# EUR-Lex - 52011DC0666 - EN

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# 52011DC0666

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Enlargement Strategy and Main Challenges 2011-2012 /* COM/2011/0666 final */**

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COMMUNICATION FROM THE COMMISSION TO
THE EUROPEAN PARLIAMENT AND THE COUNCIL

Enlargement Strategy and Main Challenges
2011-2012

1.
Introduction

The European Union's
enlargement process has entered a new phase. The completion of accession
negotiations with Croatia, opening the way to membership in mid-2013,
vindicates the policy adopted in the aftermath of the devastating Balkan
conflicts of the 1990s, which aims to bring peace, stability, democracy and
ultimately EU membership to the whole region. As fresh evidence for the
transformational power of the EU's enlargement policy, it provides new momentum
for reform in all enlargement countries.

The EU’s enlargement
policy, as enshrined in the Treaty on European Union[1],
is the response to the legitimate aspiration of people of our continent to join
the endeavour of a unified Europe. The integration of the countries of Central
and Eastern Europe over the past decade has shown that enlargement benefits the
EU as a whole and allows it to be better positioned to address global
challenges.

The enlargement policy
has proven to be a powerful tool for societal transformation. Countries that
have already acceded to the EU and those on the road to join have undergone
impressive changes through accession-driven democratic and economic reforms. Commitment,
conditionality and credibility have been situated at the core of the accession process
and its success.

The renewed consensus
on enlargement, agreed by the December 2006 European Council, and based on the
principles of consolidation of commitments, fair and rigorous conditionality
and good communication with the public, combined with the EU's capacity to
integrate new members, remains the framework for the EU enlargement policy.

Through the enlargement
policy, the EU extends its zone of peace, stability, democracy, and prosperity;
concepts that have gained renewed relevance, in the light of recent
developments:

–
The dramatic events in the Southern
Mediterranean and the Middle East, as well as the fragility of the ensuing situations,
underline the importance of a pole of stability and democracy in South-East
Europe, solidly anchored in the EU’s enlargement process.

–
The recent global financial crisis and the
present difficulties in the Eurozone have highlighted the interdependence of
national economies both within and beyond the EU. These events underline the
importance of further consolidating economic and financial stability and
fostering growth, also in the enlargement countries. The enlargement process is
a powerful tool to that end.

Since the adoption of
the last enlargement package, further positive developments have taken place in
the Western Balkans. The arrest and transfer to the International Criminal
Tribunal for the former Yugoslavia (ICTY) of Ratko Mladić and Goran Hadžić
removed a major stumbling block from the European path of Serbia and marked an
important step towards reconciliation. A dialogue between Belgrade and
Pristina, aiming inter alia at achieving progress on the road towards
the EU, was established and has yielded first results. Progress in EU-related
reforms can be reported in most enlargement countries. Visa-free travel has
been granted to the citizens of two more Western Balkan countries, Albania and
Bosnia and Herzegovina.

Nevertheless, in a
number of countries important reforms were delayed, often as a result of
internal political developments and conflicts. Delays and blockages were
particularly serious in Bosnia and Herzegovina and Albania. Good governance,
the rule of law, administrative capacity, unemployment, economic reform and
social inclusion remain major challenges in most countries. There have been a
number of concerning developments in the area of freedom of expression in the
media. Differences over status continue to affect negatively both Kosovo[2]
and the region. The recent events in Northern Kosovo are cause of grave
concern. The name question concerning the former Yugoslav Republic of Macedonia
remains unsolved.

Iceland's accession
process has made headway over the past year. Progress in negotiations is due to
Iceland's already highly integrated structures through its long established
democracy, its membership of the European Economic Area and the Schengen zone,
and its high calibre public administration.

In Turkey, accession process remains the most effective
framework for promoting EU-related reforms, developing dialogue on foreign and
security policy issues, strengthening economic competitiveness and diversifying
supply of energy sources. In the accession negotiations, it has regrettably not
been possible to open a new negotiating chapter for over a year. A new
constructive phase in the relations with Turkey needs to be triggered based on
concrete steps in areas of common interest.

Croatia's imminent
accession demonstrates that the enlargement process is geared to maximise its
transformative effects on the countries concerned. Improvements brought to the
process by the 2006 renewed consensus on enlargement were put into practice
with Croatia and have proved their value. Ongoing and future negotiations with
other enlargement countries should build further on this experience. In
particular, difficult negotiating chapters such as those on the judiciary and
fundamental rights and on justice, freedom and security should be tackled as
early as possible to allow adequate time for the candidate country to build the
necessary track record of reform.

The accession of
Croatia will be a major step in the historic project of integrating the Western
Balkans into the EU. The EU has consistently proclaimed the inclusiveness of
its policy towards the Western Balkans, starting with the ‘regional approach’
of the mid-1990s and most prominently through the Stabilisation and Association
process launched in 1999 and the 2003 Thessaloniki summit which confirmed that
the future of the Western Balkans lies within the EU. Far from drawing a
dividing line in the Balkans, it should serve as an incentive and catalyst for
the rest of the region to accelerate its course towards the EU. In view of the
EU’s commitments, as well as the history and geography of the region,
‘unfinished business’ will remain until the whole of the Western Balkans are
included, once the conditions are met.

Within this context,
the Commission remains fully attached to the principle of own merits. The pace
at which each country advances towards membership depends mainly on its
performance in meeting the established criteria and conditions.

Croatia’s successful
experience sends strong messages to other enlargement countries:

·
The EU delivers on its commitments once the
conditions are met.

·
The criteria and conditions for accession are
demanding and their implementation is monitored with increased attention. This,
however, is not an obstacle, but results in the candidate state achieving a
higher level of readiness which will benefit both it and the EU upon accession.

·
Bilateral disputes with neighbours should and
can be addressed through dialogue and compromise, in line with established
principles.

The continued
credibility of the enlargement process is an important element for advancing
reforms in the enlargement countries and ensuring support of Member States.
Developments over the past year have confirmed that tangible results along the
path towards the EU are also achievable ahead of accession, when the respective
conditions are met. The Commission recommendations in this Communication for
moving to next stages of the accession process and the extension of visa
liberalisation to Albania and Bosnia and Herzegovina are eloquent examples. On
the other hand, where political will and the commitment to achieve concrete
results are insufficient or lacking, the accession process has not advanced and
risks stalling.

This communication
assesses the current state of the European Union's enlargement agenda, comprising
the Western Balkans, Turkey, and Iceland. Based on the accompanying in-depth
country analyses[3], it takes
stock of what these countries have achieved preparing for membership, where
they stand today, assesses their prospects for the coming years and in this
regard makes a number of recommendations. As in previous years, a number of key
challenges are given particular attention.

2.
Key challenges

2.1. Increased
focus on strengthening the rule of law and public administration reform

Strengthening the rule
of law has been identified as a continuing major challenge and a crucial
condition for countries moving towards EU membership. This issue has been given
greater attention in recent years at all stages of the accession process, in
line with the renewed consensus on enlargement.

This emphasis on the
rule of law was reflected in the extensive consideration given to these issues
during the accession negotiations with Croatia, particularly in the context of
the negotiating chapters on the judiciary and fundamental rights and on
justice, freedom and security. The weight of rule of law issues in the key
priorities set out as conditions for the opening of accession negotiations with
Albania and Montenegro is another example of prioritising this area ahead of
the actual negotiations.

The experience acquired
from the accession negotiations with Croatia will put to the benefit of the
ongoing and future negotiations with other countries. To
that end, the Commission will propose a new approach with respect to issues
related to the judiciary and fundamental rights and to justice and home
affairs.  These should be tackled early in the
accession process and the corresponding chapters opened accordingly on the basis of action plans, as they
require the establishment of convincing track records. The Commission would
report regularly, at all stages of the process, on progress achieved in these
areas along milestones defined in the action plans
with, where appropriate, the necessary corrective measures. IPA funds will be
targeted to support this process.

Within the framework of
the pre-accession process, the Commission has been encouraging countries to
build up independent and efficient judiciaries and to remedy existing
shortcomings. In this respect, Croatia improved its system of appointing
judges, Serbia launched a review of the re-appointment procedure for judges and
prosecutors, Montenegro started a revision of key constitutional and legal
provisions concerning the judiciary. Kosovo completed its vetting process of
judges and prosecutors.

The fight against
corruption is one of the key challenges for the rule of law in most
enlargement countries. Corruption remains a serious problem, affecting not only
citizens' everyday life in vital areas such as healthcare and education. It also
has serious negative impacts on investments and business activities and damages
national budgets, especially concerning public procurement and privatisation.
The Commission has sharpened its focus on the fight against corruption in the
enlargement countries in recent years.

The important
experience gained working with the enlargement countries has contributed to the
development of the EU's own approach to fighting corruption, across all policy
areas, internal as well as external[4]. While the
Commission is setting up a corruption monitoring mechanism for the Member
States, it will continue to give high priority to the monitoring of
anti-corruption policies in the enlargement countries, with an emphasis on
results and sustainability, from the early stages of accession preparations.
The Commission will also promote close coordination between international
donors to ensure an optimal use of resources.

The fight against
organised crime remains an important priority for the enlargement
countries. It is closely linked with fighting corruption and establishing
independent judiciaries. The cross border nature of many criminal activities
poses a major challenge to the fight against organised crime. Regional
cooperation between law enforcement and judicial bodies, including the
creation of professional networks, is particularly important for addressing
this challenge. The Commission is supporting the creation of a regional
prosecutors' network that is assisted by seconded experts from Member States,
as well as by the relevant European agencies. The Commission also assists the
establishment of coordinated witness protection systems in the region.

Over the course of the
past year, the Commission has intensified its rule of law dialogue with
the countries of the Western Balkans. The aim is to strengthen preparations at
earlier stages of the pre-accession process, based on in-depth analyses of the
justice and home affairs sectors. To that end, expert missions were carried out
in most of the enlargement countries. The Commission strengthened cooperation
and the exchange of information with the relevant EU agencies, including
Europol, Frontex, Eurojust, and the European Monitoring Centre for Drugs and
Drug Addiction, as well as with regional initiatives, the Council of Europe and
other international organisations. Where appropriate, benchmarking was already
applied during early stages of the process. A Structured Dialogue on justice
was launched with Bosnia and Herzegovina and the
Commission proposes a similar dialogue with Kosovo on the rule of law with the
aim to address the challenges in this area and support judicial reform.

Public administration
reform, aiming at enhancing transparency, accountability and effectiveness,
essential for democracy and the rule of law, continues to be a key priority
under the political criteria in most enlargement countries. Adequate
administrative procedures, including with respect to human resource and public
financial management, are crucial for the implementation of the acquis.
Countries need to increase their efforts to improve their public
administrations on the basis of overall national strategies.

In some enlargement countries, there is increasing evidence
that the distinct roles of the ruling parties and of the state are inadequately
respected. Such practices risk undermining the rule of law and the functioning
of democracy.

2.2. Ensuring
freedom of expression in the media

Freedom of expression
is a fundamental right, which is safeguarded by international law and forms an
integral part of the functioning of pluralistic democracy. For the accession
process, ensuring this freedom is a key component of the Copenhagen political
criteria for membership.

The enlargement
countries are characterised on the whole by pluralist media landscapes. However,
in a number of countries, negative developments in this area have recently been
observed. This is a source of serious concern. The Commission further examines
freedom of expression in the accompanying reports, where the situation in each
country is outlined.

Challenges to freedom
of expression and the media include: political interference, sometimes
manifested also through the legal system; economic pressure; using crime and
corruption to influence the media; and insufficient protection of journalists against
harassment or even violent attacks. Economic challenges relate to a lack of
transparency and concentration of ownership, lack of fair competition, and the
lack of independence of market regulators. In a number of enlargement
countries, the overall implementation of media legislation is not satisfactory.
A number of cases of attacks on journalists, including killings, remain
unresolved, several years after their occurrence. In Turkey, the legal
framework does not yet sufficiently safeguard freedom of expression. The high
number of legal cases and investigations against journalists and undue pressure
on the media raise serious concern.

All of these issues
place serious restrictions on the expression of views by media critical of
governments and discourage investigative journalism. Media and journalists are
often forced into self-censorship.

It is essential that
the enlargement countries guarantee open and pluralistic media landscapes,
which allow for a culture of critical and independent journalism. Public
Service Broadcasters need to improve their economic standing and autonomy in
order to fulfil their role. At the same time, the media profession should
commit itself to self-regulation on the basis of comprehensive codes of ethics
and professional standards.

In May 2011, the
Commission organised a conference on freedom of expression, which brought
together media and civil society stakeholders from the Western Balkans and
Turkey. This conference aimed to reach out, beyond its official government
interlocutors, to those directly concerned and listen to their views and
experiences. The conclusions of the conference will continue to feed into the
Commission’s work in this area.

The Commission will
closely monitor developments in the framework of existing agreements and
structured dialogues with the enlargement countries. It will further integrate
these issues into accession negotiations, notably under the judiciary and
fundamental rights chapter. It will identify priorities and encourage
government efforts to reach European standards in the field of freedom of
expression. To this end, cooperation will be strengthened with the relevant
partner countries and international organisations - in particular the Council
of Europe and the Organization for Security and Cooperation in Europe. Dialogue
with journalists and their associations will be further developed.

2.3. Enhancing
regional cooperation and reconciliation in the Western Balkans

Regional cooperation
and good neighbourly relations are essential elements of the Stabilisation and
Association process and, as such, are closely monitored by the Commission at
all stages of the accession process. Regional cooperation underpins and
enhances reconciliation in a region that suffered major conflicts in the recent
past. Regional cooperation and trade can bring further economic benefits to the
region. It is also an integral part of the process of integration into the EU,
which often necessitates regional approaches and measures.

Significant progress
has been achieved in this respect over the past decade and further important
steps can be reported in the past year. Visits by leaders of the region, in
particular those of Serbia and Croatia, to neighbouring countries, as well as
statements made on the conflicts of the 1990s have contributed substantially to
regional reconciliation. The Sarajevo process on refugee return involving
Serbia, Croatia, Bosnia and Herzegovina and Montenegro, is about to be
successfully completed in the coming days. Initiatives by NGOs and civil society,
such as the Youth Initiative for Human Rights, the Truth and Reconciliation
Commission (RECOM), and the Igman Initiative play an important role in
enhancing reconciliation beyond governments among the citizens of the region.

Cooperation within specific
sectors is functioning well and is advancing, including through the Energy
Community, the European Common Aviation Area, and joint training at the now
fully operational Regional School of Public Administration (ReSPA). In December
2010, a strategy to boost the development of the Danube region was proposed by
the Commission and subsequently endorsed by the Member States[5].
Regional trade within the Central
European Free Trade Agreement (CEFTA)
framework is growing and the agreement is being extended to areas such as
competition policy, further abolition of tariff barriers and liberalisation of
services. The Regional Cooperation Council (RCC) has started implementing its
three-year strategy and work programme, working towards more result-oriented
action.

At the same time,
issues stemming from past conflicts, together with other open bilateral issues
remain key challenges to stability in the Western Balkans that affect regional
cooperation, relations between countries, as well as their internal functioning
and reform process. It is urgent to address these remaining issues. Resolving
these issues will remove a major impediment to the Western Balkans’ course
towards the EU.

In particular, disputes
related to inter-ethnic or status issues, notably in Bosnia and Herzegovina
and Kosovo, continue to obstruct the normal functioning of institutions, act as
a brake to the reform process and the European agenda and can sometimes have
broader regional implications. The Commission holds that pursuing their EU path
is the best way for the countries to address these problems. Recent
developments, in particular progress in the EU-facilitated Belgrade-Pristina
dialogue is key in this context. The 10th anniversary of the signing
of the Ohrid Framework Agreement, celebrated this August, is a reminder that
difficult ethnic-related issues can be successfully addressed through
dialogue and compromise.

Positive results were
recently achieved in overcoming problems concerning the inclusive
functioning of regional initiatives resulting from differences of views over
the status of Kosovo, but more needs to be done. An agreement was reached in
the framework of the Belgrade-Pristina dialogue on the acceptance by Serbia of
the Kosovo customs stamps; this should allow for regional trade to be restored
within the framework of CEFTA. Previously, the holding of CEFTA and RCC
meetings with participation of all parties was restored and the Pan-Euro-Med
Convention on Preferential Rules of Origin was signed. However, differences
over the status of Kosovo have continued to obstruct the finalisation and
signing of the Transport Community Treaty and the extension of the Autonomous
Trade Measures for Kosovo and other Western Balkan partners. These differences
remain an obstacle to the development of contractual relations between the EU
and Kosovo.

A comprehensive
settlement of issues related to regional cooperation is pending in the
Belgrade-Pristina dialogue. The Commission calls upon all parties involved to
continue to seek practical and pragmatic solutions to ensure the inclusiveness
of regional cooperation, without prejudice to differing positions over the
status of Kosovo. Progress made in the past year shows that this is possible.

Completing the process
of rendering justice for crimes committed during the wars in the former
Yugoslavia is essential for lasting reconciliation. Full cooperation with the
ICTY remains an essential condition for the accession process in the Western
Balkans. The recent arrests and transfers to The Hague of the last two ICTY
indictees were major steps in that direction. The Commission also calls upon
the governments concerned to pursue with greater vigour the proper conduct of
domestic war crime trials.

The Commission takes
very seriously the report endorsed by the Parliamentary Assembly of the Council
of Europe in January (Marty report) concerning crimes, including human organ
harvesting, allegedly committed in the period during and after the conflict in
Kosovo. It fully supports the investigation conducted by EULEX, notes the
importance of witness protection in this context and welcomes the establishment
of a Brussels-based EULEX Task Force, as well as the cooperation of the
relevant governments with this Task Force.

Overall, it is
important that governments and civil society organisations in the region do
more to explain to citizens that reconciliation is an integral part of their
European future and that justice with respect to war crimes is an indispensable
element of this process. Political leaders should avoid statements and measures
that could call these important principles into question.

With respect to open bilateral
issues, these need to be solved by the parties concerned as early as
possible during the enlargement process, with determination, in a good
neighbourly spirit and taking into account the overall EU interests. The
Commission urges them to make every effort towards solving outstanding border
disputes in line with established principles and means, including referring
issues to the International Court of Justice if appropriate. Bilateral issues
should not hold up the accession process. The Commission stands ready to
facilitate the creation of the necessary political impetus in the search for
solutions and to support related initiatives.

The border arbitration agreement between Slovenia and
Croatia, the implementation of which is due to begin later this year, paves the
way for addressing bilateral issues. The Commission strongly encourages the
parties to the dispute over the name of the former Yugoslav Republic of
Macedonia to employ a similarly constructive spirit in the ongoing UN-led
talks.

2.4. Achieving sustainable economic recovery and embracing
Europe 2020

All enlargement
countries have now embarked upon a path of recovery, though at varying paces:
Turkey has emerged from the crisis with a bigger economy and its growth
continues to be impressive, but there are increasing signs of overheating. The
Western Balkan economies are also beginning to recover, though it will take
some time for them to reach pre-crisis levels. Iceland's economy continues to
emerge from the major economic disturbances it experienced during the crisis.

However, the
enlargement countries are confronted with important socio-economic challenges.
Unemployment remains high and rising in most countries. Unemployment in Kosovo,
Bosnia and Herzegovina and the former Yugoslav Republic of Macedonia remains
the highest in Europe. Labour force participation rates are low, especially for
women and the young and widespread informal employment remains a challenge.
Exports from the Western Balkans, which are contributing to the recovery,
remain dominated by low added value products, including commodities, which are
exposed to price volatility and strong competition from emerging markets.

Most enlargement countries have maintained
overall prudent macroeconomic policies. Fiscal consolidation and the reform of
labour markets remain the most urgent short-term priorities, reflecting largely
similar challenges to those presently faced in the EU. More structural reforms
are needed to boost competitiveness and improve the investment climate, thus
attracting foreign direct investment, fostering job creation and ensuring the
sustainability of growth. In the Western Balkans, improving the capacity of
public administration, and strengthening the rule of law, including by
reforming the judiciary and combating widespread corruption present particular
challenges. Progress in these areas would also be conducive to the business
environment. Public services to the business and investment in infrastructure
remain scarce.

Labour market reforms, including a review of
transfer-benefit systems, taxation issues and overhauls of education systems,
should contribute to addressing a major structural weakness in the Western
Balkans and an impediment to achieving stronger, sustainable, and inclusive
growth.

Embracing the objectives of the Europe 2020 strategy

Europe 2020 is the EU's growth strategy for the
present decade, guiding the Union towards becoming a smart, sustainable and inclusive
economy in a changing world. The enlargement countries are encouraged to
associate to the Europe 2020 strategy and its flagship initiatives[6].
This provides a useful anchor for reform.

The Europe 2020 objectives are reflected, as
appropriate, in the dialogues on economic policy and on employment and social
policies between the Commission and enlargement countries. The Commission has
guided the programming of financial assistance towards the objectives of Europe
2020, especially with respect to socio-economic development. The Commission's
cooperation with the international financial institutions (IFIs) takes these
objectives into account.

The ongoing debt crisis in Europe has underlined
the importance of sound public finances and the Commission is sharing
some of its peer review mechanisms with the candidate countries and potential
candidates. Multilateral fiscal surveillance by the EU is an important tool to
this end. It will be progressively adapted to the upcoming strengthened
economic governance in the EU.

In the area of private sector development,
policy coordination with the Western Balkans and Turkey is guided by the
provisions of the EU's Small Business Act[7].
This coordination, based on regular evaluations against established EU
benchmarks, has resulted in the emergence of well-tested recommendations
reflecting the national particularities of the enlargement countries. The
Commission proposes that the results of the Small Business Act be used as a
reference tool for future Small and Medium Enterprises (SME) -related
activities in the region.

Within the Western Balkans Investment Framework,
the Commission encourages partner International financial Institutions (IFIs)
to support new forms of SME financing, in particular equity, venture capital
and guarantee mechanisms. The Commission will co-finance a Western Balkan SME
platform, which aims to improve access to finance for SMEs through guarantees
and venture capital.

In the area of research and innovation,
the cooperation of enlargement countries with the EU is already advanced in
terms of eligibility for participation in EU initiatives. Enlargement countries
participate in the 7th Framework Programme for Research and
Technological Development and the Competitiveness and Innovation programme.
Current indicators, however, show that in most cases they are significantly
below the EU average in terms of investments and development of research and
innovation policies. Regional leaders, including at the upcoming ministerial
conferences, are encouraged to commit to increase investment in research,
innovation and human capital.

Enlargement countries need to become better
prepared to withstand climate change and align with the EU's efforts to
address this challenge, including through awareness raising. Progressive
climate action will bring benefits through low-carbon development and can
create jobs.

The nascent economic recovery has yet to be
reflected in an improved social situation. The share of the population
living below the poverty line remains high and in the Western Balkans continues
to grow. High informal employment impacts negatively on the social situation,
particularly concerning young people.

Securing jobs and the social inclusion of
vulnerable groups is a priority. However, little real investment has occurred
in the social sector and cooperation with international donors has faced
obstacles in strategic planning. The Commission emphasises employment and
social policies in its policy dialogue and encourages countries to set clear
and realistic targets in these two areas and to better target and prioritise
social spending. The objectives of the European Platform against Poverty and
Social Exclusion should be taken up as appropriate by the enlargement
countries.

Sustained measures for the inclusion of all vulnerable
groups into mainstream society should be adopted. Concerning the particularly disadvantaged Roma minority,
the Commission has invited the Western Balkans and Turkey to cooperate within
the EU Roma platforms, which systematically monitor inclusion and propose
related actions. The Commission has held a series of seminars on Roma issues to
encourage the countries of the region to review and strengthen the relevant
national action plans and their implementation on fighting discrimination and
improving Roma integration, particularly in the areas of education, employment,
housing and health. Strong efforts
should be made by the countries of the Western Balkans to facilitate the civil
registration of displaced persons.

Improved education and training are key
factors of structural change for sustainable and inclusive growth. So far,
investments into education, skills and qualifications have typically been low
and regional recognition of national qualifications is insufficient. State
education systems and infrastructure need to be reformed and internationally
comparable vocational, education and training programmes are needed to address
the existing skills mismatch.

The Commission has opened the Education and Training 2020
strategic framework for participation of the candidate countries which the
former Yugoslav Republic of Macedonia and Montenegro are yet to join. The
Commission has proposed to develop a Western Balkans Platform on education and
training, based on the open method of coordination, to allow for the
participation of all enlargement countries. This will enhance dialogue on main
policy challenges and secure implementation and monitoring. The countries of
the Western Balkans have been invited to participate in the centralised
activities of the EU's Lifelong Learning Programme.

2.5.
Extending transport and energy networks

Improved transport and
energy cooperation with the enlargement countries directly benefits European
citizens and businesses. Transport and energy interconnection are key elements
in the EU's cooperation with all neighbouring countries aimed at promoting
sustainable economic growth, trade and cultural exchange, employment, as well
as at improving living conditions. In the case of the enlargement countries
this cooperation also aims at preparing them to fully take on and implement the
transport and energy acquis.

With its strategic
location at the crossroads between Europe, the Middle East and the Caucasus,
Turkey has steadily developed and strengthened its links with the EU – as illustrated
by recent developments in the aviation sector or its role in the establishment
of the Southern Gas Corridor. Further development of these links would benefit
both sides. The Southern Gas Corridor would contribute to Europe's security of
supply for natural gas, as it would make a considerable contribution in
expanding supply routes and stimulate competition in the international gas
market. The Commission supports Turkey financially in the further development
of its transport networks, in particular concerning high speed rail connections
and the modernisation of port facilities. At the same time, Turkey should be
encouraged to deepen its gas market, increasing liquidity and contract
flexibility. Such a process would lead to the emergence of an 'energy hub', the
existence of which would achieve greater energy security.

In the Western Balkans,
a regional transport network has been defined within the framework of the South
East Europe Transport Observatory (SEETO) identifying priority projects of
regional interest. The Western Balkan countries participate, together with the
EU Member States and other European countries, in the European Common Aviation
Area Agreement, which was signed in 2006. Cooperation in the field of transport
is also foreseen under the Danube Strategy.

Since 2008, the
Commission has been negotiating the creation of a Transport Community with the
Western Balkan countries, establishing an integrated market for infrastructure
and land, inland waterway and maritime transport. Negotiations have been almost
completed, but are held back by differences over the denomination of Kosovo.
The Commission urges the parties concerned to take the necessary steps that
will allow for a rapid conclusion of the negotiations and the signing of the
Treaty.

The Commission has
proposed a review of the EU's Trans-European Networks in the field of transport
(TEN-T) with a view to improving connections with the countries covered by the
enlargement and neighbourhood policies[8].

In the field of energy,
the EU is also pursuing the integration of networks, notably through support
for the Energy Community which encompasses the EU and its Member States, all
the Western Balkans as well as some neighbourhood countries[9].
The Energy Community, based on EU energy rules, establishes an open,
transparent and competitive regional market which helps to attract investments.
The Energy Community acquis already covers the internal energy market,
energy efficiency and renewable energies, as well as selected parts of
environmental, social and competition acquis. It will be extended to
cover mandatory oil stocks, in addition to the electricity and gas markets.

