EU Commission presents a new Growth Plan for the Western Balkans to accelerate economic convergence with the EU

Why is the Commission proposing a new Growth Plan for the Western Balkans?

The European Commission strongly believes that enlargement remains a key policy of the European Union. EU membership for the Western Balkans is in the Union’s and its partners’ political, security and economic interest.

Russia’s war of aggression against Ukraine illustrates once again the need for a determined geostrategic investment in a peaceful, stable, strong and united Europe. The war has also had a significant impact on our Western Balkan partners, putting further pressure on their economies and societies and creating risks to their stability.

The need to bring them closer to the EU and to accelerate their accession process, based on EU-related reforms in the countries, has never been clearer than it is today. In parallel, our common  objective is  to redouble investments to significantly accelerate the growth of their economies and speed up their socio-economic convergence with the EU.

At the same time, it will help meet the aspirations of the region:a majority of Western Balkans citizens believe that their country’s membership of the EU would be a good thing.

What does the Growth Plan consist of?

The new Growth Plan for the Western Balkans is based on four pillars, aimed at:

1. Enhancing economic integration with the European Union’s single market, subject to the Western Balkans aligning with single market rules and opening the relevant sectors and areas to all their neighbours at the same time, in line with the Common Regional Market.
2. Boosting economic integration within the Western Balkans through the Common Regional Market, based on EU rules and standards.
3. Accelerating fundamental reforms, including on the fundamentals cluster, supporting the Western Balkans’ path towards EU membership, improving sustainable economic growth including through attracting foreign investments and strengthening regional stability.
4. Increasing financial assistance to support the reforms through a Reform and Growth Facility for the Western Balkans for the period 2024-2027, a new financing instrument worth €6 billion in non-repayable support and loan support, with payment conditioned on the Western Balkans’ partners fulfilling fundamental reforms, and in particular specific socio-economic reforms. In its proposal of the mid-term revision of the current Multiannual Financial Framework, the Commission proposed an additional €2 billion for the Western Balkans. A further €4 billion would be provided in the form of concessional loans under the new Facility.

Why is there a specific focus on economic growth and convergence?

Economic convergence is a significant benefit of EU membership. The positive impact on a country’s GDP and income levels resulting from integration with the EU’s single market, along with the EU’s Cohesion Policy, have been empirically evident in the past.

Therefore, economic convergence is an essential element in bringing the Western Balkans closer to the European Union. Presently, the pace and extent of convergence between the Western Balkan partners and the EU falls short of the expectations and is holding back their progress on the EU track.

Greater economic convergence requires investments in modernisation of the economies, as well as in infrastructure, for which additional financial assistance is needed. At the same time there is a need for some important changes. Strengthening the rule of law and fundamental rights are indispensable to advance on the EU path, but also to unleash the benefits of integration and to create a favourable environment to attract private investments, promote sustainable economic growth, and reduce pollution.

Building a modern, dynamic and decarbonised economy with improved employment opportunities will also reduce the incentive for outward migration. Therefore, it is crucial to speed up the Western Balkan partners’ progress toward EU membership by providing some of these benefits sooner, especially in ways that directly impact the people in those countries. The goal is to encourage the partners to make the necessary changes and investments to boost their economies and move closer to becoming EU members.

How will a country be able to access the EU’s single market?

Integration with the EU’s single market has been the main driver of economic growth for all countries that joined the EU. For countries on the path to EU accession, closer association with the EU’s single market would bring benefits that could be felt directly by their citizens.

Providing the Western Balkans with more opportunities for closer links to the EU’s single market once the necessary level of preparedness has been achieved is a key rationale of the Growth Plan.

As part of this Growth Plan, the Commission has identified seven initial priority areas, which the EU could offer to the Western Balkan countries. Such integration would deliver substantial economic benefits to the region and would ensure a broad level-playing field amongst enlargement countries. The seven initial priority areas are: 1) Free movement of goods, 2) free movement of services and workers, 3) access to the Single Euro Payments Area, 4) integrating Road transport, 5) integrating Energy markets, 6) digital Single Market, and 7) integration into industrial supply chains.

