Industrialised states and Russia wrangle for two days before agreeing on Balkans stability pact

The German Chancellor, Mr Gerhard Schroder, made no bones yesterday about the essential message of the West's Stability Pact …

The German Chancellor, Mr Gerhard Schroder, made no bones yesterday about the essential message of the West's Stability Pact for the Balkans, a multi-billion pound aid package agreed at the G8 summit in Cologne.

"Whoever works with us - their people will gain something. We must make this clear in a completely material way. This is the power of good example," he said.

The leaders of the world's leading industrialised nations and Russia wrangled for two days about the terms of the Stability Pact before agreeing finally to a joint statement on Kosovo yesterday morning.

For once, the argument was not about who should pick up the bill but about who should benefit from the plan. Britain's Prime Minister, Mr Tony Blair, was adamant that Serbia should receive nothing while President Slobodan Milosovic remains in power.

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But Russia insisted that the people of Serbia should not be made to suffer for the actions of one man.

Mr Schroder made it clear yesterday that the West will allow humanitarian aid to reach Belgrade, defining such aid to include the reconstruction of power stations and municipal heating systems.

Europe will bear the brunt of the cost of rebuilding the Balkans, not only for geographical reasons but because the United States paid most of the bill for NATO's military campaign against Yugoslavia.

Germany is organising a further summit of world leaders to discuss the Stability Pact, probably in Macedonia and possibly as early as next month.

But the details of the plan will be worked out during the next three months at a series of meetings involving the European Commission, the World Bank, the International Monetary Fund (IMF), and such bodies as the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD).

Officials plan to set up a headquarters in Pristina by October and, with the experience of Bosnia behind them, they hope to start rebuilding Kosovo's battered infrastructure almost immediately.

"We don't want it to be like in Bosnia where it took a year to get 50 people into Sarajevo," according to Mr Guenther Burkhardt, from the European Commission.

The Commission estimates that rebuilding the region will cost about $60 billion - a figure that does not include the cost of maintaining a large peace-keeping force on the ground.

The chief economist of the World Bank, Mr Joseph Stiglitz, believes it could cost as much as $100 billion to fund a Marshall Plan for the Balkans similar to the economic rescue operation performed on Western Europe after the second World War.

Under the original Marshall Plan, the US government transferred funds directly to American exporters, who in turn sent goods to Europe. The recipients of these imports invested the value of the goods in local currency into a fund for investment in reconstruction.

The formula was a remarkable success in the 1940s and 1950s but some experts fear that the Balkan countries lack the economic structure to cope with such a system and that, as in Russia, large sums could be poured in with no useful effect.

The vice-president of the EIB, Mr Wolfgang Roth, said: "I would warn against just pumping money into the region without controlling it. Kosovo has anarchic structures. One can't just go in there naively." German politicians are worried that Bonn will have to bear too big a share of the cost of reconstructing the region and Mr Schroder has warned that Germany will demand an influence over the process commensurate with its financial contribution.

Although the financial cost will be formidable, the task of establishing stable, democratic structures throughout south-eastern Europe is likely to be more daunting still.

The German Foreign Minister, Mr Joschka Fischer, is determined to bring all the states in the region into the EU, a project that demands a great leap forward institutionally as well as economically. And he made it clear last week that he expects Serbia to be part of the new Europe too - but without Mr Milosovic.

"We want to bring the region into the EU and the same rules apply to all there: the preservation of democracy and human rights, the rule of law and the separation of powers," he said.

"We demand that of everyone. It's not an unreasonable request that we are just making to Belgrade. And anyone who abides by these rules will be a close partner for co-operation." Mr Fischer acknowledges that such a major expansion of the EU will have an impact on the Union as a whole, making a root and branch institutional reform more necessary than ever. He envisages a shift of control from national governments to the European Parliament and to EU executive bodies.

"The institutional structure based on co-operation between governments cannot function any longer in a Europe of 21 or even 25 members. So reform will, in the long term, lead to a parliamentarisation of the community," he said.

The integration of the Balkan states into NATO could run parallel to their incorporation into the EU and Western leaders are nurturing relationships with younger leaders in the region, such as Albania's Prime Minister, Mr Pandeli Majko, and Macedonia's Mr Ljupcho Georgievski.

EU leaders acknowledge privately that, although NATO's campaign against Yugoslavia was a military success, it underlined Europe's failure to resolve foreign policy problems without American help. Mr Fischer is convinced that Europe's failure to prevent Mr Milosovic's murderous progress through the 1990s will encourage the EU to create a more effective common foreign and security policy.

"Europe saw in the Kosovo war that it is not in a position to solve its own problems. We must draw conclusions from this. Europe needs visions, points of light on the horizon towards which one moves. It was always the case that Europe developed further out of each crisis. It will be so again now," he said.