3.
Progress in the enlargement countries and
agenda for 2011-2012

3.1.
Western Balkans

Croatia

The accession
negotiations with Croatia were closed in June. This was the result of Croatia
meeting the closing benchmarks in the remaining areas over the past year,
including in difficult chapters such as judiciary and fundamental rights and
competition policy. Croatia has  achieved substantial results in the fight
against corruption, introduced a new objective and transparent system for
appointing judges and prosecutors, and has much improved implementation of
housing care programmes for returning refugees. The restructuring of its shipyards
in difficulty has progressed substantially.

The result of the
accession negotiations will be embodied in an accession treaty which, as
foreseen by the June European Council, should be signed by the end of the year.
This should enable Croatia to join the EU on 1 July 2013 provided that the
necessary ratification procedures have been completed. Croatia has achieved a
very high level of preparation to assume the responsibilities of membership
upon accession. It meets the Copenhagen political criteria. It is expected to
meet the economic and acquis criteria by 1 July 2013. This momentum
needs to be maintained.

Croatia needs to
continue building on the reforms implemented and capacities developed during
the course of the accession negotiations. The Commission will closely monitor
Croatia's fulfilment of all the commitments undertaken and its continued
preparations to assume the responsibilities of membership upon accession. The
monitoring will focus in particular on commitments undertaken by Croatia in the
following areas: judiciary and fundamental rights; justice, freedom and
security; as well as competition policy.

The monitoring will
consist of regularly updated monitoring tables, the dialogue under the
Stabilisation and Association Agreement, peer assessment missions, the
pre-accession economic programme and fiscal notifications. The Commission will
issue six-monthly assessments up to Croatia’s accession on the implementation
of commitments taken by the country in these chapters. A Comprehensive
Monitoring Report will be presented to the European Parliament and the Council in
autumn 2012.

If issues of concern
are identified during the monitoring process and are not remedied by Croatia,
the Commission will, if necessary, address early warning letters to the
Croatian authorities and may propose to the Council to take all appropriate
measures already prior to accession. In addition, as in the fifth enlargement,
the accession treaty will contain a general economic safeguard clause, an
internal market safeguard clause and a safeguard clause in the area of justice,
freedom and security.

Croatia is expected to
continue playing an active role in regional cooperation in the Western Balkans.
The Commission looks forward to the implementation of the border arbitration
agreement between Slovenia and Croatia. It will support the establishment and
functioning of the Arbitral Tribunal, as foreseen in the said agreement. The
Commission welcomes the Statement by the Croatian Government to support the
other countries of the region on their path to EU-membership, and encourages
Croatia to address the remaining open bilateral issues with its neighbours
ahead of accession. At the same time, political leaders should avoid statements
and measures that could call into question the importance of reconciliation or
neglect the seriousness of war crimes.

The former Yugoslav Republic of Macedonia

The June parliamentary
elections in the former Yugoslav Republic of Macedonia were mostly in line with
international standards and the country has continued accession-related
reforms. The governing coalition has been stable. The country continues to
sufficiently meet the political criteria. Some progress has been made as
regards the reform of the parliament, the judiciary, public administration and
respect for and protection of minorities, though core challenges remain.
Further efforts are needed in particular as regards freedom of expression in
the media, independence of the judiciary, reform of public administration and fighting
corruption. The efforts of the political forces to cooperate need to be
strengthened.

The country continues
to fulfil its commitments under the Stabilisation and Association Agreement
(SAA). The Commission maintains its proposal to move to the second stage of the
association as provided for by the SAA and encourages the Council to act on
this without further delay.

The Commission notes
that the Council has not been able to follow up on the Commission
recommendation dating from 2009 for opening accession negotiations with the
former Yugoslav Republic of Macedonia. Moving the accession process of this
country to its next stage will benefit the momentum of reforms and the climate
of inter-ethnic relations, and will impact positively on the region.

The dispute between
Greece and the former Yugoslav Republic of Macedonia over the name of the
latter has remained unresolved for almost two decades. A dialogue under the
auspices of the UN has been ongoing since the 1990s and it is complemented
since 2009 by bilateral contacts, including at Prime Ministerial level.
However, these processes have yet to yield results. Maintaining good
neighbourly relations, including a negotiated and mutually acceptable solution
to the name issue, under the auspices of the UN, remains essential. The
Commission underlines the need for a redoubling of efforts for a solution
without further delay. It also recalls that actions and statements that could
negatively impact on good neighbourly relations should be avoided. A solution
to the name issue is long overdue.

Montenegro

In December 2010, the
European Council granted candidate country status to Montenegro and endorsed
the seven key priorities for the opening of accession negotiations identified
in the Commission's Opinion on Montenegro's application for EU membership.

Since the adoption of
the Opinion, Montenegro has made good progress in meeting the Copenhagen
political criteria, achieving overall satisfactory results, in particular in
the identified key priorities. The legislative
and institutional framework has been improved with a view to strengthening the
work of the parliament, the electoral framework, professionalism and
de-politicisation of public administration, the independence and accountability
of the judiciary, fight against corruption and organised crime, media freedom
and cooperation with civil society. Sustained efforts are needed, however, in
further developing a track record in the area of rule of law, in particular
with respect to high-level corruption and organised crime cases. Positive steps
have also been made in anti-discrimination policies and in improving the
situation of displaced persons. This now needs to translate into reducing
discrimination in practice towards vulnerable groups, including displaced
persons.

The Commission will place particular attention on monitoring
Montenegro’s progress in the areas of rule of law and anti-discrimination in
view of maintaining the momentum of reforms in these areas and will continue to
support Montenegro in implementing EU-related reforms.

Albania

Albania's domestic
political scene has been largely dominated by the continuation of the political
stalemate and further confrontational developments. Violent clashes between
anti-government protestors and police led to the death of four persons and amplified
the climate of mistrust between political forces, as well as vis-à-vis certain
State institutions. The local elections in May, although assessed as
competitive and transparent, were decisively marked by shortcomings which need
to be addressed. In particular, the controversy surrounding the vote count of
misplaced ballots for the Tirana mayor increased polarisation between the
ruling majority and the opposition.

It is now urgent that
the political forces in Albania re-establish and maintain a level of political
dialogue that would allow the proper functioning of key democratic
institutions, notably the parliament, and progress on the EU integration path.
The significant shortcomings identified in the last two elections warrant a
comprehensive electoral reform that would benefit from external independent
advice and consensus among political parties.

The two main political
parties have taken up the EU's offer for reengaging constructively with the
country's European integration priorities. It is essential now for Albania's
political parties to commit to a structured and sustained process of working
together on European reforms. The way forward should include a process of joint
review and adoption of the Action Plan addressing the Opinion recommendations
and a schedule for essential reforms, including on parliamentary work and
elections.

Overall, Albania has
made limited progress in meeting the political criteria for membership and the
twelve key priorities for the opening of accession negotiations, as identified
in the Commission’s Opinion endorsed by the Council in December 2010. There has
been some progress in fighting organised crime, improving the treatment of
detained persons in prisons, and on rights of the child, but progress remains
insufficient regarding, the judiciary, anti-corruption policy, property rights
and improving the living conditions of the Roma community in addition to the
work needed on parliamentary procedure and elections. Albania has started
implementing an action plan to address the recommendations of the Commission’s
Opinion. However, further efforts are required to ensure the effectiveness and
completeness of the actions envisaged, including through close cooperation with
the opposition. Albania will need to make sustained efforts and achieve
demonstrable progress on all of these matters before the Commission can
recommend candidate status and the opening of EU accession negotiations.

Albania has continued
to smoothly implement the Stabilisation and Association Agreement. In December
2010, the country was granted visa-free access to the Schengen area for its
citizens, as a result of its satisfactory achievements in the visa
liberalisation dialogue.

The Commission is
committed to continue supporting Albania in achieving EU-oriented reforms and
meeting the Opinion’s key priorities.

Bosnia and Herzegovina

In Bosnia and
Herzegovina, the actions of its political representatives continue to reflect a
lack of a common understanding on the overall direction and future of the
country and its institutional setup. No consensus has been found for ensuring
and improving the functioning of the institutions, while safeguarding the
interests of its constituent peoples, especially in view of the country's
widely shared EU aspirations. The process of establishing executive and
legislative authorities following the October 2010 elections still has to be
completed with the formation of the State-level Government. This long delay has
been hampering Bosnia and Herzegovina's much needed reforms which would allow
the country to make further progress towards the EU. The EU accession process
requires functional institutions at all levels and an effective coordination
mechanism for dealing with the EU, allowing the country to speak with one
voice.

As a result, the overall pace of reforms has been very
limited. Some results were achieved, notably concerning achievements which led
to the country being granted visa-free access to the EU for its citizens in
December 2010. In June, the
country's leadership agreed to engage with the EU on a Structured Dialogue on
Justice under the Stabilisation and Association process,
aiming at ensuring an independent, effective, impartial and accountable
judicial system.

Compliance with the
European Convention on Human Rights is an essential requirement of the Interim
Agreement and the Stabilisation and Association Agreement. In this respect, the
persistent delay in harmonising the Constitution with a European Court of Human
Rights' ruling on ethnic discrimination regarding representation in the
institutions of the country remains an issue of serious concern[10].
A credible process must be put in place for addressing the ECtHR decision and a
State Aid Law adopted at state level. Progress is also needed towards adoption
of a state level census law and speeding up reforms to facilitate the country’s
EU integration process. The adoption of the Global Fiscal Framework is a
priority for fiscal sustainability.

Bosnia and Herzegovina's governance continues to involve an
international presence with an executive mandate. Regarding the Brčko Final
Award, one of the objectives and conditions for the closure of the Office of
the High Representative[11], progress
was made in resolving the electricity issue. Further efforts are needed to meet
remaining outstanding objectives, to facilitate the transition from a country
with an international system of governance and security towards a country with
domestic institutions in full ownership of their political and legislative
process- in line with the requirements for a country aspiring to become a member
of the EU. Overarching these issues is the need for a stable political
environment.

The establishment of
the Structured Dialogue on Justice, as well as experience from the reforms that
were carried out under the visa liberalisation process show the way forward: by
adopting a European approach of dialogue and compromise and focusing on the EU
agenda, the country will be able to gradually move from paralysis and
confrontation to cooperation, and from international supervision to its EU
future.

The EU has reinforced its role in Bosnia and Herzegovina,
with the EU's first single representative in Bosnia and Herzegovina having
taken up office. The EU will continue to strengthen its support for the
country's institutions in implementing the objectives of the EU agenda, in line
with the March 2011 Council conclusions.

Serbia

In parallel to this Communication,
the Commission has adopted its Opinion on Serbia's application for EU
membership. The conclusions and recommendation of the Opinion are set out in
annex to this Communication.

Kosovo

In a period of early
parliamentary elections and lengthy elections of a new President by parliament,
little progress took place as regards the reform agenda. The elections
themselves were marked by serious shortcomings, which need to be addressed. The
constitutional court played a positive role through the way it exercised its
responsibilities.

The new government has
demonstrated commitment to Kosovo's European perspective, including through
sustained efforts in areas such as visa and trade and the establishment of a
National Council for EU Integration. The new parliament has recently started to
pass the relevant legislation for launching key reforms. Much more needs to be
done to tackle organised crime and corruption. Public administration is weak
and the implementation of judicial reform remains a challenge.

Following the UN
General Assembly Resolution of September 2010, an EU facilitated dialogue
between Pristina and Belgrade was launched. The dialogue aims at promoting
cooperation, achieving progress on the path to the EU and improving the lives
of people. It was conducted in a generally constructive spirit until September
and has led to agreements on several issues: freedom of movement of goods and
persons, civil registry and cadastre. These constructive efforts need to
continue and lead to further steps in normalising their relations. Agreements reached need to be implemented
in good faith.

The integration of
Kosovo Serbs south of the Ibër/Ibar river has improved. Kosovo Serbs took part
in the Kosovo census and their participation in the recent general elections
increased. On the other hand, in northern Kosovo inter-ethnic tensions and
incidents persist. Separate Serb structures, supported by Belgrade, opposed the
census and encouraged the boycott of the elections organised by the Kosovo
authorities. The Commission urges all concerned in Kosovo to defuse tensions
and to fully cooperate with EULEX.

Pursuit of solutions
through dialogue, and rejection of unilateral actions and violence, is the only
possible basis for moving ahead in Kosovo. The Commission calls on all actors
to reject violence and to refrain from taking any measures which threaten
stability.

Kosovo shares the
European perspective of the Western Balkans. In March, the Commission issued
its proposal for a framework agreement allowing Kosovo to participate in EU
programmes, one of the key initiatives announced in the 2009 Kosovo
communication.[12] The
Commission will continue supporting Kosovo's efforts in reaching the other two
key objectives – eventual visa liberalisation and a trade agreement with the
EU, as well as other reform efforts enhancing its European perspective. The
Commission will review its 2009 Communication to ensure that Kosovo can further
benefit from the EU accession process. The Commission proposes to launch a
structured dialogue with Kosovo on the rule of law. The Commission also underlines
the importance of Kosovo launching a comprehensive agenda for the north.

3.2.
Turkey

With its dynamic
economy, important regional role and its contribution to EU's foreign policy
and energy security, Turkey is a key country for the security and prosperity of
the European Union. It is already integrated to a large extent into the EU in
terms of trade and foreign investment through the Customs Union. The country has become an important industrial
platform for a number of leading European companies, and is therefore a
valuable component of Europe's competitiveness. Turkey's high GDP growth, which
reached almost 9% in 2010 and is expected to attain 6.1% this year, as well as
its membership to the G-20, further increases the economic significance of the
country.

Turkey’s contribution
to the European Union in a number of crucial areas will only be fully effective
with an active and credible accession process. This process must respect the
EU's commitments and the established conditionality.

It remains essential that Turkey continues its reforms
concerning the political accession criteria. The creation of a specific Ministry for EU affairs is an
encouraging signal in this regard. While
substantial progress has been made over the past ten years, significant further
efforts are required to guarantee fundamental rights in practice, in particular
freedom of expression, women's rights and freedom of religion. Turkey's recent
adoption of legislation on Religious Foundations facilitating the recovery of
confiscated property of religious foundations is a significant step forward.
The Commission stands ready to further assist Turkey in advancing the necessary
reforms, including an inclusive constitutional reform process.

Turkey is further
increasing its diplomatic activity following developments across Northern
Africa and the Middle East. It also remains a constructive partner in the
Western Balkans. As a stable state with democratic institutions, a fast growing
economy and a candidate country negotiating its accession to the EU, Turkey can
play an important role in projecting stability and supporting reforms in its
neighbourhood, which is also the neighbourhood of the European Union. The EU is
further developing its political dialogue with Turkey on foreign policy issues
of mutual interest. In the present context, it is important that such dialogue
further develops as a complement to the accession process and with the aim of
increased coordination.

In the light of
progress achieved between the leaders of the two communities under the good
offices of the UN Secretary-General to find a comprehensive settlement to the
Cyprus problem, Turkey is encouraged to increase in concrete terms its
commitment and contribution to these talks. A comprehensive settlement is in
the interest of all sides since it would enhance stability in the Southeast
Mediterranean, offer new economic opportunities and give a strong boost to its
EU accession negotiations, which have reached a critical stage.

The Commission is
concerned about the recent tensions in relations between Turkey and Cyprus. It
recalls that the Council has urged the avoidance of any kind of threat, source
of friction or action that could damage good neighbourly relations and the
peaceful settlement of disputes. The EU has also stressed all the sovereign
rights of EU Member States which include entering into bilateral agreements, in
accordance with the EU acquis and international law, including the UN Convention on the Law of the Sea. In line with the repeated Council and
Commission positions from previous years, the Commission reiterates that it is
urgent that Turkey fulfils its obligation of fully implementing the Additional
Protocol and makes progress towards normalisation of bilateral relations with
the Republic of Cyprus. It also urges the avoidance of any kind of threat,
source of friction or action that could damage good neighbourly relations and
the peaceful settlement of disputes. The EU will continue to follow up and
review progress made on these issues in accordance with the relevant Council
decisions.

Turkey needs to step up
efforts to solve open bilateral issues, including border disputes, with its
neighbours. A substantial number of formal complaints about violations of its
territorial waters and airspace by Turkey were made by Greece, including
flights over Greek islands.

The Commission will
work to launch a new virtuous circle in the accession process with Turkey.
Based on a pragmatic approach and incorporating concrete steps in areas of
common interest, a joint understanding of constraints and a search for progress
in Turkey's alignment with the EU, a fresh and positive agenda should be
developed, to enable a more constructive and positive relationship.

This agenda should
cover a broad range of areas, including intensified dialogue and cooperation on
political reforms, visa, mobility and migration, energy, the fight against
terrorism, the further participation of Turkey in Community programmes such as
"Europe for citizens", town twinning, as well as trade and the
Customs Union with the aims of eliminating ongoing trade irritants, seeking
closer coordination in the negotiations on free trade agreements and exploring
new avenues to make full use of the EU's and Turkey's joint economic potential.
Alongside the accession negotiations, the Commission intends to enhance its
cooperation with Turkey, in support of the country's efforts to pursue reforms
and align with the acquis, including on chapters where accession
negotiations cannot be opened for the time being. The Commission will continue
informing the Council as soon as it considers that Turkey has met relevant
benchmarks.[13]

3.3.
Iceland

Iceland continues to
recover from the 2008/2009 financial and economic collapse. The political
situation has remained stable, though the coalition government has been tested
on several occasions and seen its majority in Parliament reduced.

Iceland's accession
process continued and screening of the Icelandic legislation is being
completed. The country's already high level of integration with the EU across a
wide range of policy areas is a considerable advantage in this process. The
Commission takes Iceland's specificities and expectations into account, within
the existing approach on accession negotiations and fully safeguarding the
principles and acquis of the Union. Continued open and constructive work
will produce solutions, reflecting the high level of cooperation between the EU
and the Icelandic authorities.

On this basis, the
accession negotiations on specific negotiating chapters have been launched.
Four chapters were opened of which two have been provisionally closed. With an
overall good level of alignment in particular in the chapters covered by the
European Economic Area (EEA) and Schengen agreements, the negotiations should
be able to proceed well. Iceland will still need to address existing
obligations, such as those identified by the EFTA Surveillance Authority under
the EEA Agreement.

Communication
activities promoting an informed debate about Iceland's accession process have
started. EU accession remains a controversial issue in Iceland. The Commission
will continue to provide support in the field of information and
people-to-people contacts.

4.
Supporting the enlargement process

4.1. Financial
assistance

The Commission provides
financial and technical support to the enlargement countries for their
preparation for accession. Assistance is provided essentially under the
Instrument for Pre-Accession Assistance (IPA), under which total allocation
over the period 2007-2013 is € 11.6 billion[14].

Since 2010 the
Commission has been gradually shifting financial assistance from support to
individual projects to a more global, sector-wide approach, focusing on key
areas of the reform agenda of the beneficiary countries. Governments in the
enlargement countries are encouraged to adopt comprehensive and sustainable
policies in priority sectors such as justice and home affairs, public
administration, private sector development, transport, energy, environment and
climate change, social development, agriculture and rural development.

The Multi-Annual
Indicative Planning Documents (MIPDs) for the period 2011-2013 identify for
each country the key sectors, according to the specific situation in each
country and the progress in the accession process. Special attention is devoted
to the fight against corruption, development of civil society and freedom of
expression. Around 10% of the available IPA funds will be allocated to
multi-country projects across the Western Balkans and Turkey. The Commission
adopted today its annual revised Multi-annual Indicative Financial Framework
for assistance under IPA, covering the period 2012-13.

In line with its Communication of June 2011 on "A
budget for Europe 2020"[15], the
Commission is now preparing the legal framework for providing pre-accession
assistance under the next multi-annual financial framework which will cover the
period 2014-2020, as part of a package of instruments in the domain of external
action.

Assistance under the current IPA Regulation has proved to
be efficient and effective. The proposal for a new financial instrument to be
presented in December 2011 will draw experience from the implementation of the
current instrument. Building on this, the new instrument will cover both
support for meeting the accession criteria and support for socio-economic
development.

In dialogue with the
beneficiary countries, the other donors and civil society and drawing from the
experience to date, the Commission has been reflecting on ways to strengthen
the link between financial assistance and the priorities identified in the
enlargement strategy, as well as to make financial assistance more strategic,
more focussed, more flexible and to simplify procedures. In this context,
elements considered include longer term and comprehensive planning of the
assistance covering all policy areas, greater focus on the needs and priorities
of the recipient countries, rewarding progress in the accession process, using
IPA funds to leverage more funds from other donors and the private sector and
enhancing the role of civil society.

4.2.
Visa liberalisation and mobility

Achieving visa-free
travel to the EU is of the highest importance to the citizens of all the
enlargement partners and is part of the accession process. However, steps
towards liberalisation are subject to the countries concerned meeting
conditions that safeguard the internal security and migration policy interests
of the EU.

Iceland is already part of the Schengen area. In the
Western Balkans, Croatian citizens have always travelled to the EU without
visas. Citizens of the former Yugoslav Republic of Macedonia, Montenegro and
Serbia were granted visa-free travel to the Schengen Area in December 2009 and
the same status was granted one year later to the citizens of Albania and
Bosnia and Herzegovina.

The recent decisions to drop the visa requirement for
citizens of the Western Balkan countries were based on these countries
fulfilling the benchmarks of roadmaps that were set out in the context of
Commission-led visa liberalisation dialogues. The dialogues acted as a strong
incentive for reforms towards reaching EU-standards in the justice and home
affairs areas, notably in strengthening administrative capacity in border
management and the security of documents, but also in strengthening the rule of
law and combating transnational organised crime, corruption and illegal
migration.

However, following the
lifting of the visa requirement, some EU Member States witnessed significantly
increased numbers of asylum applications by citizens from the countries
concerned, in particular Serbia and the former Yugoslav Republic of Macedonia,
pointing towards abuse of the visa-free regime. In response, the Commission set
up, as of January 2011, a post-visa liberalisation monitoring mechanism under
the framework of the Stabilisation and Association Process, engaging with the
countries concerned in a dialogue to assess the consistent implementation of
the reforms and effective remedial measures. The countries concerned have since
strengthened controls on the ground and launched information campaigns to
inform the citizens on the rights and obligations of visa free travel. The
Commission invites the authorities of the countries concerned to take all the
necessary further measures to allow for the visa free regime to function
smoothly. The success of such measures will also need to be complemented by
increased support and better living conditions for the most vulnerable groups
concerned, including the Roma.

In a broader revision
of the EU's visa policy, the Commission has presented to the Council a draft amendment to the visa
regulation which would allow for a temporary suspension of an existing visa
free regime with a third country in case of a sudden influx of persons[16].

Visa liberalisation for
Kosovo would complete this process for the Western Balkans. In December 2010,
the Council affirmed this
perspective once all conditions are met. To address these conditions, Kosovo
has adopted a legal framework for readmission and signed bilateral readmission
agreements with 13 Schengen area states. It has adopted reintegration plans and
continued their implementation. The
Commission will therefore launch a visa dialogue with Kosovo towards the end of
the year.

The EU and Turkey
started to intensify their cooperation on visa issues, while the
Commission entered into a dialogue with Turkey on visa, mobility and
migration, in line with the Council conclusions of February 2011. This
process started delivering results on both the issuance of visas for Turkish
travellers and the tackling of irregular immigration to the EU and will help
identify concrete steps required from Turkey in view of a future visa
liberalisation. In this context, an important step would be that Turkey take
the necessary action for the swift conclusion of the readmission agreement.

4.3.
Information and communication

Public support is key
to the success of enlargement policy. The authorities of Member States and
enlargement countries at national, regional and local level have a central role
to play in information and communication efforts to this end.

The Commission is
committed to facilitating an informed public debate about the enlargement
process, based on user-friendly, factual information provided through all types
of media. These need to address as a priority young people and key opinion
formers such as journalists and representatives of civil society organisations
and business. Parliamentary exchanges can also play an important role in
fostering informed debate and mutual understanding of the enlargement process.

In the period ahead,
next steps in the accession process with enlargement countries will be under
discussion. Tangible results are the best advertisements for the EU's
enlargement policy. The successful outcome of negotiations with Croatia can be
a powerful example, as is economic resilience in South-East Europe and concrete
achievements on key issues such as energy supply or transport networks. It is
essential to explain to the public how pursuing the enlargement agenda can help
the EU attain its objectives linked to the economic crisis, jobs, the
environment and climate change, safety, and migration while at the same time
accelerating the reform agenda and improving living conditions in the
enlargement countries.

5.
Conclusions and recommendations

Based on the above
analysis, the Commission puts forward the following conclusions and recommendations:

1.
Enlargement aims to extend the EU's
zone of peace, stability, democracy and prosperity. Enlargement benefits the EU
as a whole and allows it to be better positioned to address global challenges.
With the completion of accession negotiations with Croatia in June, the
European Union's enlargement process has entered a new phase.

2.
The enlargement policy has proven to be a
powerful tool for societal transformation. Countries that have already acceded
to the EU and those on the road to join have undergone impressive changes
through accession-driven democratic and economic reforms. Croatia's development
since it embarked on its accession path provides fresh evidence for this transformative
power of the EU.

3.
Through its enlargement policy,
based on the renewed consensus approved by the European Council in December
2006, the EU applies a demanding conditionality and monitors progress
with increased attention. This results in the aspiring states achieving a high
level of readiness which will benefit both them and the EU.

4.
Experience acquired from the
negotiations with Croatia will be put to the benefit of ongoing and future
negotiations. To that end, the Commission will propose
a new approach with respect to issues related to the judiciary and fundamental
rights and to justice, freedom and security. These should
be tackled early in the accession process and the corresponding chapters opened
accordingly on the basis of action plans, as they require the establishment of convincing track records. The
Commission would report regularly, at all stages of the process, on progress
achieved in these areas along milestones defined in the
action plans with, where appropriate, the necessary corrective measures. IPA
funds will be targeted to support this process.

5.
A credible enlargement process,
providing a clear accession perspective based on strict conditionality, is key
for enhancing reforms in the enlargement countries and provides the citizens of
the enlargement countries with tangible results already along their path
towards the EU. Conditionality for advancing towards the EU provides strong
incentives to embark on difficult reforms. It is also key in ensuring support
for enlargement in the Member States.

6.
Croatia's successful European
course shows the way to the other enlargement countries. As the first Western
Balkan country enters the EU, the region's European future is becoming a
reality.

7.
Strengthening the rule of law
remains a major challenge for most enlargement countries and is a crucial
condition for moving towards EU membership. The Commission continues to
prioritise judiciary and public administration reform, the fight against
organised crime and corruption, including through its regular monitoring,
structured dialogues, peer reviews, institution building, twinning, and financial
assistance.

8.
In a number of enlargement
countries, there have been negative developments in the area of freedom of
expression. It is essential that the enlargement countries guarantee open
and pluralistic media landscapes, which allow for critical and independent
journalism. The Commission will closely monitor developments in this area and
further integrate these issues into accession negotiations, notably under the
judiciary and fundamental rights chapter.

9.
Regional cooperation, underpinning
reconciliation and integration into the EU, remains an essential element of the
Stabilisation and Association process. While this cooperation has marked
further progress in a number of areas, issues mostly stemming from past
conflicts continue to have negative effects and to challenge stability in the
Western Balkans. It is urgent to address these issues. Achieving in particular
inclusiveness in regional cooperation is a pressing priority. This should be
possible, irrespective of differences over the status of Kosovo, by all parties
adopting a constructive and pragmatic approach.

