TABLE OF CONTENTS

1........... Introduction. 3

1.1........ Preface. 3

1.2........ Context 3

1.3........ Relations between the EU and Serbia. 4

1.4........ Normalisation of relations between Serbia and Kosovo. 5

2........... Political criteria. 6

2.1........ Democracy and the rule of law.. 6

2.2........ Human rights and the protection of minorities. 10

2.3........ Regional issues and international obligations. 11

3........... Economic criteria. 14

3.1........ The existence of a functioning market economy. 14

3.2........ The capacity to cope with competitive pressure and market forces within the Union. 19

4........... Ability to take on the obligations of membership. 21

4.1........ Chapter 1: Free movement of goods. 21

4.2........ Chapter 2: Freedom of movement for workers. 22

4.3........ Chapter 3: Right of establishment and freedom to provide services. 23

4.4........ Chapter 4: Free movement of capital 23

4.5........ Chapter 5: Public procurement 24

4.6........ Chapter 6: Company law.. 24

4.7........ Chapter 7: Intellectual property law.. 25

4.8........ Chapter 8: Competition policy. 25

4.9........ Chapter 9: Financial services. 26

4.10...... Chapter 10: Information society and media. 27

4.11...... Chapter 11: Agriculture and rural development 28

4.12...... Chapter 12: Food safety, veterinary and phytosanitary policy. 28

4.13...... Chapter 13: Fisheries. 29

4.14...... Chapter 14: Transport policy. 30

4.15...... Chapter 15: Energy. 31

4.16...... Chapter 16: Taxation. 33

4.17...... Chapter 17: Economic and monetary policy. 34

4.18...... Chapter 18: Statistics. 34

4.19...... Chapter 19: Social policy and employment 35

4.20...... Chapter 20: Enterprise and industrial policy. 37

4.21...... Chapter 21: Trans-European networks. 37

4.22...... Chapter 22: Regional policy and coordination of structural instruments. 38

4.23...... Chapter 23: Judiciary and fundamental rights. 39

4.24...... Chapter 24: Justice, freedom and security. 49

4.25...... Chapter 25: Science and research. 53

4.26...... Chapter 26: Education and culture. 53

4.27...... Chapter 27: Environment and climate change. 54

4.28...... Chapter 28: Consumer and health protection. 56

4.29...... Chapter 29: Customs union. 57

4.30...... Chapter 30: External relations. 58

4.31...... Chapter 31: Foreign, security and defence policy. 59

4.32...... Chapter 32: Financial control 60

4.33...... Chapter 33: Financial and budgetary provisions. 61

1. Introduction 1.1. Preface

The Commission reports regularly to the Council and Parliament on the progress made by the countries of the Western Balkans region towards European integration, assessing their efforts to comply with the Copenhagen criteria and the conditionality of the Stabilisation and Association Process.

This progress report, which largely follows the same structure as in previous years:

– briefly describes the relations between Serbia and the European Union;

– analyses the situation in Serbia in terms of the political criteria for membership;

– analyses the situation in Serbia on the basis of the economic criteria for membership;

– reviews Serbia’s capacity to take on the obligations of membership, i.e. the acquis expressed in the Treaties, the secondary legislation, and the policies of the Union.

This report covers the period from October 2012 to September 2013. Progress is measured on the basis of decisions taken, legislation adopted and measures implemented. As a rule, legislation or measures which are under preparation or awaiting parliamentary approval have not been taken into account. This approach ensures equal treatment across all reports and enables an objective assessment.

The report is based on information gathered and analysed by the Commission. Many sources have been used, including contributions from the government of Serbia, the EU Member States, European Parliament reports[1] and information from various international and non-governmental organisations.

The Commission draws detailed conclusions regarding Serbia in its separate communication on enlargement,[2] based on the technical analysis contained in this report.

1.2. Context

The European Council of March 2012 granted the status of candidate country to Serbia. In April 2013,[3] finding that Serbia had met the key priority of taking steps towards visible and sustainable improvement of relations with Kosovo*, as set out in its 2011 opinion on Serbia’s membership application,[4] the Commission recommended to the Council that accession negotiations be opened. The European Council decided on opening accession negotiations with Serbia on 28 June 2013. It endorsed the Council’s recommendation that the Commission submit without delay a proposal for a framework for negotiations in line with the European Council’s December 2006 conclusions and established practice and incorporating the new approach to the chapters on the judiciary and fundamental rights and justice, freedom and security as well as steps towards normalising relations between Belgrade and Pristina. The Commission tabled its proposal in July. The Commission was also asked to carry out an analytical examination of the EU acquis which started in September.

The next step is adoption by the Council of the framework for negotiations with Serbia, to be confirmed by the European Council at its usual session on enlargement, with a view to holding the first intergovernmental conference with Serbia in January 2014 at the very latest.

Continued visible and sustainable progress in the normalisation of relations with Kosovo, including the implementation of agreements reached so far, will remain essential.

Serbia will have to sustain the momentum of reforms over time in the key areas of the rule of law, particularly judicial reform and anti-corruption policy, independence of key institutions, media freedom, anti-discrimination policy, the protection of minorities and the business environment.

Serbia needs to maintain its commitment to regional cooperation and reconciliation.

1.3. Relations between the EU and Serbia

Serbia is participating in the Stabilisation and Association Process.

The Stabilisation and Association Agreement between the EU and Serbia (SAA) was signed in April 2008 and entered into force on 1 September 2013. It replaces the Interim Agreement on trade and trade-related matters (IA) which had entered into force on 1 February 2010.

Serbia has continued to build a satisfactory track record in implementing the obligations of the SAA and IA. An agreement has been reached on the adaptation of the trade provisions of the SAA in order to take into account Croatia's accession to the EU and with a view to maintaining traditional trade flows. Further efforts are needed in particular in the areas of state aid control, where the independence of the Commission for State Aid Control needs to be further established and the exemption of enterprises under privatisation from state aid rules need to be repealed.

Regular political and economic dialogue between the EU and the country has continued through the SAA/IA structures and in the framework of the Enhanced Permanent Dialogue (EPD). The Interim Committee met in January and seven sub-committee and sectoral EPD meetings were held. Serbia participates in the multilateral economic dialogue with the Commission and the EU Member States to prepare the country for participation in multilateral surveillance and economic policy coordination under the EU’s Economic and Monetary Union.

The EU-Serbia Inter-Parliamentary Committee met in Brussels in March and the European Parliament adopted an opinion on the Commission’s progress report on Serbia in April. The Committee of the Regions Working Group on the Western Balkans held its annual meeting in Novi Sad on 26 June. On 10 July, the European Economic and Social Committee adopted an opinion on relations with civil society in Serbia.

The Serbian government adopted an action plan in December 2012 to follow up on all the findings of the Commission’s 2012 progress report; in February 2013 it adopted a National Plan for the Adoption of the Acquis (NPAA) for the period 2013-2016.

Visa liberalisation for citizens of Serbia travelling to the Schengen area has been in force since December 2009. In the framework of the post-visa liberalisation monitoring mechanism, the Commission regularly assesses progress made by the country in the implementation of reforms introduced under the visa roadmap. This also includes an alert mechanism to prevent abuses, coordinated by Frontex. Within this framework, the European Commission has regularly submitted its monitoring reports to the European Parliament and Council. The next report will be presented by the end of 2013. A readmission agreement between the European Union and Serbia has been in force since January 2008.

Financial assistance is provided through the Instrument for Pre-Accession Assistance (IPA). The assistance follows a sector-based approach focusing on the following seven sectors: justice and home affairs; public administration reform; social development; private sector development; transport; the environment, climate change and energy; and agriculture and rural development. In addition, the country continues to benefit from various regional and horizontal programmes. Cross-border cooperation is also used to promote capacity building and dialogue between the local and regional authorities of neighbouring countries, namely Bulgaria, Hungary, Romania, Bosnia and Herzegovina, Croatia and Montenegro.

For the period 2007-2013, the Commission has earmarked €1 384 million for IPA projects to be implemented in the country. IPA assistance is currently managed centrally by the EU Delegation in Belgrade. Preparations for decentralised management of IPA funds are being finalised and conferral of management powers is expected by the end of 2013. The government and the Commission are currently preparing a comprehensive Country Strategy Paper for the period 2014-2020, which will provide a coherent and strategic framework for financial assistance under the new Instrument for Pre-Accession Assistance (IPA II).

Serbia participates in a number of EU programmes: the Seventh Framework Programme for research and technological development, Progress, the Competitiveness and Innovation Programme, the Culture Programme, the Europe for Citizens Programme, the Customs Programme and the Fiscalis Programme.

1.4. Normalisation of relations between Serbia and Kosovo

Serbia and Kosovo have actively and constructively participated in the EU-facilitated dialogue, which was upgraded to a high-level political process with facilitation by the High Representative following the Serbian elections of May 2012. Seventeen high-level meetings were attended by both Prime Ministers since October. A meeting also took place between Presidents Nikolic and Jahjaga in February and they continued meeting in the context of various initiatives in June and in July. Since January 2013, the meetings of the two Prime Ministers have focused on northern Kosovo and on delivering structures which meet the security and justice needs of the local population in a way that ensures the functionality of a single institutional and administrative set-up in Kosovo, in line with the December 2012 Council Conclusions.

