Keynote Address by Special Co-ordinator Erhard Busek
“South Eastern Europe: On its Way to Political and Economic Integration with the EU”

Your Excellencies, Ladies and Gentlemen

I am very grateful for the opportunity to address you today on the topic of South Eastern Europe’s increasing political and economic integration with the European Union.   I salute Euromoney’s ability to bring together such a high level and diverse group of representatives from government, banks, public sector, private sector, international financial institutions, journalists, economists and the odd politician such as myself.  This type of meeting provides a wonderful opportunity for the networking, information gathering and relationship building that is the lifeblood of any investment decision. And I firmly believe that, while political and economic challenges remain, South Eastern Europe is increasingly a good destination for investment.

I am not the only one to believe this. I recently met with President Lemierre of the EBRD who informed me that the Bank is actively strengthening its presence and involvement in the region in anticipation of rapidly growing opportunities for its financial products and services.   Yes, a re-orientation is to be expected in the face of the declining market in Central and Eastern Europe, but the level of expectation and optimism that I hear from the hard headed bankers at the EBRD shows that SEE is an increasingly attractive place to do business.

Experience of the transition process in Central and Eastern Europe has taught us that the prospect of EU and NATO membership, and the ever strengthening embrace of both as countries come closer and closer to actual membership, is the key driver of political and economic reforms which in turn stimulate economic growth.

Following the accession of Bulgaria and Romania to the EU earlier this year, it is obvious when you look at a map that the countries of South Eastern Europe are now, in the words of my good friend Ivan Vejvoda, “in the inner courtyard of the European Union”.   While it may take time and while the rate of progress will differ from country to country, I believe that EU Membership is - and should be - inevitable for the region.   At the end of the day, this will be to the benefit of all our citizens – politically, economically and security-wise.

Looking first at the political integration of SEE with the EU, all SEE countries have managed to catch the EU accession train – yes some booked well in advance while others jumped on at the last moment and are still finalising their ticket with the conductor, but all are on board and the train is moving.   Like the actual railway service in SEE, the speed can vary widely, there are often delays at border crossings and the paperwork can be daunting.  Sometimes the inability of the SEE parties to implement reforms has the same effect as the inexplicable insistence of some railways company to changing locomotives at the border – the process gets suspended for a while.

However, if one looks at the contractual process with the EU – considerable progress is obvious. Croatia is in actual negotiations and has just opened two more chapters, the former Yugoslav Republic of Macedonia has candidate status and is working hard to convince EU Member States that negotiations should start soon; Albania is implementing its Stabilisation and Association Agreement; the EU has just signed the SAA with Montenegro; Serbia has initialled its SAA and can move forward once it complies with its ICTY responsibilities, while Bosnia and Herzegovina has completed negotiations and will be able to initial, once its politicians agree on a small number of issues, namely police reform.

Therefore, while many challenges remain   - and I will come to these later - the legal and administrative ties between the EU and SEE are growing stronger day by day.

Economically the region continues to do well.   Indeed, the regional economic strategy that is gradually being put in place is contributing to investor and consumer confidence alike.  Macro-economic figures look good  - with the majority of countries expected to maintain GDP growth rates of between 5 and 6%.  There are many EU Members States who would like such rates!   Most countries have also contained inflation to single digits. Trade relations are closely intertwined with the EU, with more than two-thirds of the region’s trade involving EU partners.  Country credit ratings are improving, and this touches on sovereign and sub-sovereign risk.  As a result, inflows of Foreign Direct Investment (FDI) continue to rise – although these inflows demonstrate the influence of either proximity to EU membership or the impact of privatisation.  Croatia and the former Yugoslav Republic of Macedonia are among the top 10 reformers in the World Bank’s Doing Business Report for 2007 and Serbia topped this poll in 2006.  Anti-corruption measures are also bearing fruit as the SEE countries move further up Transparency International’s ratings in recognition of their efforts.

However the uneven distribution of FDI inflows presents the countries with clear challenges in securing more investment.   Continued and visible progress with their EU accession process is vital and, now that the privatisation wave is more or less over, attracting inflows of greenfield investment is key to maintaining the momentum.

SEE’s prospects of attracting investment – investment that will provide the capital, technology and management know-how needed to stimulate economic growth and provide jobs – have been strengthened by the implementation of the region’s collective strategy, which relies on several important regional co-operation processes.   These include:

• the Energy Community Treaty   - signed between the countries of the region and the EU;
• the European Common Aviation Area Agreement   - also signed with the EU;
• the identification of transport priorities based on the Trans European Corridors;
• enhanced co-operation on improving the regional investment climate through the newly established SEE Investment Committee; and
• the recent entry into force of the substantially revised Central and Eastern European Free Trade Agreement (CEFTA) in the region.