10.
Bilateral issues need to be solved by the parties concerned, with determination, in
a good neighbourly spirit and taking into account overall EU interests. They
should be tackled as early as possible and not hold up the accession process.
Blockages linked to bilateral issues can compromise the transformative power of
the enlargement process. The Commission urges parties concerned to make every
effort towards solving outstanding border disputes in line with established
principles and means, including referring issues to the International Court of
Justice if appropriate. Good neighbourly relations
remain key. The EU stands ready to facilitate the
search for solutions and to support related initiatives.

11.
Achieving visa-free travel to the
EU is of the highest importance to the citizens of all the enlargement
partners. Visa liberalisation, as part of the accession process, has seen
further progress with the lifting of the visa obligation for citizens from
Bosnia and Herzegovina and Albania in December 2010, once both countries had
met the established conditions. The Commission urges the authorities of
Western Balkan countries to take all the necessary measures against abuse of
the visa-free travel regime. For its part, the Commission has strengthened the
post visa liberalisation monitoring by setting up a dialogue mechanism with the
countries concerned, including measures to remedy abuse.

12.
Considering
Kosovo's progress on readmission and reintegration of returnees and in line
with the December 2010 Council conclusions, the Commission will launch a visa
dialogue with Kosovo towards the end of the year. With Turkey, the EU has
intensified cooperation on visa issues and the Commission has entered into a
dialogue with Turkey on visa, mobility and migration and will identify concrete
steps required from Turkey in view of a future visa liberalisation. An
important step would be that Turkey takes the necessary action for the swift
conclusion and entry into force of the readmission agreement.

13.
Following the
global economic crisis, the enlargement countries have now embarked upon a path
of economic recovery, though at varying pace. Turkey has emerged from
the crisis with a bigger economy and its growth continues to be impressive.
However, all enlargement countries are confronted with important challenges.
Unemployment remains high and rising in most countries. Fiscal consolidation,
structural reform and improvement of the business environment, including
through strengthening the rule of law and labour market reform, are major
priorities for ensuring the sustainability of the recovery and achieving
inclusive growth. In this context, the Commission
invites the enlargement countries to use the objectives of Europe 2020 as a reform anchor.

14.
In December 2011, the Commission
will present the framework for providing pre-accession financial assistance
under the 2014-2020 multi-annual financial framework, based on the positive
experience from the current instrument. Drawing from this experience, the
Commission will strengthen the link between assistance and the priorities of
the enlargement strategy, emphasising socioeconomic development, increasing the
flexibility of assistance and simplifying procedures.

15.
Public support is key to the success of enlargement policy. The authorities of
Member States and enlargement countries at national, regional and local level
have a central role to play in information and communication efforts to this
end. The Commission is committed to facilitating an informed public debate
about the enlargement process, based on user-friendly, factual information. The
Commission encourages the development of an active civil society as an
essential element of democracy, also as a facilitator of an informed debate on
EU enlargement.

16.
The Commission adopted a favourable
Opinion on Croatia's accession to the EU, as of 1 July 2013. The
completion of the accession negotiations has been made possible by Croatia meeting the remaining closing benchmarks, including in difficult
chapters such as judiciary and fundamental rights and competition policy.
Croatia needs to continue consolidating its reforms, in line with the
commitments undertaken during the accession negotiations. The Commission will
closely monitor Croatia's further preparations to assume the responsibilities
of membership upon accession. Croatia is expected to continue to support the
accession process of the other Western Balkan countries.

17.
With its dynamic economy and its important
regional role, Turkey is a key country for the European Union. This has
been highlighted by the current regional and global political and economic
developments. Turkey has continued EU-relevant reforms, but significant further
efforts are required, including on guaranteeing core fundamental rights.
Regrettably, accession negotiations have not moved on for more than one year.
The Commission will work for a renewed positive agenda in EU-Turkey relations,
one that will continue to support reforms, in particular an inclusive
constitutional reform process, and economic integration. This agenda could
cover a broad range of areas of common interest including political reforms,
foreign policy dialogue, alignment with the EU acquis, visas, mobility
and migration, energy, the fight against terrorism, trade and participation in
EU programmes. The country's contribution to the EU will only be fully
effective within a credible and active accession perspective.

The
Commission is concerned about the recent tension in relations between Turkey
and Cyprus. The Commission recalls that the Council has urged Turkey to refrain
from any kind of threat, sources of friction or action, which could negatively
affect good neighbourly relations and the peaceful settlement of border
disputes. Furthermore, the EU has stressed all the sovereign rights of EU
Member States which include entering into bilateral agreements, in accordance
with the EU acquis and international law, including the UN Convention on
the Law of the Sea.

The EU has
repeatedly underlined the urgency of Turkey's fulfilment of its obligation of
full non-discriminatory implementation of the Additional Protocol to the
Association Agreement and progress towards normalisation of bilateral relations
with the Republic of Cyprus. This could provide a significant boost to the
accession process. The EU will continue to follow up and review progress made
on issues covered by the Declaration of 21 September 2005, in accordance with
the relevant Council Conclusions. In the absence of progress, the Commission
recommends that the EU maintains its measures from 2006.

18.
As regards the Cyprus issue,
the leaders of the Greek Cypriot and Turkish Cypriot communities have
intensified the negotiations on a comprehensive settlement under the auspices
of the United Nations. The Commission strongly supports their efforts and
provides technical advice on issues within EU competence. The Commission urges both leaders to now make the necessary
compromises to bring the negotiations to a successful conclusion and urges all
actors involved to focus all efforts and minds on the comprehensive settlement
in Cyprus. During the ongoing intensive phase of
Cyprus talks, it is essential that all parties concerned exert restraint and do
their utmost to ensure a positive climate that will facilitate a successful
completion of the process, contributing in concrete terms to a
comprehensive settlement.

19.
The accession process with Iceland is
gaining momentum and negotiations on specific acquis chapters
have been launched. The country's high level of integration with the EU across
a wide range of policy areas is proving a considerable advantage. The
Commission takes Iceland's specificities and expectations into account, while
fully respecting the established approach on accession negotiations and safeguarding
the principles and the acquis of the Union, as well as the negotiating
framework. The Commission will continue to supply the public debate on
accession in Iceland with factual information about EU membership.

20.
The former Yugoslav Republic of Macedonia continues to sufficiently fulfil the political criteria. Some progress has been made on core reforms. The implementation of
adopted legislation, as well as guaranteeing the freedom of expression in the
media, strengthening independence of the judiciary, reform of public
administration, and fighting corruption continue, however, to represent
significant challenges.

The Commission
reiterates its recommendation that negotiations for accession to the European
Union should be opened with the former Yugoslav Republic of Macedonia. The
Commission also reiterates its proposal to move to the
second stage of association as provided by the Stabilisation and Association
Agreement, without further delay.

Maintaining good
neighbourly relations, including a negotiated and mutually accepted solution to
the name issue, under the auspices of the UN, is essential. Another year should
not be lost.

21.
Montenegro has successfully addressed the key priorities set out in 2010 by
the EU as a pre-requisite to opening accession negotiations. The country has
consolidated national consensus on European Integration. In view of the
progress made, the Commission considers that Montenegro has achieved the
necessary degree of compliance with the membership criteria and in particular
the Copenhagen political criteria. Yet, maintaining the reform momentum, with
particular focus on implementation of legislation and policies in the area of
rule of law, remains essential. To that aim, the Commission intends to propose
to apply in the case of Montenegro the new approach for the negotiating
chapters on judiciary and fundamental rights and justice, freedom and security
referred to under point 4 above.

In light of
these considerations and taking into account the Council conclusions of
December 2010, the Commission recommends that accession negotiations be opened
with Montenegro.

22.
Over the past year, Albania's
domestic political scene has been largely dominated by the political stalemate
between the ruling majority and opposition and further confrontational developments.
It is now urgent that, building on recent encouraging signals, the political
forces in Albania re-establish and sustain a level of political dialogue
allowing the functioning of key democratic institutions, improving the
electoral framework, and the implementation of essential reforms. The
Commission encourages the key actors to jointly establish concrete methods for
bridging domestic differences in order to realising the country's European
perspective.

23.
The Commission presented its Opinion on Serbia's
membership application today. The Commission recommends that the European
Council should grant Serbia the status of candidate country, taking into
account progress achieved so far and on the understanding that Serbia
re-engages in the dialogue with Kosovo and is moving swiftly to the
implementation in good faith of agreements reached to date.

Serbia is well on its way towards sufficiently
fulfilling the political criteria set
by the Copenhagen European Council in 1993 and the conditions of the Stabilisation and Association
process, provided that progress continues and that practical solutions are
found to the problems with Kosovo.

The Commission therefore recommends that
negotiations for accession to the European Union should be opened with Serbia
as soon as it achieves further
significant progress in meeting the following key priority:

-
Further steps to normalise
relations with Kosovo in line with the conditions of the Stabilisation and
Association Process by: fully respecting
the principles of inclusive regional cooperation; fully respecting the
provisions of the Energy Community Treaty; finding solutions for
telecommunications and mutual acceptance of diplomas; by continuing to implement in good faith all agreements reached;
and by cooperating actively with EULEX in order for it to exercise its
functions in all parts of Kosovo.

The Commission will present a report on Serbia's
implementation of the above key priority as soon as sufficient progress has
been achieved.

24.
The EU will continue to facilitate the
dialogue between Belgrade and Pristina to promote cooperation, achieve
progress on the path to the EU and improve the lives of people. The dialogue
has proved to date a valuable means to address differences between the two
parties and has led to several agreements in areas including freedom of
movement of goods and persons, civil registry and cadastre.

25.
In a year marked by lengthy
electoral processes in Kosovo, progress achieved with the reform agenda
was limited. The President and government have demonstrated commitment to
Kosovo's European perspective. This has produced some initial reforms. Major
challenges remain concerning organised crime and corruption, as well as the
strengthening of public administration. The Commission proposes to launch a structured
dialogue with Kosovo on the rule of law with the aim to address these
challenges and support judicial reform.

While the integration
of Kosovo Serbs has improved in the South, tensions in northern Kosovo have
increased. People in the north also need to benefit from the European
perspective. To that end, the Commission underlines the importance of Kosovo
launching a comprehensive agenda for the north.

The Commission will continue to support Kosovo's efforts to further
fulfil its European perspective, notably as regards visas, a trade agreement,
and Kosovo's participation in EU programmes, in line with its 2009
Communication. To this end, the Commission will review its 2009 Communication
to ensure that Kosovo can further benefit from the EU accession process. The
Commission encourages efforts for overcoming obstacles to the development of
relations between the EU and Kosovo caused by differences on Kosovo's status.

26.
In Bosnia and Herzegovina
the political and institutional deadlock has continued, prolonging the
blockages in the functioning of the state and in the implementation of
EU-related reforms. The formation of a State-level
government is an urgent priority to ensure effective state-level governance. To
advance towards the EU the country still needs to amend its Constitution in
line with a European Court of Human Rights ruling, for eliminating ethnic
discrimination regarding representation in state institutions, as well as
adopting a Law on State Aid. A Census Law remains to be
adopted. The country's engagement on a Structured Dialogue on Justice under the Stabilisation and Association process shows the way ahead, through dialogue and compromise as well as
focus on the EU agenda.

Making further
progress towards meeting the objectives and conditions which have been set for
the closure of the Office of the High Representative remains essential. The
appointment of the EU's first single representative in Bosnia and Herzegovina
reinforces the EU presence and support to the country on its way from international
supervision to its European future, in line with the March 2011 Council
conclusions.

27.
The EU's enlargement policy has
brought about deep democratic and economic transformations in countries
seeking to join. The past year's record underlines the value of a credible
enlargement policy. At the same time, where political will and the commitment
to achieve concrete results are insufficient or lacking, the accession process
will not advance and risks stalling. Tackling difficult reforms brings stable,
better prepared, and more prosperous enlargement countries closer to the EU.

ANNEX 1

Conclusions and Recommendations of the Commission's
Opinions on the membership applications by Serbia

In the light of
substantial reforms over the last years, Serbia has considerably progressed
towards fulfilling the political
criteria related to the stability of institutions guaranteeing democracy, the
rule of law, human rights and respect for and protection of minorities, set by
the Copenhagen European Council in 1993, as well as the conditions of the
Stabilisation and Association Process. Serbia has a comprehensive constitutional, legislative and
institutional framework which overall corresponds to European and international
standards. Parliament has become far more effective in its legislative activity
under the current legislature. The legal and institutional framework for the
rule of law is comprehensive, including in the areas of the fight against
corruption and organised crime where initial results were achieved. The legal framework for the protection of human
rights and minorities is well developed and has started being implemented.
Serbia has reached a fully satisfactory level in its cooperation with ICTY and has taken an increasingly active role in
fostering reconciliation in the region. Serbia has agreed to and participated in a process of dialogue with
Kosovo to facilitate the lives of the people which has led to several
agreements (free movement of persons and goods, civil registry and cadastre)
and Serbia has taken initial steps for implementation.

As regards the economic criteria, Serbia has taken
important steps towards establishing a functioning market economy and achieved
a certain degree of macroeconomic stability in spite of the global economic and
financial crisis. However, further efforts will be necessary for restructuring
the economy and improving the business environment, in particular by
strengthening the rule of law and removing red tape, enhancing competition and
the role of the private sector as well as tackling rigidities on the labour
market. In order to enable it to cope in the medium term with competitive
pressure and market forces within the Union, Serbia needs to pursue structural
reforms to upgrade the productive capacity of the economy and create a climate
conducive to increased foreign investment.

Serbia has built up a positive track record in implementing
its obligations under the Stabilisation and Association Agreement and the Interim Agreement.

Serbia would be in a position to take on the obligations of
membership in the medium term, in nearly all acquis fields, provided
that the alignment process continues and that further efforts are made to
ensure the implementation and enforcement of legislation. Particular attention
needs to be paid to the areas of agriculture and rural development, judiciary
and fundamental rights, justice, freedom and security and financial control.
Full compliance with the acquis in the field of the environment and
climate change could be achieved only in the long term and would necessitate
increased levels of investment.

Based on preliminary estimates, Serbia's accession would
have a limited overall impact on European Union policies and would not affect
the Union's capacity to maintain and deepen its own development.

The Commission recommends that the Council should grant
Serbia the status of candidate country, taking into account progress achieved
so far and on the understanding that Serbia re-engages in the dialogue with
Kosovo and is moving swiftly to the implementation in good faith of agreements
reached to date.

Serbia is well on its way towards sufficiently fulfilling
the political criteria set by the
Copenhagen European Council in 1993 and
the conditions of the Stabilisation and Association process, provided that progress
continues and that practical solutions are found to the problems with Kosovo.

The Commission therefore recommends that negotiations for
accession to the European Union should be opened with Serbia as soon as it achieves further significant progress in meeting
the following key priority:

-
Further steps to normalise
relations with Kosovo in line with the conditions of the Stabilisation and
Association Process by: fully respecting
the principles of inclusive regional cooperation; fully respecting the provisions
of the Energy Community Treaty; finding solutions for telecommunications and
mutual acceptance of diplomas; by continuing to implement in good faith all agreements reached; and by
cooperating actively with EULEX in order for it to exercise its functions in
all parts of Kosovo.

The Commission will
present a report on Serbia's implementation of the above key priority as soon
as sufficient progress has been achieved.

Serbia is encouraged to
maintain the momentum of reforms in pursuing the necessary degree of compliance
with the membership criteria, with particular attention to the rule of law, and
to continue its constructive engagement in regional cooperation and in
strengthening bilateral relations with neighbouring countries. Implementation
of the Interim Agreement, and from its entry into force, the Stabilisation and
Association Agreement, are expected to continue. The Commission will continue
to support these efforts through the IPA financial instrument.

ANNEX 2

Conclusions on Croatia, the former Yugoslav Republic of
Macedonia, Montenegro, Albania, Bosnia and Herzegovina, Kosovo[17], Turkey and Iceland

Croatia

After Croatia met the remaining closing
benchmarks, accession negotiations were concluded in June 2011. Croatia now
needs to build on the high degree of alignment achieved and focus on the
remaining work before accession. This Progress Report is part of the
Commission's monitoring of Croatia's fulfilment of all the commitments taken in
the accession negotiations and its continued preparations to assume the
responsibilities of membership upon accession.

Croatia continues to
meet the political criteria. Substantial progress has been made in all
areas, including rule of law, and results are becoming tangible. Efforts must
continue to consolidate these results.

Democracy and the
rule of law have been further strengthened. The government
and the parliament have continued to function effectively. In the area of public administration
reform, further efforts are needed to consolidate efficient implementation of
the legal framework in order to complete building a modern, reliable,
de-politicised and citizen-oriented public service.

Croatia has made good
progress regarding the judiciary. New legislation further strengthened
judicial independence and many measures have been taken to improve the
efficiency of the judiciary. A new system for appointing judicial officials has
been established. Some challenges remain, especially the need to further
increase judicial efficiency, and to ensure the practical implementation of new
measures relating to independence, impartiality and accountability of the
judiciary. Progress has been made with the impartial handling of war crimes trials. The four specialised war
crimes chambers have been made exclusively competent for all new cases and
their role should be further strengthened for pending cases. The Ministry of
Justice adopted a strategy for addressing impunity, especially in cases where
the victims were ethnic Serbs or the alleged perpetrators were members of the
Croatian security forces.

There has been
substantial progress in the fight against corruption. Anti-corruption
efforts have been accelerated with positive results; legislation has been
improved and the relevant authorities strengthened. The track record of effective
handling of corruption cases needs to be further developed, especially covering
high level corruption, local level corruption and including cases related to
public procurement and the judiciary. Further experience is needed on
implementing the newly adopted preventive legal framework in practice and the
implementing structures remain to be further strengthened.

Human rights continue
to be generally well respected and further progress has been made in the areas
of human rights and the protection of minorities. Croatia has continued to take various measures
to raise public awareness and improve protection of human rights. As for access to justice, implementation of the Law on Legal Aid has
continued to improve, notably by simplifying procedures. With regard to the prison system,
work on the expansion of existing detention and treatment facilities has
continued, but Croatian prisons remain overcrowded. As regards ill treatment, the Ombudsman continued to
receive complaints regarding excessive use of force by the police which need to
be followed up adequately.

Freedom of
expression, including freedom
and pluralism of the media, is provided for in Croatian law and is generally
respected. There has been further progress regarding transparency of media
ownership, but limited progress with investigating cases, from previous years,
of intimidation of journalists working on cases of corruption and organised
crime. Few new cases have been reported, however. Economic pressures in
particular are hampering the development of investigative reporting. Problems
with political interference at local level remain. Freedom of assembly
requires continued attention in
terms of handling of demonstrations.

There has been some
progress with regard to women's rights and gender equality. However, the
position of women on the labour market has not changed significantly and the
percentage of unemployed women remains high. There has been limited progress
with children's rights. The Ombudsperson for Children became more active
in cases where violence against children was not being properly addressed by
the relevant authorities.

There has been limited
progress as regards the inclusion of socially vulnerable groups and persons
with disabilities. The capacity of the Office of the Ombudsman for Persons
with Disabilities is being strengthened. Criteria for establishing entitlements
are not equally applied and legislation regulating specific rights is
fragmented. The transition from institutional care to community-based care
services has progressed slowly. Labour and trade union rights are
generally respected.

Croatia has begun
developing a track record of implementation of the Anti-Discrimination
Law and legislation on hate crimes. Various awareness-raising measures were
taken and the Office of the Human Rights Ombudsman is being reinforced. Law
enforcement bodies have started a number of cases under hate crime legislation.
However, the track record needs to be developed further and societal homophobic
and xenophobic sentiment addressed.

There has been some
progress with the respect for and protection of minorities and cultural
rights. High-level public expressions of commitment to the rights of
minorities, reaffirming their place in Croatian society, have continued.
Funding has been secured for minority organisations. Police investigations into
incidents against minorities have improved. Steps have been taken to improve
implementation of the employment provisions of the constitutional act on the
rights of national minorities and a plan for minority employment was adopted
and now needs to be implemented. However, Croatia needs to continue to foster a
spirit of tolerance towards minorities, in particular Croatian Serbs. Cases of
discrimination continue, particularly in the public sector at local level.
Improvements have been made in education for the Roma minority, particularly in
pre-school education. Infrastructure improvements to some Roma settlements have
continued. Problems remain with participation by the Roma community in the
education system. There is scope for
improved take-up by the Roma of measures in their favour. Access to adequate
housing, social protection and health care remain problems for Roma and
unemployment remains extremely high.

There has been good
progress on refugee return issues. Refugees continued to return to
Croatia. Progress was made with housing issues, in particular by providing
accommodation under housing care programmes for returnees. The backlog of
appeals against refused housing reconstruction applications has also been
reduced. Progress has been made with the reconstruction of the remaining
properties. Implementation of the decision on validating pension rights has
continued. However, Croatia needs to make progress in providing accommodation
to the estimated 2,500 remaining housing care applicants. Efforts to create the
economic and social conditions necessary for sustainable returns of refugees
need to be accelerated.

As regards regional
issues and international obligations, Croatia continues to
cooperate with the International Criminal Tribunal for the former Yugoslavia
(ICTY). The government's inter
agency task force has explored important new avenues in its investigations
aimed at locating or determining the fate of missing artillery documents
requested by the Office of the ICTY Prosecutor. Croatia has, however, been
unable to fully account for the missing military documents. Political leaders
should also avoid statements and measures that could call into question the importance of
reconciliation and the need to serve justice through the prosecution of war
crimes.

Significant progress
was made with regard to the Sarajevo Declaration Process. Following the
meetings in June and September 2011, Bosnia and Herzegovina, Croatia,
Montenegro and Serbia, agreed on a number of issues, including on the text of a
joint declaration to be signed at a ministerial conference in November 2011 in
Belgrade.

In July, the Croatian
government adopted and transmitted to parliament for adoption a declaration on
promoting European values in Southeast Europe stating a firm commitment from
Croatia that bilateral issues, such as border issues, must not obstruct the
accession of candidate countries to the EU from the beginning of the accession
process until the Accession Treaty comes into effect.

Croatia continued to
participate actively in regional initiatives, including the South-East European
Cooperation Process (SEECP), the Regional Cooperation Council (RCC), and the
Central European Free Trade Agreement (CEFTA). Bilateral relations with other
enlargement countries and neighbouring EU Member States continue to develop,
including with Serbia, but some issues require
continued attention, notably regarding cooperation on the investigation and
prosecution of war crimes. Relations with Slovenia have further
improved, with the entry into force of the Border Arbitration Agreement.

The
economy of Croatia was still in recession in 2010 and the first quarter
of 2011 in spite of the recovery in the economies of the EU and other trading
partners. There are, however, signs of increasing economic activity since the
spring. Unemployment, public deficit and debt continued to increase. The high
external indebtedness remains a key vulnerability of the economy.

As
regards the economic criteria, Croatia is a functioning market economy.
Croatia should be able to cope with competitive pressures and market forces
within the Union, provided that it implements its comprehensive reform
programme with determination in order to reduce structural weaknesses.

Broad
political consensus on the fundamentals of a market economy was maintained.
Given the existing constraints, macroeconomic policy has, by and large, been
appropriate to address the challenges of the recession. The central bank
succeeded to preserve exchange rate and financial stability while maintaining
an accommodative monetary policy as underlying inflationary pressures stayed
low. The banking sector remained resilient to shocks. In the fiscal area, the
authorities made efforts to contain the rising deficit by reining in
expenditures. The budgetary framework for achieving fiscal sustainability over
the medium term has been improved. The current account deficit continued to
narrow as exports expanded while subdued domestic demand kept imports low. Some
progress, albeit limited, was achieved on structural reforms within the
framework of the Economic Recovery Programme.

However,
in overall terms the speed of structural reforms remained slow, not least with
respect to privatisation and the restructuring of loss-making enterprises. The
investment climate continued to suffer from a heavy regulatory burden,
unpredictability of administrative decisions in particular at local level and
numerous non-tax fees. Planned reforms of the highly rigid labour market were
narrowly circumscribed and the already low employment and participation rates
declined further. Social transfer payments, which represent a relatively high
share of public budgets, remained not well-targeted. Considering the need to
achieve medium-term fiscal sustainability, the budgetary process could be
improved further. Enhancing the efficiency of public spending remains a key
challenge.

Regarding Croatia's ability
to take on the obligations of membership, preparations for meeting EU
requirements have continued to progress well and there is a high degree
of alignment with EU rules in most sectors. In most areas there has been
further progress, including in those chapters where the level of alignment is
already high. Additional efforts are needed in certain areas to strengthen the
administrative capacity necessary for proper implementation of the acquis.
Implementation of the Stabilisation and Association Agreement has progressed
smoothly.

Good progress has been
made in the field of free movement of goods. Alignment with the acquis
in this chapter is well advanced. However, further efforts are necessary,
particularly on the remaining revisions of the horizontal legislation and on
the New and Old Approach product legislation in order to bring national
legislation fully into line with the acquis.

Continued progress has been made in the field of freedom
of movement for workers and preparations to apply the acquis are on
track. Continued attention must be paid to strengthening administrative
capacity with regard to the coordination of social security systems.

Further progress has
been made in the field of right of establishment and freedom to
provide services where, in general, alignment with the acquis is
satisfactory. Continued work on mutual recognition of professional qualifications
and on transposition and implementation of the Services Directive in order to
achieve complete alignment is needed as well as further strengthening of the
administrative capacity of the postal services regulator.

Further progress has been made in the field of free
movement of capital as regards the acquis on payment
services, liberalisation of capital movements and anti-money-laundering.
Legislative alignment is almost completed.

Progress has continued
in the field of public procurement. Alignment with the acquis is on track and
nearing completion. Special
attention should be paid to aligning the secondary legislation with the new
public procurement law, and to strengthening the institutions in this
sector through continuous training and professional development of their staff.

Progress can be reported in the field of company law.
Alignment with the acquis is well on track. Further progress has been
achieved in the field of intellectual property law and alignment with
the acquis has reached a very high level. Public awareness of
intellectual property rights remains to be further strengthened.

Substantial progress has been achieved in competition
policy, in particular by the approval of restructuring plans for the
shipyards. However, none of the privatisation contracts has been signed. A high
level of legislative alignment has been achieved. Further efforts are required
to continue developing the Croatian Competition Agency's enforcement record
against cartels following the entering into force of the new Competition Act.

Good progress has been
made in financial services, both on aligning legislation and on
strengthening administrative capacity. Alignment is at a high level.

Croatia has made good progress on information society
and media and has achieved a high level of alignment with the acquis.
Further efforts are needed to sustain liberalisation of all segments of
electronic communications markets and to promote the independence of the public
service broadcaster.

Good progress can be
reported in agriculture and rural development, in particular on the
establishment and implementation of the paying agency and of the integrated
administration and control system and on the common market organisation.
Overall, preparations are on track. Croatia needs to sustain considerable
efforts in all these areas in order to have fully operational and compliant
systems in place. Continued efforts are also necessary on alignment of the
agricultural support system with the acquis. Croatia needs to increase
its absorption capacity for rural development funds without delay.

Good progress can be reported in the fields of food
safety, veterinary and phytosanitary policy, in particular on transposition
of EU legislation and adoption of implementing legislation. Transposition of
legislation is reaching completion in several sectors. Croatia needs to
maintain its efforts on upgrading and monitoring establishments, setting up
border inspection posts, monitoring the animal by-products sector and
strengthening its administrative and control capacity.