These discussions resulted in the 19 April ‘First agreement on principles governing the normalisation of relations’, complemented in May by a comprehensive implementation plan. This landmark achievement represents a fundamental change in relations between the two sides. The ‘First Agreement’ includes the following key elements: the establishment of an Association/Community of Serb municipalities in Kosovo; the principle of a single police force in Kosovo and the integration of all police in northern Kosovo in the Kosovo police force; the principle of integration and functioning of all judicial authorities within Kosovo’s legal framework; and municipal elections to be held in the northern municipalities in 2013 and facilitated by the OSCE – municipal elections were subsequently convened on 3 November 2013 and will take place throughout Kosovo. The two parties have agreed that neither side will block or encourage others to block the other side’s progress on their respective EU paths.

The parties also reached agreements on energy and telecommunications in September. Implementation of other agreements reached in the dialogue to date has continued. The agreement on representation of Kosovo was broadly implemented. Kosovo became a member of the Regional Cooperation Council (RCC) in February. Full application of the principle of inclusive regional cooperation remains to be ensured; problems such as that encountered with the summit of the South East European Cooperation Process (SEECP) need to be avoided. On IBM, joint interim crossing points have been opened on all six border gates and are up and running. December’s agreement on the protection of religious and cultural heritage sites is being implemented. Implementation of the agreement on liaison arrangements started in June. The two sides have also agreed to start collecting customs duties and to set up a fund for the development of northern Kosovo. Regarding free movement, the ID card travel regime is operational. The agreement on customs stamps continues to be implemented by both sides. There has also been good progress on civil registry and implementation should be completed by March 2014. Regarding cadastre, while the implementation has commenced on the Serbian side, the legislation necessary to implement the agreement on cadastre has yet to be passed by the Kosovo side. Implementation of the agreement on acceptance of university diplomas is proceeding smoothly. Serbia’s cooperation with EULEX has continued to improve. Direct high-level contacts and regular contacts at operational level continue to facilitate cooperation, e.g. in the fight against organised crime. Serbia needs however to follow-up requests under the police protocol with EULEX, eg. vehicle registration documents.

On 19 September, one member of EULEX was killed in an attack on a EULEX convoy in northern Kosovo. The leaderships of both Serbia and of Kosovo condemned the attack in the strongest terms.

Overall, Serbia has taken significant steps towards visible and sustainable improvement of relations with Kosovo, which have already led to a number of irreversible changes on the ground.

2. Political criteria

This section examines the progress made by Serbia towards meeting the Copenhagen political criteria, which require stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities. It also monitors regional cooperation, good neighbourly relations with enlargement countries and Member States and compliance with international obligations, such as cooperation with the International Criminal Tribunal for the former Yugoslavia.

2.1. Democracy and the rule of law

Constitution

The Constitution is largely in line with European standards. Some provisions still need to fully reflect the recommendations of the Venice Commission in its opinions of 2007 and of 2013, particularly with regard to the role of parliament in judicial appointments.

Parliament

Parliament has been very active in the first year of the legislature and has enacted several important pieces of legislation aiming at alignment with the EU acquis. The consultation process has improved, with extensive use of public hearings. Parliament’s work has been made more transparent by the new practices of publishing voting records and transcripts of plenary debates on the internet and live streaming of plenary debates and committees’ sessions. But urgent procedures with limited consultation and discussion time have continued to be used extensively to enact legislation. A women’s parliamentary network was set up in February. Parliamentary oversight over the executive has improved, with the prime minister and deputy prime ministers participating in regular sessions of oral questions, the government presenting an annual work programme for 2013 and ministers submitting quarterly reports to the corresponding committees. Parliament has been actively reviewing the results of the EU-facilitated dialogue between Serbia and Kosovo and approved with an overwhelming majority a report from the government following the 19 April ‘First Agreement’. A committee of inquiry into Serbia’s budgetary allocations to Kosovo was set up in April.

Parliamentary committees have developed a more proactive approach. The Committee for European Integration has continued its review of reports submitted by the government, with active support from the corresponding parliamentary department. Independent Regulatory Bodies submitted annual reports for 2012 which were debated by the relevant committees before conclusions were examined by the plenary in July. But parliament has still given only limited consideration and follow-up to their findings and recommendations.

Elections

The Anti-Corruption Agency eventually released its final report on the financing of 2012 elections at all levels in May (See also Chapter 23 — Judiciary and fundamental rights). Allegations of electoral fraud made in the 2012 elections were dismissed by the prosecution in October. Serbia still needs to introduce changes into the electoral framework in line with recommendations from the OSCE/ODIHR.

Overall, the transparency of parliament’s work and its consultation process has improved and there was progress in oversight of the executive. Urgent procedures are still often applied, unduly limiting time and debate for scrutiny of draft legislation. Parliament needs to develop a more proactive approach to the consideration and follow-up of recommendations of Independent Regulatory Bodies. Serbia has not yet enacted changes to the electoral framework as recommended by OSCE/ODIHR.

Government

The coalition government has remained united in demonstrating commitment to joining the EU and to EU-facilitated dialogue with Kosovo. It has been increasingly consistent in practice, in terms of policy priorities, decision-making and the public conduct of its members, with all crucial policy decisions being adopted unanimously. In March, the government amended its rules of procedure, significantly extending the holding of public consultations and making it compulsory to carry out impact assessments in consultation with the Office for the Regulatory Reform and Impact Analysis. The transparency of the legislative drafting process should be further enhanced and sufficient time given for effective consultation of all interested parties to ensure a more predictable legal environment. More attention also needs to be given to the implementation and monitoring of enacted legislation. The government’s General Secretariat needs to be further strengthened to contribute to greater coordination of sectoral policies and effectiveness of policy-making. Too often, sectoral ministries take policy decisions relating to EU standards in isolation. The government needs to follow up the findings and recommendations of independent regulatory bodies actively and to keep a record of this follow up. At the end of the reporting period, a new cabinet was sworn in on the basis of a new coalition in agreement, which now excludes the United Regions of Serbia (URS). 11 out of 22 positions have been renewed, but the government leadership remained unchanged.

In September, the structures for the accession negotiations were established, including a coordinating body chaired by the prime minister, and Serbia’s Chief Negotiator was appointed. The Serbian European Integration Office continued to effectively coordinate government activities relating to the EU integration process. In February, the government adopted the National Plan for the Adoption of the Acquis (NPAA) for the period 2013-2016. It replaces the National Programme for Integration (NPI) for 2008-2012 under which 88% of the planned legislation was reported having been enacted. In December, the government adopted an action plan to address findings of the 2012 progress report. The National Council for European Integration has not yet been re-established.

As regards local self-government, the provincial assembly of Vojvodina adopted in May 2013 a declaration ‘on the Protection of Constitutional and Legal Rights of the Autonomous Province of Vojvodina’. A law on own resources for Vojvodina has yet to be adopted, as prescribed by the Constitution. Implementation of the existing legal framework for local government remains very limited. The National Council for Decentralisation has not met nor has the new inter-ministerial Municipal Finance Commission and none of the tools needed to monitor functions delegated to municipalities have yet been developed. Responsibilities have continued to be exercised at local level without proper analysis of the capacity and resources required. The legislation on municipal finance needs to be properly implemented with regard to calculation of the earmarked transfers by line ministries. Consultation of local authorities on new legislation that has local implications remains very limited. (See also Public administration and Chapter 32 - Financial control).

Overall, the government has actively pursued the EU integration agenda, demonstrating consensus in key policy decisions. The framework regulating the consultation process has been improved but implementation needs to be stepped up. The legal framework for local self-government remains to be clarified and properly implemented.

Public administration

The government undertook to develop a new public administration reform (PAR) strategy covering all key aspects of the horizontal PAR as well as an action plan for 2013-16. These preparations are based on an active consultative process and working groups involving all key stakeholders. The PAR strategy is expected to be adopted until end of 2013. The Ministry of Justice and Public Administration is now taking the lead on public administration reform but still needs to enhance its ability to coordinate a PAR agenda.

The necessary institutional and administrative capacity for policy planning and coordination needs to be enhanced. So far political coordination of PAR has been insufficient. The Public Administration Reform Council has been now formally re-established under the leadership of the Prime Minister, but the Council has yet to take up its duties.

With regard to the legislative framework, a new Law on General Administrative Procedures and a Law on local government employees and salaries have yet to be adopted. The Law on Administrative Disputes has not yet been fully aligned with European standards for judicial review of administrative acts.

A merit-based civil service system in central and local government needs to be put in place. Recruitment, particularly for managerial and middle-management positions, is an issue of serious concern, as a substantial proportion has been conducted through non-transparent procedures. Recruitment of local employees is regulated by the Labour Law, as the Law on Civil Servants does not apply to local government employees. Administrative and management capacity at local level is weak and significant disparities between municipalities persist. Training needs to be given more importance in professional development.

The government has shown the will to rationalise the organisation of public administration and to streamline subordinate bodies and agencies. However, only partial actions have been initiated, and a clear and comprehensive organisational policy has yet to be determined. Recruitment and human resources management for subordinate bodies and independent regulatory bodies do not follow a consistent regulatory framework.

Serbia has taken new steps to address the logistical constraints affecting Independent Regulatory Bodies (See also Parliament, Government and Ombudsman). The Commissioner for Information of Public Importance and Personal Data Protection remained active both within the government and with the media and civil society. The number of requests from citizens has increased. His office was allocated new premises in August which should allow expanding its administrative capacity, when they become functional as from October 2013. Serbia’s State Audit Institution (SAI) has continued to build up capacity and now has approximately 190 staff, including around 150 auditors. The SAI has improved and widened its audit coverage to include local self-government and state-owned companies, but it remains under-resourced for full audit capacity. Performance audit work has not started yet (See also Chapter 32 — Financial control).

