The future lasts a long time: a short history of European integration in the ex-Yugoslavia

„There is no alternative to Europe“ – is «la pensée unique« that dominates political life in the ex-Yugoslavia. As with the idea of a transition to the market, Europe is considered to be a destination that is to be still to be reached, a community of peace and prosperity. In fact, as we will show, we have been »in Europe« now for over four decades and we remain exactly where we started – a dependency of the European empire.

In this article we present a brief history of European integration before formal European integration. The history of European integration is the history of growing economic dependence and peripheralisation, taking the form of successive debt crisis and de-industrialisation.

From the Balkan federation to European Integration

Our story begins with the Cold War. At the Yalta Conference in 1945, Churchill, Truman and Stalin divided the Balkans into Western and Soviet spheres of influence. Following its revolt against the Soviet empire, Tito’s Yugoslavia became dependent on Western finance and markets to balance against Soviet power in the Balkans. We should not forget that the turn to the world market was not inevitable but was rather the outcome of the failure of revolutionary processes of regional integration, of a revolution against external dependency and internal processes of nationalist competition. Stalin saw a proposed Balkan federation between Yugoslavia, Bulgaria, Greece and Albania as a threat to the post-war division of superpower spheres of influence in the Balkans agreed at Yalta. The Tito-Stalin split was itself in large part due to the fact that the Yugoslavs were the driving force of an independent Balkan federation. However the failure of Balkan federalism was not simply due to the Soviet diktat, but also to the nationalist ambitions of Balkan communist parties. Firstly, to take just the Yugoslav case, Tito’s ambition to absorb Bulgaria and Albania into the Yugoslav federation, instead of treating them as equal partners, divided the Balkan peoples in the face of Soviet pressure. Secondly, the ambition to build independent nation states entered into contradiction with a permanent revolution against imperialism. Instead of countering the Soviet blockade by intervening militarily in the Greek Civil War against British and US imperialism, Tito closed the Yugoslav-Greek border in 1949 at the first offer of US food aid and trade credits. This fateful choice to withdraw solidarity from the Greek and Macedonian revolutions was to lead Yugoslavia into a new dependency.

In the Eastern bloc, the model of state-led accumulation, based on diverting investment from production to military spending to compete militarily with the West, provoked stop-go growth cycles, as planned investments outstripped available resources. Within the closed economies of the Eastern Bloc there were limits to the internal resources that could be diverted to accumulation – even in an economy the size of the ex-USSR. Hence, in the 1960s, threatened by processes of European integration the USSR proposed closer integration of Comecon, the trade community of the Soviet empire, based on a new colonial division of labour in which the Soviet Balkan states would become food producers for the USSR and markets for its industrial products – in order to maintain economic and military parity in Cold War Europe.

The re-launch of the European integration process (after the resignation of De Gaulle from the French Presidency in 1969 opened the door to the first enlargement taking in Great Britain, Ireland, Denmark, and Norway) encouraged the European Economic Community (EEC, the forerunner of the EU) to take advantage of superpower detente to flex its muscles in the Eastern Bloc, to exploit a wave of revolts led by Romania and Albania against the USSR’s colonial ambitions for Comecon, as well as increasing regional dependency on Western finance, technology and markets to solve the investment problem – to drive a wedge into the very heart of the Soviet Empire, and thereby contest its hegemony over the region. To this end it ruthlessly pursued two principles.[i] It categorically refused any agreement likely to strengthen the Soviet hold on its allies, such as the establishment of EEC-Comecon relations, accepting only bilateral contacts with individual Warsaw Pact states. Furthermore, from 1974 the member states gave the EEC the sole right to negotiate bilateral contracts with Eastern Bloc countries, forcing the latter to negotiate with the EEC giant under pain of cancellation of existing contracts. The trap had been sprung.

The trade and financial integration that followed[ii] was to lead the Soviet Balkans and Eastern Europe into a crisis of dependency on the EEC, resulting in debt crisis across the region by the 1980s. After 1989, the bilateral approach enabled the EU to impose the dissolution of Comecon, followed by regional market integration on its own terms through a process of integration before formal integration, that is, a divisive race to open up to EU capital as a precondition of EU integration. From being a periphery of the Soviet empire, the East became a periphery of a rising EU empire. However, in the beginning was Yugoslavia. Because of the failure of the Balkan federation, Yugoslavia was both the trailblazer in EU integration and its most tragic victim.