Croatia continued to
make good progress in aligning with the acquis in the field of fisheries.
Overall preparations are well advanced. Croatia needs to continue its efforts
regarding implementation of legislation, in particular with regard to fleet
management, inspection and control and structural policy.

Further progress has
been achieved and the level of alignment in the field of transport policy is
good. Additional efforts are needed, in particular to continue work on the second phase of the European Common
Aviation Area Agreement, to complete alignment of the aviation legislation and
to ensure full functioning of the railway safety authority and of the vessel
traffic monitoring information system.

Some progress has been
made in the field of energy, where the level of alignment is high.
Further efforts are needed, in particular on opening the electricity and gas
markets and meeting the EU's targets for renewable energy sources and energy
efficiency. Administrative procedures related to renewable energy projects need
to be simplified and administrative capacity strengthened.

Some progress was made
in the field of taxation. Croatia's level of legislative alignment is
very high, but some further efforts are needed, most notably in the field of
VAT and excise duties. Croatia should continue working on preparations for IT
interconnectivity.

There has been some progress in the area of economic and
monetary policy and alignment with the acquis in this area is
complete. Continued efforts to improve economic policy coordination would be
beneficial.

Good progress has been
made in the area of statistics. A good level of alignment has been
achieved. Efforts need to continue in order to align Croatian statistics fully
with the EU requirements.

Some progress has been made in the area of social policy
and employment. There is a good level of alignment with the acquis.
However, some gaps remain in alignment of the legislation, notably on
transposing labour law directives outside the scope of the Labour Act, and in
the fields of anti-discrimination and gender equality. Due attention should be paid to addressing structural
weaknesses on the labour market, as well as to the functioning of social
dialogue and capacity-building of social partners. Administrative capacity requires continuous strengthening
across all areas.

Croatia made some progress in the field of enterprise
and industrial policy. Alignment with the acquis in this chapter is
very advanced. Further sustained efforts need to focus on improving the
business environment, by reducing the administrative burden, and on innovation
and skills. Alignment of the definition of SMEs with the acquis needs to
be completed. Efforts to restructure the shipbuilding industry need to be
further pursued.

Croatia has made
further progress in the field of trans European networks, where
alignment with the acquis has been completed.

Good progress was made
in the field of regional policy and coordination of structural instruments.
Croatia is at an advanced stage of preparations for implementation of the
cohesion policy in all areas. Further sustained efforts need to focus on
increasing Croatia's administrative capacity for future implementation of
cohesion policy and on developing a mature project pipeline.

Croatia has made
substantial progress on judiciary and fundamental rights. Reform of the
judiciary has continued with the adoption of new legislation further
strengthening judicial independence and a further reduction of the case
backlog. Judicial reform requires constant attention, especially concerning
judicial efficiency and the practical implementation of new measures relating
to independence, impartiality and accountability of the judiciary. Croatia has
continued to improve the handling of domestic war crimes cases. The issue of
impunity needs to be thoroughly addressed. Anti-corruption efforts have been
accelerated with positive results, in particular as regards improved
legislation and the strengthening of the relevant authorities. The track record
of effective handling of corruption cases needs to be further developed,
especially in relation to high level corruption, local level corruption, and
including cases related to public procurement and the judiciary. Further
experience is needed with implementing the newly adopted preventive legal
framework in practice. Protection of fundamental rights has been strengthened,
but it needs to be further improved in practice, especially for minorities and
refugees.

Good progress can be
reported in the field of justice, freedom and security, where the
overall level of alignment with the acquis is advanced. On asylum, the
legal framework was strengthened. Attention needs to be paid to improving the
integration of persons granted protection in Croatia, and to the protection of
irregular minors migrants. Alignment with the EU acquis on visas needs
to continue. Progress has been made as regards external borders. Strengthening
of the Border Police has continued with regard to staffing and equipment.
Croatia needs to focus on the timely implementation of the revised Integrated
Border Management Action Plan. Progress has been made in the field of judicial
cooperation in civil and criminal matters. Good progress can also be reported
in the fight against organised crime and against drugs.

Progress in the field
of science and research has continued, the level of alignment is high,
but efforts remain necessary with respect to the level of investment in
research and to quality researchers and their rights. Preparations for the
Innovation Union should be duly considered.

Good progress has been
made in the areas of education, training, youth and culture. There is a
good level of alignment with the acquis. Croatia has been fully
participating in the Lifelong Learning and Youth in Action programmes since
January 2011. Vocational education and training and adult education require
continuous attention.

There has been progress
in the area of environment. Overall, Croatia's preparations are nearing completion with regard to both alignment and implementation
of legislation, in particular in the areas of water quality and chemicals. Implementation
of the horizontal acquis, and in particular effective public
participation and access to justice in environmental matters, need to be
improved. Significant efforts are still required to further strengthen
administrative capacity, especially as regards nature protection and climate
change. Regarding climate change, significant further efforts are still
necessary to complete the legislative alignment and to ensure implementation,
in particular in the areas of aviation, free allocation, registries and
auctioning.

There has been some
progress in the area of consumer and health protection. Alignment with
the acquis and preparations in the area of consumer protection are well
advanced. Sustained efforts are necessary in order to address the remaining
outstanding issues in the area of public health.

Croatia continued to
make good progress in the field of customs union. Legislative alignment
in this field is very high and further alignment was achieved during the
period. Croatia has continued to reinforce its administrative and operational
capacity by upgrading its equipment for physical checks and improving its risk
analysis capability. Preparations are also well advanced in the area of IT
interconnectivity and should proceed. Efforts are needed to reinforce
administrative capacity in the areas of internal controls, post-clearance and
risk management.

Croatia continued to make progress in the field of external
relations, where it has reached an advanced level of alignment and is
continuing to coordinate and align its positions with those of the EU in
international organisations. However, Croatia should step up its efforts to
bring its international agreements into line with the EU acquis and to
continue strengthening its administrative capacity in the areas of development
policy and humanitarian aid.

Croatia has made
further progress in foreign, security and defence policy. It has
continued to participate in several EU CSDP missions. Croatia has reached a
high level of alignment in this area. Croatia needs to continue strengthening
enforcement of arms control, including the transparency of arms-related
information.

Croatia has made
further progress in the field of financial control, where it has reached
an advanced level of alignment. Continuous efforts
are needed in order to improve overall public internal financial control and
external audit in Croatia at central and local levels.

Good progress can be reported in the field of financial
and budgetary provisions. The
administrative infrastructure and procedures for managing the own resources
system upon accession are largely in place.

The former Yugoslav Republic of Macedonia

The former Yugoslav Republic of Macedonia continues
to sufficiently meet the political criteria. The country has continued
accession-related reforms, though core challenges remain. The parliamentary
elections in June were generally in line with international standards. The new
governing coalition was formed swiftly. Some progress has been made in the
fields of the judiciary and public administration, notably as regards the legal
framework. Further efforts are needed to ensure effective implementation, in
particular concerning freedom of expression in the media, judicial and
administrative reform and fighting corruption. Dialogue between the government
and the opposition needs to be strengthened in order to ensure the smooth
functioning of institutions.

The Ohrid Framework
Agreement (OFA), which has reached its tenth anniversary, continues to be an essential element for
democracy and rule of law in the country. There has been some progress on implementing the Law on languages, on
decentralisation and on equitable representation. Continued efforts are needed
to address ongoing challenges such as education and to ensure harmonious
relations between all communities.

There has been an improvement in the conduct of
elections which were competitive and well-administered throughout the country.
The government needs to address the gaps and implement fully the conclusions
and recommendations of the OSCE/ODIHR election observation mission. The
resources of the parliament need to be increased to allow it to fulfil its
role. The boycott by the opposition hampered the functioning of parliament from
January until the elections. Following the elections the opposition is present
in the new parliament. Some progress has been made on the reform of parliament.
Implementation of the Law on languages and the rules of procedure has moved
forward. Political dialogue needs to be further strengthened.

The government coalition has overcome
difficulties and strengthened its internal cooperation. The new government has
given fresh impetus to the EU reform process. As regards local government, the
financial framework for local service delivery needs to be more transparent and
equitable.

There was progress as regards the framework for
public administration with the creation of a Ministry responsible for public
administration reform. E-government services have advanced to improve services
to citizens. However, there was limited progress on overall implementation of
the reforms. Significant further efforts are needed, notably as regards
recruitment policy and respect for the principles of transparency,
professionalism and independence of the civil service. The amendments to the
Law on general administrative procedures do not ensure effective provision of
administrative services and protection of citizens.

A wide-ranging legal package was adopted to
strengthen the efficiency of the judiciary, parts of which will enter into
force between 2012 and 2015. A High Administrative Court has been created,
filling a gap in the judicial system. The voting rights of the Minister of
Justice in the Judicial Council have been abolished in order to strengthen
independence of the judiciary. Further steps are needed to improve independence
and professionalism in practice, in particular through recruitment practices.
Implementation of previous reforms needs to be strengthened.

Further amendments were made to the legal
framework for anti-corruption policy. GRECO recommendations were addressed and systematic verification of asset declarations
has begun. A track record on handling high-level corruption cases has yet to be
established and verification of conflict of interest declarations needs
to be systematised. Transparency of public expenditure and of the funding of
political parties remains insufficient. Corruption remains prevalent in many
areas and continues to be a serious problem.

The legal and institutional framework for human rights
and the protection of minorities is broadly in place. Civil and
political rights are respected in general and limited further progress was
made. Certain prisons were renovated but the country has yet to develop an
effective national strategy for the prison system. Deficiencies with regard to
combating impunity within the law enforcement agencies remain. A dialogue has
begun regarding serious concerns about lack of freedom of expression in the
media. Editors and journalists reported increasing political pressure and
intimidation. The closure, on charges of tax evasion, of a major television
channel and three newspapers which are critical of the government has raised
concerns about the proportionality and selectivity of the procedure, reducing
the diversity of the media landscape. In this context, journalists and
editorial policies are easily influenced, resulting in widespread
self-censorship. The public broadcaster is failing to play its statutory role.

Economic and social
rights are broadly in place,
and some further progress was made. New criteria for representative
participation of social partners were applied. The National Council for
Prevention of Juvenile Delinquency and the Commission for Protection against
Discrimination have come into operation. The Law on anti-discrimination remains
to be fully aligned with the acquis, notably as regards discrimination
on grounds of sexual orientation. The capacity of the Anti-discrimination
Commission needs to be strengthened.

Some progress was
achieved in the area of cultural rights and minorities. The 10th
anniversary of the Ohrid Framework Agreement provided a good opportunity for
enhanced dialogue between the communities in the country. The President of the
Republic and the Prime Minister both participated in events marking this
milestone. In parliament, implementation of the Law on languages moved forward.
Representation of the ethnic Albanian community in the civil service is in line
with its proportion of the population and the representation of the Roma and
Turkish communities increased. Integration of the Roma in the education system
improved, with increased enrolment in secondary and university education.
Continued efforts are necessary to foster trust, especially in the areas of
education, culture and language. Roma continue to face very difficult living
conditions and discrimination.

Regarding regional issues and international obligations,
the country maintained full cooperation with the International Criminal
Tribunal for the former Yugoslavia (ICTY). In July the Parliament adopted an
Authentic Interpretation of the Amnesty Law which stated that the amnesty
should cover the suspects of all cases that will not be processed by the ICTY.
As regards the International Criminal Court, the bilateral immunity agreement
with the United States does not comply with the EU Common Positions and
guiding principles. The country needs to align with the EU position.

The country has
continued to participate actively in regional cooperation initiatives,
including the South-East European
Cooperation Process (SEECP), the Regional Cooperation Council (RCC) and the
Central European Free Trade Area (CEFTA).

The former Yugoslav
Republic of Macedonia is an active partner in the region and continued to
develop relations with neighbouring and other enlargement countries. Relations
with Greece continued to be adversely affected by the unresolved name issue.
The country remains engaged in talks, under the auspices of the UN as well as
through direct meetings of the prime ministers, in order to resolve it. Actions
and statements which could negatively impact on good neighbourly relations
should be avoided. Maintaining good neighbourly relations, including a negotiated
and mutually acceptable solution to the name issue, under the auspices of the
UN, remains essential.

The former Yugoslav
Republic of Macedonia has improved its ability to assume the obligations of
membership. It made some progress on fulfilling the priorities of the
Accession Partnership. However, the country continues to face major
shortcomings in implementing and effectively enforcing legislation. Adequate
human and financial resources for full implementation of the acquis are
lacking.

The economy of the former Yugoslav Republic of
Macedonia started to recover in the second half of 2010, benefitting from
external demand and increased investment, in particular in construction. In
late 2010, the government agreed with the IMF on a pre-cautionary credit line.
This should strengthen international markets confidence. Structural reforms
have continued. However, high structural unemployment, in particular among the
young and poorly educated, remains a major cause of concern. Institutional
capacities of the public administration and of regulatory and supervisory
agencies are still inadequate.

As regards the economic criteria, the former
Yugoslav Republic of Macedonia continues to be well advanced. In some areas, it
has made further progress towards becoming a functioning market economy,
notably by facilitating company registration, accelerating judiciary
procedures, improving the functioning of financial markets, further simplifying
the regulatory framework and improving communication with the business community. The country should be able to cope with
competitive pressures and market forces within the Union in the medium term,
provided that it vigorously implements its reform programme in order to reduce
significant structural weaknesses.

The country has maintained a broad consensus on the
essentials of economic policies. The economic dialogue with the business
community has improved. The stance of monetary policy, based on the de facto
peg to the euro, supported growth and contributed to macro-economic stability.
Fiscal policy maintained its stability orientation. Some further progress has
been achieved in facilitating market entry and in simplifying the regulatory
framework. The duration of bankruptcy procedures has been further reduced and
real estate registration is practically completed. The financial sector started
to recover from the global financial crisis. Competition in this sector has
slightly improved, as well as the level of financial intermediation

Weaknesses in the rule of law continue to impede the proper
functioning of the market economy. Public administration efficiency is still
low, reflecting heavy procedures, weaknesses in staffing and a high turnover of
officials. Some regulatory and supervisory agencies continue to lack the
necessary independence and resource allocation to fulfil their functions
effectively. Contract enforcement is still difficult, which hampers the
business environment, in particular for small and medium sized enterprises. The
quality of education and of the human capital is low. Physical capital needs
further modernisation and deepening. The quality of fiscal governance has
remained low, partly due to a strong short-term orientation of public spending.
As a result, progress with reducing the very high structural unemployment has
remained very limited. Public sector debt has increased, reflecting continued
fiscal deficits and increased external lending. The informal sector remains an
important challenge.

There has been some progress in the area of free
movement of goods. The budget for the implementation of the comprehensive
strategy on the horizontal institutions has increased however the framework
legislation is still not fully aligned with the horizontal acquis. There
was little progress in the area of freedom of movement for workers and
alignment with the acquis is still at an early stage. In the area of the
right of establishment and freedom to provide services the country is on
track, particularly in the area of postal services. The level of coordination
among the various bodies responsible for authorising cross-border services has
also improved. On mutual recognition of professional qualifications, the
country is at an early stage. Progress on free movement of capital was
focused on enforcement in the area of combating money laundering and financing
of terrorism. There are restrictions on short-term portfolio investments and on
cross-border payment transfers, pending the passage to the second stage of the
Stabilisation and Association Agreement.

There has been progress in the area of public
procurement. Procurement procedures are more transparent and enforcement
was stepped up. The legislation on concessions and Public Private Partnerships
remains to be aligned with the acquis. Administrative capacity in the
field of remedies and concessions, as well as at the level of contracting
authorities, remains weak.

Good progress was made in the area of Company law,
especially on further legislative alignment with the acquis. The legal
framework in the area of auditing remains only partially aligned. Some progress
was made in enhancing the legal framework for intellectual property. The
track record on investigation, prosecution and judicial handling of piracy and
counterfeiting is not satisfactory and the level of awareness of intellectual
property rights among the public remains low.

Some progress was made in the area of competition.
The enforcement record has quantitatively improved in the field of mergers and
State aid, but remains weak in the field of cartels. The quality of the
decisions in the area of State aid needs to be further improved. The Commission
for Protection of Competition does not have adequate budgetary resources and
staff in the area of anti-trust and mergers.

There was overall good progress in the area of financial
services. Risk based supervision is gradually applied. New legislation has
been introduced regulating financial services such as leasing and non-banking
financial companies.

Progress was made in
the field of information society and media. Alignment with the EU acquis
is advancing and most of the key competitive safeguards were introduced. The
capacity of the Broadcasting Council to monitor the market effectively remains
inadequate.

Further progress was
achieved in the field of agriculture and rural development. Key support
policies for agricultural and rural development are gradually being aligned
with EU requirements. Alignment with the acquis requires continuing
sustained efforts. Administrative capacity remains a concern throughout the
sector. There was good progress in the area of food safety, veterinary and
phytosanitary policy, in particular with respect to the adoption of new
framework legislation. Administrative capacity of the Food and Veterinary
Agency remains however insufficient to ensure proper implementation of the acquis.

In the area of transport policy, progress was noted
in particular regarding use of tachographs. Remaining challenges are related in
particular to the still insufficient administrative capacity of the regulatory
and safety transport authorities. The safety certification procedures need to
be introduced.

Good progress was made
in the energy sector, in particular the enactment of the new framework
legislation and the resolution of the long-standing dispute with the distribution
system operator, a major EU investor. An effectively functioning electricity
market has yet to be established, and conditions for competition ensured. The
financial independence of the radiation protection regulator is still not
secured.

Limited progress can be reported in the field of
harmonisation of taxation legislation with the acquis.
Operational capacity for the administration of taxes continued to improve.
Effective means to combat tax fraud have yet to be introduced and a code of
conduct for business taxation is not yet in place.

There was significant
progress in the area of economic and monetary policy, especially in
adoption of the relevant central bank legislation. The quality of the
pre-accession economic programme has improved. There was good progress in
several areas of statistics; substantial efforts are still needed to
improve in particular economic statistics.

Limited progress was noted in aligning with the acquis
on social policy and employment. The implementation of the framework law
on anti-discrimination has commenced. Full alignment with the acquis
remains to be achieved. The high unemployment rate and the low labour
market participation remain worrying. Inclusion of Roma, people with
disabilities and other socially excluded people is slow. Effective
employment and social inclusion policies are should be further implemented, and
the social dialogue should be further strengthened. The overall administrative
capacity is not sufficient.

Progress was good but
uneven in the field of enterprise and industrial policy. There have been
some achievements in simplification of the legislation and administrative
procedures for business operation and reduction of business costs. Enterprise
support measures remain scattered within several programmes.

In the area of trans-European networks further
progress was made. The country continues developing its transport, energy and
telecommunications networks and participates actively in the South East Europe
Transport Observatory and the Energy Community. The implementation of corridor
X remains delayed as additional time was needed to establish the financial
framework.

Some progress was noted
in the area of regional development and coordination of structural funds.
There has been some progress in the implementation of the IPA components
concerning operational programme for the regional development and human
resources development. Inadequate expertise and insufficient institutional
coordination has led to considerable delays. It is necessary to strengthen
ownership of the programme implementation by the authorities.

Some limited progress can be reported on independence and
efficiency of the judiciary, including the amendment of the Minister of
Justice's role on the Judicial Council and the establishment of the High
Administrative Court. Further efforts are needed as regards the evaluation and
security of tenure of judges. Some limited progress was made on anti-corruption
policy. Legislative alignment has continued and systematic verification of
asset declarations was introduced. A track record in handling high level
corruption cases has yet to be established. As regards fundamental rights,
while the legal and institutional framework is broadly in place, better
implementation is needed. A dialogue has been launched to address serious
concerns regarding freedom of expression in the media. Some progress was made
as regards cultural rights and minorities. The Ohrid Framework Agreement
remains an essential element for democracy and rule of law in the country.

In the area of justice,
freedom and security, good progress can be reported on external borders and
Schengen, judicial cooperation and customs cooperation. The border police still
lack adequate technical equipment, budgetary means. Some progress has been achieved
on migration, visa policy, police cooperation and the fight against organised
crime. The implementation of the police reform has continued, however
structural problems, understaffing and lack of budgetary provision still
persist. Implementation in the field of asylum remains insufficient, including
on the provision of legal aid, interpretation and access to social rights.

Concerning European
standards on science and research progress was noted. The national
strategy for 2011 – 2020 was adopted. The participation rate in the Seventh EU
Framework Research Programme has further increased. The administrative capacity
to support participation in the framework programmes is weak. Some progress can
be reported concerning European standards in the areas of education,
training, youth and culture. The country improved its performance in
relation to the Education and Training 2020 common benchmarks. The Lifelong
Learning and Youth in Action programmes remained suspended. Increasing
interaction between the ethnic communities in education remains a challenge.

Some progress can be
reported in the field of the environment, especially as regards
transposing the EU acquis into national legislation and in ratifying
multilateral environmental agreements. Significant efforts to implement the
national legislation are required especially in the areas of water management
and industrial pollution control. Regarding climate change, little
progress has been made on aligning with and implementing the EU climate change acquis.
Further efforts are required to strengthen institutional capacities and
inter-institutional cooperation. There was some progress in the area of consumer
and health protection. Efforts are still hampered by the limited financial
resources and weak operational structures.

Good progress was made in the area of customs union,
both on customs legislation and on administrative and operational capacity.

Progress was made in the area of external relations,
notably in the alignment towards the common commercial policy.

There was also progress in the area of foreign, security
and defence policy. The country took measures to ensure better coordination
between the competent authorities in the implementation of international
restrictive measures. It aligned with all EU declarations and Council decisions
and showed continued commitment to participate in civil and military and crisis
management operations.

Progress in the area of
financial control was related mainly to legislative alignment, and
efforts are called for to ensure its implementation, especially in relation to
the establishment of Financial Management and Control systems. The State Audit
Office's administrative capacity has been further strengthened; however its
independence remains to be anchored in the Constitution. There is no particular
progress to report under financial and budgetary provisions. Overall
there are no significant divergences between the systems in the country and the
EU in terms of basic principles and institutions for the underlying policy
areas that might affect the correct application of the rules on own resources.
The administrative framework for the application of the own resources framework
is still not in place.

Montenegro

Montenegro has made good progress in meeting the political
criteria for membership of the EU, achieving overall satisfactory results, in particular in
addressing the key priorities identified in the Commission Opinion released in
2010[18]. The legislative and institutional framework has been
improved with a view to strengthening the work of the parliament, the electoral
framework, the professionalism and de-politicisation of public administration,
the independence and accountability of the judiciary, anti-corruption policy,
media freedom and cooperation with the civil society. Montenegro has stepped up
efforts to develop its track record in combating corruption and organised
crime. Steps have been made to improve the implementation of
anti-discrimination policies and to guarantee the legal status of displaced
persons and ensure that the respect of their rights. Yet, vulnerable groups
still face discrimination in practice. Montenegro continued to play its
constructive role in the region and to implement smoothly the Stabilisation and
Association Agreement.

As regards democracy and rule of law, legislation on minority rights and freedoms and
on elections was harmonised with the Constitution.

The legislative and institutional framework for elections,
an Opinion key priority, has been considerably enhanced, in line with the main
recommendations made by OSCE/ODIHR and Venice Commission. The new election bill
implements the constitutional commitment to authentic representation of
minorities by introducing affirmative
action for representation in parliamentary elections for all minorities. It
also improves administration and strengthens the transparency of the election
process. Progress has been made in strengthening parliament's
legislative and oversight role, also an Opinion key priority, through enhanced
support to parliamentary committees, better planning of parliamentary work and
closer oversight, particularly in the areas of defence and security.
Parliament's overall capacity and means to scrutinise draft legislation against
the EU acquis remain to be improved. Further efforts are needed to
consolidate parliament's oversight role and to enhance its administrative
capacity.

The EU integration process is given high priority by the
new government. Coordination of Government work and policy-making have
further improved, particularly the quality of consultations with civil society.
Government work on the action plan on addressing the key priorities set out in
the Commission Opinion has been systematic and efficient. The capacity of
ministries to ensure consistency and monitor the effective implementation of
laws has improved to a certain extent, but remains to be further developed. The
administrative capacity involved in European integration coordination,
including on financial assistance, needs to be substantially strengthened. Legislative
amendments with a view to establishing a transparent, efficient and accountable
administration at local level are still pending.

Montenegro has taken
important steps to address the main challenges posed by the public
administration reform, which is a key priority identified in the Opinion. The Government has adopted and started to implement
a public administration reform strategy aimed
at introducing European standards on recruitment and promotion and
enhancing efficiency. An improved legal framework in the area of civil service
and state administration aiming at efficiency, de-politicisation and
merit-based recruitment has been adopted. Legislation regulating administrative
procedures has been amended and a further comprehensive reform has been launched.
The Human Resources Management Authority has been strengthened. Preparations
for implementation of the adopted legislation have to be stepped up and focus
on ensuring in practice the de-politicisation, professionalism, effectiveness
and impartiality of the administration, including through merit-based
recruitment and promotion. The
implementation of this strategy needs to take due account of the need to
rationalise administrative structures and strengthen administrative capacity,
notably in areas related to European integration, while ensuring the financial
sustainability of public administration. The capacity of the Ombudsman office
and the State Audit Institution is to be further enhanced.

As regards the judicial system, Montenegro has made
progress in reinforcing the independence, autonomy, efficiency and
accountability of judges and prosecutors, which is one of the key priorities
set out in the Opinion. The legal framework has been improved at
sub-constitutional level regarding the independence of the judiciary and the
autonomy of public prosecution, and the process of constitutional reform has
advanced. Provisions on the accountability of judges and prosecutors have been
strengthened. Significant efforts will be needed in the period ahead to ensure
completion of the legal reform and effective implementation of the newly
adopted legislation, including through convincing results on corruption and
organised crime cases at all levels. A country-wide single recruitment system
based on anonymous tests for first-time judicial appointments remains to be
established. Systematic training for all judges and prosecutors, in particular
on new legislation and EU law, has yet to be put in place. Efforts to reduce
the case backlog before courts have been stepped up, but the methodology used
needs to become more consistent. The lack of adequate infrastructure and
equipment continues to hinder judicial efficiency. Full publicity of court
rulings needs to be ensured.

In the field of anti-corruption
policy, progress has been made in the implementation of the government's
anti-corruption strategy and action plan, which is one of the key priorities
set out in the Opinion. The strategic and legislative framework on
anti-corruption has been strengthened in the key areas of political party
financing, conflict of interest, incriminations, protection of whistleblowers
and public procurement. Risk analysis in vulnerable areas has been completed
with a view to further refining prevention policies. Technical and
administrative capacity for preventing and combating corruption has been
upgraded, and several investigations of corruption cases have been carried out.
Steps have been made to establish a solid track record of proactive
investigations, prosecutions and convictions in corruption cases at all
efforts, which is part of the Opinion key priority on anti-corruption. Yet,
efforts need to be stepped up to further develop it. The number of
final convictions, in particular for high-level corruption cases, remains low.
Use of special investigative measures continues to be impeded by the lack of
adequate equipment and specialised human resources. Inter-agency coordination
and, in particular, cooperation between prosecutors and the police need to be
further improved. Implementation of the legislative framework is uneven. The
newly enacted provisions in the areas of conflict of interest and political
party financing need to be implemented with determination. There continues to
be a need for stronger monitoring of corruption and conflicts of interest in
the judiciary. Corruption remains prevalent in many areas and continues to be a
serious problem.