Overall, public administration reform remains hampered by the lack of clear steer and coordination structures. The system remains fragmented, with unclear lines of accountability and low policy development and coordination capacity. Recruitment and promotion need to be further reformed and developed to achieve a transparent, merit-based civil service system. Much recruitment is still conducted through non-transparent procedures. Follow-up of the recommendations of independent bodies needs to be built into the system.

Ombudsman

The State Ombudsman’s offices at both central and local level and the office of the Ombudsman of Vojvodina continued to be active, with an increase in the number of citizens’ complaints. Most of the reported infringements relate to administrative procedures. The number of recommendations followed up by the government and parliament increased slightly, but follow-up needs to be more systematic, especially in the area where the Ombudsman acts as the national preventive mechanism against torture.

Civilian oversight of the security forces

The Law on Military Security and Military Intelligence Agencies, which allowed sensitive data on itemised telephone bills and localisation to be monitored without a court order, was amended in February to require a high court order to be obtained before access to such data is granted. The new parliamentary committee has been proactive in the legislative process, supervision of the security services and cooperation with independent bodies. In March, the Committee adopted a decision regulating in detail the direct oversight of the security services through control visits, inspections and reports to the plenary. Control visits were made to all three security agencies in the course of June and July, and the Committee in particular inspected the legality of the use of special measures for the secret collection of data. Upon an initiative of the Committee, the State Audit Institution for the first time audited the civilian state security agency (BIA). A law on access to state security files has yet to be adopted.

Civil society

Civil society organisations continued to play an important role in social, economic and political life, and in promoting democratic values. The sector continued to grow. The office for cooperation with civil society produced its first annual report on budget spending on associations and other civil society organisations, covering the 2011 budget.

Judicial system

New five-year strategy on the judiciary was adopted in July, together with implementing action plan. Following last year’s Constitutional Court rulings, previously non-reappointed judges and prosecutors, representing approximately one third of the total, were re-appointed. Major legislative improvements were made. However, the legislative and constitutional framework still leaves room for undue political influence and need to be amended. To ensure accountability in the judiciary, professional appraisal rules need to be adopted and codes of ethics and disciplinary rules more systematically applied, where relevant, to prosecutors and judges. The size of the backlog of cases continues to raise concern. There are still major imbalances in the workload of judges and the length of proceedings remains excessive in many cases. Further reforms require a comprehensive functional analysis of the judiciary in terms of cost, efficiency and access to justice. The implementation of the recent changes to the legislation on ‘abuse of office‘ should be carefully monitored with a view to a comprehensive review of economic crimes. The means and expertise of the Judicial Academy should be increased and the legislative and institutional framework adapted to allow it to become the compulsory point of entry to the judicial profession.

For a detailed analysis of the developments in the judicial system, see Chapter 23 — Judiciary and fundamental rights.

Fight against corruption

A new strategy for the period 2013-2018 has been adopted in July, together with a related action plan. Implementation of GRECO recommendations has continued. Investigations into corruption cases have been stepped up, especially in high-level cases, resulting in particular in criminal charges filed against two former ministers and the sentence in first instance of a former president of a commercial court to six and a half years of prison for abuse of office. The Anti-Corruption Agency’s operations continued, mostly in relation to the control of the financing of political parties. The implementation of the legal framework and the efficiency of anti-corruption institutions need to be improved. A proactive approach to investigating corruption needs to be maintained and result into final convictions, included in high profile cases. The judiciary needs to gradually build up a solid track record of convictions in this regard, particularly in cases of misuse of public funds. The Anti-Corruption Agency needs to make full use of its capacity, in particular for checks on the funding of electoral campaigns. The law enforcement bodies need to gain expertise, in particular in financial investigations, and to become more proactive. There is no efficient and comprehensive legal framework to protect whistle-blowers. Continued political direction and improved support for institutions is needed, along with more effective inter-agency coordination in order to significantly improve performance in combating corruption.

For a detailed analysis of developments in anti-corruption policy, see Chapter 23 — Judiciary and fundamental rights.

Fight against organised crime

The institutional framework to fight against organised crime is in place. Regional and international cooperation has led to some results. Criminal investigations have been launched in a number of cases. However, final convictions remain rare. The capacity to carry out financial investigations in parallel with complex criminal investigations needs to be built up, and a track record of proactive investigations and final convictions in organised crime cases needs to be established. The dependence of the police on the security intelligence agency to carry out certain special investigative measures in criminal investigations is not in line with EU standards.

For a detailed analysis of developments in this area, see Chapter 24 — Justice, freedom and security.

2.2. Human rights and the protection of minorities

The legislative and institutional framework for the observance of international human rights law is in place. Further efforts to ensure full implementation of the legal framework and international instruments are needed.

In the area of media freedom, defamation was decriminalised. The creation of an ad hoc Commission tasked with shedding light on cases of unsolved murders of journalists contributed to re-launching some investigations. However, no progress was made in the implementation of the media strategy. Transparency in media ownership and financing of the sector still needs to be comprehensively addressed, particularly as regards direct state financing. Reports of orchestrated media campaigns in certain tabloids against the opposition, coalition partners or independent bodies, detailing investigations or announcing arrests, based on anonymous or leaked sources from the police investigation or prosecution, raise concerns. Some activities have taken place regarding the protection of the rights of the lesbian, gay, bisexual, transgender and intersex (LGBTI) population. However, sufficient political support is still lacking and a pride parade that was to be held on 28 September in Belgrade was again banned, for the third year in a row, on security grounds. Further efforts are needed to address complaints and in particular alleged ill-treatment, improve conditions in the prison system and ensure access to justice. Further attention needs to be given to actively protecting the media, human right defenders and other vulnerable groups, including the Roma and LGBTI persons, from threats and attacks from radical groups.

A comprehensive anti-discrimination strategy was adopted in June. A law on mental disability was adopted in May. Further positive measures have been taken to protect children’s rights. Additional efforts are needed to guarantee women’s rights in order to tackle domestic violence and improve gender equality, particularly in the workplace. The social integration of persons with disabilities needs to be further improved.

The legal framework providing for minority protection is in place and generally complied with. However, consistent implementation of the legal framework on the protection of minorities throughout Serbia needs to be fully ensured, notably in the areas of education, use of language, and access to the media and religious services in minority languages. The recommendations of the June 2011 EU-Serbia seminar on Roma inclusion have been actively followed up and a new set of operational conclusions addressing the remaining gaps was jointly agreed in September. Further sustained efforts remain needed to improve the situation of the Roma and of refugees and displaced persons.

For a detailed analysis of the developments in the area of human rights and the protection of minorities, see Chapter 23 — Judiciary and fundamental rights. For developments in the areas of trade union rights, anti-discrimination and equal opportunities, see also Chapter 19 — Social policy and employment.

2.3. Regional issues and international obligations

Regarding relations with Kosovo, see section 1.4 - Normalisation of relations between Serbia and Kosovo.

There are no outstanding issues regarding Serbia’s compliance with the Dayton/Paris Peace Agreement. In the framework of the Agreement on Special Parallel Relations, joint sessions of the governments of Republika Srpska and Serbia and a session of the Cooperation Council were held.

Serbia has maintained full cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY). Serbia has continued to respond to requests for assistance in a timely manner and has intensified efforts to investigate support networks responsible for helping ICTY fugitives. Proceedings are ongoing in 22 cases on charges of harbouring ICTY indictees and 10 people were sentenced on the basis of plea-bargaining. A repeat trial in a case relating to aid provided to Ratko Mladić has resumed in June 2013. Following the acquittals on appeal in the Gotovina/Markač and Haradinaj cases in November, which were met with outrage and bitterness in Serbia and beyond in the region, Serbian high officials criticised the decisions and, on the occasion of a UN General Assembly thematic debate in April, questioned the contribution of international justice to regional reconciliation. The government extended its financial assistance to all Serb ICTY detainees or convicts and their families in March.

In the area of domestic processing of war crimes, a protocol on cooperation on exchange of information and evidence in war crimes cases was signed between the war crimes prosecutors of Serbia and Bosnia and Herzegovina in January. The two sides have been meeting regularly since then to expand cooperation in practice. Cooperation and exchanges of information with Croatia and EULEX continued. The courts processed cases more efficiently and the judges performed better under new procedural rules. The number of persons indicted in 2012 was low and there was no progress in investigating high-level officers involved in war crimes. Courts continued to pass mild sentences. Serious problems in the system of witness protection have not been addressed and assistance to victims has not improved. Victims are only allowed to be assisted by members of the Bar, when they would benefit from assistance by experienced human rights experts.

Serbia’s policy regarding the International Criminal Court is in line with the EU’s guiding principles and the EU Common Positions on the integrity of the Rome Statute. Serbia does not have any bilateral immunity agreements.

Progress has been made as regards the Sarajevo Declaration Process, which brings together Bosnia and Herzegovina, Croatia, Montenegro and Serbia and aims at finding sustainable solutions for the refugees and displaced persons as a result of the armed conflicts in ex-Yugoslavia during the 1990s. The implementation of the Regional Housing Programme, which aims at providing housing solutions for the most vulnerable refugees and displaced persons in the four countries and is extensively supported with EU financial assistance, has started with the approval of the first round projects by the international donors in April. Joint regional information campaigns on the programme have been carried out throughout the region. However, the implementing capacities of the partner countries need to be further improved and a series of documents and procedures need to be finalised in order for the approved country projects to start. Efficient project implementation units and rigorous beneficiary selection procedures as well as beneficiary data cross checking remain to be established. The issue of refugees’ pensions within the bilateral working group between Croatia and Serbia still needs to be addressed. The good overall cooperation between the partner countries on the process and the housing programme needs to continue.

