The Implications of Balkan Accession for the economy of Greece

The Implications of Balkan Accession for the economy of Greece Professor George Petrakos South and East European Development Center University of Thessaly Conference The European Union s Balkan Enlargement: what does it mean for the Greek economy? The London School of Economics and Political Sciences The European Institute / The Hellenic Observatory Athens, 6 June 2006 1

Outline 1. The integration experience of Greece in the EU 2. The integration / transition experience of the Balkan countries 3. The economic interaction of Greece with the Balkan countries 4. The implications of accession for Greece 5. A policy agenda for the Balkan enlargement of the EU South and East European Development Center, University of Thessaly 2

Greece in the EU: The integration experience of a less advanced and peripheral member Despite significant EU funds, the 25 years of integration experience reveals mixed processes of convergence and divergence with respect to performance and structure The role of geography: distance from the EU core and a missing neighbor effect in the post-wwii period The role of unfavorable initial conditions with respect to key economic characteristics Significant progress in the last 10 years in macroeconomic indicators, but structural gap remains Integration among unequal and distant partners may not always lead to win-win situations and may lock weak economies with an undesirable economic structure South and East European Development Center, University of Thessaly 3

Divergence during the first years of integration GDP per head of Greece as a share of EU15=100 (in PPS) 4

Weak economic structure Employment by sector in Greece and the EU-15, 1990, 2002 year agriculture industry services Greece EU-15 Greece EU-15 Greece EU-15 1990 23.91 6.96 27.74 33.76 48.36 59.28 2002 16.62 4.15 22.60 28.65 60.78 67.19 Source: WB, ILO 5

Diverging industrial structure Industrial employment by branch in Greece and the EU-15, 1985, 2000 Branches EU Greece 1985 2001 1985 1999 Labor-intensive 34.2 37.4 65.5 66.6 Intermediate 30.6 31.5 22.6 24.2 Capital or RD-intensive 35.2 31.1 11.9 9.2 Total 100.0 100.0 100.0 100.0 Source: UNIDO (2004) 6

Declining trade performance and increasing trade deficits Exports of goods and services as a percentage of GDP at current prices 40 35 30 25 20 15 Greece EU15 10 5 0 7 1 9 6 0 1 9 6 2 1 9 6 4 1 9 6 6 1 9 6 8 1 9 7 0 1 9 7 2 1 9 7 4 1 9 7 6 1 9 7 8 1 9 8 0 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 0 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4

Declining trade performance and increasing trade deficits Imports of goods and services as a percentage of GDP at current prices. 40 35 30 25 20 15 Greece EU15 10 5 0 8 1 9 6 0 1 9 6 2 1 9 6 4 1 9 6 6 1 9 6 8 1 9 7 0 1 9 7 2 1 9 7 4 1 9 7 6 1 9 7 8 1 9 8 0 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 0 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4

Declining trade performance and increasing trade deficits Intra-Community exports of goods as a percentage of GDP. 25,0 20,0 15,0 10,0 Greece EU15 5,0 0,0 9 1 9 6 0 1 9 6 2 1 9 6 4 1 9 6 6 1 9 6 8 1 9 7 0 1 9 7 2 1 9 7 4 1 9 7 6 1 9 7 8 1 9 8 0 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 0 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4

Declining trade performance and increasing trade deficits Intra-Community imports of goods as a percentage of GDP. 20,0 18,0 16,0 14,0 12,0 10,0 8,0 Greece EU15 6,0 4,0 2,0 0,0 10 1 9 6 0 1 9 6 2 1 9 6 4 1 9 6 6 1 9 6 8 1 9 7 0 1 9 7 2 1 9 7 4 1 9 7 6 1 9 7 8 1 9 8 0 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 0 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4

Diverging trade structure Exports of Greece to EU-15 and inta-eu exports by 2-digit NACE sector Greece EU 2000-03 2000-03 DA Food, beverages, tobacco 30.7 10.5 DB Textiles and products 24.3 5.2 DC Leather and products 1.4 1.3 DD Wood and products 0.1 0.4 DE Paper, printing, publishing 0.7 3.3 DF Fuels and oils 0.9 0.7 DG Chemicals 9.4 13.8 DH Plastic and elastic products 2.0 1.7 DI Mineral products 6.5 8.9 DJ Metal products 15.6 19.3 DK Machinery 4.4 10.8 DL Electric equipment 1.9 1.5 DM Transport, communication 1.4 18.5 DN Other 0.8 4.2 100.0 100.0 consumer 57.9 24.8 intermediate 34.4 44.4 capital 7.7 30.8 11

The integration and transition experience of the Balkan countries in the post-1989 period The least successful transition experience in Europe Explained by a mix of unfavorable initial conditions in terms of key development indicators, unsettled ethnic disputes, unfavorable geography and serious domestic and international policy failures Significant progress in the last few years, but development/ structural gap remains North South type of integration with the EU The road towards the EU is still a long and bumpy one for the Western Balkans South and East European Development Center, University of Thessaly 12

Weak growth performance in the post-1989 period The evolution of GDP in the Balkans, CEE and EU-15, 1989-2004 (1989=100) 140 120 100 80 60 EU-15 Balkans CEE 40 20 0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 13