The first cycle of EU integration: the economic fragmentation and political destruction of the Socialist Federal Republic of Yugoslavia (SFRJ)

For the EEC, trade integration with SFRJ represented an eastern projection of its common customs and trade policy. It was a key element of the Mediterranean extension of the EC in the 1970s and 1980s in its struggle against Comecon and the Eastern Bloc.[iii] Limited trade preferences were granted in order to support the independence of Yugoslavia against the Eastern Bloc and extend the influence of the EEC in a buffer state in the Cold War.[iv]

The first cycle of EU integration begins in 1967 with an Association Agreement between SFRJ and the EEC, followed a non-preferential trade agreement in 1970 and a preferential trade agreement in 1980. Military competition with the USSR compelled Yugoslavia to turn to Western aid, trade and credits. To counter dependence on Western markets and finance, the 1950s saw moves towards rapprochement with the USSR and trade normalisation with Comecon, resulting in a precarious balancing between the two imperialist blocs that went under the name of ‘non-alignment’.

The balancing act was soon brought into question by the divison of Europe into three competing superpower-sponsored trade blocs, Comecon, EEC and EFTA. Yugoslav exports were faced with the prospect of increasing tariff discrimination as the common external tariffs of each bloc were gradually harmonised and internal tariffs abolished, especially with the establishment of the EEC’s Common Agricultural Policy (CAP) in 1962.[v]

Association with the EC, it was claimed, would enable it to obtain the advanced technology necessary to develop a competitive export sector. Since Yugoslavia ran a structural trade deficit with the EEC – a deficit that was continue to the very end – it was forced on the path of deeper market integration with the Community in order to import finance and technology – and to pay for these it had to to sell its mainly agricultural exports to the EEC, and thus open its market to EEC trade.

Integration reflected a pattern of dependent, financialised development, which can still be seen in the region today. Anticipating today’s neo-liberal ideology, the market reforms of the 1960s explicitly connected economic efficiency with opening up to foreign capital. As Tito declared in 1961, “The more aid, the faster socialism will grow in our country.”[vi] Yugoslavia’s export orientation in fact meant the adjustment of its production to European markets which financed the necessary capital investment. Although Yugoslavia was fast becoming an industrial nation, its trade with the EU remained characteristic of that of a less developed country— importing capital and intermediate goods in exchange for raw materials, agricultural products, and subcontracted processed goods.  Western export of capital goods took the form of the leasing of patents and licensing agreements, for example, the Zastava licensing agreement with Fiat, to maintain technological dependency, representing a transfer of value to EEC capitals. Unable to compete in the technological race, Yugoslavia saved on labour costs.[vii] To cover the growing trade deficit and foreign debt it became a major exporter of unskilled labour to the boom economies of Western Europe, a pattern of dependency that continues to this very day.

The 1970 and 1980 trade agreements, which liberalised trade with the EEC, accelerated dependency on capital and hard currency imports to finance export growth. Since these exports struggled to find Western buyers and had to be sold on soft currency Comecon markets, the result was a worsening of the balance of trade deficit. Even worse, after the world recession of 1974-5, the EEC raised trade barriers in precisely those areas which Yugoslavia had competitive advantage (steel, textiles, tobacco and beef/veal exports). To cover its trade deficit Yugoslavia was forced to borrow heavily on the international financial markets, resulting in a debt of $20bn by 1981.

These problems were in turn the product of a debt economy where the overvaluation of the Yugoslav dinar made the financing and repayment of foreign credit and capital imports easier, but at the same time made exports uncompetitive and tended to devalue money (high rates of inflation), thus requiring further borrowing to maintain investment growth, a pattern to be repeated in Croatia and Serbia in the 2000s.