The unresolved fate of missing persons from the conflicts in the 1990s is still an issue of humanitarian concern in the Western Balkans. As of July 2013, a total of 11 859 persons were still missing as a result of the conflicts in the region, according to International Committee of the Red Cross (ICRC) figures. Of these, 7 886 cases relate to the conflict in Bosnia and Herzegovina, 2 246 to the conflict in Croatia and 1 727 to the conflict in Kosovo. The lack of information on potential gravesites and difficulties in identifying the already exhumed human remains continue to be the key obstacles to solving the remaining cases of missing persons. Belgrade and Pristina held two meetings to address these issues in the framework of the ICRC-chaired Working Group on Missing Persons. Forty four cases have been resolved, owing mostly to the information provided by the Serbian authorities and international stakeholders. Serbia and Croatia resumed formal contacts on missing persons and in July, a first session of the re-established bilateral working group took place in Zagreb with the two sides agreeing to meet four times a year. As a result of the judicial cooperation between the two countries, a gravesite with 13 victims was found and exhumed near Vukovar. However, the process remains slow overall and greater political commitment, supported with financial and technical resources, is needed.

Regional cooperation and good neighbourly relations are an essential element of Serbia’s European integration process. Serbia continued to actively participate in regional initiatives and organisations, such as the Migration, Asylum, Refugees Regional Initiative (MARRI), the Central European Initiative (CEI), the Regional Cooperation Council (RCC), the Central European Free Trade Agreement (CEFTA), the Energy Community Treaty (ECT) and the European Common Aviation Area Agreement (ECAA). The new RCC Secretary General comes from Serbia. In April, Serbia hosted a regional ministerial conference on the fight against organised crime, corruption and judicial cooperation. A trilateral presidential summit took place between Serbia, Turkey and Bosnia and Herzegovina in May, preceded by an economic and trade ministerial meeting in March. In June, the Serbian President appointed a personal envoy to the Regional Commission for Establishing the Facts about War Crimes (RECOM).

As concerns bilateral relations with other enlargement countries and neighbouring EU Member States, the Serbian leadership stepped up high-level contacts with neighbouring countries with renewed impetus since January. After his disputable statements on Srebrenica and Vukovar, the Serbian President made a number of particularly welcome gestures that contributed to a spirit of reconciliation. Following the entry into force of the SAA on 1 September 2013, Serbia will have to conclude bilateral conventions on regional cooperation, under Article 15 of the SAA, with Albania, Montenegro and the former Yugoslav Republic of Macedonia.

The Serbian foreign minister visited Albania in October 2012 for the first such visit in eight years. However, bilateral relations were strained at times, with each side blaming the other for declarations or actions in the Presevo valley which raised tensions.

Relations with Bosnia and Herzegovina have improved. In April, the Serbian President publicly asked for forgiveness for crimes committed by any individual in the name of Serbia and the Serbian people, including in Srebrenica. A key development was the signing of a protocol on cooperation on the prosecution of perpetrators of war crimes, crimes against humanity and genocide. An agreement on readmission and one on extradition, which excludes war criminals, were also signed. There were many high-level reciprocal visits, a Joint Commission for Economic Cooperation was inaugurated and a memorandum of understanding on cooperation in the EU integration process was signed in December. Border demarcation remains to be addressed.

Relations with the former Yugoslav Republic of Macedonia were further upgraded. A first joint government session was held in Belgrade in June, at which agreements were signed on health and interior issues and the mixed committees on minorities and economic cooperation were reactivated. An agreement on legal assistance in civil and criminal matters entered into force. An agreement on mutual enforcement of court decisions in criminal cases was ratified, and an agreement on cooperation on the process of EU integration was signed. There were no developments in relation to the dispute between the Orthodox churches in the two countries, which both Prime Ministers signalled in January should not be an obstacle to deeper cooperation.

The Serbian Prime Minister visited Montenegro in September. The agreement on police cooperation entered into force in March. A readmission agreement and an agreement on consular protection and services in non-EU countries were signed. A joint special task force for fighting corruption and crime is operational and has already resulted in police actions in the two countries. There were no developments in the dispute between the Orthodox churches in the two countries.

The Serbian President visited Turkey in February and again in May for the trilateral meeting with Turkey and Bosnia and Herzegovina, on which occasion a protocol on commercial and economic cooperation was signed. Agreements with Turkey were signed in June on the areas of mutual legal assistance in civil and trade matters and in criminal matters and extradition.

The Serbian President visited Bulgaria in September. A social security agreement entered into force in February. A joint contact centre for police and customs cooperation was opened in December. An agreement on the implementation of the gas interconnection between Serbia and Bulgaria was signed in December.

The Serbian President and Prime Minister attended the ceremony marking Croatia’s accession to the EU in July, a culminating point in a series of high level reciprocal visits that started with the Croatian Prime Minister’s visit to Belgrade in January. A joint mixed commission was formed in March to address open bilateral issues (genocide suits, refugees, pensions, border demarcation and missing persons) and Croatia shared in July an updated list of persons facing criminal investigation or indictments for war crimes.

Reciprocal presidential visits marked by reconciliatory statements and apologies for crimes committed during WWII sealed a new phase in relations with Hungary. A new border crossing was opened in May and a trilateral memorandum of understanding on internal affairs was signed by Serbia, Austria and Hungary.

Serbia and Romania continued cooperation on the protection of minorities in line with their Joint Protocol of March 2012. Consultations continued under the auspices of the OSCE High Commissioner on National Minorities. The Serbian Prime Minister visited Bucharest in May.

Overall, Serbia generally complied with its international obligations. Serbia continued to fully cooperate with the International Criminal Tribunal for the former Yugoslavia. Serbia maintained good relations with its neighbours and was actively involved in regional cooperation.

3. Economic criteria

In examining economic developments in Serbia, the Commission’s approach was guided by the conclusions of the European Council in Copenhagen in June 1993, which stated that membership of the Union requires the existence of a functioning market economy and the capacity to cope with competitive pressure and market forces within the Union.

3.1. The existence of a functioning market economy

Economic policy essentials

In January 2013, the government submitted to the European Commission its Pre-Accession Economic Programme (PEP) for the period 2013-2015. The programme foresees a mild and plausible recovery by 2% in 2013 and further, rather optimistic, acceleration of real GDP growth to 3.5% and 4% in the following two years. A fiscal consolidation package, mostly on the revenue side, was adopted in the autumn of 2012. Revenue underperformance and expenditure pressures led to another set of consolidation measures in July and to a rebalancing of the budget, increasing the 2013 deficit target from the initial 3.6% of GDP to an estimated 5.3% of GDP. Some steps to address the numerous obstacles to growth have been taken, but the adoption and implementation of a number of important structural reforms has been delayed. The pre-cautionary Stand-By Arrangement (SBA) with the IMF expired in March 2013, without being activated and no new arrangement has been concluded. Overall, in view of the difficult economic situation, economic reforms have progressed slowly. Achieving a sustainable fiscal position and tackling the numerous obstacles to growth remains a challenge.

Macroeconomic stability

In 2012, Serbia went through another recession and the economy contracted by 1.7%. Domestic demand weakened significantly in the last quarter when private consumption fell by 2% and gross fixed capital formation by 3.4%. Loose fiscal policy, which had boosted government expenditure and led to a strong public consumption growth in the pre-election period, was reversed by the year’s end and exports remained the only driver of growth. Real GDP grew by 2.1% in the first and by 0.7% in the second quarter. However, economic growth has been uneven, concentrated in few sectors, and employment stagnated. Private consumption has continued to decrease and import growth lost pace. Activity in key sectors such as construction and retail trade continued to decline. Average per capita income in purchasing power standards stood at 35% of the EU average in 2012, unchanged from the year before. Overall, the economy is slowly emerging from another recession but growth remains weak and narrowly based.

The economy is still facing significant external imbalances. In 2012, the current account deficit increased to 10.5% of GDP, driven mainly by an expanding trade deficit. However, this trend was reversed by the end of the year and, in the first half of 2013 the annualised current account deficit shrank by half in euro terms to an estimated 5.7% of GDP. By July, exports of goods and services were up by 20% in euro terms, explaining the bulk of the current account adjustment while, due to falling domestic demand, imports remained subdued. Despite a slowdown in the EU economies hosting significant Serbian diaspora, private remittances increased strongly by 13% in the first seven months.

External financial flows have been volatile and government borrowing replaced private sector inflows as the main source of financing of the current account deficit. Due to significant outflows, net foreign direct investment fell to 0.8% of GDP in 2012. It gained some ground in 2013, but remained far below pre-crisis levels, as domestic risks and weak EU economy supressed inflows. Wholesale trade, construction and financial services sectors attracted more than half of all net foreign investment in the country, while inflows into sectors that could potentially boost export capacity remained marginal. Portfolio investment increased as a result of significant government borrowing (three rounds of eurobonds denominated in US dollars, totalling about €2.5 billion). In the first half of 2013, banks continued to reduce their foreign liabilities. The central bank foreign exchange reserves stood at a comfortable €10.7 billion in August, covering more than seven months’ worth of imports. Private sector external debt has remained fairly stable; however, since September, rising government indebtedness has kept total external debt high, at 83.7% of GDP by the end of June. Overall, external imbalances have been falling but remain significant. Government borrowing replaced private sector inflows as the main source of financing of the current account deficit.

