Branko Milanović: Can Serbia survive EU’s economic ultimatum?

The EU is seeking to bully Serbia in to accepting an ultimatum. History suggests Brussels will get its way sooner or later.

Branko Milanović is an economist specialised in development and inequality. His newest  book is “Capitalism, Alone: The Future of the System That Rules the World”

Cross-posted from Branko’s Substack Site

Picture by Balkan Photos

(I am writing this article in English although my main audience is in Serbia. But I am doing it also because very few people in the world, preoccupied by other world crises, such as the war in Ukraine, US-China issues, covid and the like, know what is happening in the Balkans and what is the nature of the EU game there.)

The current EU ultimatum, delivered three days ago, to Serbia and Kosovo, whose exact content is unpublished (at the request of the EU delegation) is the result of more than 20 years of frustrations in the relations between EU and Serbia (and also between EU and Kosovo). The essential reason are disappointed expectations. The EU has less and less to offer to Serbia and other non-members simply because the membership cannot any longer be promised with any credibility and all other advantages are small. So, the EU can only offer sticks. No carrots. And in Serbia, the support for the EU membership is now consistently below 50%.

The EU reminds me of the bullies that were roaming the area around my high-school in Belgrade. They would accost younger pupils and offer to sell them…a brick. The kid would say, “But I do not need the brick”. Ah, the bully would retort, “Yes, I know that you do, and it would cost you ten dinars”. The poor kid would pay 10 dinars knowing that the refusal would lead him to be beaten, hit in the head, kicked—and yet the ten dinars would be taken from his pocket.

That’s how the EU comes to Serbia today. Everybody of normal intelligence would say, “You have nothing to sell and we do not want to buy the brick”. But the EU then begins to list the ultimatums. We do not know the text of the ultimatum, but it does not take great imagination to realise that threats must range from the suspension of EU negotiations, elimination of EU support funds (that Serbia gets as a candidate member), reintroduction of visas, discouragement of EU investors, to possibly additional financial sanctions (say, no access to short-term commercial loans), ban on long-term lending by the European banks, EBRD and possibly the World Bank and the IMF, and for the very end elements of a true embargo and perhaps the seizure of assets. Serbia does not have oligarchs but it does have National Bank reserves and many companies that keep money in foreign banks in order to finance trade.

The question then becomes: can the country survive such sanctions that may last from five to ten to twenty years? Perhaps even longer. First, one needs to realise that such costs are imposed on 99% of the population for whom the acceptance of the ultimatum does not make any economic difference. Perhaps only 1% of the ethnically Serbian population, those who live in Kosovo, might lose some rights due to the non-economic requests contained in the EU proposal. One needs to be clear on that fact: rejection means loss for 99% of people to provide some, perhaps illusory, protection for 1%.

But what would be the consequence of rejection? Domestically, it will further stimulate the growth of nationalism. Not only – nationalists will say – that we knew all along that Europe does not want us and hates us, but now it is clear that they want to destroy us. Under such conditions all kinds of crazy schemes would be hatched. Russia will support this craziness, not because Russia much cares about it, but because it has an incentive to create as many problems in any place in the world to make the West get busy working on something other than Ukraine.

There would be thus an explosion of nationalism under the conditions of reduced GDP. The loss could be, depending on the severity of sanctions, up to 5-10% of GDP in the first year. This would divide the public. Although currently all parties are in favour of the rejection of the ultimatum, and the pro-European parties, having been cheated by Europe many times,  have taken a strongly anti-acceptance stance, seemingly stronger than the government, it is likely though that after a few years, the body public would seriously split between the “party of rejection” and the supporters of new negotiations with the EU. If such parties become of equal side and start violently accusing each other, it might end with a civil war. Since the West would have very few friendly parties to negotiate with in Serbia, and since Serbia is surrounded by NATO members, even a formal occupation of the country by NATO cannot be excluded. One should not forget that, right now, both Bosnia and Kosovo are NATO protectorates, and that the West can, by one single move, overthrow at any time the governments in Montenegro and North Macedonia. Moreover, NATO troops are in all these countries, plus in other border states (Romania, Croatia, Bulgaria, Hungary). Like in World War II, the very same countries could just march in.

How about the economics? The initial effects would be strongly negative, but Serbia, compared to Russia, has some advantages. It is not as dependent on the West as Russia was before 24 February 2023, and unlike Russia it does not need to stay abreast of technological developments for military purposes. But as Serbia conducts more than two-thirds of its trade with the West, trade will, depending on the severity of sanctions, be significantly reduced, driving exports and GDP down. Foreign investments, again coming mostly from the EU, would dry out. Unemployment would increase, and real incomes will go down. Young people will increasingly leave the country. With an already very unfavourable demographic structure, it is mostly older people, of pensionable age, that would remain.  Who would then earn money to pay these pensions?

Perhaps most insidiously, some form of EU trade coercion would stimulate alternative, illegal, ways of procuring banned goods. This has been the case during the period of Comprehensive UN Sanctions against Serbia and Montenegro between 1992 and 1995. The new sanctions will create criminal groups who would be in control of such imports. They would gradually bribe and then ignore police and the authorities and in some cases even replace them (as has happened before). The mafia will rule.  Further, Serbia, which is already a hub for the narcotics trade, will become even more so since the government would not have any incentive to control such trade if the majority of sales go to Western countries. Actually, the use of the narcotics trade could be one of the very few tools that the Serbian government would have to strike back at the EU.

The longer the situation lasts, the weaker would be the bargaining position of Serbia. The EU will be unhappy, and would (in private) be aware of its ineptitude and unwillingness to contribute anything positive, but since it controls the media and the narrative, it will shift the entire blame on an “uncooperative Serbia” and “Russian agents”. And after 4-5 years, Serbia would show signs of willingness to negotiate but its relative position would be worse than it is today. So, it might lose five or more years and end up with the same or even a worse deal.

To accept the deal does not mean that you have to like it. Serbia has thrice rejected similar ultimatums. In 1914, when in fact it accepted nine out of 10 points of the Austro-Hungarian ultimatum (and asked for the clarification on the tenth), only to be attacked by the Austrians.  The second time it accepted membership in the Axis in 1941, for a grand total of 72 hours, and then, after a military coup, de facto rejected it. As a punishment it was brutally attacked by Germany, leading to massive bombing of Belgrade, occupation, break-up of the country, four years of war, and more than one million deaths. The third time Serbia rejected NATO’s ultimatum in Rambouillet in 1999, and was duly bombed for three months until it accepted another version of the same thing.  These are the antecedents one should keep in mind. They are not very cheerful.

Branko Milanović

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