The offer under the seven priority areas is based on own merits and is subject to prior alignment on EUacquis in each specific area.

Within the Western Balkans extensive work on alignment with the acquis is already taking place in the context of the Common Regional Market. Completing the work for the Common Regional Market will be a necessary pre-condition for closer integration with the single market. Partners that are not fully committed to the Common Regional Market or impede the implementation of the Common Regional Market Action Plan cannot expect to benefit from the Growth Plan in terms of opportunities for single market integration. Importantly, no single Western Balkan partner will be able to block the other five from accessing the EU single market.

What do the 7 priority areas cover?

The offer includes actions under seven initial priority areas as follows:

1. Free movement of goods:

The offer includes:Agreements on conformity assessmentto unlock the single market for goods manufactured in the Western Balkans following alignment with the relevant horizontal EU productacquis;Improved Customs and Tax co-operationto streamline customs procedures and reduce waiting times at borders. Reducing waiting times by three hours is the equivalent of a 2% reduction in tariffs; and Promoting the participation of all Western Balkans partners intheConvention on Common Transit.

2. Free movement of services and workers:

The offer includes closer integration with the single market for those services where a regional agreement has been negotiated, but not yet adopted under the Common Regional Market. This includese-commercerelated services such as parcel delivery services andtourism services. We will also build on the four ground-breaking “mobility agreements” agreed in context of the Common Regional Market with a focus onRecognition of skills and qualificationsbetween the EU and the Western Balkans, including professional qualifications. These include the Recognition of Professional Qualifications of Doctors of Medicine, Doctors of Dental Medicine and Architects in the CEFTA context; Recognition of Higher Education Qualifications; Mutual Recognition of Professional Qualifications for Nurses, Veterinary Surgeons, Pharmacists and Midwives; and Freedom of Movement with Identify Cards in the Western Balkans.

3. Access to the Single Euro Payments Area (SEPA):

Reducing the cost of cross border payments to the benefit of consumers and businesses will act as a boost to cross-border commerce. The European Commission will continue to support the Western Balkan partners on their work within the Common Regional Market to put in place national legislation required by the European Payments Council for participation in SEPA.

4. Facilitation of Road transport:

The offer includes support to Western Balkan partners to integrate their road transport in the region on the basis of the adoption of the relevant EUacquisand in parallel work towards granting access of the Western Balkan partners to the relevant EU information systems (IMI, ERRU) and considering further facilitation of bilateral transport operations, through a separate agreement complementing the Stabilisation and Association Agreements between the EU and the Western Balkans.

5. Integration and de-carbonisation of Energy markets:

Here the offer is to build on the existing work within the Energy Community to integrate the electricity market in the region with that of the EU and to open the possibility for integration of other energy markets.

6. Digital Single Market:

The offer includes looking at extending the short-term benefits of the current voluntary agreement onreducing roaming chargesbetween the Western Balkans and the EU as well as putting the agreement on a firm legal footing. Similarly, at extending the agreement onunjustified geo-blockingbetween CEFTA countries to the EU once this agreement has been adopted. Trust services are an increasingly important element of the digital single market and the offer is to integrate the region intoEUtrust servicesonce national legislation is compliant with electronic identification, authentication and trust services (eIDAS). Strengtheningcybersecurity linksis another essential element and the European Commission proposes to associate the Western Balkan countries to the Cybersecurity pillar of the Digital Europe programme by envisaging as a first step their access to the Cybersecurity Reserve under the Cyber Solidarity Act.  Strengthening cross-borderinteroperabilityis the last element of this priority.

7. Integration into industrial supply chains:

Integration into European industrial supply trains could bring significant benefits to the Western Balkans. Our offer is, as a first step, to develop strategic partnerships on sustainable raw materials value chains (including batteries) and to develop strategic partnerships for the security of supply of critical medicines.

Why is the Common Regional Market an important part of the Growth Plan?

