By Nikola Durkovic**
Entering 2020, the outlook for Southeast Europe was fair to middling. While the outlook for the rest of Europe was grim due to historically low interest rates and low growth, Southeast Europe was in better shape.
In this post, we’ll look at the outlook for the region going forward into 2020. We’ll analyze the positive factors that stand the area in good stead and factors that could contribute to growth going forward.
We’ll look at these factors from both a pre-COVID-19 and post-COVID-19 viewpoint.
WHY SOUTHEAST EUROPE'S OUTLOOK WAS GOOD FOR 2019-2020
An increase in exports shored up the economy in North Macedonia and Albania in 2018. This, in addition to a rise in spending in the region, helped the area achieve a growth rate of 3.8% in 2018.
The region is attractive to businesses. Why?
Centrally Located
The area serves as a gateway to both Europe and Asia. Goods can be transported by road, rail, air, or, in some cases, sea. The location enables companies to set up secure freight routes at a reasonable cost.
Skilled Workforce
Higher education is highly prized in these countries, where tertiary education is viewed as a way to a better life. In the former Soviet states, access to higher education tended to be more of a function of party politics.
In modern Southeast Europe, party politics no longer play as significant or overt a role in access to education. Economic reforms have also made it easier for residents to access quality education.
This puts employers in a favorable position once again. Skilled workers are easy to come by in the region.
Lower Wages
It’s possible to access highly skilled labor in this region than in much of the rest of Europe. That’s generally due to a higher unemployment rate in some countries. The average unemployment rate in Europe in 2018 was 6.8%.
By contrast, in the same year, Armenia and Georgia recorded figures of 20.5% and 12.7%, respectively.
Not all countries in the region experience higher levels of unemployment. Historically, residents of these areas are at a disadvantage due to a lack of economic investment in the region. Economic reforms are changing the situation, but there’s still work to be done.
In the interim, companies benefit through a lower wage bill compared to much of the rest of
Europe.
ECONOMIC REFORMS BOOST INTERNATIONAL INVESTMENT
The Regional Roaming Agreement
Another factor that will have a significant impact on growth in the region is the implementation of the Regional Roaming Agreement in 2021. The agreement was tabled at the Western Balkans Digital Summit in 2019.
According to the agreement, roaming charges on public networks within the area will fall away in 2021. This should significantly cut the cost of communications within the region and enable better access to internet services.
Better access to the internet can be a factor that will promote further international investment in the area. It will also make it less expensive for local companies to conduct business in the area.
Stable Growth and Renewed International Investment
The World Bank forecast stable growth at a rate of around 3.7% for the region overall. The growth will naturally differ from country to country, but the World Bank is optimistic about the area in general.
Growth was predicted to be on par with that of Central Europe over the 2019–2020 period. Bosnia and Herzegovina and Kosovo were singled out as having the most opportunity for growth. Albania, Serbia, and Montenegro, by contrast, could see growth start slowing.
The international community has been taking note of the growing stability and economic reforms in the region. Governments are actively working on promoting business investments and making it easier to conduct business in the area.
International concerns are increasingly likely to turn to this region to take advantage of the central location and lower costs.
Improved Economic Conditions Provide an Attractive Market
The upside of increased growth in the region is that residents have more disposable income. That provides exciting opportunities for companies to expand into a market that’s been historically poor in the past.
With a population experiencing an increase in disposable income, there’s a potential for the expansion of local and international brands that wouldn’t have traditionally considered the area.
Challenging Conditions in the Rest of Europe
The rest of Europe isn’t as an attractive option as it might’ve been a decade ago. In many countries, the cost of doing business, a challenging business environment, and historically low interest rates make for a less appealing investment option.
Many of the significant markets in central Europe are already highly saturated. Brands can gain traction, but it’s costly to do so. Southeast Europe provides an alternative and largely untapped market by comparison.
Growing discontent in traditionally stable areas of Europe might bode badly for business investors, too. The drawn-out Brexit process has shaken confidence in the power of the European Union and the United Kingdom in general, leaving investors to consider less
traditional alternatives.
Political Uncertainty Could Prove Challenging for Growth
That said, some areas of Southeast Europe are also battling pockets of growing discontent. While the World Bank felt that the region was stable, it also cautioned that the stability was fragile.
Governments have, in recent years, been ensuring that their citizens have better access to essential health and education. In some areas, there’s still a long way to go. Particularly at risk are those living in poverty because few governments have made great strides toward human capital development in the earliest years.
It’s understandable. Governments with limited resources are forced to prioritize spending on creating food security, alleviating poverty, and providing more employment. Unfortunately, this does leave some citizens falling through the cracks.
A lack of human capital development programs during a child’s formative years makes it more difficult to excel in school. Fortunately, though, with the rapid technological advancement we’ve made over the last decade, we have alternatives to the standard teaching programs.
As internet access becomes more affordable, children in more impoverished regions will have better access to online teaching. That, in turn, should allow them to learn the skills that will help them succeed in a formal education environment.
AND THEN CAME COVID-19
Things were looking rosy for the region coming into 2020. Growth was on track, and it seemed as though more international investment would soon follow.
Then news from China leaked about the severity of the COVID-19 virus in that country. With China operating as a significant trading partner for Southeast Europe and the EU, the immediate effect was a slowdown of trades.
The EU imported almost €400 billion worth of goods from China in 2018. China imported nearly €210 billion worth of goods from the EU in 2018.
What difference does this make to Southeast Europe? The EU and China are two of the region’s main trading partners. Italy and Germany are two EU members that the Southeast relies on for trade and investment.
When China shut its borders and shut down trade, it had a significant knock-on effect throughout the region. That, on its own, was a blow. Had the virus remained contained in China, it wouldn’t have been a killing blow.
By the end of January, the first cases of COVID-19 reached Europe. Within weeks, the virus started to engulf Italy, exacting a horrifying death toll. It soon spread to other European countries and the United Kingdom.
Spain was the next European nation to start seeing the devastating effects of the rampant virus. Spread in other countries on the continent has been more measured, but it’s had a disastrous impact on the local economies.
Italy, one of Southeast Europe’s supporters, closed its borders and instituted a nationwide lockdown to try and curb the spread. Spain and the United Kingdom soon followed suit. Many countries around the world have opted for a hard or soft lockdown to curb the spread of disease.
According to the OECD, by the 14 th of April, Southeast Europe had over 16,000 positive cases of COVID-19.
Thus far, the region has been relatively lucky in terms of the spread of the disease. Looking at the progression of the disease in other countries, the infection rate seems to be slightly slower.
That said, we’re nowhere near out of the woods yet.
THE FINANCIAL FALLOUT OF COVID-19
The virus is relatively mild compared to nasty diseases like Ebola, with far higher fatality rates. Thanks to the high rate of infectiousness, though, it could prove even more deadly in the long run. Most people who are infected have mild symptoms and don’t require hospitalization.
Unfortunately, the economic effects of the virus are a lot more devastating. According to the OECD, the EU made €38 million available for healthcare in the region. In time, it’ll provide an additional €374 million to support the embattled economies.
Other countries may be willing to help, but the scale of this pandemic makes this problematic. Pre-COVID-19, the global economy was set to grow by 2.5% this year. Now projections suggest that it may shrink by 0.9% instead.
These predictions are based on us getting the pandemic under control by the end of the second quarter of the year. As we’re already in May, this seems unlikely. Should the pandemic extend into the third quarter without a careful financial strategy in place, we could see levels akin to the 2009 global financial crisis. During that crisis, the global economy shrank by 1.7%.
Financial industries, such as the financing and insurance industries, can expect to take a big hit. For an example of what might happen here, we can take the United States into account.
66.5% of all bankruptcies in the United States are as a result of medical debt. Unpaid medical bills in America are largely due to inadequate insurance. As more people here struggle to survive, they might have to cancel their policies.
Even if they do, the number of patients getting ill at one time puts additional strain on the insurance industry. Insurers also have to factor in a decrease in income due to loss of ancillary insurance products, such as travel insurance.
The financial services industry will be in a similar predicament as fewer people will be able to service their debt. To further complicate matters, governments may step in and require financial service providers to provide payment holidays.
The government may, for example, institute a regulation that prevents bad debtors from being evicted during this period. The normal court system may also be reduced to essential cases only in an effort to encourage social distancing.
GROWTH PROSPECTS FOR SOUTHEAST EUROPE IN THE COVID-19 AGE
Growth in individual countries won’t be affected equally. Countries that rely heavily on foreign investments and exports are likely to take the biggest hit.
Economies in the region are already suffering the consequences. Many companies are adversely affected by increasingly strict lockdown regulations, closed borders, and lower consumer demand. With most lockdowns, people are only allowed to buy essential goods such as groceries and pharmaceuticals.
Companies not operating within those industries may not be able to run. Some countries do allow non-essential companies to offer goods online, but not every company can adopt this model.
Companies have also seen a drastic drop in consumer spending. This is partly because of uncertainty and because some consumers are working shorter hours or receiving fewer wages than usual.
With the scarcity of goods becoming an issue, and supply lines becoming more complex, we also see a rise in the prices of products.
We can expect unemployment to rise as companies start to see increasingly lowering incomes.
Companies that are unable to find a way to adapt their service offerings to the changing needs of their consumers will find it very hard to stay afloat.
Overall, the prospects at this stage aren’t good. Growth in the region was classified as stable, but fragile. COVID-19 has already shattered that stability.
We should brace ourselves as the economic situation becomes more difficult, and growing discontent causes political instability. It seems as though, for now, at least, the renaissance that the Southeast was experiencing is over.
It seems as though we’re set to be plunged into a more modern version of economic Dark Ages.
The gap between the wealthy and the poor will widen significantly, with many falling below the poverty line by the end.
THERE'S HOPE
Being hopeful at a time like this seems foolish, but there’s a reason for some optimism. The outlook is bleak, there’s no denying it, but we already see some light at the end of the tunnel.
We can take China as an example of the way forward. The country now seems to have to contain local transmissions. That’s within six months of the first cases of the virus being discovered there.
While China’s economy is bruised, it’s not out for the count. The country is slowly ramping up supply and starting to recover. The downside is that now it’s a delicate balancing act. The country was unable to meet demand previously due to the high infection rate.
The Chinese now face a situation where the demand for their products is lower due to the rest of the world entering a recessionary period. We’re likely to see many other countries following suit.
WHY DO WE FEEL THERE'S HOPE?
It’s clear that we’ll be living with this pandemic and its effects for a long time to come. China shows us that there is an end in sight. Countries around the world are realizing that it’s no longer business as usual. As a result, we’ll see many innovative solutions coming forward in the next few months.
It’s also become clear globally that relying primarily on one country for most of our manufacturing needs is a flawed policy. States are now looking for ways to actively promote the creation of new manufacturing facilities in alternative locations.
Businesses are looking at ways to repurpose their own plants and change operations to meet the challenges of the post-COVID-19 era. Companies will have to become more self-reliant and streamlined.
While it will be difficult at first, economies will recover and are bound to come out stronger in the end. No one can say when that recovery will happen, but there is cause for optimism.
*This article was first published on PolicyAdvice.net.
**Nikola Djurkovic is the former Editor in Chief at Carsurance.net and PolicyAdvice.net.