[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 6.11.2007

COM(2007) 663 final

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

Enlargement Strategy and Main Challenges 2007-2008

{SEC(2007) 1429}{SEC(2007) 1430}{SEC(2007) 1431}{SEC(2007) 1432}{SEC(2007) 1433}{SEC(2007) 1434}{SEC(2007) 1435}{SEC(2007) 1436}

CO MMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL

Enlargement Strategy and Main Challenges 2007-2008

1. INTRODUCTION

Enlargement is one of the EU's most powerful policy tools. It serves the EU's strategic interests in stability, security, and conflict prevention. It has helped to increase prosperity and growth opportunities and to secure vital transport and energy routes. The present enlargement agenda covers the Western Balkans and Turkey, which have been given the perspective of becoming EU members once they fulfil the necessary conditions.

The year ahead will be a crucial one in consolidating the transition process in the Western Balkans. The countries themselves will take over responsibility from the Stability Pact for promoting regional cooperation, which plays a key role in reconciliation and the establishment of good neighbourly relations. Accession negotiations with Croatia are advancing well and are entering a decisive phase. This demonstrates to the region as a whole that the perspective of EU membership is a reality. In the year ahead the Stabilisation and Association Agreements, linking partners in the region more closely to the EU, with a view to accession, are expected to near completion.

At the same time, the region itself faces major problems, beginning with the need to reach a status settlement for Kosovo. Serbia's European course, state-building in Bosnia and Herzegovina with local ownership, and better governance in the former Yugoslav Republic of Macedonia, Albania and Montenegro will be high on the agenda. A number of these countries face important challenges with regard to governance and the fulfilment of well-established conditions linked to the Stabilisation and Association Process. The EU will need to be ready to provide its support during the year ahead, and to respond to developments by making full use of its policy instruments.

Following Parliamentary and Presidential elections, it is important for Turkey to press ahead with key reforms which are needed to consolidate fundamental rights and freedoms. Accession negotiations with Turkey need to continue, at a pace that reflects the pace of reforms in the country itself as well as Turkey's fulfilment of the relevant conditions.

Against this background, the consistent implementation of the renewed consensus defined by the December 2006 European Council is more important than ever. This consensus is based on the principles of consolidation of commitments, fair and rigorous conditionality and better communication with the public, combined with the EU's capacity to integrate new members. The pace at which a candidate or potential candidate approaches the EU reflects the pace of its political and economic reforms as well as its capacity to fully assume the rights and obligations of membership. The Commission is improving the quality of the enlargement process by tackling public administration and judicial reform and the fight against corruption at an early stage, by making full use of benchmarks, and by bringing more transparency into the process. The Commission is preparing the first impact studies, analysing the effect of a candidate’s accession in specific policy areas.

The legal basis for enlargement is Article 49 of the Treaty on European Union[1], which reads: " any European State which respects the principles referred to in Article 6(1) may apply to become a member of the Union (…) "[2].

The December 2006 European Council concluded that "enlargement has been a success story for the European Union and Europe as a whole. It has helped to overcome the division of Europe and contributed to peace and stability throughout the continent. It has inspired reforms and has consolidated common principles of liberty, democracy, respect for human rights and fundamental freedoms and the rule of law as well as the market economy. The wider internal market and economic cooperation have increased prosperity and competitiveness, enabling the enlarged Union to respond better to the challenges of globalisation. Enlargement has also enhanced the EU's weight in the world and made it a stronger international partner."

The twelve Member States that joined in the fifth enlargement display a good level of compliance with EU law. This shows the value of rigorous reform efforts combined with EU peer pressure and disciplines. Thanks to sound preparations, the EU continues to operate smoothly after enlargement.

Member States in all parts of the EU have benefited from higher levels of economic growth. Slovenia adopted the euro in January 2007; Cyprus and Malta will do so in 2008. Careful preparations by the countries concerned and the Commission, combined with rising trade and investment flows have helped the new Member States to progressively converge with EU average living standards. Between 1998 and 2006, the GDP of the twelve Member States that joined in the fifth enlargement has grown by an annual average of 4.3% as compared to 2.2% in the 15 old Member States[3]. Trade between the old and the new members increased remarkably in the last decade. Exports and imports between the ten Member States that joined in 2004 and the 15 old Member States have quadrupled between 1995 and 2006, while overall trade between them doubled in that period. The inclusion in the internal market of twelve dynamic economies of more than 100 million consumers with rising purchasing power increases the Union's competitiveness and its weight in the world economy. Ten months after accession, Bulgaria and Romania are generating further economic growth and investments. 2007 growth forecasts for Romania and Bulgaria are much higher than the expected EU average growth rate. The Commission took safeguard measures at the end of 2006 to address certain shortcomings for both countries. In June, the Commission issued its first reports on the Cooperation and Verification Mechanism in the area of justice and home affairs as well as on the safeguards[4]. The Commission will review progress in this area and report in early 2008.

