The Western Balkans is facing a double-dip recession this year led by a 2.5 percent contraction in Serbia, and recovery in 2013 will be "very slow", the World Bank warned on Tuesday.
Its regional coordinator also said that debt in some countries was too high.
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"I would say that debt in Montenegro, Serbia and Albania is at very dangerous levels, particularly in Albania at 60 percent (of GDP) but it's increasing very rapidly in Serbia and Montenegro," Jane Armitage, World Bank coordinator for the Western Balkans, told Reuters in an interview.
The bank's forecast for Serbia, the region's biggest economy, was the most pessimistic yet, as the country struggles to stimulate growth while cutting back on its spiraling budget deficit.
"This prolonged uncertainty in the euro zone means that we are facing the dreaded double-dip recession," Armitage said. "For this year at this point, we would predict the Western Balkans is in recession."
Albania and the former republics of Yugoslavia have seen exports fall and foreign direct investment dry up due to the debt crisis in the euro zone, the Balkan region's main source of trade and investment.
Remittances from citizens overseas are down, and the harsh winter and long, hot summer hit the agricultural sector and hydro-electric production, Armitage said.
Only Kosovo, a new country and small economy of 1.7 million people, is likely to continue growing thanks to a low level of integration with the European market, low debt rate and heavy investment in infrastructure, Armitage told Reuters.
But elsewhere the situation was poor.
"It will be very slow growth next year," she said of the region. "Deficits are everywhere increasing so the countries are facing really tough times.
"They need to continue on the path of fiscal consolidation and start to bring their debt levels down but at the same time growth is so low and there is such need for infrastructure investment."
Serbia's central bank said last month that national output would likely shrink by 1.5 percent. Unemployment has hit a staggering 25 percent.
The Socialist-led government is targeting growth next year of 2 percent, while also pledging to cut the budget deficit from a projected 6.2 percent in 2012 to 3.6 percent in 2013.
It needs to rein in the deficit to secure a new credit deal with the International Monetary Fund, which is sending a mission to Serbia on November 13.
Armitage stressed that Serbia must clinch a deal with the IMF before the World Bank gives the green light to a $400 million budget support loan. She lamented the slow pace of reform as a condition of World Bank support.
Bosnia, Armitage said, needs to undertake long-delayed structural reforms before the bank makes operational $200 million in loans.
(Editing by Matt Robinson. Editing by Jeremy Gaunt.)