For the Western Balkans, the Common Regional Market is essential for two reasons. Firstly, because it is crucial to unlock the economic potential of the region, create opportunities for domestic firms and workers alike and to make the Western Balkans a more attractive place for European investors. The Word Bank Group estimated that the Common Regional Market could increase by 10% to GDP of the region.

Secondly, because the Common Regional Market is based on the adoption and implementation of EU rules and standards. It therefore acts as a stepping-stone towards the EU’s single market in many sectors, and as a mechanism for making progress in the accession negotiations while reaping early economic benefits. Closer economic integration with the EU goes hand in hand with building a Common Regional Market.

The EU will provide substantial opportunities for integration in the EU’s single market only if the region delivers on regional economic integration.

Therefore, as part of this Growth Plan, the Western Balkan countries areinvited to re-commit to the full implementation of the Common Regional Market Action Plan.

How much money will be made available? What are the main components?

The proposed facility would provide financial support of up to €6 billionin current prices for the period 2024-2027, combining €2 billion in the form ofnon-repayable grantsand €4 billion in concessionalloansprovided by the EU. The grants would be financed by a top-up of the Multiannual Financial Framework, as proposed by the Commission in the context of themid-term revision of the current MFF.

The support will be provided through:

• loans disbursed directly to the national budgets of the Western Balkan partners. €3 billion will be made available as direct support to the beneficiaries to accelerate growth based on key socio-economic reforms, and
• the support for mature infrastructure investments identified through the Western Balkans Investment Framework (WBIF). €3 billion (of which €2 billion of grants and €1 billion in loans) will be allocated through the WBIF for targeted investments in transport, energy, digital, education and skills development. At least, 37% of the non repayable financial support channelled through the WBIF should contribute to climate objectives.

Payments will occur twice a year, conditional to the achievement of socio-economic reforms, coupled with fundamental reforms, including in the rule of law.

Why a new financing instrument when IPA and the Economic and Investment Plans already exist? How is the facility different from IPA and EIP?

The Facility will serve as the centrepiece of the Growth Plan, significantly increasing financial assistance based on an ambitious reform agenda focusing on necessary socio-economic reforms coupled with fundamental reforms, including on the rule of law and fundamental rights.

It will introduce strong conditionality by establishing a payment mechanism based on achievements of key reforms taking into account recommendations from the latest Commission Enlargement Package and the Economic Reform Programmes.

Such an approach requires an entirely new design, different from the currently available external assistance instruments. This type of extensive ex-ante conditionality and proposed construction is not possible under the existing Instrument for Pre-accession Assistance (IPA III), which operates with thematic allocations and no longer country allocations.

Payment conditions will also be complementary to and mutually reinforcing with the current financial assistance under IPA III as well as in particular to address legal and administrative obstacles to cross border cooperation with Interreg cooperation programmes under the EU’s Cohesion Policy involving the Western Balkans.

The financial impact of the facility, combined with the funds still available under IPA III for the remainder of the MFF 2021-2027, will provide the Western Balkans with roughly the same aid intensity per inhabitant as cohesion policy does on average in the EU. Such an unprecedented budget reinforcement would respond to the growing calls from the region for stronger socio-economic convergence; it would also reinforce the message to the region that the benefits of closer integration with the EU can be felt in advance of accession. The longer-term objective is to help the region to achieve its full potential in terms of economic and social development capacity compared to EU Member States by 2030.

Will the Growth Plan also focus on fundamental reforms?

Yes. Experience from successive rounds of enlargement has shown that closer integration with the EU’s single market and targeted financial support are not sufficient to achieving accelerated socio-economic convergence. Sustainable success requires comprehensive reforms, including in the fundamentals cluster. They are essential for candidate countries to move ahead towards EU membership, and for their economies to cope with the competitive pressure of the single market, and to build competitive and sustainable businesses to attract private investment. Moreover, accelerating fundamental reforms will also have a positive impact on the pace at which countries move along their EU accession path.

What will be new about the reform agenda and how will you assess progress?