In 2012, the unemployment rate increased to a record high of 23.9%. According to the April Labour Force Survey, the employment rate reached an eleven‑year low, while the activity rate edged slightly up but was still very low at 47.9%. Only about one person in three above the age of 15 was employed. Employment in the unreformed public sector remained largely intact. Long-term and youth unemployment have been persistently high and unemployment is very high almost everywhere throughout the country. There are a number of restrictions related to severance payments, duration of fixed-term employment, industry-wide collective agreements, termination of employment, payroll calculation and compensations which are obstacles to job creation and reduce labour flexibility. The first signs of economic recovery in 2013 did not spill over to the labour market. The number of registered employed continued to fall and registered unemployment crept up. Since September last year, gross and net wages have been declining in real terms. In the first seven months of 2013, real wages fell by 4.3% on average. Departing from regular indexation rules, due to the difficult economic situation, the government increased wages in the public sector by 2% in October and April although, at 11% of GDP in 2012, total government spending on wages and salaries remains relatively high. Overall, unemployment is very high and sustainable employment creation represents a major challenge. Labour market rigidities are significant.

The monetary policy framework remained unchanged and the National Bank of Serbia reconfirmed its commitment to inflation targeting. In November, parliament passed amendments to the Law on the National Bank, which aimed at correcting some of the amendments of August 2012, which had undermined the independence of the central bank. Until April, annual inflation remained at double-digit levels, spurred by a legacy from 2012 of depreciating currency, hikes in indirect taxes and high food prices, and the inflation target (4% ±1.5 percentage points) was missed by a wide margin. However, since November monthly inflation rates have come down, averaging 0.2% in the period until August, due to weak domestic demand, mostly stable exchange rate and delayed adjustments in administered prices. These factors, along with base effects and food price moderation because of better agricultural season, supported rapid disinflation over the summer and inflation fell to 7.3% in August.

The central bank responded to the elevated inflation by tightening its stance, raising the key interest rate in every month from September (10.5%) to February (11.75%). As inflationary pressures started dissipating, in May the bank lowered its key rate by half a percentage point, to 11.25%, followed by another cut to 11.00% in June. Reduced political risks, improving external accounts and tighter monetary policy have broadly stabilised the exchange rate. From September to April, the dinar appreciated vis-à-vis the euro by around 4% and, although this trend was reversed in early June, by early September 2013 the dinar was still stronger than a year ago. The central bank continued interventions to smoothen excessive daily volatility on the foreign exchange market. In view of the high degree of euroisation of the economy and significant pass‑through effects on inflation, the relatively stable exchange rate played a significant role in stabilising inflation. Overall, inflationary pressures have receded, helped by a stronger dinar, subdued domestic demand and a better agricultural season. However, inflation remains inherently volatile, heavily dependent on unstable food prices and exchange rate fluctuations.

In 2012, an election year, budget expenditures went off-track across almost all major categories, reaching their highest level in years. Most importantly, previous small gains in expenditure consolidation, in particular in compensation of employees, subsidies and pensions, have been wiped out. In a revised budget, adopted in September 2012, the new government took a number of consolidation measures, mostly on the revenue side. Nevertheless, the deficit overshot by far the initial target of 4.25% and reached 6.4% of GDP and was even higher if expenditure on bank recapitalisations and called guarantees are taken into account.

Building on the measures adopted in the autumn, the 2013 budget envisaged a sharp deficit reduction to 3.6% of GDP. However, tax revenue underperformed from the beginning of the year, putting this target beyond reach. By the end of April, the general government deficit stood at 46% of the planned for the year. The higher than expected deficit prompted another round of measures in May and led to a full budget revision, adopted by the parliament in July. The May measures were mainly on the revenue side and included a reduction of the wage tax and increases of employees’ social security contribution and of the property tax base. The July revision raised the annual deficit target from 3.6% to an estimated 5.3% of GDP. It envisaged cuts in ministries’ expenditure allocations, fixed indexation of wages and salaries by 0.5% in October 2013 and increases in some outlays. The government also adopted a public sector reform programme, including an action plan to finalise enterprise restructuring by mid-2014. By the end of August, total revenue declined by 4.1%, while public expenditure have been kept largely in check and declined by 5.8% in real terms. However, quasi-fiscal expenditure, related to bank recapitalisations and payments on called guarantees, have been significant, undermining budget transparency and weighing heavily on public finances. Overall, a series of measures, mostly on the revenue side, failed to deliver the expected reduction of the deficit. Expenditure inefficiencies and the high level of spending on wages and pensions still need to be addressed in a systematic way.

Fiscal rules were breached and government debt significantly exceeded the 45% of GDP limit, reaching close to 60% in 2012. In line with legislative requirements, the government presented a programme of reducing government debt, according to which, and in a rather optimistic scenario, it will take until 2020 until the debt falls again below the 45% threshold. In 2013, the high budget deficit and new government borrowing continued to push the debt up. Since the beginning of the year, government-guaranteed debt and called guarantees have also increased, reflecting continued government support of loss-making public enterprises. Taking advantage of the favourable international environment and declining interest rates on the domestic government bonds market, in April the government prepaid some €330 million of its obligations towards the London Club. Interest payments to service the debt went up by 55% to 2.0% of GDP in 2012 and increased further in 2013. Overall, the adoption and implementation of a credible medium-term fiscal adjustment programme, backed by systemic reforms of the public sector to restore fiscal sustainability and stem further rise in the government debt, is urgently needed.

Recent fiscal consolidation efforts have been mainly on the revenue side where the space for further measures has been largely exhausted, with the exception of decreasing costly tax expenditures and improving collection. Some small steps have been taken to reduce and restructure current expenditure and to tackle spending inefficiencies but the big and unreformed public sector remains a significant drain on the budget. High export growth has softened the effects of depressed domestic demand and reduced external imbalances, relieving some of the depreciating pressures on the dinar. Inflation decelerated but monetary policy continues to be restricted by unstable food prices, irregular administered price adjustments and the high degree of euroisation of the economy. Overall, achieving a proper policy mix is still a challenge. Revenue‑based fiscal adjustment has largely reached its limits and monetary policy efficiency remains constrained.

Interplay of market forces

Due to changes in consumer prices’ basket, the proportion of administered prices fell by 2 percentage points to 20%. Since the beginning of the year, gas prices were adjusted twice, while a planned electricity price increase was postponed several times until August, when the price was raised on average by 11.3% (10.9% for households). As of 2013, the electricity and gas markets have been liberalised for big consumers connected to the transmission network which need to buy energy at strictly market prices. The government continued to control prices of some public utilities indirectly by setting a limit on increases in the prices of communal and public city transport services which are under the control of the local authorities. In November, the government adopted new criteria for wholesale and retail price formation for medicines for human consumption issued on prescription. The government decree which capped retail margins at 10% for basic foodstuffs expired at the end of 2012. Overall, price liberalisation has advanced but state control over prices remains significant.

The state holds predominant stakes in major sectors such as energy, transport and telecommunications. Some legislative efforts were made to improve the operation of public companies, which continued to be poorly managed, largely overstaffed and loss making. A law on public companies was adopted, setting criteria and delineating a procedure for the appointment of companies’ management. The government continued to provide state guarantees for liquidity loans to major companies and ‘ad hoc’ subsidies to selected manufacturing state-owned enterprises to cover capital investment in modernising their equipment. Some of the large state-owned companies have been tendered (unsuccessfully) for privatisation or are in the process of setting up strategic partnerships with foreign investors. In April, with significant support from the state, the government partially re-started production in the loss-making steel mill in Smederevo.

In order to revive the privatisation of socially owned enterprises, the Law on Privatisation was amended in December 2012, enabling creditors’ forced collection of their claims against entities subject to privatisation after 30 June 2014. An action plan to restructure 179 of these companies was adopted in June, with a view to privatising the viable ones (fully or partially) and selling off assets and initiating bankruptcy procedures for those enterprises that have no market prospects. In line with the plan, a bankruptcy procedure for 26 enterprises has already been initiated. Overall, some steps have been taken to revive the privatisation process, especially regarding enterprises undergoing restructuring. The state presence in the economy remains significant and state-owned companies continued to accumulate losses.

Market entry and exit

The introduction of the ‘one-stop shop’ business registration system in 2009 has significantly improved the efficiency and speed of the registration procedure. As of October 2012, the fee for obtaining a company registration code, assigned by the Statistical Office, was abolished. However, market entry is still hampered by lengthy and costly procedures for granting various permits, notably construction permits. With amendments to the Law on Planning and Construction, adopted in late December, the requirement for converting use rights into ownership rights in order to receive a construction permit, for land obtained through privatisation, was abolished for one year. In May, the Constitutional Court suspended the execution of this provision until determining its constitutionality. In the first half of 2013, the number of companies with blocked accounts reached 44.7 thousand, marking a drop of around 25% since September. Overall, red tape and difficulties in obtaining construction permits continue to be important obstacles for business expansion.

