Dejan Šoškić, Professor Of The University Of Belgrade Faculty Of Economics

We’re Living In Dangerous Times

With relatively high inflation persisting, interest rates rising and economic activity once again waning, Europe is perhaps at its most vulnerable, and with it the economies of this region, which are inextricably linked to the EU. Some controversial measures on the part of the Government of Serbia contribute to the possible ramifications being even tougher than anticipated

We are certainly living in more dangerous times today than we’ve seen over the past few decades, considers Dejan Šoškić, professor of the Belgrade University Faculty of Economics and former governor of the National Bank of Serbia, with whom we discussed new economic and political realities, and the possibility that the escalating of existing problems could make 2024 a year that won’t lead the world towards recovery, but rather towards a possible further deterioration of the economic situation, particularly in the EU, which is very susceptible to war and economic turmoil. That also spells bad news for the region, which has decidedly strong ties to European economies.

The problem partly lies in the fact that new economic powers have emerged, but they have yet to gain an appropriate place on the political stage. In the meantime, those coming from preexisting positions of power are attempting to resolve open issues in the world of the third decade of the 21st century without having any understanding for that change. This scenario, and the possibility of the political crisis escalating further, could make 2024 a much riskier year than we think from today’s perspective, considers our interlocutor.

To what extent are current economic growth forecasts, at the global level and in Europe, being impacted by the conflict in Gaza and the possibility of it spreading to the region?

— The conflict in Gaza is extremely risky and is unfolding under international circumstances that have altered significantly compared to during previous Middle East conflicts. Today we see an obviously reduced level of consensus on the policy being implemented by the U.S. and Israel in that part of the world among some important countries in the region (Saudi Arabia, Turkey, Jordan etc.). At the same time, with China’s mediation, significantly improved relations have been established between Iran and Saudi Arabia. Major military powers have displayed a certain degree of readiness to provide financial and military support to the parties in the conflict, especially in the event that it spreads.

The policy of huge capital expenditure being led by the Serbian government seems to me to be inappropriate for the current fiscal position of the country

These are potentially tectonic shifts in the region, which ensure that the possible spreading of the conflict in Gaza to the surrounding countries could provoke significantly larger and more dangerous conflicts, with unforeseeable consequences. What is already evident is that uncertainty over energy supplies is set to increase in the period ahead, though a significant hike in energy prices has yet to occur. If the conflict doesn’t spread from Gaza to the region, there will, as a rule, be no major economic consequences, because the Israeli economy itself is relatively insignificant to economic flows in Europe and the world.

In reference to the impact of the wars in Ukraine and the Middle East, World Bank Chief Economist Indermit Gill said recently that we are facing two energy shocks for the first time. How much can similarities really be drawn between the two shocks and where do they differ the most when it comes to their impact on Europe and our region?

— The effects of the “two energy shocks”, as Mr Gill describes them, have so far had a fairly limited impact and world oil prices still haven’t reached the levels they were at when the conflict in Ukraine started or in mid-2008, when they were well over $100 a barrel. At the same time, the possible spreading of these conflicts could have very serious negative consequences in terms of rising oil prices, inflation and stagnating economic growth around the world. The conflict in Ukraine caused disruption to regular supplies of energy, first and foremost due to the sanctions imposed against Russia, an important energy supplier globally.

In the case of the possible expansion of the conflict in the Middle East, certain countries in a possible conflict are, in general, also significant producers of oil and gas, and we could see significant and relatively longstanding reductions in production and/or transport capacities in supplying the world market with energy, and that could in turn have extremely serious consequences for inflation and economic growth around the world.

In the meantime, JPMorgan Chase CEO Jamie Dimon said last month that “now may be the most dangerous time the world has seen in decades”. Where would you draw a line here between political narratives and basic economic indicators?

— This is indisputably the most dangerous time in recent decades. The conflict in Ukraine is a conflict between Ukraine, which is supported by the whole of the Western world, and Russia, which is the world’s biggest nuclear power. The conflict in the Middle East is a conflict between Israel, which is believed to possess nuclear weapons, and not only Hamas, but potentially the Arab and Islamic world in that region, which, on the issue of this conflict, is now more unified and united than at any time in decades. At the same time, three world superpowers are giving relatively clear indications that, in the event of the conflict spreading, they would support opposing parties.