The Yugoslav financial crisis of the 1970s was an integral part of the global transition to a financialised capitalism and a neo-liberal policy regime. Raging economic crisis in the 1980s saw the imposition by the international financial institutions of one of the first structural adjustment programmes in the world (1982-85 and again in 1989-90). The IMF and EU demanded the recentralisation of the Yugoslav federation to drive through macroeconomic stabilisation and financial discipline, and thereby ensure the repayment of the Yugoslav debt.[viii] Market integration had tended to splinter the national economy into a set of regional economies competing with another for state credits, foreign currency and resources, and widen inequalities in regional development – the hothouse of nationalism in Yugoslavia from the 1960s onwards. Recentralisation meant stripping the republics of control over companies, banks and finance – overturning the 1974 Consitution which had transformed Yugoslavia into a confederation.

Two opposed programs emerged, both of which linked nationalist ambitions with neo-liberal reform and greater European integration.

From the beginning, the leaders of the richer republics – Slovenia, Croatia and Vojvodina – completely opposed recentralisation. Economically they were neo-liberals, who claimed that their Europe-oriented economies were being held back by wasteful federal spending on the poorer republics and the army. Less, not more, of the state was the answer. This was called »confederalism«.

Serbia’s politicians were also economic liberals, but sought to advance their interests through the recentralisation of Serbia, by reversing the post-1974 autonomy of its provinces, Vojvodina and Kosovo. Adminstrative centralisation would provide weaker Serbian industry with a domestic market, while the strengthening of federal economic authority along IMF lines would enable it to introduce a program of investments to compete on the European market. Thus in practice the IMF/EU programme served the interests of Greater Serbian nationalism and its dream of a centralised „Serbo-slavia“.

Indeed, when still only Belgrade party boss, Milošević was presenting Greater Serbian nationalism as the latest word in European integration. Referring to the project of European economic and monetary union announced in 1985, he warned: “The nations of Yugoslavia invented the idea of community hundreds of years ago, in a period when they were divided by foreign empires. Today when this same idea has conquered Europe, we are going backwards to ideas that everybody else has abandonned.“[ix] The richer republics, in a symmetrical process of nationalist radicalisation, also drew on the promise of European integration to justify separatism.  Drawing on the imaginary notion of »Central Europe« invented by East European dissidents to relocate their countries in a »common European home« outside the Eastern Bloc, nationalist intellectuals from Slovenia and Croatia equated national sovereignty with »re-joining« Europe, while Yugoslavia became equated with the »Balkans« and »Asiatic barbarism«.[x]

It is clear that by demanding the republics be stripped of their powers, by imposing destructive but ineffective shock therapy, and by ending the redistribution of wealth from richer to poorer republics, the IMF and EU fuelled the nationalist collapse of Yugoslavia. In this way, the European Union was not only the agent of the economic disintegration of Yugoslavia, but through promises of future political integration accelerated its political disintegration.

The second cycle of EU integration; Euro-convergence and debt slavery[xi]

After the resulting wars to divide up former Yugoslavia, the second cycle of EU integration involved an ever greater opening to foreign capital and credits in order to finance the repayment of its debt.

The key to understanding this is the strong currency regime in the ex-Yugoslav countries, which in Croatia meant indexing the currency to the Euro and the adoption of the Euro in Montenegro and Bosnia. (In Bulgaria indexing took the form of a currency board: the following analysis is thus relevant to the rest of the Balkan region.)[xii] In line with the ‘Washington Consensus’ propounded by the international financial institutions, and institutionalised in ex-Yugoslavia since the 1980s, macroeconomic policy has sought to control the money supply and target inflation with the aim of ‘price stability’. The mechanism to achieve this is the ‘monetary anchor’, a type of fixed exchange rate. The anchor can only work if a tight monetary policy based on high interest rates is pursued. The real function of monetary policy is not price stability but to ‘anchor’ the debt economy; that is, to prevent the depreciation of national currencies and so keep the flow of debt repayment and keep down the cost of imports.

The system of fixed exchange rates in fact meant monetary convergence and integration with the Eurozone. In the Eurozone the loss of power to issue money or vary interest rates, combined with the tight monetary regime of the ECB, forced all capitals to increase labour productivity. However, while all capitals were able to force down labour unit costs, Germany achieved the greatest savings, resulting in increasing imbalances across the Eurozone as German exports opened up big trade deficits with the more backward countries of the Eurozone periphery.[xiii] The latter, including Slovenia, took advantage of cheaper interest rates to borrow money from the banks of the core in order to cover these deficits, laying the basis for unsustainable debt-financed growth and thus the financial crisis of the Eurozone.

