The odds outweigh the dangers (for now)

ABSTRACT

Simply put, the recession should not disrupt Germany’s economic cooperation with Serbia, Bosnia and Herzegovina, North Macedonia and Montenegro. There will be problems, especially for Serbia, if the recession continues. Why is it important to read the German Support Package on time and in detail?

In Čačak, a city in central Serbia, a well-known German company is investing 90 million euros in the construction of the first phase of a parts factory for the auto industry. Around 800 workers will work there. The President of Serbia announced the news but did not reveal the name of the company.

Just a few days later, the German company Hansgrohe opened a factory in Valjevo, in which it invested 85 million euros, and will employ 1,000 workers. About ten days earlier, the German company Wacker Neuson, which manufactures construction machines and complete mechanical equipment for the construction industry,
opened a new plant in Kragujevac, in addition to the 16-year-old one, and invested 25 million euros in it and will employ 800 workers.

And at the end of February, the German company Continental opened its second factory in Serbia and one of its largest factories in the world, in the construction of which it invested around 140 million euros. This company plans to invest another 150 million euros in Serbia and create 1,500 additional jobs in the next four years.

The value of this information is at least daily political. The opening of two and the construction of another German factory in Serbia comes at a time when it was already certain that the German economy was entering recession. Although it is considered “technical”, the recession of the German economy has forced the countries of the Western Balkans (and of course, all EU members) to think hard and is giving them serious worries. There are plenty of reasons Germany presents the economic engine and key partner of the Western Balkan countries; for some more thant the others. The question of all questions is how will the crisis (recession) in Germany affect the economic cooperation (trade exchange and inflow of direct foreign investments by German companies) of the countries of the Western Balkan region with Germany. Is it time for an alarm? And will Germany be the tug that will pull Serbia, BiH, North Macedonia and Montenegro into recovery or into recession?

It seems that Montenegro has the mildest headache caused by the recession in Germany. Its economy does not have too many points of contact with the German economy, so the impact of the recession will be minimal. According to the data of the Montenegrin Chamber of Commerce, the total inflow of foreign direct investments in the period January-September 2022 was 848 million euros, and the share of investments from Germany was only 7.8 percent. Monstat data show that Germany is not among the top three countries in Montenegro’s foreign trade, neither in exports (Serbia, Switzerland, BiH) nor in imports (Serbia, China, Greece). And of the total number of tourists who visited Montenegro, only 7.9 percent were from Germany.

MONTENEGRO HAS THE MILDEST HEADACHES DUE TO THE RECESSION IN GERMANY, BECAUSE ITS ECONOMY DOES NOT HAVE TOO MANY POINTS OF CONTACT WITH THE GERMAN ECONOMY

Germany is among the five largest foreign trade partners of Bosnia and Herzegovina with around 2.6 billion euros of exchange (out of a total of 24 billion euros). As for investments, German companies invested 43 million euros by the end of September last year, and according to that criterion, Germany is in fifth place, which is twice as much as companies from Austria, which are in first place with 86 million euros. One of the more significant greenfield investments in BiH is the Voith Hydro Bosnia d.o.o. project. Lukavac – German investment of 11.3 million euros in the production of electric motors and generators.

GERMAN COMPANIES HAVE INVESTED 43 MILLION EUROS IN BOSNIA AND HERZEGOVINA.

Opinions are divided in economic circles in Bosnia and Herzegovina regarding the impact of the German recession on the economy of Bosnia and Herzegovina. Optimists, who claim that there will be no significant implications for the economy of BiH, cite as an argument for their thesis the fact that in March of this year, a historical monthly record was recorded in exports to Germany of 123 million euros. Pessimists, on the other hand, cite data on industrial production as an argument for concern, which suggest that the German recession is still being felt in Bosnia and Herzegovina.

Germany is the largest trade partner of North Macedonia. The economy of that country has significant, if not dominant, trade and financial exposure to Germany. In the business circles of North Macedonia, there is a belief that there is no room for great concern at the moment, although calculations show that economic growth for this year will most likely be halved from four to two percent (among other things, due to the German recession). Optimism is based on the fact that there is still a great interest of German companies in investing in the economy of North Macedonia. Trade between the two countries in 2022 reached a record high of 4.8 billion euros, but already in the fourth quarter of 2022, signs of slowing down began to appear. The unfavorable economic climate in Germany affected the work of Macedonian transport companies. Since the beginning of 2023, there has been a decline in the volume of goods transported by road, rail and air transport. Only in the truck transport of goods in the first three months of this year, a drop of 15 percent was recorded.