As regards the Cyprus issue, the leaders of the Greek Cypriot and Turkish Cypriot communities need to step up their efforts to relaunch negotiations on a comprehensive settlement under UN auspices. The Commission is implementing the instrument of financial support for encouraging the economic development of the Turkish Cypriot community, facilitating future re-unification of the island. Enhanced use of the Green Line Regulation, which allows for the movement of persons and goods throughout Cyprus, will serve the interests of both communities. The regulation on direct trade with the northern part of Cyprus, proposed by the Commission to further reduce the isolation of the Turkish Cypriot community, remains to be adopted by the Council.

In the countries engaged in the present enlargement agenda – the Western Balkans and Turkey, the pull of the EU is contributing to stability and encouraging important political and economic reforms. However, these still face a number of major challenges. It is crucial to maintain the visibility and credibility of their accession prospects, as well as rallying support for enlargement in the Member States.

The Commission will continue to further improve the quality of the enlargement process. Enlargement policy will put more emphasis on the fundamental issues of state-building, good governance, administrative and judicial reform, rule of law, reconciliation, compliance with International Criminal Tribunal for the Former Yugoslavia (ICTY), and civil society development. People-to-people contacts need to be promoted; in particular it is time to initiate a dialogue on visa liberalisation for citizens of the Western Balkan countries. The development of regional cooperation in the Western Balkan should be continued, especially local ownership of initiatives in this area.

In all enlargement countries, the EU will continue to make full use of its pre-accession instruments for addressing key challenges. The track record of implementation of commitments, notably under the association agreements, is of particular importance for moving from one stage to the next on the roadmap towards EU integration and is monitored with rigour. The Commission sets out in this document a number of measures to raise awareness about EU laws and policies and to prepare the next steps in the enlargement process.

The Commission is adjusting pre-accession policy tools to current challenges of enlargement policy. Since January 2007, it is using a new financial instrument, the Instrument for Pre-Accession Assistance (IPA). In programming IPA assistance, a tighter focus on reform priorities will reflect each partner's stage in the transition process. The Commission is now proposing a revision of Accession and European Partnerships, which will serve as key references in setting priorities. It is also proposing a revised Multi-annual Indicative Financial Framework for IPA, covering the period 2009-2011. It will introduce a facility to further the development of civil society, notably through capacity-building and exchange projects. It will give added emphasis to programmes which support state-building, good governance, institutional reform and administrative capacity.

Maximum leverage of grant support to private sector development and infrastructure investment will be sought through intensified cooperation with the European Investment Bank (EIB), as well as the European Bank for Reconstruction and Development (EBRD) and other International Financial Institutions (IFIs). The Commission will ensure closer coordination with other donors across the range of their activities and encourage them to be active in priority fields identified in this communication. Implementation will also be streamlined following the transfer of responsibilities from the European Agency for Reconstruction to Commission delegations and offices.

Member States are best placed to lead in communicating to the public that enlargement is in the EU's interest. The Commission will continue to play its part, by promoting a better flow of factual information on enlargement issues. Building on the EU's existing strategy, the present communication analyses the key challenges on the road towards EU integration. It outlines an approach to adjust the enlargement policy instruments and ensure a tighter focus on areas in urgent need of progress, also taking into account lessons learned from the previous enlargements.

2. PRESENT CHALLENGES IN THE ENLARGEMENT COUNTRIES

The countries of the Western Balkans and Turkey have been given the perspective of becoming EU members once they fulfil the established conditions. Given the present state of preparations in these countries, their accessions are likely to occur in the medium to long term. The focus is now on thorough preparations to ensure that countries engaged in the enlargement process tackle fundamental governance and economic issues, as well as issues related to EU laws and policies.

2.1. The Western Balkans

EU engagement with the countries of the Western Balkans through the Stabilisation and Association Process, leading to eventual membership, has made a crucial contribution to the progress achieved in recent years by the countries of the region.

Stability has been maintained and reconstruction after the wars of the 1990s is almost completed. Democratically-elected governments are in place throughout the region. Economic growth has picked up, macro-economic stability has improved and living standards have risen. Important reforms are underway to strengthen the rule of law and modernise economic and social structures. Regional cooperation has grown, including in the areas of trade, energy, transport and environment. The Western Balkan countries are assuming increasing ownership in regional initiatives.

