Is there room in the European Union for Montenegro?

Montenegro shunned Serbia in June 2006, but it wants to be considered part of Europe as a country in its own right. Is it ready for the EU? And is the EU ready for another intake, given all the turmoil it is going through with Greece and other countries’ budget deficits?

Montenegro is a member of: the United Nations and has been since 2006, the European Bank for Reconstruction and Development (EBRD), the European Investment Bank, and the International Monetary Fund (IMF) and World Bank since Jan 2007. So it already has some big international connections.

Indeed the EU has already provided over €2bn to Montenegro and Serbia since 2000. Investment has gone into airports at Podgorica and Tivat, as well as railways, highways and waterways. And now it aspires to be part of the EU.

So is it ready for the EU?
This small nation with a big coastline, experienced robust growth of about 8% up until 2008, but the credit crunch was felt and a contraction in economic activity took place. So what are the prospects for this small country?

Historically, Foreign Direct Investment focused on the tourism and financial sectors, triggering a cycle of wealth effects. As property became more valuable, so it was used as an asset against which to secure loans, which in turn funded construction activities.

The resultant rapid credit growth compromised the quality of the banks’ portfolios; property prices soared beyond fundamentals; private sector debt swelled; a large output gap has emerged and the current account deficit grew. A story, not too unfamiliar around the world.

However the government reacted swiftly to its country’s situation, with a mid-year review of the state budget and similar adjustments locally, driving significant cuts in capital expenditure. In their three-year budget plan, the authorities envisage the phasing out the deficit by 2012, but the detail of how this will be achieved, are yet to be elaborated on.
From 2011, the economy could enjoy a more vigorous recovery and participate in the projected global upswing. Though still short of what was seen in the boom, IMF projects medium-term growth to rebound to 4% per year.

However there is interest in electricity generation and infrastructure projects, from overseas investors, with substantial upside, reflecting Montenegro’s untapped potential and small size. Even a handful of projects could turn around economic conditions very rapidly.

The Government is looking to establish a business friendly, open economy with low taxes and minimal state interference and to integrate the country. Last year Montenegro applied for EU candidate status and recently submitted answers to questions of conformity.

And is the EU ready for Montenegro?
Progress in Montenegro’s EU candidacy will be important. And in the context of the Eurozone, Montenegro will need to further strengthen the banking system, and follow through on growth-enhancing structural reforms, especially in the labour markets. The government looks set to do this, but there may be a bit too much reliance on imbalances self-correcting in a favourable economic environment.

Montenegro has demonstrated mettle in tackling the economic slowdown and its appetite for reform, in order to make it more successful. These are all important attributes to be considered for entry into the EU. It is hoping to rub shoulders with a broader array of European neighbours and not forever be in the shadow of Serbia.

The question it will not have much control over, is whether the EU has the appetite for more members, given the fiasco with Greece. The European Union already digested 10 new countries in May 2004, bringing Eastern and Western Europe closer together. On January 1st 2007, Bulgaria and Romania joined. And don’t forget, Turkey is in the wings being considered as a candidate too.

So with the German Chancellor, Angela Merkel’s reticence to back the Union whole-heartedly, given the situation with Greece, will the Union go through a period of prolonged consolidation to ride through the storm, or continue to welcome with open arms?