11 Aug 2006

Reverse Balkanisation? Trade Integration in South-East Europe

David Kernohan

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Recent research from the World Bank and elsewhere suggests that openness to trade was a vital ingredient in the transition of the former Central and Eastern European Countries (CEECs) that joined the EU in May 2004. Current EU association agreements in South East Europe indicate that future enlargements may need to accommodate the remaining former Yugoslav Republics as well as the existing candidate countries. This paper examines persistent concerns that trade openness in South East Europe generally, and the former Yugoslav Republics in particular, is much less advanced than it was for the former CEECs in the mid to late 1990s. In particular we examine the issue of whether the present network of bilateral trade arrangements put in place under the Stability Pact has had much effect in boosting trade integration and whether trade within the region is currently at or below its potential. Given the small size of many of the countries in the region, we find that trade patterns remain problematic. In some cases they are smaller than might be expected but in several cases there is an overdependence on trade with old Yugoslav neighbours. In view of this, we consider that current plans to extend the Stability Pact matrix of bilateral trade agreements into a pan-regional trade association are likely to be inadequate. A better option, and one more likely to have a more immediate effect, would be to extend the present Customs Union with Turkey to include trade with the entire South East European zone of countries linked to the EU.