Southeast Europe—a region still vulnerable from recent conflict, underdevelopment and reliance on foreign direct investment—has been uniquely effected by the global economic crisis. Citing his recent publication, Vassilis Monastiriotis explained that the region's underdevelopment had in part protected it from the financial crisis and that good policies have helped some countries to rebound more quickly.

In contrast to Central Europe, the cause of the crisis in Southeast Europe was not bad debt, but its heavy reliance on European trade and investment. When the crisis hit the EU, southeast Europe's economic drivers (FDI, household credit and remittances) dried up and thus will slow growth for some time, according to Monastiriotis.

Romania, Bulgaria and Croatia experienced less of a decline or GDP slump than their neighbors in Central Europe. While everyone suffered from reductions in FDI (especially Bosnia and Herzegovina, where FDI dropped by 28 percent), Romania and Serbia already seem to be recovering their investments from abroad. Because the region relies more heavily on trade with the EU (at 60 percent of all trade or higher) than on inter-regional trade, SEE countries were more vulnerable to the EU's recession. The only exception to this, according to Monastiriotis, was Montenegro, which has low trade volumes with the EU. The collapse of household credit was another contributing factor in the crisis and also explains the region's slow recovery.

Most economists would assume, as Monastiriotis had, that the weakest societies would experience the greatest drop in public financing. However, this was not the case in Southeast Europe, where governments were already practicing tight fiscal policy (since they have pegged currencies) and tight monetary policy (because it was a requirement by international lenders such as the IMF and the World Bank).

Due to the heavy borrowing rates in the region, there was a grave risk that banks would simply pull money from the region. In order to avoid this, the EU countries organized the Vienna Initiative, in which foreign banks operating in the region guaranteed that troubled banks would not pull their capital from the region. All banks abided by the agreement and a larger crisis was avoided in the region, Monastiriotis said.

Monastiriotis said that it was important to recognize that the period of "easy" growth will not return to the region. Instead, he urged the leaders of the region to refocus their economies on intra-regional trade as a remedy. Policy coordination on issues such as labor costs, common fiscal stimulus, common borrowing and spending will build a large enough market in the region to create growth throughout the Western Balkans.

By Nida Gelazis
Christian Ostermann, Director, European Studies and History and Public Policy