Legal system

While the legal basis has developed further, the implementation of laws needs to be seriously strengthened. The uneven and slow enforcement of laws has an impact on the cost of doing business. The backlog in the courts is still substantial and companies — aware of the limitations of the system — often avoid using the courts as a legal solution to their problems. Enforcement of restitution legislation, which is expected to improve legal clarity over real estate ownership, is ongoing. By August 2013, about 25% of all submitted claims were resolved. A new Law on Public Procurement, increasing transparency and including measures to prevent corruption and conflicts of interest, was adopted in December. The informal economy remains strong and is a major hindrance to fair competition and business development. Corruption harms the business environment, although the fight against it has intensified. Overall, legal predictability and enforcement of court decisions remain weak. Some progress has been made in improving property rights. Further concrete steps should be taken swiftly to improve the business environment.

Financial sector development

Part of the banking system has been under stress, which has prompted state intervention, costly recapitalisations and consolidation of state-owned banks. In October, parliament passed a law allowing assets and liabilities from problematic state-owned banks to be transferred to viable banks. On this basis, the cases of two troubled banks (Agrobanka and Development Bank of Vojvodina) have been resolved with unlimited coverage of deposits. Further steps in bank consolidation were made when Telenor Serbia, a major telecom operator in the country, took over the local KBC Banka, while Société Générale Bank assumed KBC’s clients and portfolio. A total of 31 banks were operating in mid-2013 — two less than a year earlier. The banking sector continued to dominate the financial system, accounting for 93% of total assets in 2012. Within the banking sector, foreign-owned banks are preponderant. As of June, there were 21 foreign banks, accounting for three quarters of the assets, almost 80% of lending and 70% of all bank deposits. There were also seven banks controlled by the state and only three small private banks. Financial intermediation remained broadly unchanged and banking sector assets amounted to 91.8% of GDP by the end of 2012.

Capital adequacy indicators improved and the regulatory capital to risk-weighted assets of the system stood at 20.2% in June, well above the required minimum of 12%. The level of Euroisation remained high, with about 81% of deposits and 72% of households and enterprises loans denominated in or linked to foreign currency. Lending activity decelerated significantly and, excluding the exchange rate effect, domestic lending growth fell to 1% in June. Corporate loans declined the most, especially after subsidised lending was suspended due to exhaustion of funds, while household lending increased only marginally. Commercial banks opted for low-risk investments, increasing their holdings at the central bank and reducing external liabilities. A weak labour market and falling incomes have undermined the growth of non-monetary sector deposits, which has steadily decelerated. The quality of the loan portfolio worsened, mainly in its corporate sector segment, and the gross non-performing loans ratio reached 19.9% in June. In December, the central bank amended its Decisions on Risk Management and on the Classification of Bank Balance Sheet Assets and Off-balance Sheet Items with the aim of facilitating the resolution of accumulated non-performing loans. Following the closure of Agrobanka, which had made significant losses, bank profitability improved. Still, a number of small banks, holding a combined market share of around 15%, continued to run losses. Overall, banking sector capitalisation and liquidity indicators remained strong. However, credit growth stagnated, non-performing loans are high and vulnerabilities need to be addressed.

The main index of the Belgrade Stock Exchange BelexLine has increased by 28% (from September) by early April, before losing more than half of this gain during the summer. The insurance sector remains underdeveloped, with a ratio of total premiums to GDP at 1.8% and per capita premiums of about €75. The sector is dominated by non-life insurance, which accounted for 80.7% of total premiums. The number of insurance companies remained unchanged at 28, of which 24 were engaged exclusively in insurance business and 4 in reinsurance. Most of the companies (21) were under majority foreign ownership and they dominated the market with a share of 90.8% in life premiums, 57.6% in non-life premiums, 68.8% in total assets and 65.5% in employment. The insurance sector’s share of total financial sector assets increased slightly, to 4.5% in 2012. The assets controlled by voluntary pension funds have increased but are still marginal at 0.5% of GDP, while the importance and operations of leasing companies continued to decline. Overall, the non-banking financial sector remains underdeveloped.

3.2. The capacity to cope with competitive pressure and market forces within the Union

Existence of a functioning market economy

State presence in the economy remains significant, while the private sector is weak and unprotected as the rule of law is not systematically observed. Economic reforms have progressed slowly. Domestic and external deficits remain high and there are significant structural rigidities and obstacles to growth. Overall, the functioning of market mechanisms remains hampered by distortions and legal uncertainty.

Human and physical capital

The gap between supply and demand of skilled workforce remains and the education system continues to educate a workforce that does not necessarily correspond to the needs of the economy. As a consequence, the main features of the labour market are high unemployment of people with lower and intermediate education, and high long-term and youth unemployment. In October 2012, the government adopted an education strategy, which envisages a number of measures to improve the quality of education at all levels by 2020. However, action plans for implementing the strategy have so far not been drafted and funding is constrained by the need to pursue expenditure-based fiscal consolidation. Active labour market programmes remain underfunded and do not seriously address youth and long-term unemployment. Overall, the education strategy is ambitious but its implementation is a challenge.

Serbia continues to need significant investment to improve and upgrade its physical infrastructure, which has been neglected for many years. Government investment increased to 3.7% of GDP in 2012 but remains low and declined by 37% in real terms in the first eight months of 2013. Works on major transport corridors are progressing slowly, delayed in part by land expropriation issues, overlapping competencies of different institutions and lack of project documentation. Energy efficiency continues to be low and energy infrastructure, in particular electricity generation and distribution, needs further investment. Steps have been taken to secure foreign financing for big infrastructure projects in the transport and energy sectors, which may help to speed up work on strategically important projects. Greenfield foreign direct investment (FDI) has been marginal, despite continued provision of costly government subsidies. Overall, the physical infrastructure needs substantial investment. Government investment is constrained by the tight financial conditions and the urgent need of further fiscal consolidation. Securing financing for large transport and energy projects need to be in line with public debt sustainability.

Sectoral and enterprise structure

Following particularly bad weather in the winter and a drought in the summer, in 2012 the value added in agriculture declined by 17% and its share of gross value added dropped to 10.4% from 10.8% a year earlier. Industry’s share also fell, from 29.3% to 28.7%, while services increased their share to 61% of GDP. Employment remained roughly unchanged across the sectors. The informal sector, driven by labour law rigidities and taking advantage of weaknesses in tax and expenditure policies and in law enforcement, remained significant. Overall, the economy is dominated by services, although agriculture’s share remains high. The informal sector is a significant challenge.

State influence on competitiveness

State aid reported in 2012 was 7% higher than in 2011, representing 2.6% of GDP. Of the total state aid granted in 2012, 35.8% was regional aid, 13.6% was in the form of other horizontal aid, 22% was sectoral aid, and 28.6% went to agriculture. There was very little aid given to training and to research and development. Most of the aid was given in subsidies (close to 60%) or as tax incentives (32.6% of total). State-controlled, monopolistic structures remain in a large number of sectors and the state continued to subsidise heavily the transport sector, which received almost a fifth of all aid. State aid control needs to be enforced consistently and the exemption from state aid rules given to enterprises that are being privatised still needs to be abolished. New state aid measures need to be systematically notified before being put into force. The Commission for State Aid Control still has to demonstrate its independence through ex post controls and use of the provision on recovery of unlawful state aid. Overall, the state continues to substantially influence competitiveness by providing significant and wide-ranging forms of state aid.

Economic integration with the EU

The EU remains Serbia’s main trading partner, accounting for 58.1% of its total exports and 58.2% of its imports in 2012. Shares of both Serbia’s exports to the EU and imports from the EU have increased slightly in comparison to 2011. Serbia’s exports to the EU have grown faster than its imports, resulting in an increase in the export to import ratio vis-à-vis the EU from 48% in 2009 to 60% in 2012. The CEFTA countries accounted for 32.4% of total exports and 10.4% of total imports in 2012. The share of net FDI inflows from the EU in total net FDI inflows stood at 64% in 2012. The average real gross wage growth was 1% in 2012, while average labour productivity growth was negative, translating into an increase in real unit labour costs. In real effective terms (deflated by inflation), the dinar depreciated on average by 7.7% in 2012. However, the depreciating trend was turned around in August 2012 and by August 2013 the dinar strengthened by 10.4%. Overall, trade integration with the EU remained high.

4. Ability to take on the obligations of membership

This section examines Serbia’s ability to take on the obligations of membership — that is, the acquis as expressed in the Treaties, the secondary legislation and the policies of the Union. It also analyses Serbia’s administrative capacity to implement the acquis. The analysis is structured in accordance with the list of 33 acquis chapters. In each sector, the Commission’s assessment covers progress achieved during the reporting period and summarises the country’s overall level of preparations.

4.1. Chapter 1: Free movement of goods

There were no developments regarding the general principles.

As regards horizontal measures, Serbia has further aligned legislation with the EU acquis by adopting the remaining implementing legislation on metrology in January. Staffing levels in the ministry in charge of horizontal coordination remain to be strengthened.

In the area of standardisation, the Institute for Standardisation of Serbia (ISS) has adopted almost 94% of the European standards (ENs) required for membership of the European Committee for Standardisation (CEN) and the European Committee for Electrotechnical Standardisation (CENELEC). Serbia has not yet applied for membership of CEN and CENELEC. The total number of EU standards and other deliverables applied nationally stood at 21 191, including 14 912 CEN standards, 5 963 CENELEC standards and 316 European Telecommunications Standards Institute (ETSI) standards. The number of conflicting Serbian standards and related documents withdrawn was 10 779. The ISS currently has 215 active technical committees. The Institute has 66 full-time employees, making its overall administrative capacity adequate.

