The proclamation of Kosovo’s independence has led to a certain worsening of short-term economic indicators in Serbia. The stock exchange is practically frozen, the dinar rate is under pressure, risk has grown. This is reflected in the central government’s raised interest rates, and the increased caution of foreign investors. In addition, there is a suggestion that a budgetary re-balance is needed, which means it is reckoned that public spending might have to be increased. There are signs that money is going abroad, though this has not been confirmed. So what can be said, on the basis of all this, about the Serbian government’s Kosovo policy and its possible short-term, medium-term and long-term consequences?

A policy of delay

The current behaviour of the economic indicators suggests that economic actors have no clear idea of the Serbian government’s Kosovo policy. This is because, on the one hand, there are messages that it has given up further integration into the European Union. On the other hand, there is still an expectation that the Serbian public could force the government to return to the path of European integration, although pessimism may also be rising about the prospects of the European policy winning out over the Kosovo policy.

The basic cause of pessimism lies in the fact that the pro-European forces lack resolution, whereas the anti-European forces are determined. This can be seen simply by comparing the two basic slogans emanating from the Serbian government. One says ‘Both the EU and Kosovo’, the other ‘Into the EU only with Kosovo’. The latter is politically superior to the former, because the slogan ‘Into the EU only with Kosovo’ has clear political implications , while the slogan ‘Both the EU and Kosovo’ has no political implications. The former is realistic, the latter not. Those who advocate the policy according to which integration into the EU is conditional upon the return of Kosovo to Serbia have in practical terms given up joining the EU. Those who advocate both joining the EU and regaining Kosovo in practical terms have no policy. This is because they do not say which comes first; or, in other words, how realising one of these aims would help to realise the other. This policy can only be called one of delaying a decision, i.e. a policy of delay.

In this way, the economic and political public is given two messages: for the time being Kosovo policy has the priority over European policy; but this relationship will be re-examined in future. The second outcome, which does contain a certain promise of change, arouses little hope, since it has to be understood as acceptance of the policy ‘Both the EU and Kosovo’ - which in concrete terms means nothing. Some interpret it as placing closer association with the EU above the Kosovo policy, but this interpretation remains unconvincing so long as it fails to imply opposition to, or direct disagreement with, the policy that makes integration into Europe conditional upon the Kosovo policy. As time passes by, it is becoming ever clearer that the policy of ‘Both the EU and Kosovo’ will always come down to the European policy being subordinated to the Kosovo policy.

This is the conclusion that politicians and business people inside and outside Serbia will sooner or later reach. The current waiting for Serbia to make up its mind will turn into an understanding that Serbia has already opted for the policy of those who say that Serbia can join the EU only with Kosovo. From that moment on, one can expect serious political and economic repercussions.

Short, medium and long term

In order to talk about the possible repercussions of the Kosovo policy, it is necessary first to classify somehow the ways in which policy influences economic movements over certain periods of time. The effects are usually divided into short-term (up to a year), medium-term (between 3 and 5 years) and long-term (ten years and more). In the short term, one-off changes - or shocks - are decisive. In the medium term, what matters are the expected risks, and the assessment of whether these will increase or decline. In the long term, the key role is played by uncertainty: i.e. the degree of certainty with which the direction in which a country’s economy is moving can be predicted.

In order to illustrate what is meant by this, let us take the example of the long-term expectations of a country that is a potential EU member. If that country is firmly committed to a European policy, it is to be expected that its long-term economic growth and development will be determined by movements within the EU economy. This practically removes all elements of uncertainty; to put it differently, the country imports the stability of the EU. The risks which the economy of the country faces in the medium term, on the other hand, depend on the speed with which it adapts to the conditions prevailing within the single EU market - and they can be greater or smaller depending on political developments. In the short term, of course, the economy may undergo shocks which, let us say, derive from the chosen economic policy or from political and social changes.

The cost of the Kosovo policy

Starting with this classification of factors that are significant over different time periods, what might be the economic consequences of Serbia’s policy of delay?

Viewed in the short term, the basic consequence will be a protracted waiting period. Since the relationship between the European and Kosovo policies is not quite clear, we have to wait for a political decision as to whether the Kosovo policy will prevail, or whether an interpretation will be adopted according to which the Serbian strategy is ‘Both Europe and Kosovo’ - which implies fostering integration into the EU while not recognising Kosovo’s independence. If no decision is reached before the end of the year, the pessimistic conclusion will be drawn that the sum of these two policies does indeed add up to - the Kosovo policy. In which case a significant increase of risk can be expected.

In the medium term, this means that credit will become more expensive, meaning that it will be more difficult to find the money to finance investment, and spending too. Let us say that the Serbian economy in 2007 had a deficit in current transactions with abroad of around 5 billion euros. If risk were to rise to the point where no more than, let us say, 3 billion euros could be secured, then it would be necessary to reduce investment and spending by 2 billion euros. This is just under 10 percent of total spending. This would result in a significant downturn of economic growth, spending and employment.

This would also imply significant changes in the rate of the dinar, and also consequences for fiscal policy. A weakening of the dinar can be expected, and a considerably greater budget deficit - as is already indicated by current movements. First, because the flow of money from abroad would decrease; and secondly, because the tax base would fall at the same time as public spending would increase. It is difficult to say in advance what would happen in such circumstances to institutional and political reforms; but there is no doubt that conditions for serious reforms would not be all that favourable.

The medium-term effects could be much worse if the increased risk were to encourage not only a diminution of the money inflow, but also a greater outflow. In the worst case, due to the dominance of one or other form of economic nationalism, it might lead to the withdrawal of investors from Serbia. This would involve not only foreign but all entrepreneurs, because all would suffer from the effects of increased risk. This would certainly come to pass if the Serbian government were to start introducing protectionist measures - to which they are anyway inclined whenever they meet a problem - in regard to both trade and capital movement. In that case, a serious economic crisis in the medium term could not be excluded.

In the long term, the uncertainty would have to be resolved, most likely in favour of the European policy. But alternative outcomes are also possible. Given that there is uncertainty in this regard, it is not rational to count upon an optimistic outcome, at least not in the sense that one could say it is worth putting up with short-term and medium-term negative effects in order to reap a long-term benefit. Businessmen will decide at some point that it is better to switch their activities elsewhere, and return when the uncertainty has been resolved. If this were to happen, the damage would be measured in terms of another lost generation.

Conclusion: political responsibility

Pescanik.net, 03.03.2008.
Translation from Bosnian Institute