Trouble at the Top

Thirty years after the fall of the Iron Curtain, East-Central and Southeast Europe is still the most democratic of all BTI regions, but it is also the only region to have continuously lost ground in terms of the quality of democracy since 2008. Governance performance is also trending downward. And while the current economic situation appears to have improved, most of the development models in the region are not particularly sustainable.

Compared to the state of affairs under Communist rule before 1989, the trajectory of development in East-Central and Southeast Europe remains, on balance, a success story. From Central Europe to the Baltic states, 11 countries have joined the European Union, and eight of them are now members of the Organisation for Economic Co-operation and Development (OECD). For the region’s remaining six Western Balkan countries, EU accession remains a distant hope, as they continue to struggle with the turbulence brought on by the end of socialism and the Yugoslav federation. Some of these states are at risk of falling into chaos (Bosnia and Herzegovina), or they have yet to be fully recognized as a sovereign state (Kosovo).

The gap between East-Central and Southeast Europe has grown rather than narrowed over time, and heterogeneity within the two sub-regions has increased: The Baltic states, the Czech Republic and Slovenia outperform by far other new EU member states in several areas. In general, however, BTI data shows continuous democratic backsliding since 2008. Only the three Baltic states of Estonia, Latvia and Lithuania were able to further consolidate their democracies over the past 10 years.

Most recently, the small state of North Macedonia has offered a glimmer of hope. Following a dramatic change of government in 2017, the country began to address the various problems experienced during the 10 years of strongman rule under Nikola Gruevski and proved able to reverse its downward trend. Of particularly symbolic significance was the 2018 referendum to rename the country, along with an agreement with Greece, which together cleared the way out of an impasse that had long blocked the country’s development and European integration. Thanks to the agreement, the Former Yugoslav Republic of Macedonia was able to escape the shackles of history and drop the reference in its name to a country that had disappeared more than 25 years ago.

However, for many other countries in the region, the following is true: Whereas until the early 2000s, government instability was regarded as the greatest obstacle to political and economic development, today, government stability has increasingly become a synonym for stagnation, and is often a contributing factor to authoritarian tendencies. This includes Hungary's Viktor Orbán, who was re-elected for a third term backed by a two-thirds majority in parliament; the appointment of Serbia’s Prime Minister Aleksandar Vučić to the office of president; the resurgence of the well-established but corrupt Social Democratic Party in Romania; Boyko Borisov’s return as prime minister in Bulgaria; and Miloš Zeman’s second term as president of the Czech Republic. The new prime ministers of Latvia, North Macedonia and Slovenia, on the other hand, demonstrate much more commitment to progress and positive change. This appears to be particularly true in the case of Slovak President Zuzana Čaputová, who was elected in 2019.

Throughout the region, the cleavage between communist and anti-communist groups that prevailed immediately after the fall of the Iron Curtain was slowly but surely replaced by socioeconomic antagonisms, conflicts over liberal versus illiberal values, and divisiveness over the key issue of corruption, which plagues so many of the region’s countries. Various media outlets have rightly drawn attention to the rise of illiberalism in several countries. However, this focus on democracy under duress all too easily overlooks the demands being made by citizens and large parts of the political opposition for the protection of democratic values – even if the opposition is often weak and fragmented. In fact, mass anti-government protests have been on the rise in most of the region’s countries.

Things are more encouraging with respect to economic transformation in the region, as the overall situation has stabilized. The main challenges to be addressed are related to sustaining economic development. Some of the region’s countries may have recently become members of the OECD, but are lagging in many respects behind the economic powerhouses of the world. Social exclusion continues to plague the region and affects in particular women and minorities, such as the Roma, who often suffer from abject poverty, despite the fact that overall poverty levels are low. Most countries have been subject to heavy outmigration flows and declining population numbers in the last 20 years, which in turn has a negative impact on the supply of labor and economic activity. In addition, most of the region’s countries continue to struggle with challenges in the areas of research and development, education policy and environmental sustainability, all of which stymies their ability to take a qualitative leap in economic development.

Curbed and cornered

Highly repressive

Democratic backsliding – underway since 2008 – continues in the region. Most of these setbacks have taken place in those countries once known as pioneers of freedom in the region. Nonetheless, the mass protests in recent years underscore how unwilling civil society is to accept the march of authoritarianism.