Respect of human
rights and protection of minorities in Montenegro is broadly ensured.
Efforts were made to further improve the relevant legal and institutional
framework. Effective implementation of existing legislation and
strengthening of administrative capacities need to be ensured.

As regards promotion
and enforcement of human rights, limited progress has been made. The
authority and influence of the Protector of Human Rights and Freedoms
(Ombudsman) Office have been considerably enhanced: the new Law on the
Ombudsman, establishing the latter as the national mechanism for protection
against torture and discrimination, was adopted in July. However, the Ombudsman's
Office continues to face shortcomings regarding its financial and
administrative capacity to carry out its tasks efficiently. Some limited
progress has been made as regards ill-treatment and fight against
impunity. Relevant staff have undergone further training. Occasional cases
of violence continue to be reported, in particular in police stations.
Processing of reported cases is still slow. As regards the prison system,
the legal and regulatory framework for the establishment of a system for
alternative sanctions and implementation of criminal sanctions has been
developed. Prison conditions still need to be further aligned with
international standards, in particular as regards provision of medical
treatment and family rooms. The issue of effective implementation of sanctions
also needs to be addressed.

Progress was made in
the area of freedom of expression, one of the key priorities set out in
the Opinion. Defamation and libel were fully decriminalised. The Supreme Court
adopted guidelines sent to the national Courts regulating the level of
pecuniary compensation in defamation cases against the media, in line with
European standards and the case law of the European Court of Human Rights. However, previous cases of violence and current
threats against journalists have still not been properly investigated and
prosecuted.

Freedom of assembly
and association is broadly
respected. Very good progress has been made in the cooperation of State
institutions with civil society organisations, one of the key priorities
set out in the Opinion. The Law on NGOs was adopted in July. The highest State
authorities have maintained regular contacts with NGOs and overall open and
constructive cooperation with relevant stakeholders. Efforts have also been
undertaken to improve cooperation with civil society at local level.

Montenegro made
progress as regards anti-discrimination policies, which is one of
the key priorities set out in the Opinion. The Law on the Ombudsman was passed
in July; the Ombudsman has now responsibility over cases of
anti-discrimination. An advisor on anti-discrimination was appointed in
September in the Prime Minister's office. Roma, Ashkali and Egyptians, persons with disabilities as
well as lesbian, gay, bisexual and transgender (LGBT) persons continue to face
discrimination, including by public entities. Effective implementation of the anti-discrimination law
needs to be demonstrated by enhancing the capacity of the Ombudsman Office and
of law enforcement bodies to proper process discrimination cases. Progress has
been made with regard to the enforcement of rights of persons
with disabilities. The Law on anti-discrimination against persons
with disabilities and the Law on Professional rehabilitation and employment of
persons with disabilities have been adopted. Inclusive education activities
have been launched and some efforts have been made to promote their employment.
However, the legal framework presents shortcomings, notably regarding positive
action and sanctions mechanisms, and these persons continue to face
discrimination notably as regards employment and access to public places.
Conditions in the Komanski Most remain a cause of concern. Some
progress has been made with regard to the promotion of the respect of women's
rights, but the enforcement of these rights, in particular as regards
protection of victims of domestic violence, remains limited. Access of women to
decision-making positions needs to be improved.

Limited progress has
been made as regards property rights. The process of
restitution continues to be very slow and needs to be accelerated. Due to
several cases of forgery of property documents, measures have been taken to
strengthen control over the cadastre offices. The Parliament adopted in July
amendments to the law on state survey and immovable property cadastre; yet,
functioning of the cadastre system remains to be further improved, in
particular as regards the completeness and accuracy of data, and its national
coverage.

Interethnic relations
have remained stable in Montenegro. Efforts have been made to improve minority
political representation, amending the Law on minority rights to harmonize it
with the Constitution. Progress in the economic, social and political inclusion
of Roma, Ashkali and Egyptian persons is still rather limited, despite the continuing efforts of the
authorities at national and local levels. Limited progress has been achieved in
terms of improving the situation of displaced persons, one of the key
priorities set out in the Opinion. Despite efforts by the authorities to
provide these persons with legal status, the cumbersome procedures mean that
only a small number of persons have so far obtained legal resident status.

Regarding regional issues and international
obligations, Montenegro continues to satisfy the conditionality of the
Stabilisation and Association Process on cooperation with the ICTY and regional
cooperation. Montenegro pursued its active participation in regional
cooperation initiatives, including the South East European Cooperation Process
(SEECP), the Regional Cooperation Council (RCC) and the Central European Free
Trade Agreement (CEFTA). In 2010-2011, it held the chairmanship of the Central
European Initiative (CEI), the South-East European Cooperation Process (SEECP)
and the Adriatic-Ionian Initiative (AII). The country continues to be strongly
committed to regional cooperation and to playing a constructive regional role.
Outstanding bilateral issues remain to be resolved.

Significant progress
was made in relation to the Sarajevo Declaration Process. Following the
meetings of June and September 2011, Bosnia and Herzegovina, Croatia,
Montenegro and Serbia agreed on a number of issues, including on the text of a
joint declaration to be signed at a ministerial conference in November 2011 in
Belgrade.

As regards the International Criminal Court, the 2003
bilateral immunity agreement with the United States does not comply with the
EU Common Positions and guiding principles. Montenegro needs to align with
the EU position.

The economy of Montenegro started to recover in 2010 from the effects
of the crisis which challenged the
country's economic policy framework. The absence of standard monetary policy
tools[19] left fiscal
policy with the difficult mission of striking a balance between restoring
growth and proceeding with consolidation. Nevertheless, the country managed to
improve overall macroeconomic stability and the quality of public finances, and
kept up the pace of reforms. The recovery process of the Montenegrin economy is
still fragile. The competitiveness of the economy remains limited with low
diversification across the sectors. Shortcomings remain concerning the rule of
law, public administration, human resources and infrastructure.

As
regards the economic criteria, Montenegro has made further progress
towards a functioning market economy as a result of progress in stabilising the
banking sector and maintaining a relatively prudent fiscal stance, thus
reinforcing macroeconomic stability. Montenegro should be able to cope with competitive
pressures and market forces within the Union in the medium-term, provided that
it addresses existing structural weaknesses through the implementation of its
reform programme.

The
recovery of export-oriented industries stimulated economic growth and, together
with subdued domestic demand and positive developments in tourism, contributed
to a reduction of the still high external imbalances. The economic policy
remained consistent and some structural reforms advanced. The reform of public
pensions is a step towards a higher quality and sustainability of public
finances. Market entry and exit mechanisms, contract enforcement as well as
business and property registration procedures were further improved. Financial
legislation was developed with a view to improving the resilience of the
sector.

However,
the financial intermediation role of banks remained subdued as banks pursued
the consolidation of their balance sheets. The very high share of
non-performing loans remains a serious concern for financial stability.
Businesses continue to be confronted with tight and expensive credit
conditions. Unemployment is high. Budget financing needs led to the expansion
of public debt while contingent liabilities from state guarantees and budget
arrears increased significantly. The privatisation process suffered from the
negative global environment. Besides tourism and exports of commodities,
economic activity remains concentrated on non-tradable sectors. The informal
sector remains an important challenge. Persisting weaknesses in the rule of law
negatively affect the investment and business environment.

Montenegro has made good progress in improving its ability to
assume the obligations of membership, in particular in the areas of public
procurement, company law, statistics, financial services,
judiciary and fundamental rights, science and research, education, youth and
culture. Progress has been limited in other areas such as free movement of
workers, freedom to provide services, agriculture, environment, regional policy
and coordination of structural funds. Overall, Montenegro continued to smoothly
implement the obligations under the Stabilisation
and Association Agreement (SAA).
However, some gaps remain as regards State aids and transit traffic, where
further efforts towards alignment are needed.

In the field of free
movement of goods, there has been some progress in standardisation,
accreditation, metrology and market surveillance. Alignment of the horizontal
legal framework with the acquis is not very advanced, and transposition
of the product specific acquis has not yet fully started. There was
little progress in the area of freedom of movement of workers, mainly in
the field of coordination of the social security systems. Alignment of the
legislative framework with the acquis is still in the early stages.
Little progress has been made in the area of the right of establishment and
freedom to provide services, in particular in relation to the issuance of
construction permits. Full independence of the Agency for Electronic
Communications and Postal Services is not ensured. Efforts to align with the EU
Services Directive need to be strengthened. There was some progress in
the area of free movement of capital, more particularly on
combating money laundering, action to counter financing of terrorism and
cooperation between the financial supervisory authorities and enforcement
agencies. Administrative and supervisory capacities remain weak. Good progress
can be reported in the area of public procurement. Administrative capacity has been strengthened and transparency of the procedures has
improved. The overall institutional
set-up for public procurement raises some concerns. Montenegro has
made good progress in the field of company law. There were advances in
the alignment of the legislation on business organisation, accounting and
auditing and takeover bids with the acquis.

Some progress was made in the area of intellectual
property law, in particular regarding alignment of the legislation with the
acquis in the fields of Copyrights and Related Rights, trademarks
and protection of industrial designs. Additional strengthening of
administrative capacity is vital for further progress in this area.

In the field of competition
policy, some progress was made
in aligning national legislation with the acquis. Yet, challenges remain
on the administrative capacity of the Competition Protection Administration and
the State aid bodies. Furthermore, the alignment of the legal framework on
State aid control to EU rules has not been completed. The lack of full respect
of the State aid commitments under the Stabilisation and Association Agreement
remains a cause for concern. The operational independence of the State aid
authority needs to be further guaranteed. As regards the metal industry, authorities
need to ensure full transparency on the amount of State aid provided to the
aluminium and steel companies. Decisions about the ownership of the steel
company which was declared bankrupt need to be taken without delay.

Montenegro made uneven
progress in the field of financial services, particularly in banking.
Cooperation between the three regulatory institutions has been strengthened.
Legislative alignment in the areas of insurance, financial infrastructure,
securities markets and investment services is still at an early stage, and the
situation of the occupational pension funds needs to be addressed.

As regards information
society and media, there has been further progress in terms of legislative
alignment. In the area of electronic communications and information society,
independence of the regulatory authority improved but remains endangered.
Efforts remain to be made to implement the legislation fully and to introduce
competitive safeguards ensuring level playing field for all operators. In the area
of audiovisual policy, the Agency for Electronic media has been strengthened,
but its capacity to monitor the market effectively remains inadequate.

There has been some
progress in the area of agriculture and rural development. A basis for
accurate agricultural statistics is being established. Progress on policy
development and on using the available financial assistance in the field of
rural development has been fairly limited.

Some progress was made
in the area of food safety, veterinary and phytosanitary policy,
on strengthening capacity in the field of food safety and alignment with the acquis
in the field of phytosanitary and veterinary policy. Some progress was made in
the area of fisheries, mainly with regard to upgrading administrative
capacity, enhancing inspection and monitoring of marine fishery resources and
in collecting data in a more systematic manner. Management and inspection
capacity of the fisheries administration remain weak.

Some progress was made
in the field of transport policy in terms of aligning with the
acquis, particularly in the areas of road and air transport. Further
efforts are to be made in order to fully align the transport acquis, in
particular with the third railway package. Decisions to abolish discriminatory road charges towards EU
vehicles have been adopted. Yet, they need to be fully implemented.Montenegro has made some progress in the field
of energy, in particular in the field of renewable energy. A new
strategy on energy policy until 2030 was adopted. Further efforts should be
made towards adopting legislation concerning oil stocks and setting up a
regulatory environment that would foster the increased use of renewable energy
sources in all the sectors. Administrative capacity is still limited.

Montenegro made some
progress in the field of taxation, principally through the development
of a computerised registration and collection system. Administrative capacities
in the field of information technologies (IT) and effectiveness of the data
systems in the fields of administrative cooperation and internal control remain
weak.

Further progress was
made in the field of economic and monetary policy, consisting mainly of
an improvement of the legal framework, with the adoption of detailed provisions
on reserve requirements, on the credit registry and on the withdrawal,
replacement and destruction of worn out banknotes and coins.

Good progress was made
in the area of statistics. Montenegro successfully carried out the
population and housing census in April 2011 and published the first complete
results in July. Yet, further considerable efforts are needed to address
identified weaknesses and to improve statistical infrastructure in view of
reaching a satisfactory level of alignment with the acquis in
statistics.

Little
progress has been made with regard
to alignment with the acquis in the
area of social policy and employment, in particular in the area
of health and safety at work, social inclusion and social protection. Some
progress has been made on social dialogue. Efforts have been made in the area
of anti-discrimination, particularly through the adoption of Law on the
Ombudsman and awareness raising activities. Both the capacity of the Public
Employment service and active labour market measures remain weak when it comes to
addressing low activity and employment rates, and the mismatch between needs
and the skills available. Overall, the situation of public finance negatively
affects reforms in the social area.

There has been some
progress in the field of enterprise and industrial policy, particularly
as regards policy development in favour of SMEs. However, efforts to develop
industrial policy and policy in strategically important manufacturing sectors
need to be intensified.

There has been little
progress in the area of trans-European networks. Regarding TEN-T
infrastructures, further work remains to be done on improving road and rail
links. Progress regarding the TEN-E network was mainly linked to the
improvement of electricity interconnection lines.

Little progress has been
made in the field of regional policy and coordination of structural instruments,
mainly towards the establishment of relevant implementation structures for IPA
components III and IV. These structures need to be completed as a matter of
urgency. Appropriate administrative capacity needs to be developed, notably in
areas such as strategic planning, project development, project management and
financial management and control.

In the area of judiciary and fundamental rights,
Montenegro has made some progress, in particular in addressing the relevant key
priorities set out in the Commission Opinion. Further sustained efforts will be
needed to align with the acquis in this chapter, in particular to
implement and enforce it effectively in the medium term. The track record in
combating serious crime, notably high-level corruption, has to be further
developed. As regards fundamental rights, although some progress has been made
in reinforcing the legal and institutional framework, the existing legal
guarantees need to be fully enforced and administrative capacities strengthened.

As regards justice,
freedom and security, good progress has been achieved on strengthening
judicial cooperation, particularly in criminal matters. Some progress has been
made in the field of migration and asylum. Progress has been also made in the
area of border management. A new strategy was adopted for fighting terrorism.
Progress has been made on addressing challenges in the fight against organised
crime, in particular in the form of closer international and regional
cooperation. The number of related investigations and arrests, notably in the
area of drugs trafficking, increased slightly. Financial investigations in two
major cases led to the temporary seizure of assets of significant amount. Yet,
the overall number of financial investigations and confiscations of criminal
assets remains low. Intelligence-led policing and inter-agency cooperation need
to be improved. Investigation and prosecution mechanisms have to be
strengthened, in particular in the areas of trafficking in human beings and
money laundering. Amendments to the laws on internal affairs and on preventing
money laundering are still pending. Visa policy requires further alignment.
Further efforts are needed to ensure proper reception conditions for
asylum-seekers and irregular migrants.

Good progress was made
in the area of research and innovation. The institutional and
legislative framework for scientific research activities has been strengthened
and several measures have been taken to improve the mobility of researchers.
Preparations for the Innovation Union need to be duly considered.

Some progress can be
reported in the areas of education and culture in particular in aligning
with the acquis. Further efforts are still necessary to ensure inclusive
education for vulnerable groups and children with special needs.

Montenegro has made
little progress with alignment and implementation of the acquis in the
field of environment and climate change. Progress is mainly a result of
the adoption of implementing legislation in waste management and nature areas
and the ratification of international environmental agreements. The administrative capacity of the Environmental Protection Agency
(EPA) has improved, but still needs considerable strengthening in particular in
the field of inspections. Montenegro needs to speed up its strategic planning
in all sectors, integrate more systematically environment in other sectors to
find sustainable funding for implementation. The capacity of the administration
for environment and climate change at local and national level requires
strengthening responsible.

In the field of consumer
and health protection, Montenegro is making progress towards alignment with
the EU consumer policy and the EU health strategy. However, further efforts are
required to align national legislation with the acquis and build up
administrative capacity. Support for consumer organisations and
awareness-raising activities remains low.

Some progress has been
achieved in the area of Customs Union, especially in aligning the
combined nomenclature and abolishing customs fees that are not in line with the
acquis and SAA obligations. Further efforts remain necessary in areas
such as management of quotas, security-related provisions and alignment with
the EU Customs Code.

Some progress has been
made in the area of external relations. Strengthening of institutional
and administrative capacity is needed as regards commercial, development and
humanitarian policies. Montenegro has continued to make progress regarding foreign,
security and defence policy. In particular, it has continued to make a
strong contribution to regional stability.

Montenegro has made progress in the field of financial control,
in particular in the fields of internal and external audit. However, the
country's implementation capacities in fields related to financial management
and control still need strengthening in order to implement the legislation
fully and effectively. In the field of financial and budgetary provisions,
there are no major
differences between the systems in Montenegro and the EU in terms of the basic
principles and institutions in the policy areas underlying the application of
the own resources rules, however, the administrative framework for the application
of the own resources rules is not yet in place.

Albania

Albania's domestic
political scene has been dominated by the continuation of the political
stalemate and the partial boycott of Parliament by the opposition. This
political deadlock dates back to the June 2009 general elections. The outcome
of these elections, which were considered by OSCE/ODIHR to meet most
international standards although marked by shortcomings, was contested by the
Socialist Party. The violent incidents of 21 January 2011, which led to the
death of four demonstrators, exacerbated the climate of mistrust between the
two larger political parties and also towards certain State institutions. The
local elections of 8 May, as a result of the controversial vote count of
misplaced ballots and contested results in Tirana, further accentuated the
polarization between ruling majority and opposition. All these events diverted
political attention away from much needed EU policy reforms.

Against this
background, the government made some efforts to move ahead with the EU
integration agenda and in particular to prepare an action plan to address the
recommendations of the Commission's 2010 Opinion. These efforts were mirrored
by good cooperation between the ruling majority and the opposition on the
Action Plan in the parliamentary committee for European integration and joint
work to achieve agreement on necessary reforms. The efforts, also to launch
working groups on electoral reform, eventually stalled. On 5 September, the
opposition ended its boycott and returned to parliamentary work.

Overall, Albania has
made limited progress in fulfilling the political criteria for
membership of the EU. Important EU-related reforms have been hampered by the
political stalemate. Progress in addressing the key priorities[20]
and the other challenges identified in the Opinion has been uneven. There has
been some progress on implementing measures to combat organised crime, on
improving the treatment of detained persons in prisons, and on children's
rights. However, there was only limited progress regarding the work of
parliament, elections, the judiciary, anti-corruption policy, property rights
and improving the living conditions of the Roma community. Albania will need to
make considerable and sustained efforts on all areas identified in last year's
Opinion.

As regards democracy and rule of law, the
continuation of the political stalemate, further confrontational developments
and increasing mistrust between majority and opposition have negatively
impacted on Albania's reform agenda. Key reform areas are still work in
progress and important pieces of legislation are awaiting adoption or
finalisation.

Despite some improvements in parliamentary rules and
practice and some increase of the parliament's administrative capacities, the
performance of the Parliament on legislative and oversight functions, a
key priority of the Opinion, remains insufficient. The political stalemate has
seriously hampered parliamentary work, as well as the need for sustained and
constructive political dialogue. It has also prevented the establishment of a
consensus enabling the implementation of relevant EU reforms. The opposition's
partial boycott has obstructed parliamentary business, including hampering the
adoption of laws requiring a three-fifths majority. The end of the opposition's
boycott and their return to parliamentary work on 5 September is a positive
step towards the normalisation of political dialogue and cooperation. An
inclusive political environment conducive to cross-party consensus needs to be
fostered in Parliament. The climate of polarization and mistrust between the
government and the opposition affected the local elections of 8 May. There are
areas where international standards were met, in the conduct of these
elections, a key priority of the Opinion, and areas where this was not the
case. Electoral reform, which is a key priority of the Opinion, has stalled.
Parliament has not yet ensured an orderly hearing and voting procedure for
constitutional and high court appointments, a key priority of the Opinion.

Efforts have been made by the government and by the
parliamentary committee for European integration to advance and coordinate
reforms on EU integration including to develop and conduct consultations on an
action plan to address the recommendations in the Commission's Opinion, and in
particular the 12 key priorities. The quality of legislative drafting and
consultation with third parties need to be significantly improved. The
decentralisation reform process was adversely affected by the difficult
relationship between central and local government.

Essential steps in public administration reform,
which is a key priority of the Opinion, including amendments to the civil
service law, have not been completed. Despite some reform measures such as the
Council of Ministers' decision on the structure and organisation of public
bodies of June 2011, adoption of essential legislation is still pending and
contingent on overcoming fully and in a sustained way the political stalemate
as it requires adoption by three-fifths majority vote in Parliament.
Implementation of existing laws and administrative acts remains weak. The
Department of Public Administration (DOPA) still lacks sufficient authority in
the institutional context to fully assume its role. Establishing an
independent, merit-based and professional civil service free from political
interference has still to be achieved. Appointment of the Ombudsman is still
pending.

As regards the judiciary, limited progress has been
made in completing judicial reform, which is a key priority of the Opinion. The
judicial reform strategy and its action plan were adopted in July. They form a
good basis for reform efforts. Implementation will require the allocation of
adequate human and financial resources as well as sound inter-institutional
cooperation. Important legislation requiring adoption by a three-fifths
majority vote in Parliament such as the Law on Administrative Courts is pending
adoption. The efficiency of the judicial system is undermined by lengthy court
proceedings leading to backlogs. Budgetary appropriations for the judiciary
remain generally insufficient. The rate of enforcement of decisions is still
weak. No concrete steps have been taken to combat corruption in the judiciary,
including through limiting or abolishing the immunity of judges.

Limited progress was made in the field of anti-corruption
policy, which is a key priority of the Opinion. The legal framework and
inter-agency structures are mostly in place, but implementation of specific
actions remains overall ineffective and results are insufficient. Public
awareness campaigns are only starting. The immunity of certain public
officials, the absence of a proactive approach and lack of resources and
equipment continue to seriously obstruct effective investigation. A track
record of investigations, prosecutions and convictions is lacking at all
levels. Corruption prevails in many areas and continues to be a particularly
serious problem.

Albania has further
enhanced the legal and institutional framework for human rights and the
protection of minorities. There has been progress in certain key
priority areas, such as strengthening the protection of children's rights
through the adoption of a comprehensive law and improvements in the conditions
of detained persons in prison and the development of alternatives to detention.
Progress in the field of human rights has nonetheless been uneven and renewed
concerns have emerged in certain areas, such as freedom of media, where
editorial independence continues to be hampered by political and business
interests. Effective implementation and enforcement of legislative and policy
tools governing human rights and protection of minorities needs to be
substantially reinforced.

Property rights remain an issue of great concern. There has
been little progress towards the adoption and implementation of a coherent
property reform strategy and action plan. This is a key priority of the
Opinion. The fragmentation of responsibilities and lack of coordination between
the various institutions involved hampers effective policy implementation and
creates legal insecurity and a systemic risk of corruption.

There has been partial
progress on addressing the key priority which calls for reinforcing the
protection of human rights, notably for women, children and Roma, and the
effective implementation of anti-discrimination policies. There
have been developments in this area, including the adoption of the new National
strategy on gender equality and the fight against domestic violence; the start
of implementation of the Law on Protection from Discrimination. Some important
legislative gaps remain, in particular with regard to persons with
disabilities, and Albania needs to ensure the consistent implementation of
existing legislative and policy tools. General awareness of anti-discrimination
legislation and the complaints mechanism needs to be increased. Concerns remain
over continued discrimination against certain vulnerable groups, such as
lesbian gay bisexual and transgender persons and Roma. The Roma community
continues to be marginalised and lacks access to social protection and
services.

Some progress has been
made towards addressing the key priority on improving the treatment of detainees
and application of the recommendations of the Ombudsman in this field. Measures
have been taken to improve the conditions of detention and to systematise the
follow-up of the Ombudsman's recommendations. However, cases of ill-treatment
are still being reported, notably during arrest and police custody. The
treatment of mentally ill offenders still needs to be improved. The lack of a
permanent appropriate solution for the placement of those under obligatory
treatment remains a serious concern.

Regarding regional issues and international obligations, Albania has continued to contribute to
regional stability by fostering positive relations with neighbours and regional
partners. It now has a visa-free regime in place with all Western Balkan
countries. The country has continued to participate actively in regional
cooperation initiatives, including the South East European Cooperation Process
(SEECP), the Regional Cooperation Council (RCC) and the Central European Free
Trade Agreement (CEFTA).

As regards the
International Criminal Court, the bilateral immunity agreement with the United
States does not comply with the EU Common Positions and guiding principles. The
country needs to align with the EU position.

The economy of
Albania maintained macroeconomic stability and positive growth during and in
the aftermath of the global crisis. However,
the political stalemate hampered the capacity of the government to implement
necessary structural reforms. The economy grew by 3.8% in 2010, thanks to
exports, while domestic demand was muted. Monetary policy has successfully
assisted in keeping inflation stable, also against heightened international
commodity prices. Shortcomings regarding the enforceability of contracts and the rule of law, together with weak infrastructure and human
capital and the informal economy continue to hinder economic development.

As regards the economic criteria, Albania
made some progress towards becoming a functioning market economy by reducing
the fiscal and external deficits and keeping inflation expectations anchored thereby reinforcing
macroeconomic stability. Albania should
be able to cope with competitive pressures and market forces within the Union
in the medium term, provided that it steps-up structural reforms, including by reinforcing the legal system and
strengthening physical and human capital.

Despite a more
polarised political landscape, a broad agreement on the key essentials of a
market economy was maintained. The Albanian economy continued to grow, albeit
at a slower pace and notwithstanding the weak economic conditions in important
trading partners. Monetary policy remained sound, maintaining price stability
while inflation stayed within the target range. The current account deficit and
the fiscal imbalance declined in 2010. State involvement in the economy is low
and subsidies remain limited. The banking sector remains well-capitalised and
liquid. Some progress was made to further facilitate market entry. The EU
continues to be Albania's main trade and investment partner.

However, a lasting
reduction of the relatively high public debt has not been achieved. Further
narrowing of the external imbalances may prove challenging especially if the
decline in workers' remittances persists. Labour market performance
deteriorated in 2010, while unemployment remains high. Implementation of
bankruptcy procedures remains incomplete, while the weak rule of law hampers
the enforceability of contracts and the business environment in general. The issue of property rights remains unaddressed.
The high level of non-performing loans in the banking system continues to be an
issue of concern. Investment in
human capital and infrastructure remain inadequate. The informal sector remains
a challenge. The concentration of the production in terms of sectors and export
markets leaves the economy vulnerable to external shocks.

Albania has made some
progress in improving its ability to assume the obligations of membership,
in particular in the areas of free movement of goods, enterprise and industrial
policy, justice, freedom and security, external relations and financial
control. Progress has been limited in other areas such as free movement of
workers, public procurement, intellectual property law, information society and
media as well as energy, environment and air transport. Overall, sustained efforts
are needed to strengthen administrative capacity for the implementation and
enforcement of legislation. Additional efforts are required to ensure the
timely implementation of commitments under the Stabilisation and Association
Agreement.

