A Customs Union for the Balkans

The fall of Milosevic does not cure the political woes of the Balkans; indeed, it raises their urgency. Yugoslavia has disintegrated, but the disintegration is incomplete. It was in Yugoslavia that Vojislav Kostunica was elected president, but his mandate comes solely from support in Serbia. Montenegro, Serbia’s junior partner in the Yugoslav federation, mostly boycotted the election while Albanians in Kosovo ignored them.

Yet it was Yugoslavia, whose foundations are unstable, that was recently admitted to the UN. A host of problems remain unresolved: relations between Serbia and Montenegro and the status of Kosovo (not to mention Serbia’s northern province of Vojvodina). Any resolution – any suggestion of change – will engender new conflicts because of conflicting claims of sovereignty.

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However tempting it may be to solve the puzzle by drawing new borders or establishing new entities, this conundrum cannot be resolved in terms of sovereignty. That traditional solution would only perpetuate the problems of the Balkans. A new approach is needed: the European Union should use the prospect of European integration as the way to promote regional integration.

The EU could act as a magnet to bring the region closer together by bringing the region as a whole closer to Europe. This idea has great appeal to people in the region, but only the EU can make it happen. After NATO intervention in Kosovo, European leaders made this approach the cornerstone of their vision for the Balkans. It was enshrined in the Stability Pact signed at the Sarajevo Summit of July, 1999.

But the Stability Pact is merely a shell – it needs to be filled with content. The time to do so is at the Zagreb Conference on November 24 called by France as the current EU president. The European Union should now propose a three-point plan for the Balkans:

$ a customs union with preferential access to EU markets within one year. The existing EU-Turkey customs union should be used as a model. Once all these countries reach agreement with the EU there would automatically be free trade throughout the Balkans. This will take some time to implement. But from the start, the EU should give a signal by unilaterally opening its border to imports from the region. This cannot endanger any EU interests as the countries at issue now have far less than 1% of the EU market.

$ a regional VAT to replace the lost customs revenues should be established within two years. Differences in indirect taxes such as VAT pose another way in which borders become obstacles to trade. They should be unified throughout the region. Regional VAT rates might be increased slightly if expenditure restraint is not sufficient to offset the loss of tariff revenues due to the customs union.

$ Temporary budgetary support on a declining scale for three years, subject to EU supervision over budgetary expenditures. Because it will take time to collect revenues from the regional VAT, the EU should provide financial help during the transition.

The area covered by this plan would include Bulgaria, Croatia and Albania as well as Serbia, Bosnia, Macedonia, Montenegro and Kosovo. Participation by Romania and Moldova is optional. Bulgaria and Croatia could be persuaded to participate provided it would not interfere with their candidacy for EU membership. Depending on the country, there could be more or less budgetary support. (Bulgaria, for example, might not need compensation since to a great extent it has already eliminated tariffs).

In comparison to the cost of military intervention and peacekeeping, the financial costs here are ridiculously low. I estimate that Euro 750 million in the first year, Euro 500 million in the second year and Euro 250 million in the third year would do the trick. (If Romania and Moldova were included the figures would be slightly higher). These figures are well within range of pledges already made by the EU for the Stability Pact and they could be easily accommodated within the confines of the Berlin Accord on the EU budget for 2000-2005 if EU member states agree to a reallocation of unspent funds. Budgetary support in the context of a Customs Union would be a more effective way to disburse EU funds than conventional methods.

This three-point program would lay the ground for economic resurgence. It would remove two major sources of corruption and inefficiency: the customs service and the misuse of public funds in general. It would create a trade area large enough to generate both local and foreign investment. The Deutsche Mark, already widely used in the region, now functions as the de facto common currency. Any ban on its use should be lifted to make borders irrelevant for trade and investment.

Improved economic prospects and the strengthening of institutions, in turn, would have a positive impact on the political climate throughout the Balkans.

Serbia has climbed part of the way out of the abyss. Success in peacefully removing a tyrant has set in motion a process of national renewal. But that process has a long way to go. The opposition inherited a bankrupt country whose institutions are in ruins. The population, frustrated by ever deepening impoverishment and isolation, is beginning to question what happened over the past decade in Serbia. People are asking about crimes committed by the Milosevic regime against Serbs. They must begin to come to terms with the crimes committed against others - in Croatia, Bosnia and Kosovo. Once that process is underway, many problems that now seem intractable will be resolved more easily.

Kostunica’s election as President of Yugoslavia amounts to an incomplete revolution: many of the old guard are still in place. The momentum created by Milosevic’s overthrow needs to be maintained. Milosevic was overthrown in the hope of ending Serbia’s isolation. Europe must now fulfill its promise. If the French Presidency fails to seize the moment in Zagreb, an historic opportunity will be lost.