East-Central and Southeast Europe remains the most democratic of all BTI regions. Even the region’s worst performer in terms of political transformation – Bosnia and Herzegovina – scores better than the global BTI average here. This relative success must be borne in mind when considering recent and less inspiring developments. Since the BTI 2018, the quality of democracy in Bulgaria, Poland and Romania has deteriorated to such an extent that the three countries are no longer classified in the highest category, that of consolidating democracies. Serbia and North Macedonia, both of which are also classified as defective democracies, appear to be moving in opposite directions: While Serbia lost 0.75 points in terms of democratization, thereby recording the region’s largest point loss on this measure, North Macedonia recorded a point increase of equal measure (+0.75) and is the region’s only country to register significant gains here.

During the review period, following a major electoral defeat in December 2017, the curtain fell on the nationalist VMRO-DPMNE government of North Macedonia and its prime minister, Nikola Gruevski. Prior to this and after losing his parliamentary majority in the 2016 elections, Gruevski incited a movement against political change – purportedly orchestrated by Albania – that culminated in April 2017 in the forcible entry into parliament of who were aided by VMRO-DPMNE politicians. The mob injured 70 people, including many members of parliament and the future prime minister, Zoran Zaev of the Social Democratic Union of Macedonia (SDSM). After Zaev took office in May 2017, his government reached an agreement with Greece, thereby resolving a long-standing dispute over the country’s name that had prevented North Macedonia from becoming a member of various international institutions. Shortly thereafter, North Macedonia and NATO signed the accession protocol in February 2019. In addition, there are signs that the government has loosened state control over the media and civil society. However, political polarization remains high. The VMRO-DPMNE continues to wield its hand by boycotting important parliamentary votes, which is a key weapon of the political opposition in the Western Balkans.

By contrast, authoritarian tendencies gained traction in neighboring Serbia after Prime Minister Aleksandar Vučić – following in the footsteps of a fellow member of the Serbian Progressive Party – was elected president in May 2017. Backed by an absolute parliamentary majority, his government has since controlled the legislative process and sidelined the opposition, while the scope of media pluralism has narrowed. In addition, Serbia’s inefficient judiciary has been subject to political interference, nepotism and corruption. Anti-corruption measures are inconsistent and, where applied, remain only partially implemented.

Democratic regression continues to worsen in Hungary as well. Under Viktor Orbán’s rule, the government took further steps to undermine the separation of powers and tighten control over the media. In September 2018, the European Parliament voted in favor of triggering the article 7 procedure – as stipulated in the Treaty on European Union – against Hungary. This marked the EU’s condemnation of the country’s evisceration of the rule of law as evinced by the government’s attacks on the media, academics, the judiciary, migrants and refugees, and the rights of minorities, all of which mark a new low in violations of the EU’s foundational principles. Since the BTI 2006, Hungary has fallen from being the region's third most democratic to its third least democratic country. The ongoing erosion of democracy has been further exacerbated by a weak and fragmented opposition in the 2018 parliamentary elections, which helped the ruling Fidesz Party to secure once again a qualified majority. Cooperation among the parties in opposition, however, improved toward the end of 2018 as they united in mobilizing the largest anti-government protests since Orbán took office in 2010.

Hungary and Serbia are only two examples from the long list of states in the region in which the rule of law is increasingly under attack from within. The regional average scores assessing the separation of powers and prosecution of office abuse both fell by a remarkable 0.47 points in comparison with the BTI 2018. Seven countries registered losses in the former indicator while eight recorded losses in the latter. Albania, Croatia and Romania mark examples of countries in which corruption waged by high-ranking officials has either gone unpunished or the judiciary has been subject to massive government intimidation. A particularly striking example of checks and balances under attack is provided by Poland, where the ruling Law and Justice (PiS) party exercises almost absolute control over the judiciary, leaving the government near-free of accountability. To be sure, civil society has mobilized massive anti-government protests in response, and in December 2017, the European Commission initiated article 7 proceedings against Poland, citing the fact that the judiciary had been brought under the political control of the ruling majority. However, neither of these actions have proven able to bring about a restoration of the Polish judiciary’s independence. In fact, Poland’s Central Anticorruption Bureau has been increasingly staffed with employees who are loyal to the PiS and target opposition politicians.

Independent media outlets are also subject to a growing number of attacks by the Polish government: The outright politicization of Poland’s National Broadcasting Council KRRiT resulted in the dismissal of outspoken journalists and walkouts by others in protest of these developments. Other weapons wielded by the region’s powerful include excessive litigation (e.g., Croatia), insufficient ownership transparency (e.g., Bulgaria), the forced consolidation of media outlets into businesses with loyalties to governing parties (e.g., Hungary, Serbia) – not to mention personal threats or even violence. The worst imaginable outcome of such violence, the murder of Slovak journalist Ján Kuciak and his fiancée, ushered in a series of events that ultimately led to the resignation of Prime Minister Robert Fico.

