zimfan93

Heeeellloo world.Today after some days from the match Albania – Serbia and their conflict I wanted to search and write about on how EU accession of 2004 and 2007 enlargement countries impacted the inflow of FDI in their respective countries.What has been the impact of euro-zone crisis in South East Europe and Western Balkans with a more detailed insight on Albania. I thought of writing about this because I wanted to see the road of Albania towards EU and this somehow creates an image. As always thank you for reading.

OUTLINE

1. Introduction
2. The expansion
   1. Process of entering the European Union
   2. 2004-2007 Expansion

• Foreign Direct Investment
  1. Description of Foreign Direct Investment
  2. Foreign Direct Investments in EU25 (For the 12 countries)

1. The Euro-zone Crisis
   1. Overview of the crisis
   2. The effect of the crisis in South Eastern Europe/Western Balkans
   3. The effect of the crisis in Albania
2. Conclusion

The European Union with a unified currency and organization has always been a target for most of the countries in the European region. First by being a member and then by being part of the European Monetary Union, the countries have been under development, but have also faced difficulties. The European Union has always been under constant changes on both the economical and political side. Joining the European Union and the European Monetary Union has shown that it can make countries grow and maintain a sustainable political, social and economical situation through trade and relationship between the member countries. From expansions to economical difficulties, the countries in the Union have had their ups and downs. In this paper, we discuss about the expansion of 2004-2007 by the entrance of 12 new countries in the Union and the effect that this entrance brought to the inward Foreign Direct Investments as a positive situation. On the down side, we have the famous Euro-zone crisis which affected all Europe and especially the South Eastern side, the Western Balkans and moreover Albania. From the analysis, we find out that the accession of the 12 countries in 2004-2007 was highly positive about the inward FDI in those countries. Additionally, we find out that, no matter the benefits of the EU membership and the pattern that the FDI followed, the crisis that came with that was demolishing regarding numbers of GDP and poverty, especially for the countries of the South Eastern Europe and the Western Balkans, and slightly for Albania.

After knowing the benefits after it, joining the European Union has been a challenging issue for most of the countries in the European Region. As stated officially by the entities of the European Union, three are the categories in which the countries wanting to join should be perfectionized:

• “stable institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities;
• a functioning market economy and the capacity to cope with competition and market forces in the EU;
• The ability to take on and implement effectively the obligations of membership, including adherence to the aims of political, economic and monetary union” (“europa.eu”, 2014).

During the discussions, there are criteria that are negotiable and there are others that are fixed and the candidate country cannot do anything about it. Negotiable are the criteria regarding the time in which the candidate chooses to implement the rules, known as “acquis”. Each of the categories of the “acquis” is treated separately to decide the conditions. This way, countries that join will have a unified comparable system that will make it easier to enter and operate within the Union. For the countries that joined in 2004 and 2007, the process dated at least four years prior to the accession. Here we discuss the procedure of each country individually:

1. BULGARIA

First Effort: 1997. Signing of treaty: 2005

1. ROMANIA

First Effort: 1997. Signing of treaty: 2005

• CYPRUS

First Effort: 1998. Signing of treaty: 2003

1. HUNGARY

First Effort: 1997. Signing of treaty: 2003

1. SLOVENIA

First Effort: 1997. Signing of treaty: 2005

1. SLOVAKIA

First Effort: 1998. Signing of treaty: 2003

• MALTA

First Effort: 1999. Signing of treaty: 2003

• LATVIA

First Effort: 1997. Signing of treaty: 2003

1. LITHUANIA

First Effort: 1997. Signing of treaty: 2003

1. CZECH REPUBLIC

First Effort: 1997. Signing of treaty: 2003

1. POLAND

First Effort: 1997. Signing of treaty: 2003

• ESTONIA

First Effort: 1997. Signing of treaty: 2003

Economically, the benefits of joining the European Union with EMU have shown to overpass the benefits of not joining (later on seen in the FDI perspective). “EU membership has two important implications regarding FDIs. First, it allows countries that have small domestic markets to expand their market and to attract European funds for investments. Second, membership suggests political, economic and legal stability” (Radulescu, n.d). This fact was the one driving the ten countries in 2004 and two countries in 2007 to finally fulfill all the requirements and enter the Union.