Post-Yugoslavia was integrated into the Eurozone through three major regional processes of financialisation[xiv] – the fixed exchange rate regime, financial liberalisation and privatisation. The EU financial sector, which controls up to 90% of the post-Yugoslav banking sector, taking advantage of the extra profits accruing from the difference between Eurozone and domestic market interest rates, fuelled a speculative model of growth based on imports and consumer borrowing, which at the same time destroyed industry and pushed our region into a debt trap more dangerous than ever before. The states of the former Yugoslavia now have a combined debt five times greater than Yugoslavia in 1990. The same monetary regime that attracted foreign credits and privatisation receipts was also responsible for destroying industry, mass unemployment and rising absolute poverty for millions of working class families. Expensive money acted as a disincentive to investment in the real economy, while overvalued currencies made exports uncompetitive. The result was growing trade and budget deficits, which could only be covered by more speculation, foreign credits and privatisation receipts. Economic growth in the region had become completely dependent on external finance. With the financial crash of 2007, the bubble had to burst.

In Croatia today, the need to maintain kuna parity with the euro – since as in the rest of the Balkans the majority of consumer and public debt is euro-ised – to prevent the debt burden from spiralling out of control merely deepens the crisis. The situation is identical to that of peripheral countries like Greece in the fixed exchange rate system of the Eurozone. Indexing prevents external adjustment through devaluation and imposes what is called “internal devaluation”, that is, debt repayment by means of prolonged austerity and wage compression, which depress demand and thus the means to repay debt. In effect, the countries of the region have lost any independence in monetary policy, and thus economic sovereignty to the European Central Bank, becoming colonies of European finance capital.

By contrast, Slovenia did not open up to flows of foreign capital to anything like the same degree, but rather attempted to break into the world market on its own terms, taking the path of export-led growth. Its failure can be seen in the present debt crisis which is in reality a crisis of integration into the EU. As a member of the Eurozone, Slovenia was no longer able to devalue its currency to keep its exports competitive and so could only maintain growth by becoming dependent on cheap foreign credits for growth. Slovenia has not escaped the regional crisis of dependency on external markets and finance. From this perspective rising living standards are a barrier to further accumulation. Foreign Direct Investment outflows in the 2000s are a sign that Slovenian capital is increasingly compelled to outsource production to the low wage post-Yugoslav region. The ambition to use outward investment to undermine domestic wages and welfare spending reveals that a Slovene exception to regional neo-liberalism is an illusion.

The third cycle of EU integration: the crisis of EU regionalism[xv]

The lessons of the Slovenian experience are clear. EU integration will further undermine the competitiveness of the Croatian and Serbian export sector, resulting in a continuing transfer of value to the European banks, via the structual trade deficit and external debt. Once again debt will serve as the lever for another round of opening to foreign capital. So far foreign capital has been reluctant to invest in the real economy, outside of limited branches, since it faces a series of small consumer markets that are weakly integrated and do not promise expanding sales. To create the kind of internal market that would be attractive to foreign investors, the EU imposed the Central European Free Trade Agreement (CEFTA, est. 2006) on the Western Balkans (including Serbia, Croatia, Bosnia, Macedonia, Montenegro, Albania, Kosovo and Moldova).

CEFTA aims to create a free market (limited to tariff and quota reductions), not a customs or currency union: in other words, the aim is prepare the region for integration in the EU, not promote a regional integration that would conflict with EU integration. Integration takes the form of a “hub and spokes” model in which trade and investment in each of these countries is diverted towards the EU. The EU has become the main trading partner of all countries, accounting in 2008 for 55–80 per cent of the imports and exports of the Western Balkans. Therefore, given the structural weakness of regional exports under the system of fixed exchange rates, CEFTA in fact represents a free trade zone for EU exports. Furthermore, as in the case of the trade agreements between the Socialist Federal Republic of Yugoslavia and the EEC, and of the first CEFTA (established in 1991 between Poland, Hungary and the Czech Republic), access to the EU market is restricted precisely in areas of regional comparative advantage. Therefore the second CEFTA, just like the first, will mean the restructuring of the regional economy to serve the needs of the European multinationals and yet more de-industrialisation.[xvi] The present structural adjustment programs in Slovenia, Croatia and Serbia, under which the public sector, health provision and pensions are being opened to foreign capital in order to repay external debt, are the sign of things to come.