Economic transformation

No model for the future

In comparison with the BTI 2018, six of the region’s 17 countries have shown slight improvements in the area of economic transformation. However, many measures, particularly in the areas of education and research, stand in the way of long-term development. Such policies are often politically motivated.

Taking only the general level of economic performance as a benchmark, many of the countries of East-Central and Southeast Europe perform remarkably well. The average regional score has edged closer to the pre-crisis level of 2008, and none of the region’s economies have deteriorated in this respect over the last two years. Boosted by foreign direct investment, Lithuania, Slovakia and Slovenia have shown some of the most solid improvements, while Bosnia and Herzegovina has been able to recover from the setbacks experienced following the 2014 floods. However, there is some doubt regarding the sustainability of the region’s positive development.

The banking system is one potentially problematic area. Here, although East-Central and Southeast Europe was able to maintain its leading position among the BTI regions, there have been significant setbacks recorded. This applies in particular to Montenegro, where there have been serious problems with banking supervision. A former vice governor of the central bank was arrested due to his alleged involvement in a corruption scandal, while the central bank in the same period suspended payments by two banks that did not comply with minimum capital risk requirements. The owner of the banks later accused President Milo Đukanović of corruption. In Poland, the government pursued a controversial “repolonization” of the banking system.

However, the lack of sustainability underlying economic-development models appears to pose an even greater danger. The governments of East-Central and Southeast Europe show relatively high levels of expenditure on research and development in cross-national comparison. In half of the region’s countries, this share amounts to about 1% of GDP, and in Slovenia, it has been 2% or higher. Nevertheless, most of the region’s countries, including some of the most economically robust, have shown clear tendencies toward decline in the areas of sustainability and the quality of education policy. Symptomatic of this trend have been the fierce recent disputes triggered by questions of education policy. Reforms have often been controversial, either because they have been thin on substance (Croatia) or because they have been politically motivated, purporting a desire to fix systems – such as that in Poland – that in fact already functioned well and had achieved excellent comparative results in past rounds of international tests. In numerous countries, students and/or teachers have organized protests (Albania) or strikes (Lithuania). Bulgaria, Hungary, North Macedonia and Romania are among the countries that have been most strongly affected by an excessively high school drop-out rate. At the same time, the declining number of school-age children in many countries is creating problems for educational systems – particularly for universities, which often compete with foreign rivals.

Governments frequently assign a comparatively low priority to measures promoting research and development in the belief that such policies do not pay off in the short term in the form of election-day votes, and do not produce a short-term return on investment. Even in the most economically advanced countries, the resources devoted to research and development have declined steadily over recent years. This is partly due to a lack of private funding, which is in some respects itself the consequence of misguided policies. For example, there are pervasive problems with vocational education, which has seen its reputation suffer because the skills and qualifications offered do not meet current labor market requirements.

Nepotism, political interference and corruption also serve to undermine the education and research sectors. In Hungary, for example, gender studies programs have been banned, the Central European University – the country’s flagship graduate-level institution – was forced into exile in Vienna, and a significant share of the country's research funding has been brought under the direct control of the government. In Romania, highly sought-after R&D funds are often used for the benefit of long-established insider institutions rather than acting as a catalyst for new ideas and innovations. The plagiarism allegations leveled against a number of leading politicians across the region (e.g., in Hungary, Romania, Serbia and Slovakia) illustrate the prevailing attitude toward education: While it is accorded a high value on paper, few are willing to make the needed investments. There is a striking gap between what the comparatively affluent countries could afford and what they are actually doing. The same is true with regard to environmental-protection policies. Although both Hungary and Poland show relatively high levels of economic development, their BTI scores for environmental policy are below the regional average. Environmental concerns are all too often subordinated to growth considerations. In addition, both countries, together with the two other economically advanced countries of the Czech Republic and Estonia, vetoed the European Union’s plans to make the EU climate-neutral by 2050.

Environmental and educational sustainability: on diverging paths

The example of Serbia shows how politics have constrained the economy in other ways. The country is facing a particular problem related to the dominance of state-owned enterprises in the network and utility sectors (e.g., rail transport, and gas and electricity transmission). These firms’ inefficiency is exacerbated by the fact that many enjoy a privileged market status or even an absolute monopoly. Their weak performance often requires the intervention of state aid; as a consequence, Serbia has the second-highest level of state subsidies in Europe. The lack of transparency additionally fuels suspicions of corruption. However, indictments and trials are rare.