The world today differs drastically to the one of just a few decades ago. There has been a significant shift in world economic power, which many analysts don’t seem to be aware of in their analyses. If we look at GDP levels (purchasing power parity adjusted) from the Washington database of the World Bank1, which can be used to make relevant international economic comparisons, we see that – unexpectedly for some – China has been the world’s largest economy since back in 2017, and is today already approximately 20% larger than the U.S. economy. Furthermore, and again probably unexpectedly for many, we see that Russia has a larger economy than Germany and that it is the largest European economy, that Iran’s economy is three times the size of Israel’s, and that Turkey’s economy is bigger than Italy’s. We can also see in that same World Bank database that the five BRICS countries are economically stronger than the G7 countries. These new world economic realities are obviously not yet clear to many, and lead to the risk of someone persistently attempting to resolve open issues in the world of the third decade of the 21st century with the perception of the relative economic power relations of the final decade of the 20th century.

Renowned economist Olivier Blanchard suggested back in early 2023 that secular stagnation is not yet over. An aggressive fiscal policy and rising public debt used to be widely accepted solutions for overcoming economic stagnation. What makes things different today; and what impact could an economic slowdown around the world, and particularly in Europe, have on Serbia?

— Secular stagnation, as a theoretical model that implies that low private demand represents a key limiting factor for economic growth, was considered by many as a suitable model to describe the economic situation in the aftermath of the 2008 World Economic Crisis. This is used to explain the need to reduce interest rates drastically and implement huge monetary expansion, so-called quantitative easing, first in the U.S., and later also in the EU, as a way to use the lowering of interest rates and the increasing of banking sector liquidity to stimulate economic growth. However, we saw a significant part of that additional liquidity ending up on the securities market and the real estate market, and partly also on the commodities market (especially after the outbreak of the war in Ukraine and the imposing of sanctions against Russia), which prompted inflation around the world in 2022.

Low expected growth rates in the EU don’t provide much reason for optimism regarding Serbia’s own economic growth. Simultaneously, world economic growth isn’t under threat, because a growth rate of 5% is expected for China, 6.3% for India and 2.2% for Russia, and those are today three of the world’s five largest economies

Circumstances are today changing. Inflation is higher, interest rates are rising and economic activity is again faltering. Europe is perhaps the most vulnerable in that domain, because it doesn’t have enough energy of its own, as well as other raw materials and semi-finished products needed for its economic activity, industrial production and agriculture in particular. The EU’s economic prospects aren’t encouraging. Expected growth rates for 2023 – of 0.7% in the EU and 0.5% in Germany2 – don’t provide much reason for optimism regarding Serbia’s economic growth either. Simultaneously, world economic growth isn’t under threat, because a growth rate of 5% is expected for China, 6.3% for India and 2.2% for Russia, and those are today three of the world’s five largest economies. Still, if Europe is deprived of relatively cheap energy sources over the long term, that will inevitably be reflected in its competitiveness, especially when it comes to industrial production in the EU. Such circumstances will result in the importance of the EU economy to the world reducing in relative terms over the period ahead. This in turn doesn’t provide too many reasons for optimism when it comes to accelerating economic growth in Serbia and the region, which are predominantly dependent on the EU when it comes to trade and investment.

Elections are in the spotlight in our country, and budget expenditure always increases during election campaigns. Considering the expenditure announcements to date, can we say that this campaign is more generous than previous ones or less?

— I think too much is being spent. They are announcing incomes with higher growth rates than current inflation, even though it is known that increasing budgetary spending, almost without exception, fuels inflation. This is particularly problematic when a restrictive monetary policy is being conducted at the same time as an expansionary fiscal policy. This will hamper and extend the process of reducing inflation, and cause the subsequent necessarily more restrictive monetary policy to reduce economic growth potential.