Weak growth performance in the post-1989 period Basic economic indicators of the Balkan countries Countries Population (million) 2005 million EUR GDP 2005 GDP/cap 2005 89=100 EUR PPP Share of agricultu re in GDP 2003 Unemployment 2005 Bulgaria 7.8 21,448 92 2,760 7,500 12 10.0 Romania 22.2 79,314 101 3,500 7,700 12 5.8 Albania 3.2 6,739 130 2,140 4,710 25 14.0 Bosnia 4.1 7,995 64 1,950 6,140 15 46.0 Croatia 4.5 30,465 95 6,770 11,000 8 13.1 FYROM 2.0 4,631 84 2,280 5,980 12 37.5 Serbia-Montenegro 8.1 21,060 54 2,600 6,179 15 33.0 Greece 10.7 181,088 141 16,924 19,600 7 8.9 Transition Balkans 52.0 171,651 90 3,278 7,344 13 23.0 EU-15 380.0 10,245,077 133 26,929 25,300 2 8.0 14

Diverging industrial structure Structure of manufacturing, 2001 Balkans Central Europe EU-15 Labour-intensive 53.8 24.9 37.4 Intermediate 26.5 40.2 31.5 Capital or RD-intensive 19.7 34.9 31.1 Total 100.0 100.0 100.0 15

Weak trade performance and diverging trade structure Regions 1990 1995 2000 2003 X 100.0 137.8 120.5 183.7 Balkans M 100.0 117.7 154.9 254.2 Central Europe EU X/M 0.81 0.95 0.63 0.58 Deficit/GDP -3.2-1.5-12.9-18.5 X 100.0 210.5 220.5 355.1 M 100.0 224.2 292.3 421.7 X/M 1.07 1.01 0.81 0.88 Deficit/GDP 2.6 0.3-9.6-5.6 X 100.0 134.4 114.0 145.6 M 100.0 128.8 121.6 149.6 X/M 1.07 1.11 1.00 1.04 Deficit/GDP 2.4 3.2 0.0 1.2 16

Weak trade performance and diverging trade structure Export structure of BCs and CE to EU-15, 2000-03 Balkans Central Intra Europe EU-15 consumer 59.4 21.4 24.8 intermediate 24.1 43.4 44.4 capital 16.6 35.2 30.8 Total 100.0 100.0 100.0 17

Limited regional trade interaction Share of exports (row) to (column) in the Balkans Albania Bosnia Bulgaria Croatia FYROM Romania Greece Balkans EU-15 total Albania 0,0 0,0 0,1 0,7 0,0 13,1 0,8 95,8 100,0 Bosnia 0,1 0,3 22,8 1,0 0,0 0,1 24,3 46,1 100,0 Bulgaria 0,5 0,1 0,7 2,3 3,5 11,4 7,1 64,6 100,0 Croatia 0,5 15,9 0,4 1,2 0,4 0,7 18,4 60,1 100,0 FYROM 1,6 2,2 2,4 6,2 0,1 16,8 12,5 69,0 100,0 Romania 0,1 0,1 1,7 0,8 0,1 2,6 2,8 71,5 100,0 Greece 2,9 0,0 6,8 0,4 3,0 2,9 16,0 50,3 100,0 18

Limited FDI inflows FDI stock in the Transition countries in Europe, 2004 Countries Million $ Share of total stock Bulgaria 7.569 2,0 Romania 18.009 4,8 Albania 1.514 0,4 Bosnia 1.660 0,4 Croatia 12.989 3,5 FYROM 1.175 0,3 Serbia-Montenegro 3.947 1,1 Balkans 46.863 12,5 CEE 197.633 52,6 Baltics 20.412 5,4 FSU 110.658 29,5 total 375.566 100,0 20

Making sense of the integration experience of SEE countries Similarities in the integration experience of Greece and the BCs Weaker performance and structure than EU Weaker performance and structure than other countries in similar situation (Spain, Ireland, CE) North South integration or integration among unequal partners may not always lead to convergence with respect to key development indicators if adequately designed policies are not in place Can South South integration or regional integration in the South be a balancing force for the weaker EU partners? South and East European Development Center, University of Thessaly 21

The relations of Greece with the Balkan countries in the post-1989 period Rapid expansion and diverse structure of trade relations and especially exports has allowed for thousands of firms to expand their activities and internationalize an option that was not available before Rapid development of outwards FDI Significant immigration (mostly illegal) has expanded the labor force and has contributed to the expansion of sectors in which labor cost is a critical factor All types of economic interaction (trade, FDI, migration) has contributed to regional integration and the development of the region through the operation of regional multipliers South and East European Development Center, University of Thessaly 23

The evolution of Greek Trade with the Balkans and the EU-15 Trade with the Balkans Trade with the EU YEAR X M X/M 1990 1995 2000 2003 Share of total X Share of total M X M X/M Share of total X Share of total M 100 100 0.62 3.9 5.3 100 100 0.49 64 65 323 144 1.40 8.3 3.6 113 152 0.37 57 66 864 292 1.84 14.7 2.8 149 155 0.47 48 60 888 303 1.82 16.5 2.4 139 196 0.35 50 53 24