In the area of free
movement of goods there has been good progress in standardisation. An
adequate market surveillance structure needs to be established. In the
area of freedom of movement of workers, there was little progress and
preparations are at an early stage. There was some progress in the area of right
of establishment and freedom to provide services, mainly in the area of
postal services. There was some progress in the area of free movement of
capital as regards the legislative framework on payment systems and
combating money laundering. Further efforts are required to effectively
implement the national strategy to combat money laundering and financial crime.

Little progress was made in the area of public
procurement. Institutional capacity remains weak and there is a lack of a
clear definition and distribution of competencies in all public procurement
institutions. Preparations in this field are moderately advanced. There was
some progress in the area of company law. However, the capacity of the
National Accounting Council and the operational independence of the Public Oversight Board remain
weak. There was limited progress in the area of intellectual
property law, and preparations are not very advanced. Effective enforcement
of intellectual and industrial property rights remains poor. Albania has not
succeeded in meeting on-time its SAA obligation of guaranteeing a level of
protection similar to that in the EU, including as regards enforcement. There
was moderate progress in the area of competition, in the fields of both
antitrust and State aid. However, the responsible authorities lack the
appropriate administrative capacity. The operational independence of the State
Aid Commission must be safeguarded. Preparations in this area are on track.

There was some progress in the area of financial
services. The regulatory framework on risk management and capital adequacy
improved. Supervisory capacity in the non-banking sector remains weak.

There has been uneven progress in the field of information
society and media. Alignment with the acquis and market
liberalisation on electronic communications are improving. However, media
legislation is not yet aligned with the Audiovisual Media Services Directive
and the capacity of the radio and television regulatory authority remains weak.
Preparations in this field are not very advanced.

Some progress was made
in the area of agriculture and rural development. Progress in
setting up the structures for the implementation of rural development was made.
However, the capacities to carry out analyses, as well as to design and
implement rural development policies remain weak. There has been some progress,
albeit uneven, in the area of food safety, veterinary and phytosanitary
policy. The operational capacity of the National Food Authority was
significantly enhanced and there were improvements in the legislative framework
on food safety and veterinary issues. Overall capacity and inter-service
cooperation and definition of competencies remain weak. There was some progress
in the field of fisheries, particularly as regards inspection and
control. Enforcement of the regulatory framework remains poor due to
lack of physical and financial resources and poor inter-institutional
cooperation.

There was some progress, albeit uneven, in the area of transport
policy. Although alignment advanced in the areas of road transport and air
traffic management, air safety remains a concern. The rail and maritime
transport sectors require further efforts. There has been limited progress on energy.
Security of supply improved slightly, but market reform in the electricity
sector has not yet been effectively achieved and ensuring its economic
viability will require further efforts. The capacities and institutional
independence of the electricity, gas, and radiation protection regulatory
authorities need strengthening. Preparations in this field are advancing
slowly.

Although some progress was made in aligning taxation
legislation with the acquis, and preparations are advancing, further
efforts are required in the administrative and technical capacity, including in
the area of tax fraud and avoidance. There is no progress to report in the area
of economic and monetary policy. Progress was made in the field of statistics,
particularly as regards classifications and statistical infrastructure.
Progress as regards sector statistics was uneven.

Progress in the area of social policy and employment
has been uneven. Although there were some positive developments in the fields
of health and safety at work, social dialogue, and social protection, high
levels of informality and inactivity continue in the labour market. Overall
implementation of policies also remains insufficient, particularly as far as
social inclusion is concerned. Preparations in this field are not very advanced.

There has been progress
in the field of enterprise and industrial policy, particularly as
regards improving the regulatory framework for business and on access to
finance to SMEs. Institutions have been established to facilitate innovation
and technological development. Preparations in this field are advancing.

Some progress was made
in the area of trans-European networks. Completion of road corridors
advanced and a new electricity interconnection became operational.

There has been limited
progress in the area of regional policy and coordination of structural funds.
Considerable efforts are needed to establish the necessary institutional and
administrative capacity and to develop a mature pipeline of projects in the
area of regional development. Preparations in this area are still at an early
stage.

As regards judiciary and fundamental rights, there
are still some important gaps despite some efforts to develop legislation in
line with European standards. Furthermore, the implementation of legislative and
policy tools remains insufficient overall and presents a major challenge.
Albania's alignment with European standards and the acquis in the field
of judiciary and fundamental rights is at an early stage.

Albania has made progress in the area of justice,
freedom and security. Visa-free travel to the Schengen area entered into
force in December 2010 for citizens holding biometric passports. Progress has
been made on fighting organised crime, notably through good international
cooperation and implementation of the 'anti-mafia' law including confiscation
of criminal assets. Nevertheless, organised crime remains a challenge. Efforts
need to be maintained for the effective implementation of the legislative
framework and in strengthening the fight against organised crime, which is a
key priority of the Commission's Opinion. This includes the building up of a
credible track record of proactive investigations, prosecutions and, where
appropriate, convictions. Measures to increase the expertise and empowerment of
investigators and the cooperation of law enforcement agencies should be
actively pursued. The fight against drug trafficking, money laundering,
trafficking in human beings and protection of its victims must be intensified
and conducted systematically, and the legal framework for the confiscation of
criminal assets systematically enforced.

There is progress to
report as regards the capacity to implement the acquis in the area of science
and research. Administrative capacity relating to participation in the 7th
EU Research Framework Programme improved, although national research capacity
remains low. Some progress was made in the areas of education and culture,
in particular as regards Vocational and Educational Training.

There was little
overall progress as regards legislative alignment in the field of environment.
Overall implementation and enforcement of legislation remains weak.
Strengthening administrative capacity and inter-institutional cooperation
require further efforts. Regarding climate change, Albania has made no
progress overall and institutional capacities remain very weak.

Some progress has been made in the area of consumer and
health protection. There was also progress in consumer protection
regulation and enforcement. The legislative framework improved overall. As
regards public health, advances were made in legislation on health care
insurance and there were positive developments in the fields of communicable
diseases and mental health. However, inequalities on access to primary health
care remain.

In the area of customs union there was some progress on legislative alignment
and preparations in this field are advancing. However, the use of reference
prices in customs valuation remains high by EU standards and further efforts
are required as regards simplified procedures and trade facilitation.
Enforcement capacity and management of human resources remain weak.

Some progress was made
in the area of external relations, in particular as regards the common
commercial policy. Strengthening the institutional and administrative capacity
is needed. There has been progress in the area of foreign, security and
defence policy. The country aligned with most EU declarations and common
positions, and continued to participate in CSDP operations.

There was progress as
regards financial control. The primary legal framework for Public
Internal Financial Control and centralised budget inspection improved.
Administrative capacity in the field of internal control requires
strengthening. Preparations in the area of protection of EU's financial
interests are at an early stage.

In the field of financial
and budgetary provisions, the basic principles and institutions for the
underlying policy areas affecting the own resources system are in place. The
administrative framework for the application of the own resources rules is not
yet in place.

Bosnia and Herzegovina

Bosnia and Herzegovina
has made limited progress in addressing the political criteria.

In the areas of democracy
and the rule of law, one year after the general elections held on 3
October 2010, the process of establishing executive and legislative authorities
remains to be completed with the establishment of a State-level Government.
This long delay has hampered Bosnia and Herzegovina's progress on much needed
reforms.

The lack of a credible
process for the harmonisation of the Constitution with the European
Convention on Human Rights remains an issue of serious concern. The first inter-institutional Working Group
which was set up to implement the
European Court of Human Rights (ECtHR) decision in the Sejdić-Finci[21]
case failed to reach an agreement.
The establishment of a new Working Group, as recommended by the Council of
Ministers, is outstanding.

The RS National Assembly (RSNA) adopted Conclusions and a
decision on holding a referendum challenging the State level judiciary
institutions. Following the EU
facilitation, the RSNA repealed the decision on the referendum and amended the
Conclusions on 1 June. Within
the established framework of the Stabilisation and Association Process, Bosnia
and Herzegovina has engaged with the EU in a Structured Dialogue on Justice.

The administrative
capacity of the Parliament improved but lack of coordination between the
State and Entity parliaments and political discord between the Entities has
continued to hamper the work of the Parliamentary Assembly. The functioning of government
institutions, at different levels, continued to be affected by fragmented,
uncoordinated policy-making. The three Presidency members improved efforts at
joint policy formulation and implementation but foreign policy coordination
remained subject to disagreements on some issues. An effective coordination
mechanism between the State and the Entities remains to be established on EU
matters including on programming of financial assistance under the Instrument
for Pre-Accession Assistance (IPA).

Limited progress has
been made in the area of public administration reform. Implementation of
the public administration reform strategy is continuing. However, coordination
between the various administrations remains weak and the public administration
reform process lacks the necessary political support. Sustained efforts remain
necessary to prevent political interference. A State-level Ombudsman is in
place but staffing and financial constraints hamper its effectiveness. The
establishment of a professional, accountable, transparent and efficient civil
service based on merit and competence remains an issue to be addressed.

Bosnia and Herzegovina
has made limited progress in improving the judicial system. An EU-Bosnia
and Herzegovina Structured Dialogue on Justice, aiming at ensuring an
independent, effective, impartial and accountable judicial system, was
launched.
Implementation of the Justice
Sector Reform Strategy and the War Crimes Strategy needs to be stepped up.
Measures were taken to reduce the backlog of cases, particularly of utility
bills cases, but the overall backlog remains high. The fragmented legal
framework across all jurisdictions places significant legislative and financial
burdens on the judiciary. The lack
of streamlined budgetary responsibilities continues to affect the independence
and effectiveness of the judiciary. The
frequent political attacks on the judiciary and the backlog of cases remain
causes for serious concern.

Bosnia and Herzegovina
has achieved very limited progress in tackling corruption, which remains
a serious problem and is prevalent in many areas throughout the public and
private sector. Implementation of the anti-corruption strategy and
action plan remains weak. The Anti-Corruption Authority is not yet fully
operational. The judicial follow-up of corruption cases remained slow
and only a limited number of high-level cases led to prosecution. Insufficient
implementation of legislation and problems of coordination between entities
remain issues of concern. Bosnia and Herzegovina needs stronger political
commitment and determined action against corruption.

Respect for human
rights and protection of minorities is broadly ensured. Bosnia and
Herzegovina has ratified the major international human rights conventions, but
implementation is lagging behind.

Civil and political
rights are broadly respected.
Little progress has been made towards harmonising criminal sanctions across the
country. Adoption of the Framework law on free legal aid, needed to
comply with the ECHR, remains outstanding. Access to justice in civil
and criminal trials needs to be ensured. There has been some improvement in prison
conditions, particularly in psychiatric facilities, but overcrowding and ill-treatment
of detainees remain issues to be addressed.

The State and the
Entity Constitutions provide for the freedom of expression and media,
the freedom of assembly and association and for the freedom of
religion. However, better implementation of existing legislation is needed.
The self-regulatory activities of the Press Council improved. Citizens'
complaints to the Press Council about violations of the Press Code are on the
rise. The capacity of the Press Council to enforce professional standards is
hampered by lack of resources. Political pressure on the media continued, as
did its ethnic bias. Cases of intimidation against journalists also continued.
The implementation of the public broadcasting reform remains outstanding. The
independence of the Communications Regulatory Agency continued to be undermined
and Board appointments remain pending. The development of civil society
requires further support and transparency in funding allocations.

Economic and social
rights are guaranteed by the
existing legal framework, but implementation remained weak due to fragmented
levels of competence. A comprehensive State-level anti-discrimination law is in
place but its scope remains limited and implementation weak. The protection of women
against violence needs to improve, as does the social protection of children.
In terms of inter-ethnic relations, despite the establishment of a coordination
body in the Federation, the number of divided schools ('two schools under one
roof') and mono-ethnic schools remains a cause for concern. The system of
social benefits is based on rights instead of needs, which has an adverse
impact on the situation of vulnerable groups, including the mentally
disabled. Social dialogue and the exercise of labour rights continued to be
hampered by the lack of recognition of State-level social partners and a
fragmented legislative framework.

Respect for and protection of minorities[22] and cultural rights are broadly ensured. Progress was made in
implementing the Roma action plans on housing and employment. Efforts need to
be stepped up to ensure effective implementation of the action plans on health
and education and to improve resources and sustainability with regard to the
action plans. The Roma minority continues to face very difficult living
conditions and discrimination. The lack of birth registration and of access to
free legal aid for civil registration continues to hinder their access to basic
social and economic rights. Further steps are needed in order to improve implementation
of the Law on national minorities and to guarantee minority rights.

Some progress has been
achieved concerning refugees and internally displaced persons. The
revised strategy supporting the return process and ensuring proper implementation
of Annex 7 to the Dayton/Paris Peace Agreement (DPA) is in place. Some steps
have been taken to implement the strategy, notably as regards funding to deal
with vulnerable groups living in collective centres. However, procedures for
allocating return assistance are not fully in place yet. Lack of employment
opportunities and of access to social protection continues to hamper the
sustainability of return and of local integration.

As regards regional
issues and international obligations, implementation of the DPA has
continued but political representatives in Republika Srpska frequently
challenged the territorial integrity of the country. Cooperation with the
International Criminal Tribunal for the former Yugoslavia has remained
satisfactory.

The EUSR mandate was
transferred from the Office of the High Representative to a single EU
Representative acting under a double-hatted mandate as EUSR and Head of the EU
Delegation.

Cooperation between the
courts and prosecutors from Bosnia and Herzegovina, Croatia and Serbia
continued. Implementation of bilateral agreements on the mutual recognition and
enforcement of court rulings in criminal matters is ongoing. However, efforts
at prosecuting war crime cases continued to be hampered by legal obstacles to extradition
in the Criminal Procedural Code.

As regards the
International Criminal Court, the bilateral immunity agreement with the United
States does not comply with the EU common positions and guiding principles. The
country needs to align with the EU position.

Significant progress
was made with regard to the Sarajevo Declaration Process. Following the
meetings in June and September 2011, Bosnia and Herzegovina, Croatia,
Montenegro and Serbia agreed on a number of issues, including on the text of a
joint declaration to be signed at a ministerial conference in Belgrade.

Bosnia and Herzegovina continued to participate actively in
regional cooperation initiatives, including the South-East European Cooperation
Process (SEECP), the Regional Cooperation Council (RCC), and the Central
European Free Trade Agreement (CEFTA). Bosnia and Herzegovina's relations with
its neighbours have developed further. In September, Bosnia and Herzegovina
adopted a decision to recognise the customs stamps of Kosovo. However, some border-related
issues with neighbouring countries remain open.

The economy of
Bosnia and Herzegovina gained some speed in 2011 after a modest growth in 2010.
The recovery is nevertheless still subdued and mainly driven by external
demand. Unemployment remained at very high levels. The fiscal situation eased somewhat as a result of fiscal
adjustment measures implemented under the programme of the International
Monetary Fund and increased revenues. However, medium-term fiscal
sustainability was severely hampered by the failure to adopt the Global
Framework for Fiscal Policies 2011-2013. The commitment to structural reforms
and sound public finances remained weak and uneven across the country, and the
quality of public finances remained low.

As regards the economic
criteria, Bosnia and Herzegovina has made little further progress towards a
functioning market economy. Considerable further reform efforts need to be
pursued to enable the country to cope over the long term with competitive
pressure and market forces within the Union.

The recovery is mainly
driven by external demand, but domestic demand also picked up, supported by
resuming credit activities. Industrial production is growing. Trade activities
significantly increased and the level of trade integration with the EU remained
high. Financial and monetary stability was preserved. The currency board
arrangement continued to enjoy a high degree of credibility. Some improvements
in the business environment can be reported with regard to business
registration and the streamlining of administrative procedures in general.

However, the failure to
adopt the Global Framework for Fiscal Policies 2011-2013 severely hampered the
sustainability and credibility of fiscal policy in Bosnia and Herzegovina and
left fiscal authorities without an agreement on the general fiscal line. The
political stalemate in the country resulted in a significant delay of the 2011
State-level budget adoption and postponement of further programme discussions
with the International Monetary Fund on the implementation of the Stand-By
Arrangement. The quality of public finances remained low with high shares of
current expenditures to GDP. External imbalances, in particular the current
account deficit, have been rising and inflation picked up. The business environment continued to be
affected by administrative inefficiencies and the weak rule of law. Planned privatisation, restructuring of public enterprises and the liberalisation
of network industries did not advance. The productive capacity and the competitiveness of the
economy remained weak as domestic sources of growth were not adequately
exploited. Structural rigidities such as the high rates of social
contributions, poorly targeted social transfers and low labour mobility
continue to hamper job creation. Unemployment
continued to be very high and the informal sector remains an important
challenge.

Bosnia and Herzegovina
made limited progress in aligning its legislation and policies with European
standards. Some progress was noted in the areas of intellectual
property, State aid, research, culture, transport and a number of justice,
freedom and security-related matters. Particular efforts remain necessary on
free movement of goods, persons and services, customs and taxation,
competition, public procurement, employment and social policies, education,
industry and SMEs, agriculture and fisheries, food safety, veterinary and
phytosanitary sectors, environment and climate change, energy, information
society and media and statistics.

On the whole, the implementation
of the Interim Agreement (IA) remained uneven. The country is in breach
of the IA due to non-compliance with the European Convention on Human Rights
and with the rules on State aid. The State-level State aid law, required for
compliance with the Stabilisation and Association Agreement, was adopted by the
Council of Ministers in August but adoption by the Parliament is pending. The
State-level census law, necessary for the country's social and economic
development, remains to be adopted as a matter of priority.

Bosnia and Herzegovina
made some progress in internal market areas. Regarding free
movement of goods, some progress was made in market surveillance and
consumer protection. Substantial efforts remain necessary to approximate the
legal framework to EU legislation, improve administrative capacity and achieve
a single economic space.

In the area of movement of persons, services
and right of establishment limited progress was made. Both Entities adopted
implementing legislation on financial services and the coordination of banking
supervision improved. Further simplification of company registration and
alignment of the legislative framework for postal services will be essential.

There was no progress
in the area of free movement of capital. Further alignment with
the acquis as well as country-wide harmonisation of legislation is
needed. Good, but uneven progress can be reported in the areas of customs
and taxation. Further alignment of legislation and capacity building to
ensure effective implementation and enforcement of intellectual property rights
remain essential.

Bosnia and Herzegovina
made some progress with the enforcement of competition rules. There was
no progress in the area of public procurement, particularly regarding
full alignment of the Public Procurement Law. Progress continued in the area of
intellectual property rights.

There was little
progress in the area of social and employment policies and public health
policy. Country-wide strategy papers exist or are being prepared, but policies
and legislation remain fragmented. Framework laws and strategies are in
place in the field of education but implementation is pending. Some
progress was made on culture. Progress continued in the field of research
and preparations for the Innovation Union started. Negotiations to join the World
Trade Organisation further advanced.

Bosnia and Herzegovina
made little progress towards meeting European standards on a number of sectoral
policies. Regarding industry and small and medium sized enterprises
(SMEs), a country development strategy including industrial policy elements
remains to be adopted and the SME strategy implemented. There was some progress
in the areas of food safety, veterinary and phytosanitary policy and fisheries.
Progress in agriculture and rural development remained limited. Closer
coordination between the State and Entities in aligning with the acquis
in these fields remains essential. The lack of progress had a negative impact
on trade in agricultural products.

Bosnia and Herzegovina's preparations in the field of the environment
remained at an early stage. A harmonised legal framework for environmental
protection and a State Environmental Agency remain to be established. The
administrative capacity is weak and the horizontal and vertical communication
between the different authorities requires strengthening. Regarding climate
change, further efforts are needed towards the adoption of a State-level strategy
for climate change, alignment with the acquis and awareness-raising.

Bosnia and Herzegovina made progress in the transport sector.
There were some positive developments regarding the trans-European transport
networks, road and air transport, rail and inland waterways sectors. The Law on
Transport of Dangerous Goods remains to be adopted. The upgrading of transport
infrastructure remains an issue to be addressed. Preparations in the field of energy
are not very advanced. As party to the Energy Community Treaty, Bosnia and
Herzegovina needs to implement the relevant EU energy legislation. Some
progress was achieved regarding the supply of electricity to Brčko
District and the launch of a comprehensive review of the electricity
legislation at all levels of Government. To guarantee the security of
electricity supply, a country-wide functioning national transmission company
needs to be in place and a comprehensive energy strategy adopted.

Progress in information
society and media was limited. Harmonisation of the legal framework for
public broadcasting remains outstanding. The continuing challenges to the
independence of the Communications Regulatory Authority, political pressure and
the slow pace of implementation of the public broadcasting reform remained
causes for serious concern.

Some progress can be
reported in the area of financial control. Central Harmonisation Units
exist at State and Entity level and the introduction of internal audit started.
The financial management and control systems need further development. The
independence of the State-level audit office remained an issue of concern. Some
progress was made in the area of statistics with regard to
classifications and registers. Sector Statistics such as national accounts or
business and agriculture statistics need to be improved. Cooperation between
the country's statistical institutions at State and Entity level and other
relevant State-level agencies remained insufficient.

In the area of justice,
freedom and security, some progress has been made in the different
areas. In the area of visa policy, priorities continued to be addressed. The
visa facilitation agreement between the EU and Bosnia and Herzegovina and the
readmission agreement have continued to be implemented smoothly. Visa-free
travel to the Schengen area entered into force in December 2010 for citizens of
Bosnia and Herzegovina holding biometric passports.

The country's
preparations in the fields of border management, asylum and migration
have advanced. The asylum and international protection system, the monitoring
of migration flows and inter-agency cooperation continued to improve. However,
the infrastructure at some border crossing points requires strengthening.
Little progress has been made in the fight against money laundering. The
implementation of the strategy and action plan for the prevention of money
laundering remains limited. There has been little progress in the fight against
drugs. The absence of effective judicial follow-up impedes the fight
against drug trafficking, which remains a serious problem.

Bosnia and
Herzegovina's preparations in the area of the police are advancing. The
fragmentation of Bosnia and Herzegovina's police forces continues to undermine
efficiency, results, cooperation and information exchange. The fight against
organised crime remains insufficient due to the lack of effective
coordination between law enforcement agencies. Organised crime remains a
serious concern that affects the rule of law and the business environment.
Efforts to fight trafficking in human beings need to be intensified and
deficiencies in identification of victims of trafficking addressed. Bosnia and
Herzegovina made some progress in fighting terrorism. The Joint Task Force to
fight terrorism was re-established. However, the implementation of the strategy
for preventing and combating terrorism needs to be enhanced.

Preparations for the protection
of personal data have continued, but further efforts are necessary on law
enforcement and to ensure the independence of the supervisory agency.
Well-functioning personal data protection is crucial in order for Bosnia and
Herzegovina to conclude agreements with Europol and Eurojust.

Kosovo

The political situation
in Kosovo was marked by both parliamentary and presidential elections in the
period from October 2010 to April 2011. The conduct of the general elections
was marred by serious shortcomings and technical difficulties. A new coalition
government was formed in February and a new president elected in April.

The President and the
government have demonstrated commitment to the European agenda. Coordination of
EU-related reforms has been strengthened. Elections have delayed the
implementation of many key reforms. Sustained efforts are now needed to
accelerate reforms and their effective implementation. Public administration
and the judiciary are both weak. Much more needs to be done to tackle organised
crime and corruption, including in the area of public procurement. The economic
situation is also serious and the government needs to take urgent steps to
improve the budgetary situation in close coordination with the International
Monetary Fund. On a more positive perspective, Kosovo has continued to make
sustained efforts to deliver on key areas of its European agenda such as visa
and trade.

On the basis of the UN
General Assembly resolution adopted on 9 September 2010, which had been tabled
jointly by Serbia and the 27 EU Member States, a process of dialogue between
Belgrade and Pristina started in March. It was conducted in a generally
constructive spirit until September and has led to agreements on several
issues: free movement of goods and persons, civil registry and cadastre. The
agreements reached to date need to be implemented in good faith.
Further results remain to be achieved to implement, as a matter of priority,
the principles of inclusive and functioning regional cooperation and to provide
sustainable solutions on EU acquis related matters in sectors such as
energy and telecoms.

During the reporting
period, integration of the Serb community south of the River Ibër/Ibar has
improved. Serbs have benefited from the legal framework protecting their
rights. Their participation in general elections increased and they also
participated in the census. The teaching staff of Serbia-supported schools has
started to sign contracts with Kosovo municipal education directorates.

In northern Kosovo,
Serbia-supported structures have continued to be in place and integration has
not progressed. The Serbia-supported municipalities opposed the conduct of the
census in the north and the turnout of Serbs from northern Kosovo in general
elections was negligible. Serbs in the north also challenged the mandate of
EULEX. The situation in northern Kosovo and the issue of the control of the
border/boundary have led to outbreaks of violence, which resulted in injuries
and one dead in July and September. The situation has also led to more frequent
inflammatory rhetoric by the Kosovo leadership. All sides need to play their
part in defusing tensions in northern Kosovo and allow for the free movement of
persons and goods, for the benefit of the people in the region.

The authorities are
cooperating with EULEX in the investigation of the allegations raised in the
resolution adopted by the Parliamentary Assembly of the Council of Europe on
inhuman treatment of people and illicit trafficking in human organs in Kosovo.
Kosovo authorities also need to ensure consistent and effective cooperation
with EULEX in all areas of its mandate.

As regards democracy
and rule of law, the rule of law in particular continues to be an issue
of serious concern and needs urgent attention from the government, assembly and
judicial authorities of Kosovo.

The fourth mandate of
the assembly was inaugurated on 21 February following general elections.
There were serious shortcomings in
the electoral process. Kosovo needs to take urgent steps to address these by
simplifying the system, following international standards, and investigating
and prosecuting cases of electoral fraud. The assembly adopted a budget and a range of key reform
laws relevant to the European agenda. The capacity of the assembly to
scrutinise the draft legislation and work of the government remains weak. There
are concerns that the rules of procedure of the assembly are not always
followed.

A new coalition government
took office on 22 February. In March, the government adopted a regulation
establishing and strengthening the role of the European integration departments
within ministries. The Ministry of European Integration has strengthened its
role as coordinator of the European agenda and donors, and pressed to
accelerate reforms. Further efforts are necessary to identify specific goals
and measurable results, which would guide the government better in its reform
activities. The efforts on decentralisation have continued. The government
needs to find solutions for the long-term sustainability of the newly-founded
Serb-majority municipalities. At the same time, Serbia-supported structures
have continued to operate within Kosovo preventing full implementation of
decentralisation.

There has been limited
progress as regards public administration reform. The regulatory
framework was strengthened, but still needs to be completed. The revised public
administration strategy 2010-2013 has not yet been implemented. Public
administration reform remains a major challenge and public administration is
very weak. The office of Ombudsperson lacks adequate resources, premises and
political support.

There has been progress
as regards the judicial system, notably in the form of key judgements by
the Constitutional Court. The assembly adopted important legislation such as
the laws on witness protection, on criminal liability of legal persons for
criminal offences and the law on international legal cooperation. The reform
process needs to continue. Implementation of the four reform laws adopted in
the previous reporting period has continued satisfactorily. The Division for
International Legal Cooperation in the Ministry of Justice increased its
capacity and has handled cases professionally. The Kosovo Judicial Council has
started addressing key priorities. All nine members of the Kosovo Prosecutorial
Council were appointed and the Council has started to function. Salaries of
judges and prosecutors were increased. At the same time, the judicial system in
Kosovo remains weak. Significant backlogs of cases persist. There are still reports of threats and
intimidation to judges and political interference in the work of the judiciary
is still an issue of concern. A
more proactive approach by prosecutors and judges is needed to investigate and
adjudicate organised crime and corruption cases. There are also serious concerns
about transparency in implementation of the law on pardons.

