the point of view of the local economy. For Serbia's economy, the EU remains a far more important partner: thanks to investment from Germany, the Netherlands, Austria and other countries, Serbia's industry has been integrated into European value chains. Be it the production of generators for Siemens or parts for Bosch: for years local factories have been attracting more and more investment. In total, around 26 billion euros in direct investment from EU countries will have flowed into Serbia by 2021. 

Unfortunately, this is not enough to bring prosperity to the region. Serbia alone has lost almost nine percent of its population in the past 20 years because the young in particular see a rosier future elsewhere. In such a dynamic, it is often the best brains who run away - with dramatic consequences for society. Brussels should take action here and underline the accession promises with much more support. Relevant EU payments amount to only about one percent of gross domestic product - especially since the six states together have an economic output like that of Slovakia: Compared to the large funding pots and crisis packages of the EU, these are ridiculous sums.  

Moreover, the EU would need to help the small candidate countries in particular with their administration. A bureaucracy that is not susceptible to corruption can find it difficult to gain a foothold where wages are low and qualified personnel are leaving. This makes it difficult to fill all the top civil service posts. Imagine if the three Viennese districts of Favoriten, Donaustadt and Floridsdorf (similar numbers of people live there as in Montenegro) had to produce a judiciary, a diplomatic corps, directors, officers, police, chief physicians, etc. 

Dark prospects 

A dystopian prognosis must be included by the EU in its considerations: Should a new cold war break out between China and the US, proxy wars loom in regions such as the Western Balkans. The EU should prevent this by finally keeping its word and pushing for the political integration of the Western Balkans.