A Relationship in Crisis

It is hard to imagine Kosovo’s development without the EU, but its lack of vision to address Kosovo’s most pressing issues is becoming dangerous and counterproductive.

Importers of EU products to Kosovo are happy. The Stabilization and Association Agreement, SAA, between Kosovo and the EU came into force in 2016. The free trade part of the agreement will liberalize the market between Kosovo and the EU in the next eight years. EU products will be 10 per cent cheaper due to the removal of customs duties on most products (save for some dairy products, potatoes and pears), so they will beat their similarly priced competitors, including a handful of local producers.

Producers and exporters of Kosovo products into the EU are not so happy. For years Kosovo has been enjoying duty free access to the EU market, thanks to the one-sided EU trade measures applied toward Western Balkan countries. Still, Kosovo could not export much, due to low production capacities and quality standards. In 2016, total exports from Kosovo to the EU were 73 million euros, compared to, say, 3.8 billion euros from Bosnia and Herzegovina. Unless there is a major injection of cash and technological transfers into Kosovo producers to allow for serious improvements of production lines, the SAA alone will not have a big effect on exports.

Illustration by Jeta Dobranja/Trembelat.

Illustration by Jeta Dobranja/Trembelat.

The Ministry of Finance, MoF, is also unhappy. As Kosovo’s economy is mainly based on imports, the budget is largely collected at the border through customs tax. The removal of customs duties from EU products will take its toll on the budget. In an internal document, the MoF estimated that the SAA will shave close to 500 million euros off the Kosovo budget by 2024. In addition, it will cost hundreds of millions of additional euros to implement the provisions of the free trade agreement. Overall, the SAA will cost Kosovo’s budget close to a billion euros in the next decade or so, without ensuring equal return in economic development.

The SAA is not only a trade agreement. As a tool used by the EU to prepare the Western Balkan countries for possible future enlargement, it has a political dimension too. It demands that Kosovo makes reforms in rule of law, public administration, and aligns some legislation to the acquis – similar to other countries in the region. Unique to Kosovo is the anchoring of the SAA on the Kosovo-Serbia dialogue. If Kosovo does not implement the agreements reached with Serbia – which it will most likely not be able to do considering that some are not in line with Kosovo’s constitution – the EU may actually suspend the SAA (see article 5 and 13).

As it currently stands, the SAA is the end of Kosovo’s road toward the EU.

Kosovo is also unique in that it cannot apply for EU membership, since five of its member states do not recognize the country’s statehood. As a result, EU institutions treat Kosovo as a non-state entity, and while the EU can sign trade agreements with non-state entities (see Taiwan and Palestine), there are no provisions in EU law to allow non-state entities to join the EU. As it currently stands, the SAA is the end of Kosovo’s road toward the EU.

It is no surprise that Kosovo citizens are not so excited about the SAA. They are more concerned about being able to travel to the EU visa-free, like the citizens of the neighbouring countries, which does not seem likely anytime soon.

The EU and the Kosovo government, however, want citizens to be excited. Neither party can offer more than the SAA, so they want it to look like the shining prize. And what they cannot offer in substance they will make up with advertising campaigns.

Since last year, the Ministry of European Integration, MEI, the EU, and other donors are engaging in ‘awareness raising campaigns’ that hire good designers and filmmakers to advertise the SAA to Kosovo citizens. With short clips, billboards, flyers and TV/radio ads, they are hoping to convince the Kosovo citizen, voter, consumer, and student that the SAA will truly benefit them.

But in order to make the SAA look good, they had to enhance its benefits quite a bit. One flyer by the Ministry of European Integration – financed by the German Cooperation, GIZ – states that the SAA is “the most important legal and political agreement which creates the legal basis toward EU integration.” This is simply not true. The SAA does demand that countries harmonize some legislation with the EU, but it does not provide the legal base for accession.

EU officials know this. They also know how weak EU soft power is when they do not have leverage over a country. And to have leverage they have to either be able to give countries something they want (visa liberalization, EU accession) or give the impression that they do. In the case of Kosovo they decided, in addition to the advertising campaigns, to keep appearances through the European Reform Agenda, ERA – a “high level dialogue” between Kosovo and the EU, focusing on “prioritizing priorities,” as EU officials like to say.

ERA identifies Kosovo’s economic problems really well. However, the measures it prioritizes to address those problems are weak. Here is how they define the problems with competitiveness and investment climate:

Kosovo is a small, consumption-driven economy dominated by the service sector, limited international integration and high dependency on donor assistance and remittances. The trade deficit is very high (2.3 billion EUR in 2015) reflecting a narrow and still uncompetitive production base…Among the key challenges for Kosovo are the need to raise its production base, develop export capacities and close the competitiveness gap…”

Kosovo needs a radical approach to its economy, with all efforts focusing on expanding the production base and developing export capacities.

From this it would follow that Kosovo needs a radical approach to its economy, with all efforts focusing on expanding the production base and developing export capacities. This would require a serious investment fund that would give grants to exporting businesses – or those with the potential to export – to enhance their production facilities and meet EU quality standards. This was also suggested to the EU officials drafting the ERA during the civil society consultation.

They however rejected this idea and kept ERA’s focus on other measures, such as strengthening the capacity of the Kosovo Investment Enterprise Agency, focusing on improving the World Bank ‘Doing Business’ indicators, or helping Kosovo’s businesses access loans through participating in the EU’s programs (for detailed planned actions see here). While these measures will have some effect on Kosovo’s economy, the effect will most likely be very marginal.

ERA is only one of many documents produced jointly by the EU and Kosovo that has the status of a priority strategic document: the National Program for Implementation of the SAA, the Economic Reform Program 2015, the National Development Strategy, and close to one hundred sector strategies for each line ministry. While all these documents have some overlap, they most certainly pull the government – and the budget – in different directions. With this head-spinning list of priorities everywhere, and the ever-limited budget, what is the government to focus on?

It is hard to imagine Kosovo’s socio-economic and political development without the EU. Yet this lack of vision for how to address Kosovo’s status question, this insistence on an unconstructive dialogue with Serbia, the refusal to break the isolation of its citizens, the tinkering on the edges of economic policies but not really pushing for real development – all this is becoming counterproductive and dangerous. In the best case, this will maintain Kosovo’s status quo. In the worst case this will push Kosovo further into a crisis that nobody should want.

read more: