Worry but also Relief among Greece's Neighbors

July 6, 2015 2:00 PM

The rapidly escalating financial troubles that Greece faces worry its neighbors for three main reasons. First, Greek banks account for a significant share of corporate lending in Albania, Bulgaria, Cyprus, Macedonia, Romania, and Serbia. A collapse of the Greek banking system will have repercussions on the long-term viability of subsidiaries and branches abroad. The experience of Ireland in 2010–11 shows that these may be put up for sale quickly so that the mother companies can shore up their domestic market. Second, Greece is a significant trading partner for other Balkan countries, accounting for between 4 and 8 percent of their overall exports. The temporary closure of Greek banks has already reduced trade across the region, and prolonged uncertainty will cause permanent damage. And third, the increased attention to this part of the world raises other, somewhat neglected questions of economic sustainability.

Along with these worries, however, is a feeling of relief—relief that after more than five years of constant focus on Greece's problems, Europe is sick and tired of being played by successive Greek governments and will now turn its attention to other pressing problems in the region.

Such problems abound, not surprising for a part of Europe that is trying to catch up in terms of productivity and living standards. The main problem, however, is sagging economic growth in the years following the start of the euro area crisis. In the years before the crisis, all countries in Southeastern Europe rapidly integrated their trade with Western Europe, whose large markets provided plentiful export opportunities. West European banks also became an important source of corporate financing in the region, which fueled domestic growth, particularly in the construction, tourism, agriculture, and services sectors. With the advent of the euro area crisis, growth stalled and has not recovered to precrisis levels.

The lack of economic prospects has led to an outflow of young people to Western Europe. The numbers are startling: Every fourth high school student from Bulgaria and Cyprus and every fifth student from Romania leaves their respective country upon graduation. Statistics from Albania, Macedonia, and Serbia are less accurate as these countries have yet to join the European Union and many young people leave on tourist visas. Yet the outflow patterns are similar: Last month Hungary's Prime Minister Viktor Orban enraged European politicians by announcing the construction of a 200-mile wall along the border with Serbia to keep immigrants out.

The European Union has been slow to respond to the region's concerns. The European Commission has recently come up with a plan—the so-called Juncker plan—which calls for massive investment in infrastructure and technology as a way to increase economic growth across Europe. This plan may be particularly well-suited for Southeastern Europe. Details are sketchy, however, and the first project has yet to be approved. Understandably, political leaders from the region point to the excessive—in their view—attention to Greece and ask that some of this attention be diverted to their countries. Their patience may be finally rewarded.