From The Sleepwalkers: How Europe Went to War in 1914, by Christopher Clark (Harper, 2013), pp. 28-30:
In June 1881, Austria-Hungary and Serbia agreed a commercial treaty. Three weeks later, it was supplemented by a secret convention, negotiated and signed by Prince Milan himself, which stipulated that Austria-Hungary would not only assist Serbia in its efforts to secure elevation to the status of a kingdom but would also support Serbian claims to territorial annexations in Macedonia. Serbia, for its part, agreed not to undermine the monarchy’s position in Bosnia and Herzegovina. Article II stated that Serbia ‘would not permit any political, religious or other intrigue to be directed from her territory against the Austro-Hungarian monarchy, including Bosnia, Herzegovina and the Sanjak of Novi Pazar’. Milan reinforced these agreements with a personal engagement in writing not to enter into ‘any kind of treaty’ with a third state without first consulting Vienna.
These agreements were, to be sure, a fragile foundation for good Austro-Serbian relations: they had no anchorage in the sentimental life of the Serbian public, which was deeply anti-Austrian; they symbolized a relationship of economic dependency which was increasingly unacceptable to Serbian nationalist opinion; and they depended on the cooperation of an erratic and increasingly unpopular Serbian monarch. But as long as Milan Obrenović remained on the throne, they at least ensured that Serbia would not side with Russia against Austria, and that the sharp end of Belgrade’s foreign policy would stay pointed in the direction of Macedonia and the coming contest with Bulgaria, rather than at Bosnia and Herzegovina. A new trade treaty was signed in 1892 and the Secret Convention was renewed for ten years in 1889; it was allowed to expire thereafter, though it continued to be the operative platform for Serbian policy vis-à-vis Vienna.
The change of dynasty in 1903 signalled a major realignment. Austria was quick to recognize the Karadjordjević coup, partly because Petar had assured the Austrians beforehand that it was his intention to keep Serbia on an Austrophile course. But it was soon evident that Serbia’s new leaders planned to push towards greater economic and political independence. During 1905–6, a crisis unfolded in which trade policy, armaments orders, high finance and geopolitics were closely intertwined. Vienna pursued a threefold objective: to secure a commercial treaty with Serbia, to ensure that Serbian armaments orders would continue to be placed with Austrian firms, and to contract a major loan to Belgrade.
The failure to achieve agreement on any of these questions produced a drastic cooling of relations between the two neighbours, and the outcome was an unmitigated disaster for Vienna. The Serbian armaments orders went to the French firm Schneider-Creusot instead of to the Austrian rival, Škoda of Bohemia. The Austrians reacted by closing the border to Serbian pork, triggering a customs conflict that came to be known as the ‘pig war’ (1906–9). But this was a counter-productive measure, since Serbia quickly found other export markets (especially in Germany, France and Belgium) and at last began to build slaughterhouses on a substantial scale, thus emancipating itself from its long-standing dependence on Austro-Hungarian processing facilities. Finally, Belgrade secured a major loan again not from Vienna, but from Paris (offered in return for the placement of armaments orders with French firms).
It is worth pausing for a moment to consider the larger significance of this French loan. Like all the emergent Balkan states, Serbia was an inveterate borrower, totally dependent on international credit, most of which was used to finance military expansion and infrastructural projects. Throughout the reign of King Milan, the Austrians remained willing lenders to Belgrade. But since these loans outran the debtor state’s financial resources, they had to be hypothecated against various pledges: for each loan some definite revenue was pledged, or some railway property mortgaged. It was agreed that pledged revenues from railways, stamp and liquor taxes should be paid into a special treasury controlled jointly by the representatives of the Serbian government and the bondholders. This arrangement kept the Serbian state afloat during the 1880s and 90s, but did nothing to restrain the financial profligacy of the Belgrade government, which had managed to accumulate an indebtedness of over 350 million francs by 1895. With bankruptcy looming, Belgrade negotiated a new loan through which almost all of the old debts were consolidated at a lower rate of interest. The pledged revenues were placed under a separate administration run partly by the representatives of the creditors.
In other words, fragile debtors like Serbia (the same applied to the other Balkan states and to the Ottoman Empire) could secure loans on reasonable terms only if they agreed to concessions of fiscal control that amounted to the partial hypothecation of sovereign state functions. For this reason among others, international loans were a political issue of the highest importance, inextricably wound up with diplomacy and power politics. French international lending in particular was highly politicized. Paris vetoed loans to governments whose policies were deemed unfriendly to French interests; it facilitated loans in return for economic or political concessions; on occasion it reluctantly conceded a loan to unreliable but strategically important clients in order to prevent them from seeking relief elsewhere. It pursued potential clients aggressively – in Serbia’s case the government were given to understand in the summer of 1905 that if they did not give France first refusal on the loan, the Paris money markets would be closed altogether to Serbia. Acknowledging this nexus between strategy and finance, the French foreign ministry merged its commercial and political divisions in 1907.
Seen against this background, the Serbian loan of 1906 was an important turning point. French financial relations with Belgrade became, in the words of an early American analyst of pre-war high finance, ‘more intimate and dominant’.66 The French came to own more than three quarters of all Serbian debt. These were vast commitments for the Serbian state – repayment schedules extended forwards to 1967 (in fact Belgrade defaulted on the greater part of its obligations after 1918). The lion’s share of this money went into military purchases (especially fast-firing artillery), most of which were transacted in France, much to the annoyance not just of Austrian, but also of British diplomats and armaments suppliers. The loan of 1906 also enabled Serbia to resist Vienna’s commercial pressure and to wage a protracted tariff war. ‘The undoubtedly successful issue of [Prime Minister] Mr Pašić’s resistance to [Austrian] demands,’ the British envoy in Belgrade reported in 1906, ‘marks a distinct step in the economic and political emancipation of Servia.’
These successes in the field of high finance should not distract us from the parlous condition of the Serbian economy as a whole. This had much less to do with Austrian tariff policy than with a process of economic decline that was deeply rooted in the country’s history and agrarian structure. The emergence and subsequent expansion of Serbia were accompanied by a process of drastic de-urbanization, as the mainly Muslim towns were depopulated through decades of harassment and deportations. What replaced the relatively urbanized and cosmopolitan imperial structures of the Ottoman periphery was a society and an economy entirely dominated by smallholding Christian peasants, a consequence in part of the absence of a home-grown Serbian aristocracy and in part of the ruling dynasty’s efforts to prevent the emergence of such a ruling class by blocking the consolidation of latifundial estates. While the cities shrank, the population grew at an awesome rate; hundreds of thousands of hectares of marginal land were opened up for exploitation by young families, loosening social constraints on marriage and fertility. But this rampant growth in the production of people did nothing to reverse the cycle of underperformance and decline that gripped the Serbian economy between the middle of the nineteenth century and the outbreak of the First World War in 1914. Per capita output in farming fell by 27.5 per cent between the early 1870s and 1910–12, partly because the expansion of arable land led to large-scale deforestation and thus to a decline in the pasture lands needed to sustain large-scale pig-husbandry, traditionally the most profitable and efficient arm of Serbian agricultural production. By the 1880s, the beautiful forested wilderness of the Šumadija – perfect pasture land for swine – had all but disappeared.