Finally, in Romania, the center-left government increased the budget deficit in 2018 through tax cuts and significant spending increases, especially for public employees’ salaries and pensions. In the same year, the government introduced a new tax on banks and other sectors dominated by foreign companies, which even the finance minister called a “greed tax.” Business associations and the European Central Bank (ECB) protested that they had not been consulted. As an ironic footnote to the story, it was ultimately domestic banks whose stock prices were harmed most by the policy.

Governance

Headed for confrontation

The murder of a mayor in Poland is a particularly shocking example of just how polarized ideological camps in many countries have become. And in the Balkans, thoughts of redrawing borders are being voiced – a dangerous game.

In recent years, tensions have grown in many East-Central and Southeast European countries as ideological camps have solidified, mass protests have increased, historical grievances have festered and speculations about redrawing borders along ethnic lines have emerged. This tinderbox atmosphere can easily result in violence, as a variety of events at the beginning of 2019 show: In Gdansk, a mentally ill young man – apparently driven by the virulent anti-liberalism fomented by the PiS – stabbed to death the city’s liberal mayor, Paweł Adamowicz, at a public event. In Serbia and Hungary, efforts to suppress the political opposition and the government’s refusal to accept accountability resulted in the mobilization of tens of thousands of people who took to the streets at the end of 2018 while the government demonstrated no intent to take their demands seriously.

In terms of foreign policy, both the Hungarian and Polish governments are headed toward confrontation. Yet, however united both governments may be in terms of their anti-EU agenda, as is demonstrated by their rejection of refugee quotas, there are major differences between the two when it comes to their relationship with Russia, for example. Whereas Poland still harbors considerable reservations regarding Russia, Hungary's Prime Minister Viktor Orbán is an open admirer of President Putin. In fact, the Russian state-owned company Rosatom is currently building a new nuclear power plant in the country.

The situation in the Balkans, meanwhile, remains explosive as things more recently have taken a turn for the worse. Croatia and Serbia continue to butt heads over disputes that are rooted in conflicts waged in the 1990s. Vojislav Šešelj, the leader of the opposition Serbian Radical Party, refused to hand in his resignation as a member of parliament after being convicted of war crimes in 2018. The controversial statements made by each of the countries’ ministers of defense resulted in a mutual ban of entry for both men. In addition to the extremely heated rhetorical battles waged by the two countries, Croatia and Serbia have been caught up in a relatively moderate but nonetheless hostile arms race. Bosniak war victims have condemned the Croatian president for inappropriately claiming that Bosnia and Herzegovina (BiH) is becoming a hub for Islamist terrorists and for her criticisms of the election of a Croat member of Bosnia and Herzegovina’s collective presidency. Bosnia and Herzegovina’s relations with neighboring Serbia deteriorated when Serbian President Vučić aligned himself with the leadership of the governing party of the Republika Srpska (RS), which is committed to securing independence for the federal entity.

The Brussels Agreement between Serbia and Kosovo, signed in 2013, has also come under heavy fire since the election in 2017 of a more nationalist Kosovar government. After Serbia blocked Kosovo's membership in Interpol, Kosovo retaliated with 100% customs tariffs on imports from its neighbor to the north in 2018. President Vučić proposed a land swap as a means of opening up talks on EU membership, but this resulted not only in a split between the president and prime minister of Kosovo, but also within the international community. Whereas both EU High Commissioner Federica Mogherini and U.S. President Donald Trump, for example, praised the proposal as a means of promoting compromise and stability, other observers remained highly skeptical. Indeed, many fear that redrawing borders along ethnic lines could set a precedent with explosive potential that would reach far beyond the borders of the Western Balkans.

Growing tensions are hampering consensus-building

The fight against corruption remains an urgent regional issue. Although Estonia, Lithuania and Slovenia register among the best-rated performers in battling corruption, on regional average, this indicator suffered the largest losses in the Governance Index. Problems with corruption were most evident in Romania. When the coalition under the leadership of the Social Democrats (PSD) came to power in early 2017, it quickly sought to decriminalize the abuse of public office in cases where the damage was less than €45,000. This move was presumably designed to clear PSD leader Liviu Dragnea of past crimes, thereby paving the way for him to be appointed prime minister. Following a wave of mass protests that did not subside until 2019, the government withdrew the initiative, but it continued to undermine anti-corruption measures from behind the scenes. The protests prompted President Klaus Iohannis – a critic of the government – to hold a national consultative referendum in May 2019 that proposed imposing a ban on amnesties and pardons for individuals convicted of corruption. In the Czech Republic, Andrej Babiš, who has held the office of prime minister since December 2017, was accused of embezzling EU funds for his companies. Although Babiš dismissed the accusations as a witch hunt, the preliminary report issued by the European Anti-Fraud Office, which was leaked to the media before the 2017 parliamentary elections, confirmed the results of the Czech police investigation.