As a definition, we consider as Foreign Direct investments, the ones that are deriving from one country to be physically present in another one. They might come as buildings and machinery or even as stocks and complete acquisition of a firm. The Foreign Direct Investments are strongly considered as a direct way of development in both economic and social perspective. Therefore, there are certain rules that are unified in order for the development to be more efficient and more possible. This way, risk and uncertainty will be reduced to bring a stabilized situation. The FDI’s have the tendency of increasing the cash inflow, making the currency more stable and increasing profitability. Easily noticeable effects that derive from Foreign Direct Investments are linked with both inputs and production, increasing the levels above the previous results.

Back in 2003, it was widely expected that, after 2004, FDI flow to Central Europe would go up sharply, at least for a number of years, and this despite the drying-up of privatization projects. As a trend, this is what happened with the twelve accessed countries. Because they were unified in a single currency, these countries faced decrease and elimination of exchange rate risks, followed by a further increase in FDIs. “The gravity model estimation finds that the introduction of the euro and EU membership (2004, 2007) leads to higher FDI activity among the euro area and EU members. The effect is more pronounced in the case of countries that joined the EU in 2007, with an increase in FDI inflow of more than 100% between 2007 and 2010” (“europa.eu”, 2014). More noticeably than the others, countries like the Czech Republic and Poland seem to be rated top when talking about the attractiveness they offer to the Foreign direct Investments. Europa.eu explained that “FDI contributed to a certain extent to regional imbalances, favoring the most developed areas in the given countries. Certainly, the quality of infrastructure and labor force were here better than elsewhere, being important location factors for foreign investors”. As shown also by the graph, thankfully there is an immediate positive effect of the accession when speaking economically. The FDI’s generally grew during the time period, which might have caused also the increase in the European Union.

The figure here shows the pattern that the FDIs followed in the new Member countries from the moment they joined and later on.

Efstathiou (2011) explained that “the flows of FDI into the under accession economies promoted growth, technical innovation, helped to restructure the domestic enterprises, which was very crucial to the process and supplied the economies with capital”. His description was completed by mentioning that the quality of the standards and techniques were favorably affected, making it possible for the countries to benefit as much as possible.

Knowing the general idea that we explained above, we can now come down to a trend. Kalotay (2010) explains that “over the period 1992–2008 the FDI inflows of economies in transition had maintained a strong upward trend” adding that the “new EU members still accounted for almost half (49% of the group’s cumulative total of close to $ 1 trillion over the period 1992–2009”. This way, we see that we have a trend that implies that the FDI after the accession in the EU increased positively by giving the same effect to those countries’ capital. Also, the trend suggests that the countries which accessed the EU in 2004 and 2007 have to adopt and adapt new structures regarding their macroeconomic features. Estonia, Latvia, Lithuania and Poland showed a certain trend towards the Baltic countries, making the region more attractive towards the inward Foreign Direct Investments. The country that reflected the benefits more was Poland. Overall, it is not doubt that the accession of Poland to the EU in 2004 has created an opportunity to speed up the rate of economic growth by improving living standards of citizens. It involved all sectors of polish economy, changed public policy, environment of many firms, and position of single consumers. It opened the market thirdly times larger then Poland’s GDP for polish producers of goods and services. It gave the Poles the opportunities to take up jobs nearly all around the Europe on the conditions of non – discrimination. As for the Czech Republic, the region became an attractive opportunity for the automotive industry, whereas the Greenfield automotive plants were mostly thought of being developed by FDI in Slovakia. This way, the trend suggests that the FDIs did increase in number but they had a certain pattern for certain countries.

Along with the improvements that the Foreign Direct Investments brought, came a crisis later on in 2008-2009 known as the Euro zone crisis related to some banks that were finding difficulties in their financing. The causes to the crisis were the major three described as:

1. One-size-fits-all monetary policy

Since the implementation of the single currency in 1999 by the first 11 members, the power to decide was given to the European Central Bank. Because the bank was one for all the countries of the EMU, it set unified standards. Harari (2014) also adds that “by giving up an independent monetary policy and currency, countries with high debt burdens were not able to use certain measures to respond to the crisis that countries outside the euro could use”.

2. Misplaced confidence and assessment of risks

Even though the European Union brought unification, it did however damage itself by doing so. Considering countries as all the same due to their presence in the European Union and the EMU, the Union failed to strictly predict the default risk, therefore set a proper standard of interest rates for those countries.

