What type of fiscal policy for the Western Balkans during the crisis

In the period 2003 to 2008, Western Balkan countries have made the average budget deficit of 0.8% of GDP and an average public expenditures of 38% of GDP. The public debt of the Western Balkans in the period was on average 50% lower than the public debt of euro-zone countries. Growth of budget revenues and strong performance in the conduct of fiscal policy, however, was largely a result of rapid credit expansion in this region. Since the ownership of banks in the Western Balkans has been dominated by banks from Austria, Italy, France and Slovenia, the global financial crisis had resulted in a sudden drop in lending activity in the Western Balkans, which caused a recession in most countries of the region and the decline of fiscal discipline in 2009-2010. This paper argues that the fiscal discipline in Western Balkan countries is needed with respect to the public expenditures on public administration, but that a remedy for getting out of the economic crisis in the region is not a restrictive fiscal policy. It is a controlled and targeted fiscal expansion that is needed for the Western Balkans. To get out of the economic crisis Western Balkan countries should increase cross-border cooperation based on joint investment projects. Cross-border investment projects could be financed by a new type of financial assets government bonds denominated in national currencies and guaranteed by the European Union. Receipts from issuing these securities would be exclusively used to finance cross-border capital projects that would facilitate economic growth and employment, and a more efficient portfolio management of banks and institutional investors in the region.