Due to the need to balance external deficits with the EU there has been a limited trend towards the revival of intra-regional trade, facilitated but not caused by the liberalisation of tariff barriers under CEFTA. In many ways this is a return to the 1970s when difficulties in EEC markets forced Yugoslavia to re-orient exports to Comecon markets. The problem here is that each ex-Yugoslav state tries to run a trade surplus with the others to compensate for deficits with the EU, thereby blocking the further development of intra-regional trade. It is partly to address this difficulty that Slovenia has begun to extend import credits and outsource production to the region.

The case of Slovenia, as the most advanced regional economy, shows the limits of intra-regional integration. It is both impelled by external dependency on EU finance and structurally limited by it. The EU model of Balkan integration spurs de-industrialisation and erects a fragile consumer economy built on a pyramid of debt. As we see in the current regional double-dip recession, without external finance there is no economic growth. Regional integration is caught between the Scylla of EU dependency and the Charybdis of the narrowness of the national market. Post-Yugoslavia is locked into a process of peripheralisation.

EU regional policy for the Balkans is also part and parcel of the imperialist fragmentation of the region into a set of competing statelets and neo-colonial protectorates (Bosnia, Macedonia and Kosovo). Under the doctine of ‘regional co-operation’ the EU has sought to police the new geopolitical order and prepare the region for EU integration, following on the heels of NATO expansion. A moveable set of iron curtains has been erected, dividing regional ‘winners’ and ‘losers’ in the race to European integration. In the 1990s the EU raised undeclared sanctions against Croatia when Tudjman rejected regional co-operation outright, while Milošević was rewarded for guaranteeing the Dayton Agreement of 1995 with an EU trade agreement. Today Croatia has been granted an EU accession date mainly because the Serbian-Albanian struggle over Kosovo has become a proxy for struggles between the EU-US and Russia for hegemony in the post-Soviet East.  EU regionalism thus creates a new arena for the nationalist struggles of the ex-Yugoslavia.[xvii]

The EU model of regional financial integration is both iniquitous and unviable. Regional nation states have not been able to withstand external economic and military pressures, and have tended to respond by competing with each other for external sponsorship in the vain and disastrous pursuit of regional hegemony. To return to the beinning of our story, it is the forms of regional competition in the late 1940s that opened up the Balkans to division between competing superpower blocs, and thereafter to integration into competing economic empires (Comecon, the EEC-EU), passing from one empire to another, but always in the role of dependent periphery and military outpost.

The alternative lies in a Balkan federation[xviii], that is, a form of co-operation uniting the peoples of the region in a common purpose; to liberate the region from external dependency and internal strife, maximise the welfare of its peoples, and make them the subjects of their own destiny. The experience of the old Yugoslavia is proof that the logic of market competition itself produces uneven development, and can only exacerbate existing inequalities between regions, fanning nationalist resentments. Hence the first step towards a new regional order is a break with the political economy of financialisation, and its defence of the value of money (debt) at the expense of the destruction of commodities, in favour of a political economy that promotes the welfare of labour by redistributing resources towards employment, welfare provision and living standards. The nationalisation of the banks and industry would provide the instruments for regional co-ordination of investment to tackle inequalities in development; for the establishment of mechanisms of regional solidarity and co-operation; and for a participatory economics in which sovereignty resides in the direct producers and local communities. It is time to make a regional exit from the crisis of European integration.

Andreja Živković is a sociologist and member of Marx21 in Serbia. He is the author and editor of ‘The Balkan Socialist Tradition’ (special issue, Revolutionary History Journal, 2003) and Revolution in the Making of the Modern World (Routledge 2007); and is contributing a chapter on the political economy of the debt economy in ex- and post-Yugoslavia to Srecko Horvat and Igor Stiks (eds.), Welcome to the desert of post-socialism: radical politics in former Yugoslavia, Verso, 2015 .

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