South East Europe Regular Economic Report, June 2012

Abstract

After they achieved 2.2 percent growth
 in 2011, early indications are that the economies of the six
 countries in South East Europe (the SEE6: Albania, Bosnia
 and Herzegovina (BIH), Kosovo, FYR Macedonia, Montenegro,
 and Serbia) are slowing drastically and can expect just 1.1
 percent growth in 2012. Economic conditions in the Euro zone
 are holding back economic activity and depressing government
 revenues in SEE6 countries. With both public debt and
 financing pressures high, most countries in the region need
 to embark on major fiscal consolidation programs if they are
 to reverse their adverse debt dynamics and avoid financing
 problems down the road. The good news is that in general the
 SEE6 financial sectors are still relatively well placed,
 despite elevated risks and vulnerability to adverse shocks,
 especially the possibility of contagion if the Greek crisis
 should intensify. The bad news is social: SEE6 countries
 have the highest unemployment and poverty rates in Europe.
 Yet even with the difficult short-term situation, SEE6
 countries now have historic opportunity to board the
 European 'convergence train' and over the long
 term reduce their per capita income gap with developed
 European Union (EU) countries. All earlier entrants were
 able to 'catch up quickly.' In principle, the same
 'convergence train' is now pulling into the EU
 candidate countries in SEE6; but these gains are not
 automatic, they will materialize only if country policies
 and reforms facilitate them. The long-term SEE6 structural
 reform agenda must leverage greater trade and financial
 integration and reform labor markets and the public sector.