This, however, is unfortunately not the end of inappropriate budget allocations. The huge capital expenditure envisaged for the construction of the stadium and some other facilities and infrastructure, under conditions of rising interest rates and without serious public debate and pre-investment studies made available to the public, seem to me to be unacceptable and completely wrong.

Despite inflation being relatively high, and the Fiscal Council and quite a large number of economists warning of the failure to take seriously enough the maintaining of the macroeconomic and fiscal balance, we are bearing witness to Serbia essentially receiving very positive relative ratings from the IMF and ratings agencies. Who is in the right and how come the differences of opinion?

— Serbia is one of the poorest European countries. The average annual economic growth rate in Serbia from 2001 to 2011 was 4.44% per annum and was above the world growth rate and the GDP growth rate of Central and Eastern Europe. The average annual economic growth rate in Serbia from 2012 to 2023 is 2.27%, which is lower than the world growth rate and the GDP growth rate in Central and Eastern Europe. So, Serbia has fallen even further behind the CEE and the world over the last ten years. As an illustration, we had a growth rate of 2.3%3, in Serbia last year, while the average growth rate around the world was 3.5%. Expressing Serbia’s GDP in euros, which is commonplace among our public, under the conditions of a fixed exchange rate and the present inflation, has the effect of nominal GDP in euros showing growth that isn’t real.

A somewhat distorted picture can be created under conditions of inflation and a fixed exchange rate concerning expression of GDP in Euros; both in terms of Serbian GDP trends, but also about the real debt to GDP ratio

As in illustration, in the pandemic year of 2020, we had a real GDP fall of 0.9%, but when the GDP was expressed in euros, due to the present inflation and fixed exchange rate, it was higher than 2019’s GDP, i.e., nominal GDP showed growth when expressed in euros, even though real GDP fell by 0.9%. A similar thing happens with debt-to-GDP ratio indicators. Debt indexed in a foreign currency, under conditions of inflation and a fixed exchange rate, decreases in relation to GDP even when there is no real GDP growth. This is because nominal GDP increases as a result of inflation, which when multiplied by the fixed exchange rate provides GDP growth in euros without real GDP growth. As such, a completely distorted picture can be created under conditions of inflation and a fixed exchange rate; an illusion about GDP trends, but also about the real debt to GDP ratio.

In the same way, although we’ve seen export activity decreasing in Europe, we are witnessing foreign investments growing constantly in Serbia, despite the current relevance of the themes of corruption, excessive bureaucracy and poor administration. What makes Serbia attractive to FDI inflows today, when it no longer has such cheap labour?

— Not all FDI is equally beneficial to the national economy. Only FDI that comes and launches new economic activities in the so-called tradable part of GDP (new export-oriented activities), and which creates new and well-paid jobs, represents a real improvement to the national economy and real and desirable FDI. A lot of it, however, is FDI that represents something other than what we expect from it. Any retained (reinvested) profit of companies with foreign founders is also classed as FDI. These can sometimes be investments that have very dubious benefits to society (bookmakers) or in areas where they squeeze out local companies and entrepreneurs, and even the state sector (real estate construction, hospitality facilities, health clinics, publishing school textbooks, private schools, representation of foreign companies etc.). We also shouldn’t lose sight of the fact that, in countries with weak institutions and widespread corruption, even money taken from illegal activities abroad can be returned to the country, in order to legalise it, in some form that is categorised as FDI. Serbia is the largest economy in the Western Balkan region and, as such, should be somewhat more attractive to foreign investments. What is needed is for our side to develop an awareness that not all FDI is the same, nor is it all equally useful to the development of the economy and society, and this is particularly important if FDI is incentivised with budget subsidies.


Not all FDI is the same, nor is it all equally useful to the development of the economy and society, and this is particularly important if FDI is incentivised with budget subsidies


The possible spreading of the conflict in Gaza to the surrounding countries could provoke significantly larger and more dangerous conflicts, with unforeseeable consequences


We’re spending too much, and when a restrictive monetary policy is being conducted at the same time as an expansionary fiscal policy, that hampers the curbing of inflation and negatively impacts growth

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