Amid all of this, there is nonetheless a ray of hope: North Macedonia's new government, with its much more consensus-oriented tone, has helped ease ethnic tensions and involve civil society more thoroughly in the country’s political processes. These positive developments are reflected in the strongest improvement recorded in the region in the Governance Index. However, many political and economic challenges remain, including investment gaps in infrastructure and a bloated public administration apparatus that is intransparent.

Outlook

Clouded hopes

An increasingly eviscerated rule of law, disregard for those institutions exercising democratic oversight, high levels of corruption, and nepotism: These areas are destined to be the political weak spots in East-Central and Southeast Europe. This should come as no surprise, as the problems begin with the political leadership itself in many of these countries. Far too many of the region’s leaders see little to no need to target transformation. But there are increasing signs that citizens are losing patience with corrupt and illiberal practices. In North Macedonia, Romania and Slovakia, citizens have taken to the streets in mass protests that have forced governments to introduce tangible change. The spirit of 1989 still seems to be alive.

The EU, on the other hand, has lost much of its glamour as a beacon of hope and no longer holds much weight among the new member states when it comes to promoting reforms. This is even more evident in view of the growing fragmentation under way in Europe more generally. Just how differently various countries interpret EU rules and regulations can be seen in the process of eurozone enlargement. According to the accession treaties, all new members are required to adopt the euro, as five countries have already done between 2007 and 2015. The current governing parties of the Czech Republic, Hungary and Poland oppose introducing the euro in the near future, even if they meet the convergence criteria. In contrast, the governments of Bulgaria, Croatia and Romania are determined to join the eurozone by 2022 or 2023. These three countries meet the Maastricht Treaty criteria of inflation and exchange rate stability, although Croatia still struggles with a high debt ratio and Romania with overly high interest rates on long-term bonds. Moreover, none of these countries features an administration of justice that is fully compatible with the EU framework.

The new EU member states, in particular, have benefited in the past from their access to the EU single market and from the inflow of generous EU structural funds. However, fewer funds will be available in the upcoming EU budget round for 2021. At the same time, Hungary and Poland are battling legislation designed to link the allocation of subsidies to those countries demonstrating respect for the rule of law. The region's weak performance – relative to its economic strength – in terms of environmental, educational and R&D matters suggests that continued solid growth requires more investment in these areas, particularly given the narrowing inflow of EU funding.

EU membership remains a target for the six countries of the Western Balkans. But even the four countries with candidate status (Albania, Montenegro, North Macedonia and Serbia) are not yet ready for accession. The EU itself seems ambivalent about letting them join. The EU’s blocking of Albania and North Macedonia from starting membership talks in the fall of 2019 suggests anything but a desire to bring these countries into the fold. Among a handful of older member states, another EU enlargement could prove politically explosive, as the center of power would shift further to the East and the political landscape of the EU subject to further fragmentation. For Serbia, on the other hand, strengthening ties to the EU involves walking a tightrope – also because of the country’s strong historical ties with Russia, which sees the EU as an expansive, competing power in the region. As a formerly direct or indirect ruling power in the region, Russia is clearly exerting more and more influence throughout the region as it finds allies in illiberal regimes (Hungary), while others are growing increasingly more fearful of the regional hegemon. NATO membership therefore remains crucial to most countries in the region; Montenegro was the most recent country to join, in 2017, and North Macedonia is well on its way to joining soon.

Those Western Balkan countries that are not yet members of the EU face a potentially explosive cocktail of circumstances. For one, regional tensions are growing as Bosnia and Herzegovina, Croatia and Serbia pull in three different directions. For another, hopes of EU membership have dimmed for most countries seeking membership, even though the prospect of membership has always been one of the most important arguments putting wind in the sails of (relatively) moderate, pro-European political forces. Strengthened by Russia's increased determination, this combination could strengthen radical political forces and exacerbate mutual animosities and ethnic tensions. And while the encouraging developments observed in North Macedonia point in a different direction, the future there remains uncertain, too.