ANALYSIS - Why W. Balkan EU candidates aim to join SEPA?

Earlier this month, leaders of the six Western Balkan countries - Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia - agreed to cut financial transaction fees across the region by aligning their regulations with those of the SEPA countries.

Streamlining cross-border transactions is a key issue which the Western Balkan countries need to resolve in order to access 6 billion euro ($6.5 billion) in EU financing under a reform and growth plan for the region.

The six countries are in different stages of their EU accession process. Serbia and Montenegro were the first in the region to start EU membership talks. Albania and North Macedonia launched talks with the bloc in 2022. EU leaders agreed to open negotiations with Bosnia last week.

SEPA benefits

The idea behind SEPA is simple: enabling cashless euro payments – via credit transfer and direct debit – to anywhere in the European Union, as well as a number of non-EU countries, in a fast, safe and efficient way, just like national payments.

The goal is to make the European economy more efficient and competitive by eliminating differences between national and cross-border payments through harmonising standards across the countries. SEPA was introduced in 2008, and fully implemented by 2014 in the euro area (and by 2016 in non-euro area SEPA countries).

Clearing a major barrier to economic activity

The opening of the system to non-EU members enables Western Balkan countries to significantly reduce cost of transactions both within the region and with the EU. High payment charges are a drag on the economy. Albania's prime minister Edi Rama has pointed out that transaction fees in the six Western Balkan countries are currently six times higher compared with EU countries.

In a recent interview with SeeNews, Anita Angelovska Bezhoska, North Macedonia’s central bank governor, said that a SEPA membership is among the central bank's priorities because it will benefit households, companies and boost economic growth. North Macedonia has amended 26 regulations to align them with EU rules.

Albania’s finance minister, Ervin Mete, highlighted yet another advantage of SEPA membership: the EU can use the cross-border payment links to assess the candidates’ readiness to join the bloc.

Making remittance transfers cheaper

For many countries, money transfers from their citizens working abroad are a lifeline for development. This is especially true for the Western Balkans, where remittances have traditionally been a significant source of foreign exchange inflows. With the Western Balkan countries having a substantial diaspora in the EU, a notable reduction in transaction fees could potentially lead to accelerated growth in forex inflows into the region.

Even now, remittance inflows continue to rise despite the challenge of high transaction costs. Total foreign remittances to Kosovo increased to 1.34 billion euro in 2023, from 1.22 billion euro the previous year. In Albania, the inflow of foreign remittances rose to 928 million euro in 2023, up 11% from the previous year. To grasp the significance of these remittances for the local economy, it's worth noting that foreign direct investments (FDI) in Albania totaled 1.49 billion euro in 2023. Given that a portion of remittance flows remains unaccounted for due to many transfers occurring through unofficial channels, it's possible that the funds that individuals working abroad send back to their home country approach, and even exceed, FDI levels.

FDI is arguably a 'higher-quality' investment than remittances as it tends to have a broader impact on economic development, including job creation, technology transfer, and infrastructure development. In contrast, remittances have a more direct impact on household welfare and consumption patterns. They, however, play an important role in poverty reduction and improvements in living standards.

(1 euro = $1.08)