Kosovo has made some progress in addressing corruption,
notably by starting to tackle some of the corruption cases. Corruption remains
prevalent in many areas and continues to be a very serious concern which also
affects access by citizens to services. The anti-corruption task force was
strengthened. The legislative framework for the fight against corruption was
improved by adopting several important laws, even if it is still not complete and needs to be
further strengthened. The law on financing of political parties has major
shortcomings and monitoring of its implementation also needs to be improved.
Breaches of procurement rules continue to be an issue of concern in the context
of corruption. Declarations of assets continue to show discrepancies between
declared assets and actual revenue.

The Constitution of
Kosovo has strong provisions to secure international standards of human
rights and respect for and protection of minorities. The different
institutions dealing with promoting, enforcing and monitoring fundamental
rights do not coordinate their activities adequately. Bodies in the executive
branch of government suffer from a shortage of capacity, and poorly-defined
responsibilities and authority, which frequently overlap with other bodies.
Their political and practical impact is limited. More needs to be done to
enforce legal and administrative remedies for infringements of human rights. Integration of the members of the Serb community
has improved, notably south of the River Ibër/Ibar. More efforts are needed to
address the needs of the Serbs across Kosovo, but in particular in the north.

Limited progress has been achieved in the area of civil
and political rights. Efforts by the government need to continue as regards
prevention of torture and ill-treatment. Further steps are
necessary to eliminate impunity. In some prisons the lack of
space and overcrowding need to be resolved. Access to justice is not
fully guaranteed, notably in northern Mitrovicë/Mitrovica where the district
court is functioning with limited capacity under EULEX. This undermines rule of
law in this part of Kosovo.

As regards freedom
of expression, limited progress can be reported. The transparency of media
ownership is guaranteed by a law and the law is properly enforced. Journalists
continue to face political pressure and threats. The independence and
impartiality of the public broadcaster (RTK) is not guaranteed. Freedom of
assembly and association is largely respected. The right to association is
secured with the adoption of the amendments to the law on freedom of
association in NGOs. The environment in which civil society operates
needs to be significantly improved. The government needs to use civil society
expertise better.

In the area of freedom
of thought, conscience and religion, the police have continued to manage well the
transfer of responsibility for guarding historical and religious sites,
including Serbian Orthodox ones, from KFOR. Kosovo has advanced its renovation
activities of Serbian Orthodox sites in cooperation with relevant participants
from the Church and from the Serbian authorities.

Further efforts are
needed in order to fully guarantee economic and social rights. There has
been some progress in relation to women's rights, notably by increasing
their representation in politics and improving legislative framework to
guarantee their rights. The relevant institutions need to be strengthened and
the budget increased in order for the legislation to be implemented. Protection
of children's rights has improved with the implementation of the
juvenile justice code. The Council for Child Protection and Justice for
Children was established. Child protection remains weak and child
poverty high. There has been limited progress on socially vulnerable groups
and persons with disabilities. A report on the implementation of the action
plan for persons with disabilities was published. Implementation of the action
plan and relevant laws in this sector needs to be enhanced, particularly at
municipal level, notably by securing the access to schools for disabled pupils.

The government carried
out awareness-raising campaigns on the anti-discrimination law.
Discrimination remains a cause for concern. As regards labour and trade unions
rights, some progress can be reported. The labour law was adopted as well
as the law on trade unions and the law on the Economic and Social Council.
There has been a mixed progress in the area of property rights. The
legislative framework was improved and a property rights coordinator was
appointed. The significant backlog of cases in this area prevents people from
exercising their property rights. More efforts are needed to enforce the
existing legislation.

Kosovo has achieved some progress regarding respect
for and protection of minorities and cultural rights. The newly-founded
Serb-majority municipalities are facing a number of challenges such as land
management. Limited progress has been achieved on access to education
for minority communities. The Serb community both north and south of the
Ibër/Ibar still relies on textbooks and an education system provided by Serbia.
Kosovo authorities need to offer an alternative and to develop a Serbian
curriculum. Serbian is not available as the second official language in schools
outside the predominantly Serb-populated areas. There has been little progress
with regard to the use of languages. Implementation of the legal
framework is inadequate. Multilingual public services are not in place. The
position of Serbian minority media has improved, notably by the launch
of "TV Mreža".

With regard to the relocation of Roma,
Ashkali and Egyptian families from areas contaminated by lead, the Çesmin
Lug/Česmin Lug camp was closed in October 2010. The Osterode camp is not
closed because an alternative public land was not allocated in northern
Mitrovicë/Mitrovica. The government has promoted the civil registration of
these communities, including by organising registration free of charge. A
report on implementation of the Strategy for Integration of Roma, Ashkali and
Egyptian Communities was published. At the same time, the living conditions of
these communities and their access to employment, education, health care and
social protection remain very serious concerns.

The return of refugees and internally
displaced persons remains a challenge for Kosovo institutions. Public
budget allocated to return was reduced by 40% and is very low. Issues such as
delayed property restitution proceedings, and the scarcity of economic
opportunities continue to be major obstacles to voluntary and sustainable
returns. Many displaced persons are still living in difficult conditions.
Regarding enforcement of cultural rights, limited progress can be
reported. Cooperation between the relevant ministries and between central and
municipal levels has improved. The legislation on the protection of cultural
heritage and implementation of the laws remain weak.

As regards regional
and international obligations, Kosovo has continued to cooperate with
the International Criminal Tribunal for the former Yugoslavia. EULEX has
conducted a number of operations, including arrests and convictions in war
crime cases, some involving senior political figures, including a former
minister. The law on missing persons, adopted in August, is an important
development. The law guarantees the recognition of the families' right-to-know,
right-to-reparation and provides for the legal status of the missing persons.
The government needs to step up its efforts on providing information and
resources to clarify the fate of the missing persons. The January resolution of
the Parliamentary Assembly of the Council of Europe raised serious allegations
related to the conflict of 1999. EULEX has established a Brussels-based task
force with a liaison office in Pristina to investigate these allegations. The
authorities are cooperating with EULEX in this investigation.

Kosovo participated in
the Regional Cooperation Council meeting in Montenegro in June for the first
time since summer 2010. Kosovo has chaired CEFTA meetings satisfactorily in
2011. Within the Belgrade/Pristina
dialogue, an agreement has been found on the customs stamps. An agreement
remains to be found on a sustainable solution for the participation of Kosovo
in regional fora. The principles of inclusive and functioning regional
cooperation need to be fully implemented by all concerned.

The economy of
Kosovo has continued to be characterised by fragile growth and significant
domestic and external imbalances, aggravated by an unpredictable fiscal policy
stance. The high inflation and dysfunctional labour market represent major
challenges for economic and social cohesion. A series of ad hoc measures
and lack of commitment by the authorities derailed the Stand-By Arrangement
with the International Monetary Fund (IMF). The new non‑disbursing
agreement with the IMF, to run until the end of 2011, is an important test for
Kosovo to regain credibility in economic and fiscal policy. High uncertainty
remained an obstacle to private sector development. Firms are confronted with
weak administration, lack of reliable electricity supply, deficient skills of
workers, poor infrastructure and deficient rule of law.

As regards the economic
criteria, Kosovo has made no progress towards establishing a functioning
market economy. Considerable reforms and investments are needed to enable it to
cope over the long term with competitive pressure and market forces within the
Union.

The monetary framework
has continued to function relatively well, although there is scope for improvements,
in particular in financial sector regulation and supervision. Financial
intermediation has continued to deepen and the banking sector has remained
stable and profitable, despite increasing non-performing loans. There has been
some progress with the privatisation process.

The proper functioning
of the macroeconomic policy mix has been increasingly threatened by an
unpredictable fiscal policy, unsustainable government expenditure growth and
limited financing options. Poor governance and ad hoc measures have negative
impact on the private sector and deep structural problems continue to hamper
the economy. Inflation has been high and volatile. Unemployment has remained
very high and not enough jobs have been created to reduce pressures on the
labour market and offer employment opportunities, especially to the young new
entrants. The external imbalances have also remained high, especially in the
trade in goods, and production-enhancing foreign investment inflows have
remained limited. The public electricity company have continued to receive
substantial subsidies from the state budget and loans for financing of its
investment programme. The weak rule of law and challenges related to property
rights have continued to impact negatively on the business environment. The
informal sector remains an important challenge.

The electoral campaign
ahead of the early general elections, followed by the process to form a new
government and to elect a president, left only a short period of time for the
assembly and the government to adopt legislation and policies in line with European
standards. The progress has been mixed. The system for capital movements is
well advanced. Kosovo has made progress in the field of asylum and migration,
notably on readmission and reintegration of repatriated persons.

There has been some
legislative progress regarding competition policy, the energy sector and the information society and media. Some progress has
been noted in the following areas: taxation, intellectual property rights, employment, social policies and public health, financial control, statistics, border management
and tackling trafficking in human beings. Transport infrastructure needs
further development. Limited results have been achieved on the environment, agriculture and food safety, drug-trafficking, organised crime and the fight
against terrorism. Little has been done to align legislation with the acquis
on movement of persons, services and right of establishment, money-laundering, and personal data protection.

Regarding the EU internal market, there has
been some progress as regards legislation related to free movement of goods.
Some progress has been noted on conformity assessment, accreditation,
metrology and market surveillance. Limited progress has been achieved on
standardisation. No legislative progress took place concerning consumer
protection. Approximation with the EU acquis in the area of
free movement of goods is limited. Better
coordination of and a strategy for the alignment process for the whole of the acquis
in this area are needed. The
administrative capacity, the necessary implementation and enforcement measures
are inadequate. Alignment with the acquis in the areas of movement of
persons, services and right of establishment and also company law
is at an early stage. The system for capital movements is very liberal
and well advanced. Further reform is desirable to introduce Basel II risk
requirements and to establish a legal framework fully in line with EU
standards.

Kosovo customs legislation is largely in line with
the EU Customs Code. Efforts need to be pursued further concerning the fight
against smuggling and counterfeiting. The Independent Review Board needs to
function more effectively and to reduce the backlog of cases. There has been
some progress in the area of taxation, mostly related to the
implementation of reforms to support the tax compliance strategy.
Administrative capacity to enforce tax payments and reduce the large informal
sector remains low.

There has been some legislative progress regarding competition
policy, in particular antitrust policy as well as State aid
by adopting law on State aid. Implementation of the antitrust policy is
improving. Progress can be reported in the area of public procurement, with
the adoption of the amended public procurement law that constitutes a step
towards alignment with EU standards. The legal framework remains to be
completed and cooperation between the institutions responsible needs to be
improved.

There has been some progress in the area of intellectual
property rights, in particular concerning industrial property rights. The
legislative framework is still not complete and enforcement of the intellectual
property rights rules is insufficient. Some progress can be reported on legislative alignment of employment,
social and public health policies with EU standards. The implementation of this legislative
framework is crucial to help the unemployed and other vulnerable groups to
improve their living standards. Administrative capacity in these areas also
remains limited, notably at municipal level. Some progress has been made on the
alignment with European standards on education and research.
Capacity at central and municipal level needs to be strengthened to ensure
effective implementation of the legal and strategic framework. In the field of
research and innovation, limited progress has been made. Serious efforts are
needed to create the necessary research and innovation capacity. The
implementation of the legislative framework needs to be enhanced by inter alia
improving coordination between central and local levels. In order to fully
benefit from donors' support, adequate human resources have to be allocated to
education and research projects.

Regarding sectoral policies, the implementation plan for
the SME and industrial strategies needs to be adopted, an adequate
budget needs to be allocated and the authorities responsible need to be
strengthened. Coordination and cooperation between stakeholders remain a
challenge. Kosovo
has made limited progress in the areas of agriculture and food safety.
Efforts have been made to develop administrative capacity, particularly in the
area of food safety. Mainly due to insufficient budgetary allocations, limited
progress has been made on strengthening the legislative and administrative
framework in the area of the environment and climate change.

Transport infrastructure needs further
development. Kosovo's main road infrastructure project, construction of the
highway from Kosovo to the Albanian border, remains a cause for concern given
its disproportionately high costs and level of investment required in the long
term. Some progress has been made in the field of aviation.

In the energy sector,
some progress has been made on legal alignment and on implementing the Energy
Community Treaty. In order to attract investment, continued efforts are needed
to improve electricity billing and collection performance and to put in place a
non-subsidised, cost reflective tariff. The planned new Kosovo power plant has
suffered delays. This has had an impact on the timetable to close the
heavily-polluting Kosovo A plant. Due to differences over status, Kosovo
remains unable to participate in regional power transit mechanisms. This
imperils the stability of Kosovo's power system and means Kosovo loses out on
transit revenue.

In the area of the information
society and media, Kosovo has adopted some telecommunications regulations
to apply EU standards. Important laws on sustainable funding of the public
service broadcaster and on the Independent Media Commission were pulled from
the Assembly's agenda as they neither meet EU standards nor protected the
independence of the Commission and the public service broadcaster. Both issues
need to be resolved as a matter of urgency.

Some progress has been
achieved on financial control. Public internal financial control
practice remains at an early stage. Awareness needs to be raised among managers
in budget organisations about the relevance of financial management and
control. In the area of statistics, Kosovo has achieved some progress,
notably by carrying out the population and housing census satisfactorily.

Kosovo has achieved
mixed progress in the area of justice, freedom and security. Steps have
been taken by the Ministry of Internal Affairs to prepare Kosovo for issuing
biometric passports. Good progress has been achieved by adopting adequate
legislation and improving the reliability of civil registries. Further efforts
are still needed to ensure security of documents.

Some progress has been
achieved in border management. A joint task force involving customs and the police was established to
fight cross-border crime. The agencies have organised joint patrols along the
border and joint operations at border crossing points. Joint and synchronised
police patrols have been conducted with counterparts from Albania and the
former Yugoslav Republic of Macedonia. The police took over further responsibilities from KFOR for
protecting the green border with the
former Yugoslav Republic of Macedonia and Montenegro. The quality
and consistency of border checks still need to be improved.

In the area of asylum,
progress has been achieved. Kosovo has faced an increased number of
asylum-seekers. A number of decisions were taken on asylum requests. Shortcomings remain in the asylum procedure,
notably lack of interpretation, determination of the origin of persons and
appeal procedures. Kosovo has achieved progress in the field of migration.
It has continued signing new readmission agreements with European countries.
The Department for Citizenship, Asylum and Migration has continued dealing with
readmission requests from European countries efficiently. Kosovo has achieved
considerable progress with regard to the reintegration of repatriated persons,
including at the municipal level. Sustained efforts are needed to ensure
effective implementation.

Kosovo has made limited
progress on addressing money-laundering and economic/financial crime. A
gradual transfer of the responsibilities of the financial intelligence centre
from EULEX to Kosovo authorities has started. Kosovo's capacity to investigate and prosecute economic crimes
remains limited. Economic/financial
crime and money-laundering remain serious concerns.

The police increased
the number of seizures and arrests for narcotics offences, including
trafficking, but the amounts seized are still limited. Efforts to fight drug-trafficking need to
be significantly stepped up to match the scale of the challenge Kosovo is
facing. Some progress has been achieved in policing. The police took on increased
responsibilities from KFOR. Now, they need to address structural and
organisational challenges and improve their ability to fight complex types of
organised crime.

Limited progress has
been made on tackling organised crime. A number of searches, arrests,
indictments and convictions have been achieved in organised crime cases. A more
proactive approach by the law enforcement agencies and judicial authorities is
needed to tackle organised crime. Human and technical capacity need to be
strengthened and the quality of investigations considerably enhanced. Kosovo's
capacity to fight organised crime is still at an early stage. Serious efforts
are needed to address this challenge. Kosovo has made some progress with
tackling trafficking in human beings. The number of victims identified
has increased slightly during the reporting period. The strategy and action
plan against trafficking of human beings for 2011-2014 was adopted. The
efficiency of the police Directorate for Investigation of Trafficking in Human
Beings improved. At the same time, the capacity of the Kosovo prosecutors and
courts to investigate, prosecute and sentence cases of trafficking is still
weak.

Kosovo has made limited
progress in the fight against terrorism. Kosovo's capacity to enforce
relevant legislation and strategy papers such as the law on prevention of
money-laundering and terrorist financing, the counter-terrorism strategy, etc.
remains weak. There has been little
progress on personal data protection and this is a serious concern.

Turkey

Turkey continues to
sufficiently fulfil the political criteria. Free and fair parliamentary
elections took place on 12 June 2011. Work on implementing the 2010
Constitutional reform package was launched by the government. The prevailing
political climate lacks an adequate dialogue and spirit of compromise between
political parties relations between key institutions are strained; this
atmosphere hampered the continuation of the reform process. A new process to
reform the constitution started after the elections. Significant further
efforts are required to guarantee fundamental rights in most areas. This
relates, in particular, to freedom of expression, where the number of court
cases against writers and journalists, and the still frequent disproportionate
website bans, raised serious concerns.

As regards
democracy and the rule of law, the Ergenekon investigation and the
probes into other alleged coup plans still provide an opportunity for Turkey to
shed light on alleged criminal activities against democracy and, thus, to
strengthen confidence in the proper functioning of its democratic institutions
and the rule of law. There were, however, serious concerns over the conduct of
investigations, judicial proceedings and the application of criminal procedures,
which put at risk the rights of the defence and affected the legitimacy of the
cases.

As regards public
administration reform, there has been some progress in legislative reform.
Attention needs to be paid to the establishment of the institution of the
ombudsman. Increased political support is needed for public administration
reform and decentralisation.

Good progress has been
made in consolidating the principle of civilian oversight of security forces.
In particular, civilian oversight of military expenditure was reinforced.
Decisions of the Supreme Military Council were opened to civilian judicial
review. Further reforms are still required in order to consolidate civilian
oversight in the domestic security sector, in particular of the gendarmerie, and
to continue progress in the area of the military justice system.

Progress has been made
in the area of the judiciary. The adoption of legislation on the High
Council of Judges and Prosecutors and on the Constitutional Court provides the
framework for enhanced independence and impartiality of the judiciary. Measures
have also been taken to improve the efficiency of the judiciary and address the
increasing backlog of pending cases. Further steps are still needed in all
areas, including the criminal justice system. Turkey has a large backlog of
pending criminal serious cases while a large proportion of the prison
population is not finally sentenced. In addition, implementation needs to be
monitored, as measures taken to date have divided the country's legal community
and civil society. Judicial proceedings are not sufficiently transparent.
Courts and prosecution offices do not inform stakeholders or the public at
large on issues of public interest. The judicial reform strategy needs to be
revised with the participation of all stakeholders, the Turkish legal community
and civil society.

The implementation of the strategy and the anti-corruption
action plan is at an initial stage. Corruption remains prevalent in many
areas. The lack of transparency of political party financing and the scope of
immunities remain major challenges. Increased political support is needed in
order to strengthen and implement the legislative framework on anti-corruption.
As regards investigation into the charity association Deniz Feneri, concerning
a fraud case in Germany, a former head of the Radio and Television Supreme
Council (RTUK) and four senior executives of television network Kanal 7 were
detained. Turkey needs to develop a track record of investigations, indictments
and convictions in the area of corruption.

Concerning human rights and the protection of
minorities, limited progress has been made. Significant efforts are
needed in most areas, in particular freedom of expression and freedom of
religion.

As regards the observance of international human rights
law some progress was made, notably through the ratification of the
Optional Protocol to the UN Convention against Torture (OPCAT). A number of
reforms have been outstanding for several years. Legislation on human rights'
institutions needs to be brought fully into line with UN principles.

The positive trend on the prevention of torture and
ill-treatment, as regards both the incidence and severity of ill-treatment
by law enforcement officials, continued. Disproportionate force has still been
used by these officials, in particular outside official places of detention.
Credible allegations of physical ill-treatment were received, which concerned
mainly excessive use of force during arrest. There is no progress on tackling impunity,
including the processing of cases of alleged ill-treatment brought to the
judiciary.

As regards prisons,
the increase in the prison population is leading to serious overcrowding, which
hampers attempts to improve the conditions of detention. An overhaul of the
complaints system in prisons is overdue. Implementation of the OPCAT is
expected to contribute to tackling some of these matters. Medical services for
inmates, as well as the conditions for the detention of juveniles, are matters
requiring special efforts.

With regard to freedom of expression, an open debate
continued on topics perceived as sensitive, such as the Kurdish and Armenian
issues, minority and cultural rights and the role of the military. However, the
right to freedom of expression is undermined by the large number of legal cases
and investigations against journalists, writers, academics and human rights
defenders. This leads to self-censorship and, together with undue pressures on
the media, raises serious concerns. Present legislation does not sufficiently
guarantee freedom of expression in line with the ECHR and the case law of the
ECtHR, and it permits restrictive interpretation by the judiciary. Frequent
website bans are also a cause for serious concern. Overall, Turkey's
legislation and judicial practice are obstacles to the free exchange of
information and ideas.

As regards freedom of assembly, there has been
progress on the ground: various demonstrations, including Newroz (the
Kurdish New Year) and 1 May, took place peacefully. Demonstrations in the
Southeast of the country and in other provinces related to the Kurdish issue,
students' rights, the activities of the higher education supervisory board YÖK
and trade union rights were marked by a disproportionate use of force.

Legislation on freedom of association is broadly in
line with EU standards. Excessive controls and restrictive interpretation of
the law still remain. There were no developments as regards the amendment of
legal provisions on the closure of political parties.

There has been limited progress on freedom of thought, conscience and religion. Freedom of worship is generally respected. The dialogue
with the Alevis and with the non-Muslim religious communities continued.
Members of minority religions continued to be subject to threats by extremists.
A legal framework in line with the ECHR has yet to be established, so that all
non-Muslim religious communities and the Alevi community can function without
undue constraints.

Protecting
women's rights, promoting gender equality and combating violence against
women remain major challenges. The legal framework guaranteeing women's rights
and gender equality is broadly in place. Further substantial efforts are needed
in order to turn this legal framework into political, social and economic
reality. Legislation has yet to be implemented consistently across the country.
Honour killings, early and forced marriages and domestic violence against women
remain serious problems. Further training and awareness-raising on women's
rights and gender equality are required, in particular for the police.

With respect to children's
rights, an adequate number of juvenile courts in line with the legislation
in force have yet to be established. Children are not detained for the minimum
necessary period of time or in appropriate conditions. Efforts, including on
preventive and rehabilitative measures, need to be strengthened in all areas,
such as education, combating child labour, health, administrative capacity and
coordination.

Efforts to improve the situation of socially vulnerable
persons and/or persons with disabilities continued. Further measures are
still required in order to increase the participation of those persons in
social and economic life.

Further efforts are required in the fight against
discrimination. Comprehensive anti-discrimination legislation is lacking.

Many challenges remain in the area of labour and trade
union rights. The current legal framework is not in line with EU standards
and ILO Conventions. Persisting disagreements among social partners and lack of
adequate political will, have prevented progress in this area.

As regards property rights, a new piece of legislation amending the 2008 Law on
foundations facilitates the return of immovable properties to non-Muslim
religious communities.

Turkey's approach to minorities
remains restrictive. Full respect for and protection of language, culture and
fundamental rights, in accordance with European standards, has yet to be
achieved. Turkey needs to make further efforts to enhance tolerance and promote
inclusiveness vis-à-vis minorities. The comprehensive revision of existing
legislation and the establishment of protection mechanisms or specific bodies
to combat racism, xenophobia, anti-Semitism and intolerance are still
outstanding.

Turkey has made
progress on cultural rights, especially as regards the use of languages
other than Turkish by all national radio and television stations, as well as
the use of multiple languages by municipalities. The opening of a Kurdish Language and Literature Department
in Muş Alparslan University has been authorised. Restrictions still remain on the use of languages other
than Turkish in political life, in contacts with public services and in
prisons. The legal framework on the use of languages other than Turkish is open
to restrictive interpretation, and implementation remains inconsistent across
the country.

There has been some
progress as regards the Roma, in particular on amendment of
discriminatory legislation. There is no comprehensive policy to address the
situation of the Roma.

As regards the East
and Southeast, the 2009
democratic opening was not followed through. The detention of elected
politicians and human rights defenders raised concerns. The truth about
extra-judicial killings and torture carried out in the Southeast in the 1980s
and 1990s has yet to be established following the due process of law. Landmines
and the village guard system are still causes for concern.

Terrorist attacks intensified. The PKK is on the EU list of terrorist organisations.

Compensation of internally displaced persons (IDPs)
has continued. The overall
effectiveness of the scheme has yet to be assessed. A national strategy, in
order to better address IDP needs, has not been developed yet. Despite some
improvements, the lack of a comprehensive legal framework for refugees and
asylum-seekers is an impediment to the provision of adequate treatment. The general conditions in foreigners' detention centres
need to be further improved.

With regard to regional issues and international
obligations, Turkey reiterated its support to the negotiations between
the leaders of the two communities under the good offices of the UN
Secretary-General to find a comprehensive settlement to the Cyprus problem.
However, despite repeated calls by the Council and the Commission, Turkey has
still not complied with its
obligation of full non-discriminatory implementation of the Additional Protocol
to the Association Agreement and has not removed all obstacles to the free
movement of goods, as outlined in the declaration of the European Community and
its Member States of 21 September 2005 and in the Council conclusions,
including the December 2006 and December 2010 conclusions. There is no progress
towards normalisation of bilateral relations with the Republic of Cyprus.

As regards relations with Greece, there are
continued efforts to improve bilateral relations. The bilateral exploratory
talks continued. A substantial number of formal complaints were made by Greece
about continued violations of its territorial waters and airspace by Turkey,
including flights over Greek islands.

Turkey has significantly intensified contacts in the Western
Balkans, expressing a firm commitment to the promotion of peace and
stability in the region.

The economy of Turkey is currently
experiencing a robust economic recovery. Public finances are improving and
confidence in a lasting transformation of the country's economic prospects and
stability is increasing. Nevertheless, the rapid expansion of economic
activity, driven by strong domestic demand, has led to significant and rising
external imbalances that pose a threat to macroeconomic stability.

As regards the economic criteria, Turkey is a
functioning market economy. It should be able to cope with competitive pressure
and market forces within the Union in the medium term, provided that it
accelerates the implementation of its comprehensive structural reform
programme.

The economy expanded rapidly in 2010 and in the first half
of 2011. Along with the high GDP growth, strong employment growth allowed for a
decrease in unemployment. As a result of primarily higher cyclical revenues and
a lower interest burden, the consolidation of public finances remained on
track. The financial sector has shown considerable strength thanks to earlier
reforms while the legal system continues to function relatively well. Moreover,
the new law on State aid monitoring and the operation of the regulatory
authority may increase transparency and lead to a reduction of State aid. The
free interplay of market forces has been confirmed. Privatisation has
accelerated. The EU remains Turkey's most important trade partner and investor.

