Fearing contagion, Albanians see worrying signs in Italian and Greek economic woes
By Andi Balla
TIRANA, Nov. 10 – It has been a miserable week for Albania’s EU neighbors. With a wrecked economy, Greece had to come up with an interim government to implement tough recovery measures. Italy’s sovereign debt crisis grew to unmanageable levels, leading to fears it too will seek a massive international bailout. Its prime minister, Silvio Berlusconi, lost his majority and is poised to resign.
As these debt-fueled fires ravage the economies of Italy and Greece, Albanians have been watching with great worry. And there are good reasons to be fearful. Italy and Greece are Albania’s largest trading partners. They also host the majority of Albanians working abroad. For years these workers have been propping up the Albanian economy through remittances. Greek- and Italian-owned banks also hold a large share of Albania’s banking sector.
Despite assurances by the Albanian government that Albania is holding up fairly well in a global storm and a regional hurricane, economic experts say there is now more than ever a need to have a frank discussion in this country about the true costs of the economic crisis, and how to prepare for the future. It’s not a question of whether the effects will spill across the border, they add – they already have.
“The political and central bank authorities in Tirana should not underestimate the potential adverse consequences of the twin Greek economic and sovereign debt crises. Their implications medium-term are considerable. Some spill over effects are already manifesting themselves in Albania, for example, concerning reverse labor migration, the level of remittances being sent home from Greece and Albania’s capacity to further place sovereign debt in international bond markets at reasonable yield levels,” says Jens Bastian, a visiting fellow at St Antony’s College, Oxford andsenior economic expert at ELIAMEP, an Athens-based think tank.
Jens says Albania and other countries in the region face a “crisis at the gates” that cannot be ignored on underestimated. “Despite a remarkable economic success story during the past years, Albanian policy makers would make a grave mistake by judging that they are immune to developments in neighboring Greece,” he says.
Crisis to have ‘serious implications’ on Albania
Albania’s Institute for International Studies has been tracking and researching the effects of the Greek crisis on Albania since the start of the year, and its executive director, Albert Rakipi, points out that despite Albania’s lack of full integration with global markets, which has contributed to the country’s relative safety, Albania clearly is not and will not be immune to the global economic forces.
“There is no doubt that the crisis in Greece and the latest developments in Italy will have serious implications for Albania. No one can argue against that when you have 50 percent of Albania’s workforce in Greece and Italy,” says Rakipi.
Remittances from Albanians working abroad, which have been a lifeline for many Albanian families, have been declining steadily, and the crises in Greece and Italy have only accelerated that decline. The latest Albanian central bank data indicate migrant worker remittances have hit a new record low. Remittances dropped by 12 percent to 690 million euros in 2010, down from 781 million euros in 2009.Remittances accounted for 10.7 percent of the GDP in 2009 down 13.5 percent in 2007 at the start of the global economic crisis.
There is anecdotal evidence that Albanians migrants who have not been able to find work abroad are returning home in droves, particularly from Greece, where pessimism has hit hard due to the prolonged economic crisis.
On the negative end, returning workers might increase Albania’s already high unemployment figures, some analysts say, fearing social unrest.
Prime Minister Sali Berisha however sees a rosier picture. In several interviews with foreign and domestic media he has stated that Albania is doing well, and is one of the few countries in the world that did not slip into recession during the economic crisis. He says the return of Albanian migrant workers is a good thing, because they will bring new skills and business models with them that will ultimately help the Albanian economy.
But in addition to their skills, the Albanian government has another hope, that returning families will bring their savings with them to the relative safety of Albanian banks, provided much needed liquidity to the Albanian economy.
An unlikely banking crisis
The economic crisis in Europe has so far not been a banking crisis, nor are the crises in Greece and Italy the same, but in markets fear spreads fast and perception is very important, particularly now that Italy, the world’s eighth largest economy, might be going the way of Greece in seeking bailout.
Bank of Albania, the country’s central bank, has repeatedly stated that all banks operating in this country are under its close supervision, though they might have parent bank elsewhere.
However, in a market where 95 percent of the banks are foreign-owned, the central bank was concerned enough to push for a draft law in parliament, which is expected to pass soon, that makes it mandatory for branches of foreign banks to become subsidiary Albanian companies, which protects Albanian depositors to a higher degree than having mere branches of foreign banks. Experts also point out the law looks into the future, since the vast majority of the banks already operating in Albania are currently subsidiaries.
Bastian notes that no Greek bank has closed anywhere in the region, but in general banks become much more conservative with lending at a time of economic decline.
BoA has often asked banks in Albania to lend more into the economy, noting their reluctance to do so could harm economic growth.
“The cost of lending by the local subsidiaries of Greek parent banks operating in the region is increasing. Feeling the heat through financial channels is affecting the credit supply of Greek banks to private households and corporations in Albania,” notes Jens. “It is in this area that we can observe what economists call a ‘negative feedback loop,’ where the dire conditions of the Greek sovereign immediately affects the domestic banking sector, through rising capital flight, and by extension has consequences on the lending resources being made available to neighboring subsidiaries.”
Economic issues come with political implications
Albania’s government lauds as one of its greatest achievement keeping the country safe from the global economic crisis, marking economic growth in an era of recession. But experts note that beyond the rosy picture coming out of the government, if the Eurozone continues on the current path of economic instability, Albania will be affected. And if Greece and Italy are any indication, economic woes sooner or later spill out into political problems.
“We need to learn from what happened in the economies of these two countries, but other places too, about the measures governments need to take,” says AIIS’ Rakipi. “At least it is not smart to say that during the greatest recession since the 1930s the Albanian economy cannot be affected by what happens elsewhere.”
Last, but not least, the Greek financial crisis might affect Albania’s aspirations toward EU membership, according to AIIS experts.
They note the debt crisis in the Euro zone reinforces EU enlargement fatigue, so there is a risk of slowdown in the EU integration process. Greece has also been the main promoter of Balkan integration, and with loss of credibility in Greece, the whole region might suffer.
Stefano Sannino, one of EU’s highest officials in the enlargement department, said this week in an interview with German public broadcaster DW that the latest Eurozone crisis should not have any direct connection with the enlargement process. However, he also noted that the enlargement process is getting more and more complicated, and that’s partly due to political reasons.
Jens predicts similar difficulties. “Following Croatia’s expected accession in 2013 the EU could become rather cautious about further enlargement and more rigorous regarding the economic conditionalities of membership,” he notes. “Many voters and policy makers across the continent are keen at avoiding anotherdꫠ vuof a Greek tragedy.”