In some cases, these treaties or agreements, such as the Energy one, mean that SEE is, in effect, part of the EU’s internal market in specific sectors before membership – thus providing investors with a clear legal basis for investment decisions.   In other cases, such as CEFTA, the Parties have agreed to simplify and harmonise trade relations among themselves - all in line with their EU and WTO obligations, again providing a clearer and more familiar basis for business decisions.

A highly interesting feature of recent progress in regional co-operation is the fact that the countries of the region are moving increasingly into the driving seat and taking over the lead from the Stability Pact and other international actors. 

This ownership of regional processes is a crucial development, particularly when one recalls that the EU   - the desired destination of all the SEE parties - is in effect, a massive exercise in regional co-operation.  Therefore demonstrating the ability to co-operate with your neighbours is highly complementary to the overall EU accession process.   Thus, I think this “takeover” by the region is a very positive political signal.

In line with this “takeover” trend, the Stability Pact    - where many of the regional initiatives such as parliamentary co-operation, energy, trade, building human capital, and anti-corruption were born and nurtured - is in the process of handing over responsibility for monitoring and promoting regional co-operation processes to the newly created Regional Co-operation Council – the RCC.  The RCC, which will formally start work at the end of February 2008 will be based in Sarajevo and headed by Hido Biščević, the current State Secretary at the Croatian Ministry of Foreign Affairs. 

Whereas in the Stability Pact much of the leadership and management came from the international community, in the RCC it is the region that is in the lead.   This does not mean that the international community now walks away from the region; it means that the international community is less directional and moves to a more supportive and facilitative role. This team work between the region and the international community, in particular the EU, is vital for the challenging task of improving the economic, social and security climate in South Eastern Europe.  I have been very pleasantly surprised at the level of enthusiasm and commitment from the SEE Parties for this transition process, which is proceeding on schedule.

However, before you decide that I only look at the region through rose tinted spectacles, I am fully aware that we still face considerable political and economic challenges and that the future of the region is not yet 100% certain.   There are political challenges, economic challenges, social challenges and security challenges.

The most immediate and high profile challenge is the need to resolve the status of Kosovo swiftly and amicably.   The current situation creates considerable uncertainty for Serbia, for Kosovo, for the entire region, the EU and beyond. Managing the outcomes of whatever decisions are taken in the coming months peacefully and constructively will be a severe test for the nascent democracies in the region and for the EU.  This is a test we cannot afford to fail.

The Stability Pact is not directly involved in the status issue, however we have sought to exercise fully our mandate to integrate Kosovo as far as possible into the various regional co-operation processes that commenced under our auspices. In line with UNSC resolution 1244, UNMIK/Kosovo is a signatory to the energy community treaty, the European Common Aviation Area Agreement, CEFTA, the MoU on the Core Transport Network and is involved in the SEE Investment Committee, the Ohrid Border Process and other initiatives.    We have tried to ensure that there is no black hole in the region and that Kosovo’s economic development and regional links can make progress even in the absence of final status.  

The debate in the EU regarding the reform treaty and enlargement has had an impact on South Eastern Europe, where politicians struggle to justify often-painful reforms in terms of eventual EU membership. However it seems that we are making progress in this area now.

Preparatory work on a number of major energy projects is proceeding; and while the payoff is still in the future, it is positive that things are moving.    However, rising energy prices, lack of generation capacity, high levels of public debt and long lead times for infrastructure prices mean that, while the energy situation has improved in SEE it is far from ideal and many countries face the prospect of shortages and power cuts this winter.   This will create many economic and social difficulties.  

Corruption, while decreasing as reflected in the Transparency International poll, is still distressingly high and many potential investors are still sceptical regarding the ability of the courts to consistently apply the rule of law. 

The level of economic growth is still not sufficient to make a substantial inroad into the high level of unemployment and the resulting brain drain has serious implications for the future.   The Stability Pact’s work to begin to address the region’s human capital needs and labour market competitiveness is a start in this area, one that the Regional Co-operation Council will need to continue and intensify.

In conclusion, I believe that that the comprehensive political and economic framework that is gradually being put into place in South Eastern Europe provides a good basis for us to work together to overcome these challenges.   Many of which are normal parts of the transition process to democratic societies and a market economy.    The SEE countries have signed up to a range of ambitious reforms and, on the whole, are making considerable efforts to meet their obligations.  They need political, technical and financial support from the international community, but their increasing willingness to assume full responsibility for implementation is a substantial and most positive development that augurs well for the region’s political and economic integration with the EU.

Thank you.