The structure of Greek exports to the Balkans and the EU-15, 2000-03 Balkans EU-15 DA Food, beverages, tobacco 16.9 30.7 DB Textiles and products 18.8 24.3 DC Leather and products 1.0 1.4 DD Wood and products 0.1 0.1 DE Paper, printing, publishing 1.6 0.7 DF Fuels and oils 0.7 0.9 DG Chemicals 11.2 9.4 DH Plastic and elastic products 0.9 2.0 DI Mineral products 18.5 6.5 DJ Metal products 15.0 15.6 DK Machinery 9.9 4.4 DL Electric equipment 0.6 1.9 DM Transport, communication 2.5 1.4 DN Other 2.3 0.8 Total 100.0 100.0 Consumer 40.8 57.9 Intermediate 46.3 34.4 Capital 13.0 7.7 25

The coefficient of Revealed Comparative Advantage (RCA) of the Greek trade with the Balkans and the EU-15, 2000-03 Balkans EU-15 DA Food, beverages, tobacco 0,67 1.24 DB Textiles and products 1,03 1.33 DC Leather and products 0,42 0.51 DD Wood and products 1,97 0.55 DE Paper, printing, publishing 1,17 0.49 DF Fuels and oils 0,87 0.89 DG Chemicals 1,13 1.00 DH Plastic and elastic products 0,51 0.81 DI Mineral products 1,32 0.52 DJ Metal products 0,97 1.04 DK Machinery 1,83 0.68 DL Electric equipment 0,69 1.04 DM Transport, communication 0,83 0.58 DN Other 1,69 0.61 26

The IIT Coefficient for the trade of Greece with the Balkans 2000-03 Bulgaria 0.62 Romania 0.83 Albania 0.14 Bosnia 0.82 Croatia 0.93 FYROM 0.09 Serbia 0.70 Balkans 0.57 EU-15 0.56 27

Immigration to Greece by country of origin Country immigrants Share of total Albania 438.036 57,47 Bosnia 294 0,04 Bulgaria 35.104 4,61 Serbia 3.832 0,50 Croatia 219 0,03 Romania 21.994 2,89 FYROM 747 0,10 other 261.965 34,37 total 762.191 100,00 28

FDI of Greek origin by recipient country in the Balkans Country Stock Ranking Year Albania 254 2 2002 Bulgaria 619 1 2002 FYROM 124 1 2000 Romania 171 12 2001 Serbia 481 2 2000 Inward stock, million USD 29

The implications of accession for Greece Greece is the largest and more advanced economy in the region Positive effects and opportunities will dominate but challenges will also be present Regional integration was the missing part in the integration experience of Greece South South integration as a balancing and complementary force of North South integration Strategically, Greece has an interest to promote integration at both levels (Regional, European) as an engine of growth However, the EU is still the most important market and a more successful EU integration is the greatest challenge for Greece South and East European Development Center, University of Thessaly 30

The implications of Balkan accession for Greece: positive effects and opportunities (2) A new and accessible economic space of 50 million (+ Turkey) Increasing exports of industrial and Mediterranean agricultural products Increasing exports of services (banking, consulting, research, education, etc.) Cross-border cooperation as a policy for regional development Attract FDI in the region Stability and a new institutional setting in the region Greater representation of Southeastern Europe in the decision making bodies of the EU South and East European Development Center, University of Thessaly 31

The implications of Balkan accession for Greece: challenges (3) Import competition for L-intensive sectors Dislocation of L-intensive industry may continue A new wave of (legal) immigration Disqualify for Structural funds due to a statistical effect caused by a further decline of the EU GDP per capita Border regions: from walls to bridges or tunnels? Avoid trap at the low end of the market South and East European Development Center, University of Thessaly 32

A Policy Agenda for the EU s Balkan Enlargement Free trade area is not a substitute for integration into the EU One-size-fits-all policy of enlargement? Standards before status: An unlikely to work strategy Status may be a catalyst for the ethnic issues in the Balkans Status before Standards - Then Standards before membership Provide all WBC the same status with Turkey South and East European Development Center, University of Thessaly 33

Country Relations with EE Prospects Albania Stabilization and Association Agreement (SAA) (expect Potential Candidate in 2006) B-H No contractual relations with EU Potential Candidate Autonomous Trade Preferences by the EU Negotiations on SAA since 25/11/2005 Bulgaria Sign of Accession Agreement in April 2005 Accession till 2008 Accession 1.1.2007 Romania Sign of Accession Agreement in April 2005 Accession till 2008 Accession 1.1.2007 Croatia SAA (signed 2001, implementation since Feb. 2005) Candidate status Accession Negotiations started on 3-10-2005 FYROM SAA (signed in 2001, implementation since 2004) Since 17.12.2005 is a Candidate State, but still no Candidate status (no negotiations) Negotiations Serbia Autonomous Trade Preferences since 2000 Potential Candidate Montenegro Negotiations on SAA since 10/2005 Kosovo No contractual relations Potential Candidate Turkey Tariff Union since 1996 Accession Negotiations since 2005 Candidate 34