GERMANY IS THE LARGEST TRADE PARTNER OF NORTH MACEDONIA.

Although in the first statements she was reserved about the impact of the recession, the director of the German Chamber of Commerce in Macedonia, Antje Wandelt, was later determined that “the recession in Germany will not have a negative impact ontrade with North Macedonia and its economy in general.” Her opinion is that North Macedonia offers an interesting potential, especially in the context of the current restructuring of supply chains among German companies and the trend of suppliers getting closer to Germany. This is evidenced by the large number of questions from German companies, which, as Vandelt claims, are interested in the market of North Macedonia, as a market in which one can invest and with which trade exchange can be expanded. “The phone in the Chamber is constantly ringing, potential German investors who are interested in coming to North Macedonia are calling.” Vandelt announced that the German company for the production of advanced battery systems will be the next German investment in North Macedonia.

OF ALL THE COUNTRIES OF THE WESTERN BALKANS, SERBIA IS THE COUNTRY THAT HAS THE WIDEST AND MOST SIGNIFICANT ECONOMIC RELATIONS WITH GERMANY

Of all the countries of the Western Balkans, Serbia is the country that has the largest and most significant economic relations with Germany. Germany is the single largest trade partner of Serbia, and direct foreign investments coming from Germany are the third largest. A total of 900 companies operate in Serbia (of which 124 are large) whose founders are German companies and they employ 78,000 workers (it is predicted that they will employ 100,000 workers at the end of 2024). Trade exchange between Serbia and Germany will reach 8.3 billion euros in 2022, with exports and imports almost equal. An incredible result was recorded in the last two years – the trade exchange had a growth of 35 percent. Five German companies are among the 15 largest Serbian exporters.

German companies have invested, according to data from the National Bank of Serbia, around 2.2 billion euros in the last ten years, which places them in the group of the three largest investors.

The results of a recent survey by the German-Serbian Chamber of Commerce suggest that the German recession should not be a major threat to the expected economic growth of Serbia, since the optimism of German companies in Serbia is not decreasing but rather increasing slightly.

Experts, however, warn that the recession in Germany may represent a “risk in the forecast (perspective)”. If it does not last long, it will not affect Serbian exports and German direct foreign investments, but if it lasts – everything is possible: exports will decrease and new foreign direct investments will be postponed or not realized at all.

GERMAN COMPANIES HAVE INVESTED 2.2 BILLION EUROS IN SERBIA OVER
THE LAST 10 YEARS.

The success of the countries of the Western Balkans in maintaining economic growth will be possible if their governments and economic policy makers recognize where the announced transition of the German economy will go.

In order to preserve the current level and raise economic relations with Germany even more, Serbia would have to closely monitor the Support Package, i.e. the transition plan for the German economy prepared by the Government in Berlin. The package is a response to the structural problems of the German economy, and its goal is to strengthen the competitiveness of the German economy. One of the priorities is the modernization of the tax law, which does not foresee an increase in tax rates, nor the introduction of new levies, but the introduction of an investment premium is therefore being prepared. Tax and credit policies will encourage the increase in the innovative power of German companies, as their technological advantage has been shown to be disappearing. An important move will also be the abolition of bureaucratic obstacles in order to ensure a faster procedure for planning and approving permits for all construction projects. To strengthen competitiveness, resilient supply chains and a secure supply of raw materials must be ensured. Labor legislation will be significantly modernized in order to facilitate the immigration of qualified workers to the labor market. Finally, but perhaps the most important measure, is the acceleration of the energy transition and the expansion of renewable energy infrastructure, which includes the construction of hydrogen reception facilities and distribution networks.

IN ORDER TO PRESERVE THE CURRENT LEVEL AND IMPROVE ECONOMIC RELATIONS WITH GERMANY, SERBIA HAS TO FOLLOW THE TRANSITION PLAN OF THE GERMAN ECONOMY PREPARED BY THE GOVERNMENT IN BERLIN.

Although the polemic in the German public points out that long-term sustainable growth cannot be maintained from public funds financed by government borrowing, there are also opinions that one of the answers to the recession could be government programs of economic and investment incentives for companies as long as high interest rates on bank loans.

The Serbian economy would have to find a place in the German Support Package. First, by offering raw materials, semi-finished products and parts in order to strengthen the security of supply chains, but not only in the automotive industry (as it was until now). And the state administration in Serbia will have to (broader) economic and (narrower) investment incentives to continue and speed up the attraction of German companies, moving their plants from China, to stop in Serbia and build new plants there to supply their industry. A good example of practice is the state incentive of 20 million euros for the second factory of Continental in Novi Sad.

Author: IPESE Research Team