Milojko Arsić, full professor at the University of Belgrade Faculty of Economics, corresponding member of the Serbian Academy of Sciences and Arts

Growth in domestic demand will be the main driver of Serbia’s economic growth over the coming year, which isn’t sustainable over the long run for a small and open economy like Serbia’s, due to rising public and external debt

Coming to the end of one year and the start of the next naturally provides good reason to wonder what awaits us over the year ahead. Standing out among the key challenges in 2025 are the ongoing energy crisis, cybersecurity, rising geopolitical tensions, the emergence of new global economic centres like China, and their rivalry with the West, falling trust in multilateral institutions, political uncertainty in Europe, climate change and demographic problems.

Adding to this multitude of issues are recent events in Syria, which is again becoming the epicentre of geopolitical rivalry, with the potential to further fuel global tensions, particularly in the context of relations between the U.S., Russia and China. Here CorD Magazine discusses some of these challenges, but also related internal ones, with Milojko Arsić, full professor of the University of Belgrade Faculty of Economics and corresponding member of the Serbian Academy of Sciences and Arts (SANU/SASA).

In your opinion, how could the possible introduction of trade tariffs by the U.S. – as announced by president- elect Trump – impact Europe and, consequently, Serbia’s own economy?

— Exports of goods from the EU to the U.S. totalled a value of 502 billion euros in 2023, which was close to 20% of all EU exports. In accordance with that, the U.S. is collectively the largest export market for EU countries. Over that same year, the U.S. exported goods worth 347 billion euros to the EU, representing close to 17% of U.S. exports – and only Canada and Mexico represent a similar share of the U.S. export market. aside from this, the EU and U.S. have a high volume of service sector trade, as well as major mutual capital investments.

The possible introduction of tariffs on products exported from the EU to the U.S. would have a negative impact on the EU economy, which is stagnating anyway. The EU has been exposed to negative shocks over the last few years, which have caused the EU economy to stagnate, while some member states are even in recession. The EU has reduced its exports to Russia significantly over recent years, which has also impacted its economy negatively, while rising energy prices have reduced its competitiveness further.

The reducing relative importance of Europe to the world economy – its technological straggling in important areas and problems in the functioning of the EU – impact on redirecting Serbia towards cooperation with non- European countries

The EU is confronted by structural problems, such as labour shortages and lagging behind China and the US in terms of technological innovation. Any further deterioration of the EU’s economic situation would impact Serbia’s economy negatively, as the EU is Serbia’s chief economic partner, whether it comes to trade or FDI. Approximately 60% of Serbia’s trade is conducted with the EU, while the EU is the biggest investor in Serbia.

Although introducing high tariffs on EU exports at this time would impact both the EU and Serbia negatively, it’s possible it won’t happen because such a policy would also have serious negative ramifications for the U.S. economy. President-elect Trump’s possible introduction of high tariffs on imports from the EU, China, Mexico, Canada and other countries would cause inflation to rise in the U.S. Likewise, the noted countries would certainly apply countermeasures in terms of introducing their own tariffs on products from the U.S., which would cause American exports to fall and threaten U.S. jobs.

Considering the difficulties afflicting the automotive industry and the extent to which it is represented in the Serbian economy, what could the possible ramifications be for employment levels in Serbian factories?

— The negative impact on Serbia of the situation in the European automotive industry has so far been reflected enin the delay to the start of production of electric Panda cars in Kragujevac. When it comes to Serbian companies that produce auto parts, it is estimated that they will be impacted in the case that the European auto crisis becomes deeper and protracted. Although such a possibility isn’t out of the question, the chances are that improving cost efficiency will improve the situation for the European auto industry. If the crisis is short-lived, auto parts makers likely won’t be impacted, because production in Serbia is among the cheapest in Europe.

Could public investments envisaged for 2025 lessen the possible negative impact of falling exports and FDI on GDP?