3. Economic divergence and trade imbalances

In the year 2000, many countries were struggling to join the EU or the EMU, and the growing pattern was unique for each (from inflow of FDI to trade balance). Due to the fact that some countries were not self sufficient and had to import, the funding to that would be enormous. However, there was always the question of either the country could pay the debt back, knowing that it was not operating under normal circumstances. Because of these factors, trade deficit followed up with the later on crisis of 2008.

To get more into details, we focus now in the South Eastern region of Europe, also considered as the Western Balkans because of their geographic position. Also, some of the countries in the region are not part of the European Union which makes it difficult to have a fair comparison. The western Balkans is composed by Greece, Bulgaria, Albania, Republic of Macedonia, Kosovo, Serbia, Montenegro, and Bosnia and Herzegovina. The impact of the crisis on the Western Balkan countries came in two waves. The first wave was the period 2008-2011, when the region was exposed to the full brunt of the global economic crisis. By the end of 2011, however, just as some level of stabilization had been achieved and GDP was on the upswing again, the second wave came, when the full scale and depth of Greek sovereign debt crisis was revealed and the drama unfolded on a European level (RSCAS, 2012). The countries of this region faced devastating fiscal deficits (except for Croatia) which made it difficult for the countries to hold a stable trade balance. Also known as the “Greek Crisis”, the financial crisis of 2008 did damage the GDP, employment, FDI and the banking sector of Europe, especially the south eastern part. Regarding GDP, the Euro Zone crisis either favored GDP growth or turned it negative for these countries. As the picture shows, only a minority of the countries (Kosovo and Albania) faced an increase in the country’s GDP. This was thought to have come mostly due to the fact that these two countries are not part of the European Union so they do not suffer direct consequences. However, unlike the other European countries, the countries of South Eastern Europe/ Western Balkans did have positive GDPs only a year later (2010).

Bartlett et al. (2010), however, explains that “despite the increases in public debt generated by the fiscal expansions, all the Southeast European economies continue to report public debt levels that are below (and except for Albania, well below) the 60% of GDP reference point in the EU’s Stability and Growth Pact”. Also, if we mention FDI, we see that there was a major decrease in those investments starting with a decline of 67% in Croatia to a 28% decline in Bosnia and Herzegovina. However, because countries of this region were not big and did not have a major importance in the European trade, the crisis was not very typical; it mostly came with some problems that were manageable. The main consequence was actually unemployment for which Kosovo (70%) and Bosnia and Herzegovina are top ranked in Europe.

To narrow down the situation, we analyze the effect of the crisis in Albania. Under the crisis effect or not, Albania has always been under the term “poor country”; one of the poorest of Europe. However, the Euro Zone crisis did deepen the poorness even more. Even though Albania is not part of the EU or EMU, it is highly affected by what happens in the region. However, the crisis surprisingly brought benefits and drawbacks at the same time. Durmishi (n.d)  states that “according to official figures, Greece represents about 28% of foreign investment in the Albanian Economy. Based on economic theories, the degree of trade partnership directly affects the degree of economic interdependence between the two countries. In 2007, the Albanian economy had about 8.3% of exports and imports 14.6% with Greece. In 2008, Greek exports to Albania increased by 19%, while the Albanian exports to Greece increased by about 25%”.  This numbers are part of the “exploitation” that Albania made during the crisis. However, on the other hand, the crisis in the Greek banking system has no negative effect on the safety of deposits, but in reducing the level of lending by banks for Albanian businesses. Additionally, given the serious crisis that is facing Greece, Greek companies will have less financial resources available to invest in Albania and this would lead to reduced foreign direct investment.

To conclude, we wrap up with findings that we made throughout the research. First, we understand that Foreign Direct Investments are crucial to a country’s economy and they should be as easy as possible. The best way to ease things is to be part of a unified market in which the risk is lowered as much as possible through a common currency and common laws. The research showed that after the enlargement of 2004-2007 by 12 countries, European Union’s economy started face improvement which were mostly seen in the countries that accessed. Without any doubt, we see a pattern of increasing numbers regarding GDP, employment and industry improvement from FDI after being part of the EU and EMU. However, this stable market faced its downfall with the crisis of 2008. It did damage the countries of the South Eastern Europe/ Western Balkans even though some of those countries were not part of the Union. Nevertheless, the effect was not so demolishing for Albania. On the contrary, it gave Albania the possibility of benefiting to a certain extent. With these statements, we conclude by saying that all the great changes that Europe faces economically do have an impact on all the region.