However, trade and current account deficits have been
rising and external imbalances are now significant. Monetary policy has been
only mildly successful in curbing credit growth, which along with high
commodity prices, continues to feed Turkey's growing current account deficit. More support from the
fiscal side, and some specific and targeted micro-prudential measures are being
elaborated, including by the banking regulator, in order to help engineering a
soft landing of the economy and ease the burden placed on monetary policy.
Turkey's price and cost export competitiveness has slightly worsened. Inflation
has started to rise, in large part due to pressures stemming from energy and
food inputs, buoyant economic activity and hikes in administrative prices. A
more resolute implementation of structural reforms is awaited. Measures to
increase fiscal transparency and better anchor fiscal policy were modest, while
they could help Turkey to gain credibility in the markets. Market exit remains
difficult and bankruptcy proceedings are still relatively cumbersome.

Turkey continued improving
its ability to take on the obligations of membership. Progress was made
in most areas. Alignment is advanced in certain areas, such as free movement of
goods, anti-trust policy and State aid, energy, economic and monetary policy,
enterprise and industrial policy, consumer protection, statistics,
Trans-European Networks, and science and research. Efforts need to continue
towards alignment in areas such as environment, public procurement, freedom to
provide services, social policy and employment and taxation. Enforcement
needs to be strengthened in areas such as intellectual property rights and
anti-money laundering. As regards the Customs Union and external relations,
alignment needs to be completed, particularly in areas such as the general
system of preferences. A number of longstanding trade irritants remain
unresolved. It is essential that Turkey fully respects its commitments under
the Customs Union. For most areas it is crucial that Turkey improves its
administrative capacity to cope with the acquis.

As regards free
movement of goods, legislative alignment is advanced, but limited progress
was made in the reporting period. Technical barriers to trade continue to
prevent free movement of goods in breach of Turkey's obligations under the
Customs Union. Hardly any progress can be reported in the area of freedom of
movement for workers where preparations for applying the acquis
remain in the early stages. Alignment
in the areas of right of establishment and freedom to provide services
also remains at an early stage. No progress has been recorded in the field of
right of establishment, freedom to provide cross border services, postal
services and the mutual recognition of professional qualifications. As regards the free movement of capital,
Turkey made some progress, in particular on capital movements and payments.
There has been no progress in the gradual liberalisation of real estate
acquisition by foreigners, where various obstacles remain. Restrictions on
capital movements remain in place in a number of sectors, including on direct
investments originating from the EU. The legal framework against financing of
terrorism remains incomplete and the Financial
Action Task Force has blacklisted Turkey for its strategic deficiencies in this
area.

Limited progress can be
reported in the area of public procurement. The institutional set-up is
in place, but administrative capacity needs improvement. The draft alignment
strategy with a time-bound action plan is ready but has yet to be adopted.
Turkey still maintains derogations contradicting the acquis. It needs to
further align its legislation, particularly on utilities, concessions and
public-private partnerships. As regards company law, significant
progress can be noted following adoption of the new Turkish Commercial Code,
which is expected to promote openness, transparency and adherence to
international accounting and auditing standards. The legal and institutional
framework for auditing is not yet in place, nor is the necessary enhanced
capacity of the commercial judiciary. Alignment on intellectual property law
is relatively advanced but enforcement remains poor. The recently launched IPR
Working Group with the Commission addresses a key element for the accession
negotiations. The adoption of updated draft laws regulating intellectual and
industrial property rights, including deterrent criminal sanctions, is still
pending. Coordination and cooperation between the different IPR stakeholders
and public bodies is essential, as are general awareness campaigns on the risks
of IPR infringements.

On competition
policy, Turkey's alignment
record in the field of anti-trust and merger control is high. The Competition
Authority enforces antitrust rules effectively, with a satisfactory level of
independence. Good progress has been made in the area of State aid. In
particular, the State Aid Monitoring Authority is now set up. However, a number
of important State aid schemes remain to be aligned with the rules of the
Customs Union.

There has been further progress in the area of financial
services; in particular, the banking regulator took measures to strengthen
financial stability. However, overall alignment with the acquis, in
particular in the insurance sector, is not yet complete. With regard to information society and the
media, some progress can be reported in the area of electronic
communications and also good progress on audiovisual policy.

There is some progress to report in the area of agriculture
and rural development. Significant progress has been made in the implementation
of the Instrument for Pre-Accession Assistance for Rural Development (IPARD)
programme, leading to the Commission Decision to confer the management of EU
funds, as well as in preparations achieved for the second phase of the IPARD
programme. Agricultural support policy differs substantially from the CAP and
there is still no strategy for its alignment. The failure to fully remove
barriers to beef imports also constitutes a major shortcoming. As regards
food safety, veterinary and phytosanitary policy, progress towards
transposition and implementation of the acquis has been achieved. The
restructuring of the Ministry of Agriculture and Rural Affairs is a positive
step towards strengthening the official control system. The overall control
system is still not fully in line with the EU acquis. Considerable
effort is needed in the area of animal health and in bringing agri-food
establishments into compliance with the EU hygiene and structural requirements.
In fisheries, some progress can be reported overall. In particular some
progress has been made on setting up administrative structures as well as on
resource and fleet management. Turkey is expected to make further progress in
other areas such as inspections and controls.

Some progress has been achieved in alignment of the transport
sector, except for the railway sector. Alignment in maritime and land transport
remains at an advanced level and air transport is following at a slower pace.
The lack of communications between air traffic control centres in Turkey and
the Republic of Cyprus continues to seriously compromise air safety. In the
maritime sector, the Voluntary IMO Member State Audit Scheme is expected to
create positive results for becoming a party to international conventions. The
implementation capacity is limited, particularly for dangerous goods in land
and maritime transport.

In the energy
sector, progress has been uneven. There has been good progress on the internal
market for electricity and on renewable energy. Measures are particularly needed
in order to ensure the highest possible standards for nuclear safety, security,
safeguards and non-proliferation. Developments on security of supply, the gas
sector and energy efficiency also require further efforts.

On taxation,
there has been limited progress on legislative alignment, particularly towards
eliminating some discriminatory practices in the taxation of tobacco. The
increase in excise duty on spirits contradicts the Action plan agreed with the
Commission on that issue. Abolition of discriminatory practices in taxation is
key to making further progress in this chapter. No progress can be reported on
direct taxation.

Turkey has made some progress on economic and monetary policy. The
Central Bank adopted a new policy mix to ensure financial stability, reducing
policy rates while increasing reserve requirements for the banking sector.
Turkey's alignment with the acquis on economic and monetary policy is
not complete, particularly as regards the full independence of the Central Bank
and the prohibition of privileged access of the public sector to financial
institutions. The overall level of preparedness is advanced.

There has been good progress in the area of statistics, in
which the overall level of
alignment with the acquis is advanced. Further progress is needed, particularly
in national accounts and in agriculture statistics.

Turkey made limited progress in the field of social
policy and employment. Administrative capacity showed some improvement.
Constitutional amendments regarding trade union rights have not resulted in
further changes of the legislation aimed at granting full trade union rights in
line with EU standards and ILO conventions. The reduction of large-scale
undeclared work and the increase of female employment rates are still matters
of concern. The scope of the labour law remains limited. Enforcement of health
and safety at work legislation needs to be stepped up. The risk of poverty
remains very high, especially for the rural population and for children.
Legislation establishing an equality body has not yet been adopted.

Turkey has made further
progress in the area of enterprise and industrial policy, where Turkey
maintains a sufficient level of alignment with the acquis. The
progress relates to the adoption of an Industrial Strategy and Action Plan
covering the period 2011-2014, the wider availability of enterprise and
industrial policy instruments, the adoption of sectoral strategies and
alignment on combating late payment in commercial transactions.

Turkey has made
progress in the area of Trans-European networks, in particular in the
TEN transport area. Further efforts are needed as regards reliable transport
data. There is also some progress to report in the TEN energy area.

Some progress was made in the field of regional policy and co-ordination of structural
instruments. There are delays in establishing the bodies to take over
the financial management and control responsibilities of pre-accession funds in
this policy area. Although the institutional framework for implementation of
pre-accession funds has been finalised and the administrative capacity has been
improved, there is a need for further strengthening of this capacity and
improved coordination between all relevant institutions in order to accelerate
implementation.

Overall, progress has
been made in the area of the judiciary.

With respect to anti-corruption,
limited progress has been made as regards the implementation of the strategy
and action plan on anti-corruption. The lack of transparency in political party
financing and the scope of immunities remain major shortcomings. Turkey needs
to develop a track record of investigation, indictments and convictions.

Progress achieved in
the area of justice, freedom and security has been uneven. The adoption
of the Law on Foreigners and International Protection remains a priority to
ensure a sound legal basis for an efficient asylum and migration management
system, as well as safeguards for the rights of migrants and refugees. There is
only limited progress to report in the area of judicial cooperation in criminal
and civil matters. Some progress can be reported in the area of drugs and
organised crime. Limited progress can be reported in the area of police
cooperation and terrorism. Limited progress has been achieved on visa policy
and customs cooperation. Very limited progress can be reported in the area of
border management where the key issues are the adoption of a law on the
establishment of new Border Security Agency and inter-agency cooperation.
Turkey remains an important country of transit and destination of irregular
migrants. Efforts are needed to prevent irregular migration and to readmit
irregular migrants.

Turkey is well prepared
for accession in the area of science and research. Good progress has
been made towards integration into the European Research Area and preparations
for the Innovation Union. Overall,
Turkey's participation and success rate in the EU Seventh Framework Programme are growing, but further efforts are needed in order to meet the excellence requirement and
competitive participation in the EU research programmes.

In education and culture there has been
progress, in particular in the area of education and training. Interest in the Community Programmes continued
to grow. There has been some
progress in the area of culture, but no progress on legislative alignment.

In the environment area, Turkey has made good
progress on waste management, whereas only limited progress can be reported on
horizontal legislation, air quality and industrial pollution control and risk
management. Turkey made very limited progress on water quality, chemicals and
on administrative capacity. No progress can be reported on nature protection.
Regarding climate change, Turkey made limited progress on
awareness-raising on EU climate requirements, but a more robust and ambitious
climate policy, both domestically and internationally, has yet to be
established. There is a need to enhance administrative capacity .

Some progress can be
reported on consumer and health protection. In the area of consumer
protection, revised framework laws for consumer protection and general product
safety are still to be adopted. Improvement of market surveillance activities
requires the allocation of further financial and human resources, while
cooperation with consumer NGOs needs strengthening. In the area of public
health, Turkey has not yet completed the legislative alignment process nor
built up the administrative capacity to improve the enforcement of legislation
in order to enhance the health and safety status of the population.

Turkey has achieved a high level of alignment in the field
of customs legislation thanks to its Customs Union with the EU. Duty
free status of the shops established at entry points and requirements for
importers of products in free circulation in the EU to submit information of
origin in any format prior to customs clearance is not in line with the Customs
Union. Legislation on free zones, surveillance and tariff quotas are yet to be
aligned. Improved risk-based controls and simplified procedures would
facilitate legitimate trade by reducing the number of physical controls. There
is still no effective enforcement of intellectual property rights at customs
and measures to tackle counterfeit goods are still lacking.

Turkey has achieved a high level of alignment in the area
of external relations, owing to the Customs Union. Some discrepancies
still remain in areas such as the general system of preferences in terms of its
geographical coverage.

Turkey's alignment with the EU's common foreign and
security policy has continued; overall Turkish alignment with CFSP
declarations fell during the reporting period and Turkey did not align with EU
restrictive measures on Iran, Libya or Syria. Turkey has sought dialogue and
consultation with the EU on various foreign policy issues. Turkey made efforts
to normalise relations with its neighbouring countries, such as Iraq, including
the Kurdish regional government. No progress was made in the normalisation of
ties with Armenia. Relations with Israel further deteriorated since the Gaza
Flotilla incident in 2010. After the publication of the independent UN report,
Turkey downgraded relations with Israel and suspended military agreements with
Israel.

Turkey is continuing to contribute to CSDP and is seeking
greater involvement in CSDP activities. The issue of EU-NATO cooperation, which
would involve all EU Member States beyond the "Berlin plus
arrangements", remains to be resolved. Turkey has not aligned itself with
the EU position on membership of the Wassenaar Arrangement.

There is some progress
to report in the area of financial control, which already has a fairly
advanced level of alignment. Legislation implementing the Public Financial
Management and Control Law is fully in force. The Public Internal Financial
Control Policy Paper and the action plan need to be revised. The adoption of
the Turkish Court of Accounts Law was a significant step in further aligning
external audit with relevant international standards. The Turkish Anti-Fraud
Cooperation Structure needs to continue reinforcing its coordination function,
its operational independence and its operational network.

There is limited
progress to report in the area of financial and budgetary provisions.
Administrative preparations for setting up the own resources system are at a
very early stage.

Iceland

Iceland continues to
meet the political criteria. Iceland is a functioning democracy with
strong institutions and deeply rooted traditions of representative democracy.
The country's judicial system continues to be of a high standard, and Iceland is ensuring the continuous
strengthening of its already high level of protection on fundamental rights.

The unity of the
coalition government was tested on several occasions, but remained stable. The
domestic scene is characterised by diverging views among the political forces
and the population on the prospect of EU accession. Communication activities
promoting an informed debate about Iceland's accession process have started.

Both government and
parliament have continued to function well. A constitutional council was set up
in April 2011 to review the Constitution and propose constitutional changes.
Legislation was also drafted to further strengthen the efficiency of the
parliament and the public administration.

Good progress can be
reported in the further implementation of the recommendations of the Special
Investigation Committee on the political and administrative consequences of the
financial crisis. In accordance with these recommendations, the Court of Impeachment
was convened in March 2011 to rule on a case against the former Prime Minister.
This led to his indictment for gross negligence in May 2011. In parallel, the
Office of the Special Prosecutor continued its work efficiently. It
investigated numerous cases for alleged fraudulent business practices in the
banking sector, which led to some arrests.

Progress can be
reported in further strengthening of the efficiency of the judiciary and the
anti-corruption framework. A number of judges were appointed in accordance with
the rules of the amended Judiciary Act, and the UN Convention against
corruption was ratified in February 2011. As regards conflict of interests,
Iceland has begun to frame specialised codes of conduct for ministers and for a
number of categories of employees.

Iceland continued to
safeguard fundamental rights, including economic and social rights. The Council
of Europe Framework Convention for the Protection of National Minorities
remains to be ratified.

The economy of
Iceland is slowly recovering from the fallout of its financial crisis and the
deep and long recession that followed, but growth prospects remain weak as
households and firms continue to suffer from a high level of indebtedness.
Economic policies continued to be oriented towards stabilisation, firmly
anchored by the successful completion of an IMF programme. Recently rising
inflation prompted the central bank to increase interest rates whereas fiscal
policy was somewhat relaxed. Expenditure-led fiscal adjustment to reduce public
debt to sustainable levels remains a challenge. Unemployment is high,
particularly among youth and long-term unemployed. Despite progress in banking
sector restructuring, the economy still suffers from a dysfunctional financial
sector and the removal of capital controls represents a key challenge.

As regards the economic
criteria, Iceland can be considered a functioning market economy. However,
financial sector weaknesses and capital movement restrictions still impede an
efficient allocation of resources. Iceland should be able to cope with
competitive pressures and market forces within the Union over the medium term,
provided that it continues to address current structural weaknesses through
appropriate macroeconomic policies and structural reforms.

The policy mix with a
strong focus on exchange rate stabilisation and fiscal consolidation has been
supportive in re-establishing a higher degree of macroeconomic stability. In
response to trade surpluses and an appreciating exchange rate the central bank continued
to reduce its policy rate in the second half of 2010, but reacted with a modest
tightening of monetary policy as of August 2011 in reaction to a weaker
currency and significantly rising annual inflation. Efforts to strengthen
public revenues and implement spending cuts have continued. In view of the high
level of public debt, measures were taken to reduce refinancing risks and to
strengthen local government finances. Foreign exchange reserves continued to
increase and recent central bank estimates point to a more manageable external
debt position. New measures were taken to accelerate private sector debt
restructuring. A revised strategy for capital account liberalisation was
adopted and its implementation remains a challenge. The labour market remained
flexible and participation rates relatively high. The country enjoys good basic
infrastructure, abundant natural resources, and overall a well-educated
population.

However,
macro-financial risks remain elevated. Domestic demand has picked up, but the recovery
is largely based on temporary measures which supported private consumption.
Risks and uncertainties with respect to future sources of growth and its
sustainability remain. The financial sector is still suffering from weak asset
quality and an efficient financial intermediation remains hampered by the
incomplete private sector debt restructuring process. Public debt has risen
above 90% of GDP. The fiscal consolidation path has been somewhat relaxed and
public finances remain confronted with the challenge to implement severe
spending cuts to enhance long-term sustainability. Fiscal risks arise from
sizeable contingent liabilities and the unresolved Icesave issue. The labour
market continues to be seriously affected by the deep post-crisis recession with
unemployment unprecedentedly high for the country, particularly among the youth
and with the large share of long-term unemployed. Growth, investment and
development are hampered by weaknesses in the business environment, such as
high barriers to market entry in certain sectors. The industrial structure
remained little diversified.

In line with the
methodology of the first progress report, Iceland's ability to assume the
obligations of membership continued to be assessed in the light of its
participation in the European Economic Area (EEA) and taking into account the
exemptions granted under the EEA, as well as the EU legislation falling outside
the scope of the EEA. The overall level of preparedness to meet EU acquis requirements
remains good, in particular due to Iceland's participation in the European
Economic Area.

The Icesave dispute
remains unresolved. In spite of negotiating efforts, the new bill on the terms
and conditions for the loan repayment to the UK and the Netherlands in a
referendum was rejected in April 2011. The government confirmed that the
outcome of the referendum would not affect the commencement of the payments to
the UK and the Netherlands, which are due to start in late 2011. In May 2011,
the government sent its reply to the letter
of formal notice of May 2010 of the EFTA Surveillance Authority (ESA). In June 2011, ESA proceeded with the second
stage of the infringement procedure, namely the issuance of the reasoned
opinion. This opinion reiterates in full the findings of the previous letter of
formal notice, namely that Iceland acted in breach of the deposit guarantee
scheme directive. The European Commission shares the legal analysis of ESA. Iceland's
government provided the answer to the EFTA Surveillance Authority's reasoned
opinion at the end of September. The Authority is now examining the response in
detail before deciding on further action in this case. At this stage, the
Icesave dispute remains unresolved.

Preparations to take on
the obligations of membership continued, albeit relatively slowly, in areas
partly covered by the EEA as well as in chapters not covered by the EEA.
Iceland remains largely in line and applies a substantial part of the acquis
in the fields covered by the EEA, such as free movement of goods, freedom of movement
of workers, the right of establishment and freedom to provide services, free
movement of capital, public procurement, company law, intellectual property
law, competition, financial services and information society and media.

The progress report
confirms that the following areas are likely to present challenges in the
accession process: financial services, agriculture and rural development,
environment, fisheries, free movement of capital as well as food safety,
veterinary and phytosanitary policy, taxation and customs.

From the point of view
of administrative capacity, attention should be paid to ensuring that human and
financial resources are made available and remain available for the necessary
preparations associated with the process of EU accession.

Iceland continues to be
closely in line with the acquis on free movement of goods.
However, there are no new legislative developments in Iceland to report as far
as horizontal measures and product legislation under the 'Old Approach' are
concerned. Transposition still needs to be completed in a number of areas where
new EU acquis was adopted.

Iceland maintains a
high level of alignment with the acquis in the area of free movement
of workers.

Legislation on the right
of establishment and freedom to provide services remains broadly in line,
with the exception of the postal services directive. The implementation of the
services directive was notified in July 2011.

Iceland largely applies
the acquis on free movement of capital, with some exceptions.
However, in the aftermath of the financial crisis, Iceland continues to apply
capital controls which will need to be removed by the time of EU accession. .

In the field of public
procurement Iceland remains broadly aligned with the acquis.
Alignment with remedies and defence procurement remains outstanding.

Iceland has already reached a high level of alignment and
applies a substantial part of the acquis in the field of company law.
However, full alignment with accounting standards and international audit
standards remains to be achieved.

Iceland maintains a high level of alignment with the acquis
on intellectual property law
and has the administrative capacity necessary to implement it. There is a need
to implement a comprehensive enforcement policy.

Iceland maintains a
high level of alignment in the field of competition policy. Monitoring
of the State aid measures taken in response to the financial crisis is
proceeding satisfactorily.

Further efforts are needed in order to implement the acquis
on financial services and in particular to ensure its effective
enforcement and the adequate supervision of the sector. The Icesave dispute
remains unresolved.

Some gaps in transposition remain in the field of information
society and media.

Iceland's policy on agriculture
and rural development is overall not in line with the acquis, and
the appropriate administrative framework for implemention needs to be set up.

Parts of Iceland's
legislation and administrative framework are not in line with the acquis
on food safety, veterinary and phytosanitary policy. Particular
attention is needed in order to close the remaining gaps with EU legislation on
live animals, plant protection products and novel food.

In the area of fisheries, Iceland has not begun to
align with the EU acquis or to set up the mechanisms for implementing
and monitoring EU support measures. The
existing restrictions on foreign investment in fisheries, which remain in
place, are not in line with the acquis.

Some progress has been made in the transport field,
in particular on road and maritime transport. However, there are still several
areas where Iceland needs to transpose relevant EU legislation.

Legislation on energy continues to be broadly in
line, except for oil stocks, the independence of the regulatory authority and
energy efficiency.

Iceland's tax
legislation remains partially aligned with the acquis. A strategy
for achieving IT interconnectivity and interoperability with EU IT systems for
taxation needs to be defined.

On economic and
monetary union, alignment with the acquis on monetary policy remains
incomplete and the relevant administrative structures require further
strengthening.

Availability of statistics
in line with EU methods, in particular in business, labour market and
agriculture statistics, remains to be further improved.

Iceland continues to apply and implement a substantial part
of the acquis on social policy and employment. A comprehensive
employment strategy has yet to be drafted.

Iceland's state of
preparation in the area of enterprise and industrial policy remains at a
high level. Access to SME finance is still affected by the financial crisis.

Iceland maintains a
good level of alignment with the EU standards on trans-European networks.

On regional policy and coordination of structural instruments
Iceland needs to identify the
institutions responsible for the implementation of the cohesion policy.

Preparations in the
area of judiciary and fundamental rights continue to be well on track.
Progress was made in further reinforcing the independence of the judiciary and
the anti-corruption policy framework. Further monitoring of the implementation
of these measures is needed. The legislation on citizen's rights and data
protection is not yet in line with the acquis.

Iceland continues to
apply the Schengen Agreement and is well advanced in aligning with the acquis
in the area of justice, freedom and security. Further efforts are still
needed to ratify and implement international instruments.

Iceland continues to be
well advanced in terms of preparation for EU accession and integration into the
European Research Area.

Iceland maintains its already high level of alignment in
the field of education and culture.

Some progress has been made in strengthening the
legislative and administrative framework on environment and climate change.
Full compliance with the acquis on nature protection and water quality
has yet to be achieved. Iceland needs to gradually align with the EU positions
in the international environmental fora, as well as to ratify the outstanding
multilateral agreements.

Iceland maintains a good
level of alignment with the acquis
on health and consumer protection. However, further efforts are
necessary in the field of consumer
protection.

The customs legislation continues to be partially in
line with the acquis. Significant efforts are needed in order to address
the discrepancies in the legislation,
in particular in the fields of customs rules, procedures with economic impact,
duty free and security aspects. Preparations for effective implementation of
the acquis upon accession still have to be initiated, in particular as
regards the development of interconnectivity with the EU IT customs systems.

Further progress has been made in external relations,
in particular in the field of development cooperation and humanitarian aid.
Iceland still needs to become member of the Kimberly process.

Iceland maintains
a high level of alignment in the
area of foreign, security and defence policy. Iceland's emphasis on
Arctic policy underlines its commitment to play an active role in regional
organisations in Northern Europe.

There has been limited progress in legislating on financial
control. Further efforts are needed in order to prepare a public internal
financial control policy paper and to ensure the separation between internal
and external audit. Preparations for the protection of the EU's financial
interests still have to be enhanced.

With regard to financial and budgetary provisions,
Iceland has reached a good level of alignment in the policy areas underlying
and affecting this chapter. It has continued to identify the required alignment
with the acquis. Administrative preparations and concepts for setting up
the own resources system are needed. A coordination structure remains to be
formally established.

[1] Article 49

[2]               Under UNSCR 1244/1999

[3]               Summaries and conclusions of the country reports are
included as an annex to the present Communication.

[4]               This is reflected in the Commission's recent
Communication on fighting corruption COM(2011) 308 final.

[5]               The strategy implies cooperation among the Danube
basin countries in the areas of environment, transport, energy, socio-economic
development, education research and innovation, and safety and security. Among
the enlargement countries, Croatia, Serbia, Bosnia and Herzegovina and
Montenegro participate in this strategy. See COM(2010) 715 final and Council
conclusions of 13 April 2011.

[6]               The Europe 2020 flagship initiatives are digital
agenda for Europe, innovation union, youth on the move, resource efficient Europe,
industrial policy for the globalisation era, agenda for new skills and jobs,
European platform against poverty.

[7]               COM(2008) 394 final.

[8]               COM(2011) 415 final.

[9]               Turkey is an observer. The neighbourhood countries
involved are Ukraine and Moldova as full members, and Georgia and Armenia as
observers.

[10]             Sejdić-Finci vs. Bosnia and Herzegovina case,
December 2009.

[11]             These cover 5 objectives: 1) Acceptable and sustainable
resolution of the issue of apportionment of property between State and other
levels of government; 2) Acceptable and sustainable resolution of defence
property; 3) Completion of the Brčko Final Award; 4) Fiscal
sustainability; and 5) Entrenchment of the rule of law (demonstrated by
adoption of a National War Crimes Strategy, of a Law on Aliens and Asylum and
of a National Justice Sector Reform Strategy), as well as two specific
conditions: 1) signing of the Stabilisation and Association Agreement 2) a
stable political situation.

[12] COM (2009) 534 final

[13]             Examples of this are chapter
20-Enterprise and industrial policy, chapter 21-trans-European networks.

[14]             Regulation (EC) No 1085/2006.

[15]             COM(2011) 500

[16]             COM(2011) 290.

[17]             Under UN Security Council Resolution 1244.

[18]             The key priorities concern the following areas: legislative framework for elections and Parliament's legislative and
oversight role; public administration reform; judicial reform; fight against
corruption; fight against organised crime; media freedom and cooperation with
civil society; implementation of the anti-discrimination framework and the
situation of displaced persons. For the full text of
the key priorities, please see COM (2010) 670.

[19]             Montenegro unilaterally uses the euro as the sole legal
tender.

[20]             The key priorities concern the following areas: the
proper functioning of parliament; adopting reinforced majority laws; appointment
procedures and appointments for key institutions; electoral reform; the conduct
of elections; public administration reform; rule of law and judicial reform;
fighting corruption; fighting organised crime; addressing property issues;
reinforcing human rights and implementing anti-discrimination policies;
improving the treatment of detainees and applying recommendations of the
Ombudsman. For the full text of the key priorities, please see COM(2010) 680.

[21]             The Sejdić-Finci vs. Bosnia and Herzegovina case,
December 2009, regarding ethnic discrimination for representation in the
institutions of the country for persons not belonging to one of the three
Constituent Peoples.

[22]             According to the Law on the protection of rights of
persons belonging to national minorities, there are 17 national minorities in
Bosnia and Herzegovina. The three constituent peoples – Bosniaks, Croats and
Serbs – do not constitute national minorities.