As part of this Growth Plan, every Western Balkan partner will be invited to prepare a Reform Agenda based on existing recommendations including from the annual Enlargement Package and the conclusions of the Economic and Financial Dialogue, based on the countries’ Economic Reform Programmes (ERP). The Agenda will be consulted with, assessed and adopted by the Commission.

The Reform Agenda will identify a limited set of priority reforms and related investments broken down into qualitative and quantitative steps which will serve as payment conditions. This means that achieving these payment conditions will trigger the release of funds under the new Reform and Growth Facility according to a pre-determined timeline. Payment conditions will be linked to specific socio-economic reforms to unlock national and regional growth potential, and to specific reforms related to fundamentals of the enlargement process, including the rule of law, democracy, the respect of human rights and fundamental freedoms. Macro-financial stability, sound public financial management, transparency and oversight of the budget are general payment conditions that have to be fulfilled for any release of funds.

Another pre-condition should be that Serbia and Kosovo engage constructively in the normalisation of their relations with a view to fully implementing all their respective obligations stemming from the Agreement on the Path to Normalisation and its Implementation Annex and all past Dialogue Agreements and engage in negotiations on the Comprehensive Agreement on normalisation of relations.

The Reform Agenda will be a key driver of the Growth Plan: fulfilling it will create the necessary preconditions to take up and fully benefit from the available single market opportunities, to trigger disbursements under the new Reform and Growth Facility and, at the same time, bring the countries closer to fulfilling the criteria for EU membership.

When do you expect the funds to become available?

The Commission wants to see the funding becoming available as soon as possible in the course of 2024. This will require the rapid adoption of the proposal by the co-legislators: the Council and the Parliament. In parallel, our Western Balkans partners will need to prepare their reform agendas. If both of these are achieved in the early next year, the Commission will be able to assess progress on the reforms and initiate the first disbursements under the facility by the middle of 2024.

How much funds will each country get? What are the criteria for the allocation?

The key innovation underlying this instrument lies in the principle that financial disbursements are contingent upon the successful implementation of specific reforms by the recipient countries. While an indicative allocation will be calculated from the onset based on the population and the GDP per capita of the beneficiaries, the Reform and Growth Facility will operate on a results-based system.

This means that a country’s eligibility to receive funding is intrinsically linked to its demonstrated commitment to and progress in implementing the agreed reforms.

How will the EU monitor the use of funds?

The European Commission will use prior assessments on the quality and appropriateness of the audit and control systems of the Beneficiaries. If there are important reform needs, the European Commission will demand from the Beneficiary to include related measures in the Reform Agendas.

The Reform Agendas shall prioritise in the first years of their implementation reforms related to public finance management and internal control, the fight against fraud and when it comes to justice, corruption, organised crime and State aid control.

In any event, the European Commission will reserve a right to carry out systems audits, including on the functioning of the national budgets.

In addition, channelling funds for investments through the WBIF will provide additional reassurance against fiduciary risks. The WBIF offers a well-established cooperation platform with implementing partners that dispose of sound control systems and due diligence processes.

What happens if reforms are not achieved?

It is important to guarantee both flexibility and programmability in providing Union support to the Western Balkans. For this, funds under the Facility should be released according to a fixed semi-annual schedule, based on a request for the release of funds submitted by the beneficiaries and following the verification by the Commission of the satisfactory fulfilment of both the general conditions related to macro-financial assistance, sound public financial management, transparency and the oversight of the budget and the relevant payment conditions.

When a payment condition is not fulfilled in accordance with the indicative timeline foreseen in the Reform Agenda, the Commission could withhold part or the entire funds corresponding to that condition.

Beneficiaries will have 1-2 years to fulfill the conditions, otherwise the amount will be redistributed among the other ones in the subsequent years.

Why is the EU not considering to open single market for WB workers before accession?

Free movement of workers is negotiated and gradually implemented as part of the accession negotiations with candidate countries.

The Growth Plan contains measures that will, once the necessary conditions are met, facilitate workers from the Western Balkans to find work in the European Union, as a stepping-stone to the free movement of workers once a country is a Member State.