In the area of conformity assessment, a number of conformity assessment bodies have been designated in accordance with the relevant EU Directives: 7 for the Machinery Directive, 4 for the Low Voltage Directive, 4 for the Electromagnetic Compatibility Directive, 7 for the Lift Directive, 8 for the Pressure Equipment Directive, and one for the Radio and Telecommunications Terminal Equipment Directive.

In the field of accreditation, the Accreditation Body of Serbia (ABS) signed the International Laboratory Accreditation Co-operation (ILAC) Mutual Recognition Agreement for the field of calibration, testing, and inspection, and the International Accreditation Forum (IAF) Multilateral Agreement for product certification fields. New fields of accreditation were established for several New Approach Directives. For the first time a national certification body was recognised by the European Commission (EC), a body performing certification of organic products in line with the acquis, allowing Serbia to freely export and place its organic products on the EU market. By June, the ABS had granted accreditation to 535 bodies, including 313 testing, 53 calibration, and 9 medical laboratories, and 125 inspection bodies, plus 21 certification bodies for products, 9 for management systems and 2 for persons. Staffing levels of the ABS remain insufficient to handle these new tasks.

In the area of metrology, the Directorate for Measurements and Precious Metals became a contact member of EURACHEM and Serbia was included in EURAMET’s Metrology Programme for Innovation and Research (EMPIR) for the first time. 23 rulebooks for the implementation of the framework law have been adopted. Overall, the administrative capacity of the Directorate is sufficient.

In the area of market surveillance, after a period of low activity, the Product Safety Council restarted its regular operations in January, to include representatives of relevant groups. Inter-institutional co-operation and co-operation with the civil society sector, businesses and academia has improved. The administrative capacity of the joint body for surveillance of chemicals and biocidal products needs to be reinforced.

In the field of ‘Old Approach’ product legislation, Serbia has aligned its legislation with the acquis on pre-packaging and units for measurements. It has yet to align its legislation with the acquis in a number of areas, including emissions of pollutants from non-road engines, crystal glass, textiles and footwear.

As regards ‘New and Global Approach’ product legislation, Serbia has adopted legislation and aligned its legislation to the relevant directives in the field of personal protective equipment, equipment in the potential explosive atmosphere (ATEX Directive), noise emissions from outdoor equipment, and non-automatic weighing instruments (NAWI Directive). It has updated the list of standards in the field of electromagnetic compatibility, machinery safety, low voltage electrical equipment and general product safety, non-automatic weighing instruments, and radio and telecommunications terminal equipment. However, further alignment is needed inter alia in the areas of construction products, cableway installations, recreational craft, cosmetics, and toy safety.

As regards procedural measures, the law on dual use of goods remains to be adopted. Serbian law has yet to be aligned with the acquis on civil firearms as well as the return of cultural objects unlawfully removed from the territory of an EU Member State.

Conclusion

Progress was made in the area of free movement of goods. Serbia continued with the alignment of horizontal legislation. 94% of EU standards have been adopted. The Serbian accreditation body signed additional Multilateral Agreements and Mutual Recognition Agreements, while the Directorate for Measures and Precious Metals was admitted to EURACHEM. Stronger emphasis needs to be put on administrative capacity and coordination between institutions. Overall, preparations in the area of free movement of goods are moderately advanced.

4.2. Chapter 2: Freedom of movement for workers

In the area of access to the labour market, the Law on Employment of Foreigners has yet to be adopted by the parliament.

Objectives were defined by the National Employment Service in preparation for Serbia’s participation in the EURES (European Employment Services) network. The National Employment Service’s vacancy database is incomplete, as there is no obligation on employers to register all vacancies centrally.

As regards coordination of social security systems, bilateral agreements with Austria, Bulgaria and Slovakia entered into force. The electronic system of exchange of information among former Yugoslav republics remains limited, operating only with Slovenia. Due to limited public administration resources, the capacity of the social security institutions still needs strengthening.

Preparations as regards the European Health Insurance Card have not started yet.

Conclusion

Little progress was made in the area of freedom of movement of workers, apart from preparations for participation in EURES. Overall, preparations in this area are moderately advanced.

4.3. Chapter 3: Right of establishment and freedom to provide services

There were no developments in the area of the right of establishment.

As regards the freedom to provide cross-border services, a general law aligning Serbian legislation with the Services Directive needs to be adopted. The capacity of departments dealing with the service sector needs strengthening.

In the field of postal services, the postal strategy for 2013-2016 was adopted in April. The administrative capacity of the postal regulator (RAPUS) is now sufficient. The administrative capacity of the line ministry’s inspectorate is weak, so quality monitoring is inadequate. The public postal operator has modernised its operational processes but the sector has not yet been corporatized.

Legislation on mutual recognition of professional qualifications has yet to be adopted.

Conclusion

Little progress was made in the area of the right of establishment and freedom to provide services. Efforts to further align the legislation with the acquis and to improve administrative capacity in this field are needed. Overall, in the area of the right of establishment and freedom to provide services, preparations are moderately advanced.

4.4. Chapter 4: Free movement of capital

In the area of capital movements and payments, amendments to the Law on Foreign Exchange Operations were adopted in December. The amendments further liberalise capital transactions, for both natural and legal persons. Limitations still exist regarding short-term capital transactions, while deposits by residents continue to be partially liberalised. Long-term capital transactions are fully liberalised. Restrictions on the acquisition of real estate, especially agricultural land, remain.

Serbian legislation on payment systems still needs to be aligned with the acquis.

As regards the fight against money laundering, Serbia initiated the National Risk Assessment process. The Agency for Prevention of Money Laundering (APML) signed memoranda of understanding (MoU) with Argentina, Andorra, Panama, Denmark and Portugal, bringing the total number of signed MoUs to 42. The APML does not have adequate business premises, which complicates the recruitment of additional staff and the establishment of a training centre.

Conclusion

There was limited progress in the area of capital movements. Serbia needs to make further efforts to align its legislation with the acquis for short-term capital movements, real estate and payment systems. Overall, alignment in the area of the free movement of capital is moderately advanced.

4.5. Chapter 5: Public procurement

In the field of general principles, a new Law on Public Procurement was adopted in December and entered into force in April. It provides for further alignment with the acquis. It introduces provisions for the prevention of corruption and conflicts of interest and aims to improve the transparency and integrity of the public procurement system. It strengthens the powers of Public Procurement Office (PPO) and the Republic Commission for the Protection of Rights in Public Procurement Procedures (‘Republic Commission’). The PPO adopted five rulebooks for the implementation of the new law in March. It also published nine standard model documents and one set of guidelines in July to facilitate the new procurement practice. The public procurement portal was upgraded and the Common Procurement Vocabulary was adopted. The national strategy and action plan for upgrading the public procurement system need to be aligned with the new law. Two implementing decrees for the Law on Public Private Partnerships (PPPs) and Concessions were adopted.

As regards the award of public contracts, the PPO notes a decreasing trend in irregularities in the use of the negotiated procedure for the first quarter of 2013. The PPO is recruiting eight new employees, but further reinforcement of its administrative capacity is needed. The Budgetary Inspectorate of the Ministry of Economy and Finance took action against irregularities in public procurement procedures worth €17 million. Its administrative capacity needs to be strengthened. In the area of PPPs and concessions, three projects of a mainly concessionary nature and two PPP projects were approved by the PPP Commission (CPPP). The administrative capacity of the CPPP remains limited. Institutional co-operation on public procurement, including audit and judicial institutions, is improving, notably between the PPO, the Republic Commission and the State Audit Institution, but still needs to be strengthened. In general, tendering authorities do not take appropriate action often enough in cases of established misuse of public money.

In the field of remedies, new members of the Republic Commission were appointed by the parliament in March in line with the new Law on Public Procurement. A new organisational structure and rules of procedure were adopted in July. The number of cases received by the Republic Commission increased by 23% in 2012, and the number of cases solved increased by 31%. It has continued to actively monitor the implementation of its decisions. It has continued to build up its administrative and enforcement capacity to a total of 40 employees. The Republic Commission still needs to build its credibility and a solid enforcement record, by further ensuring that its decisions are implemented.

Conclusion

There has been good progress in the field of public procurement. The new Law on Public Procurement further aligns the legislation with the acquis and improves public procurement procedures. The capacities in this area and in particular of the PPO remain insufficient. Effective coordination between the main stakeholders needs to be ensured. Overall, alignment in the area of public procurement is moderately advanced.

4.6. Chapter 6: Company law

In the area of company law, the Business Registers Agency published founding acts and statutes as required in the Law on Economic Entities. The Agency started running the register of chambers of commerce in January. The electronic registration process is still not operational.

In the areas of corporate accounting and auditing, the Law on Accounting adopted in July aims to ensure further implementation of the Fourth and the Seventh Company Law Directives. The Law on Auditing adopted in July further harmonises national legislation with the Eight Company Law Directive.

Conclusion

Progress was made in the area of company law. In the field of corporate accounting and auditing, two new laws were adopted, in order to achieve further alignment with the acquis in this area. Overall, alignment in the area of corporate law is well advanced.

4.7. Chapter 7: Intellectual property law

In the area of copyright and neighbouring rights, certain amendments to the law on intellectual property rights, adopted in December, are not in line with the acquis. These provisions need to be harmonised no later than five years after entry into force of the Interim Agreement. A new Law on the Protection of Topographies of Semiconductor Products was adopted in June and further aligns the Serbian legislation with the acquis. The Commission for Copyright and Related Rights was abolished and its responsibilities were transferred to the Intellectual Property Office (IPO). The IPO needs additional capacity to cover these new responsibilities.

