Few corners of the earth remain unaffected by the financial crisis – and even those which were growing economically pre-crisis, at remarkable speed, are feeling the slowdown.

To say, however, that the economies of the western Balkans were booming, pre-crunch, would be overexuberant. Political concerns have slowed the progress of the two big economies, Croatia and Serbia, toward EU accession. Macedonia and Albania are still regarded as volatile by many potential investors and the full repercussions, both at regional and geopolitical levels, of the independent declaration of Kosovan independence in 2008 is yet to be fully understood.

Figures ahead

“The truth is,” according Peter Sanfey, chief economist for the western Balkans at the European Bank for Reconstruction and Development, “that any downturn has yet to fully show up in the figures.” The region, which was just making its presence felt, is almost certainly going to feel the pinch. But the extent isn’t yet entirely clear.

However, the credit crunch is starting to manifest itself in specifics. In Croatia, the country’s inward investment agency acknowledges that a number of investments which were planned for the end of 2008 failed to materialise, or perhaps, according to a statement from the agency “deliberately reprogrammed at the decision of the [Croatian] government”.

Across the border, the Serbian Investment and Enterprise Promotion Agency (SIEPA) reports that “according to recent estimates from the Foreign Investment Council in Serbia [an association of major foreign investors], its member companies have planned to invest between €700m and €800m in 2009. However, they will be forced to delay the actual investment until autumn 2009.”

For the moment, says SIEPA, the companies are “on hold”, waiting to see how the crisis will develop over the next two quarters; predictions of downsizing are in the region of 4%.

In September 2008, Fiat signed a E1bn joint investment agreement in Belgrade, which was touted as being set to create nearly 5000 jobs. At the signing, the deal was praised by Serbia’s prime minister, Mirko Cvetkovic, as being “an important investment for Serbian macroeconomic stability”, and one which would “open the door to new investment and employment” – in other words, it would constitute a landmark project.

By February, Fiat had announced that a sizeable proportion of its proposed investment – an initial tranche of some €200m – would be postponed, although it later signed an annex to prevent the activation of a significant fine. The carmaker cited concerns about the state of the international automotive industry – always a bellwether of the state of the economy – as being the ultimate author of its decision.

Also in February, Bangalore property developer The Embassy Group, which had scheduled an investment of more than €450m into the country, announced it was being put on hold.

It is ironic for these countries, which have been so long in coming out of the cold – first emerging from the Communist era, and then from war – that their advance is being held back not by their own economic fundamentals, but by contagion which started in the US and spread like wildfire through the ‘advanced’ economies. The banking industries of central and eastern Europe had not themselves accumulated the kinds of toxic assets seen in the West. However, many of the parent companies of the now almost wholly privatised and internationalised industry were heavily exposed.

Certain protection

Arguably, the Balkan countries are protected to an extent, as a result of having relatively less distance to fall, notwithstanding even their comparative success in attracting investment in recent years (comparative, for example to the 1990s). The truth of that proposition is visible in the smaller states – Albania and Macedonia. The latter, for example, was recently ranked as ‘best consecutive reformer’ in the past two years in the region. Volumes of FDI are, as might be expected, small: less than $350m in 2006; but alongside the country’s 2002 figure, of about $80m, it has made great strides.

And although the EU’s august members’ club, with ever-exacting standards, remains critical of the extent of organised crime and the state of the judiciary, the country has implemented a ‘regulatory guillotine’, the objective of which is to “eliminate all unjustified requests” from regulatory and government bodies. Low labour costs and a crossroads location in south-east Europe also play a positive role: the Macedonian inward investment agency likes, for example, to boast of the significant investments it has witnessed in the steel and automotive sectors.

Mr Sanfey insists that the pre-accession states are not disadvantaged alongside, for example, Romania and Bulgaria. “Most of the financial assistance which members receive is made at the pre-accession stage anyway,” he says. And the promise of accession remains no less critical to the Balkans, or less keenly awaited. Last year, Kosovo’s declaration of independence threw Serbia into something akin to an identity crisis. This precipitated an election which resembled, in effect, a referendum on the country’s relationship with Europe which, if it had gone the other way, would have forged closer ties with Russia.

SIEPA claims that accession is “the top priority” for the Serbian government and that by the of end 2012, the country’s regulatory framework will be fully harmonised with the acquis communautaire. Serbia is due to submit its formal application for membership this year, and has already started the implementation of the Interim Trade Agreement as part of the Stabilisation and Association Agreement, providing for gradual elimination of import customs duties for industrial goods from the EU countries during the following six years.

Croatia is even further along in this essential process. As one investment banker with long-term experience of the region says: “The really important thing right now is for the world to pull together. What the Balkans does not need is for individual member states – or members of the international community generally – to each bolt down their own individual rabbit hole.”

It is almost unthinkable that the world would ever again stand by if the Balkans was in need.