— The main drivers of Serbia’s economic growth over the past few years have been high FDI and high public investments. Planned public investments for the year ahead are slightly higher than in previous years, while the relatively high growth of private spending is also planned. As such, in the year ahead it is planned for rising domestic demand to be the main engine of growth for the Serbian economy, which isn’t sustainable over the long run for a small, open economy like Serbia’s, as a result of the growth of public and external debt.

The positive effect of public investments on Serbia’s economy will also be somewhat limited due to largely foreign companies being engaged in their implementation, while ever-more foreign workers are also being hired. The longterm impact of public investments on the economy is less certain, because that depends on how effectively the facilities built with these investments (highways, stadiums, exhibition venues etc.) are utilised.

What are the key challenges of such an approach from a fiscal policy perspective?

— There are several challenges when it comes to using public investments to stimulate the Serbian economy. The first is the fact that public investments are financed mostly through loans, which means increasing Serbia’s public debt, and thus increasing future financing costs. The public debt is starting to negatively impact the sustainability of public finances and the economy despite being below the GDP, because Serbia is borrowing at significantly higher interest rates compared to developed countries. A second problem is that Serbia’s selection and implementation procedures for public projects deviate markedly from global good practices. Over the past few years, decisions on the implementation of public projects in Serbia have tended to be made without the preparing of economic and social impact studies, which increases the risk of implementing projects that are neither a priority nor profitable over the long term. Finally, the selection of contractors and oversight bodies is predominantly conducted through direct negotiation as opposed to competition procedures, a consequence of which is implementation costs almost certainly being higher than is justified economically, and the quality of work being sub-standard.

To what extent do the challenges confronting Serbia today, as a result of global economic changes, differ from those we faced as a closed economy? What has changed and what has stayed the same?

— Viewed over the long-term, the 2001 opening up of Serbia’s economy to the world has brought an enintire array of benefits to Serbia, such as the possibility to sell local products, and buy cheaper foreign products, on the world market, the influx of foreign capital and modern technologies into the country etc. The inflow of foreign direct investments, representing one of the main drivers of growth and modernisation for the country’s economy, is particularly important for Serbia, which traditionally has low domestic savings. In general terms, the opening up of Serbia’s economy to the world has been one of the key drivers of Serbia’s economic advancement over the past two and a half decades.

If the EU auto industry crisis is short-lived, auto parts makers in Serbia likely won’t be impacted negatively, due to the country’s competitive production costs

With the opening up of Serbia’s economy to the world, the country was exposed to both positive and negative changes in the world economy. As such, for example, the major financial crisis of 2007-2008 resulted in an abrupt halt to inflows of capitals to Serbia, which caused the depreciation of the dinar, followed by rising inflation. Economic activity in Serbia fell in 2009, after which came several years of stagnation. The fact that the crisis came before the end of the first phase of the country’s transition proved particularly unfavourable for Serbia. Similarly, the hike in world energy and food prices, resulting from geostrategic conflicts and an expansive monetary policy pursued by major central banks, triggered rising inflation in Serbia during 2022 and 2023. As an importer of capital, Serbia benefited from the low interest rates on the world market from 2014 to 2022, but also rising interest rates over the last two or three years. Likewise, labour emigration possibilities during a period of high unemployment eased the pressure on the domestic labour market, though worker emigrations have intensified Serbia’s labour shortage problems over the last few years.

Does linking Serbia’s industry to Europe remain the optimal option, or is policy diversification also required here?

— Due to geographic proximity, low transport costs and cultural similarities, Europe will in future continue to be Serbia’s most important economic partner. However, the reducing relative importance of Europe to the world economy – its technological straggling in important areas and problems in the functioning of the EU – naturally impact on redirecting Serbia towards strengthening cooperation with non-European countries. The economic and technological rise of China and other Asian countries certainly justifies the establishing of cooperation with these countries in industry and other areas. Cooperation with them should serve the function of increasing the prosperity and wellbeing of Serbia, which means all companies doing business in Serbia should respect the country’s laws, including those related to workers’ rights, the environment etc.