In the field of industrial property rights, in January, the Law on Trademarks was amended to further align with the acquis and Serbia became a member of the International Union for the Protection of New Varieties of Plants (UPOV).

In the field of enforcement, the IPO conducted a large number of training events for government enforcement agencies and SMEs. The customs administration introduced a web application for electronic exchange of information with right holders. Seizures of counterfeit goods decreased over the reporting period. The Tax Administration increased the number of checks by 74% in 2012. They showed that the use of illegal software has decreased in Serbia. The Market Inspectorate of the Ministry of Trade and Telecommunications received an increased number of requests and confiscated more goods for the whole year 2012.

Full alignment with the enforcement directive needs to be ensured. There is still no formal coordination mechanism between the institutions in charge of IPR protection. Implementation of the national IPR strategy and action plan 2011-2015 has been delayed. No solution has yet been found to the issue of the IPO’s long-term financial sustainability. The participation of economic operators and consumers in the prevention of counterfeiting and piracy remains limited. Specialisation of prosecutors, judges and court panels to handle IPR cases remains to be ensured.

Conclusion

Limited progress was made in the area of intellectual property law. Enforcement was improved, although formal coordination between stakeholders and effective implementation of the national IPR strategy remain to be ensured. The changes to the law on copyright regarding fee collection and exemptions constitute a step backwards in alignment to the EU acquis. Overall, alignment in the area of intellectual property law is advanced.

4.8. Chapter 8: Competition policy

In the field of anti-trust and mergers, the CPC adopted four decisions on restrictive agreements, one decision on abuse of dominance, and 62 decisions on mergers in summary procedure, and it carried out three investigation procedures on mergers that were conditionally approved. Six CPC decisions were partially or fully confirmed by the courts while two were overturned. The CPC resumed its sector analysis of the oil market in 2012 and continued its analysis of the milk sector. The CPC signed a memorandum of understanding with its Russian counterpart.

Conflicting legislation, limiting the scope and effectiveness of competition law, notably on price regulation, has been adopted without prior consultation of the CPC. The CPC’s financial plan for 2013 is still awaiting government approval. With 30 employees, the CPC’s capacity remains insufficient. The capacity of the judiciary to assess complex competition cases needs to be strengthened. Competition advocacy needs to be stepped up.

In the area of state aid, the Commission for State Aid Control (CSAC) adopted 111 decisions, including 41 conclusions initiating ex-post control, compared to 148 decisions over the previous period. The majority of the existing state aid schemes, including the fiscal aid schemes, still need to be aligned with the acquis. The rules on aid to the provision of services of general economic interest need to be aligned with the acquis. An effective mechanism must be implemented to ensure the respect of the de minimis aid threshold and of cumulation rules. The exemption from state aid rules for companies in the process of being privatised needs to be repealed. The CSAS needs to demonstrate its operational independence, particularly from state aid granting bodies. Further efforts are needed to ensure that aid measures are notified to the CSAC and approved before being granted. A decree subsidising the sale of cars produced in Serbia was adopted in March without the CSAS being notified or approving it. It was incompatible with the Interim Agreement and with the acquis and was subsequently repealed.

Concerning liberalisation of specific sectors, a number of Serbian undertakings continue to enjoy special or exclusive rights, de facto or de jure, e.g. in the fields of transport, infrastructure, postal services, telecommunication services, broadcasting, agriculture, the environment and, to some extent, energy. Additional efforts need to be made to move towards market liberalisation in line with the acquis.

Conclusion

No progress was made in the area of competition. Serbia’s record on ex ante notifications of state aid measures needs to be improved. The legislation on state aid control must be aligned with the acquis and applied to all undertakings, including those in the process of being privatised. In both anti-trust and state aid fields, additional advocacy measures are needed. Overall, alignment in the area of competition policy is moderately advanced.

4.9. Chapter 9: Financial services

In the area of banks and financial conglomerates, some measures were adopted to address the issues of non-performing loans and bank restructuring. In October, the Law on Takeover of Assets and Liabilities of Certain Banks, aimed at maintaining the stability of the financial system, was adopted. The National Bank of Serbia (NBS) adopted decisions on risk management by banks, on bank capital adequacy and on classification of assets. The capacity of the NBS’ newly created Administration for Supervision of Financial Institutions was increased. Full implementation of the Basel II standards has yet to be achieved. The NBS has postponed the adoption of its own strategy for the full implementation of Basel III standards; however, some elements of these standards have already been introduced. Alignment with the latest acquis on deposit guarantees remains to be achieved.

In the area of insurance and occupational pensions, the NBS has continued to supervise insurance companies and has increased the number of on-site controls. Alignment with the Solvency II directive has yet to be achieved. There have been no changes in legislation relating to occupational pension funds.

There were no developments in the area of financial market infrastructure.

In the area of the securities market and investment services, the by-laws adopted by the Securities Commission in 2012 have been implemented. There has been no further alignment with the acquis on rating agencies or on undertakings for collective investment in transferable securities (UCITS).

Conclusion

Some progress was made in the area of financial services. Steps were taken to address the issue of non-performing loans and bank restructuring. Additional efforts are needed, e.g. to align Serbia’s rules with the requirements of Basel III and the Solvency II and UCITS directives. Overall, alignment in the area of financial services is moderately advanced.

4.10. Chapter 10: Information society and media

As regards electronic communications and information and communications technology (ICT), an annual action plan (2013-2014) to implement the 2010-2020 e-communications strategy was adopted in March. In October a frequency allocation plan was adopted, allowing the use of the 900 and 1 800 MHz bands for e-communications on a technology neutral basis that enables deployment of new wireless broadband services. The fixed broadband penetration rate increased to 13.5% of the population according to the latest available data, which is low compared to the EU average of 28.2%. The penetration rate of mobile services, including 3G, exceeds the EU average, while mobile broadband is still low at 3.5%, below the EU average of 8.8%. Serbia still needs to fully align with the 2009 EU regulatory framework. The amendments made to the budget law and the law on public sector salaries in September 2012 have had an impact on the National Regulatory Agency’s (RATEL) operational independence and its ability to recruit and retain competent staff. Competitive safeguards need to be fully implemented, notably in the fixed telephony market. Implementation of fixed number portability has been postponed. The emergency number 112 has yet to be introduced.

In September, Serbia and Kosovo reached an agreement on telecommunications under the EU-facilitated Dialogue. The agreement provides for Telekom Srbija to operate legally in Kosovo until 2015. It also provides for Kosovo being allocated a 3-digit Dial Code from the International Telecommunications Union as of 2015.

In the field of information society services, an action plan for 2013-2014 for the information society strategy 2010-2020 was adopted in August and a working group was set up in March to develop a national broadband network. Further alignment with conditional access and EU legislation on e-commerce is needed. The administrative and inspectorate capacity of the line ministry and its units responsible for ICT and digital administration remains insufficient. Overall IT capacity needs to be strengthened, especially at local level.

As regards audiovisual policy, the implementation of the Media Strategy, aimed at alignment with the EU acquis in this area, has not progressed. The digital switchover needs to be handled efficiently to meet the June 2015 deadline. Provisions allowing media financing from the state budget need to be brought into line with the EU acquis on state aid.

Conclusion

Some progress was made in the area of information society and media with the adoption of several action plans implementing the information society and respectively e-communications strategies. The legislative framework needs to be further aligned with the acquis and competitive safeguards in electronic communications need to be fully implemented. The issue of the telecom regulator’s budgetary and operational independence raises concerns. Media strategy implementation needs to step up. Serbia needs to implement its commitments made in the agreement on telecommunications reached with Kosovo. Overall, alignment with the acquis in the area of information society and media remains moderately advanced.

4.11. Chapter 11: Agriculture and rural development

As regards horizontal issues, the law on agricultural and rural development subsidies was adopted in January providing for production-linked payments, quality premiums and rural development measures. The law introduced an acquis-like instrument of cross compliance but support measures coupled to production are not in line with the acquis. The agricultural census — the first in 50 years — was completed and preliminary results were published in January. Administrative capacity for the Farm Accountancy Data Network continues to be developed. The number of participating holdings increased from 42 to 173. A strategy for Agricultural and Rural Development has yet to be adopted. Administrative capacity needs to be strengthened, particularly vacant senior level positions in the agricultural administration affecting the quality and pace of decision-making. An Integrated Administration and Control System (IACS) has yet to be established.

As regards alignment with the acquis in the area of common market organisation, the legal basis for the system of geographical indications has been established in the wine sector. Over 1 600 vineyard parcels with a surface of some 1.400 ha have been entered in the vineyard register. The capacity of the administration in charge of the wine market organisation requires further strengthening. A draft law on spirit drinks needs to be further aligned with the acquis before adoption.

In the area of rural development, the operating structures for the IPA rural development programme are being developed. However, capacity must be strengthened at the Managing Authority, the future Paying Agency, and the Audit Authority in order to continue the development of the management and control system. Strong links with stakeholders through the extension service and rural finance institutions have yet to be put in place.

As regards quality policy, a system of labelling and control of agricultural farm products and foodstuffs with Protected Designation of Origin and Protected Geographical Indication is being established. In the area of organic farming, the national action plan for the development of the organic sector in Serbia has yet to be adopted.

Conclusion

Some progress has been made in the area of agriculture and rural development. The law on agricultural and rural development subsidies provides for a clearer and more predictable plannin