All countries of the Western Balkans have been moving forward towards the EU, albeit at different speeds. Croatia is engaged in accession negotiations with the EU, and the former Yugoslav Republic of Macedonia has obtained candidate status. The EU is in the course of completing Stabilisation and Association Agreements with the countries of the region and economic integration with the EU is well advanced. The Western Balkan countries have now signed visa facilitation and readmission agreements with the EU.

These achievements now need to be consolidated and made irreversible. Further major challenges need to be addressed. In a number of countries, the overall reform process has slowed down. State-building, as well as better governance, remain priority concerns in much of the Western Balkans. The situation in Kosovo[5] continues to necessitate a significant international presence. The present status of Kosovo is not sustainable; it needs to be settled without further delay to permit Kosovo's political and economic development and to ensure regional stability. In Bosnia and Herzegovina, nationalist rhetoric by key political leaders is challenging the arrangements established by the Dayton/Paris peace agreement and has stalled reforms. Much needed reforms of the police and of the constitutional framework have failed to make progress. Bosnia and Herzegovina has yet to assume full ownership of its governance, which currently necessitates a significant international presence. In some other countries the constitutional framework needs to be completed or fully implemented.

More dialogue and a greater spirit of tolerance are needed throughout the Western Balkans, not least on ethnic-related issues. In Kosovo, relations between Albanians and Serbs remain strained. In addition, Kosovo Serbs have by and large not participated in the institutions and administration. The functioning of Bosnia and Herzegovina's state institutions continues to be compromised by ethnic divisions. In Serbia, despite the victory of democratic forces in the parliamentary elections and the formation of a reform-oriented government, extremist parties and nationalist rhetoric remain strong and affect negatively the overall political climate. Democratic forces are fragile. In the former Yugoslav Republic of Macedonia, frequent tension and insufficient cooperation between political actors has affected the normal functioning of institutions and slowed down reforms. The dispute between the government and an opposition party about a constitutional matter led to that party boycotting parliament. The highly confrontational political climate in Albania and the lengthy process of adoption of a constitution in Montenegro point to other challenges in building modern democracies. Croatia needs to make further efforts to promote tolerance towards minorities.

Significant progress has been made in cooperation with the International Criminal Tribunal for the Former Yugoslavia (ICTY), a key condition of the Stabilisation and Association Process. Croatia and the former Yugoslav Republic of Macedonia maintain full cooperation with the Tribunal. Montenegro's cooperation with the Tribunal is satisfactory. Progress made in this area by Serbia allowed for the resumption and technical completion of negotiations for a Stabilisation and Association Agreement (SAA). Bosnia and Herzegovina has also made progress in cooperation with ICTY. However, Serbia and Bosnia and Herzegovina still need to achieve full cooperation with the Tribunal, leading to the arrest of the remaining indictees. Kosovo has made some progress in cooperating with ICTY but the intimidation of witnesses in Kosovo remains a source of concern.

Limited progress has been made on refugee return. Many refugees and internally displaced persons are living under very difficult circumstances. Some progress has also been recorded in improving representation of minority groups in the public services. However, the Roma continue to be the most vulnerable minority in the region. All countries need to encourage a spirit of tolerance towards minorities and take appropriate measures to protect persons who may be subject to discrimination, hostility or violence. This is essential to achieve reconciliation and lasting stability.

The enforcement of the rule of law, notably through judicial reform, and the fight against corruption and organised crime are top priorities. Most countries have taken steps to improve the organisation and performance of their justice systems. Efforts are underway to intensify the fight against organised crime and have yielded first results. Legislation and institutions are being developed to fight corruption; in several countries investigations are underway and a number of prosecutions have been brought. However, justice systems still require considerable improvement across the region. Wide-ranging reforms need to be conducted in a sustained manner to ensure the independence, efficiency and accountability of the justice system. Corruption remains widespread and is deeply rooted in society. In all Western Balkan countries, measures taken are not commensurate with the magnitude of the problem. Strong political will is needed to root out corruption and prosecute offenders, including in high-profile cases. Organised crime remains a serious concern. Criminal networks extend to various socio-economic sectors and into politics. They often benefit from insufficient transparency in public procurement, investment planning and privatisations. The region is a place of origin and transit for human trafficking, as well as for drug smuggling. Considerable and sustained efforts are needed in this area.

Administrative capacity is a crucial aspect in fulfilling the Copenhagen membership criterion on the ability to take on the obligations of membership, as was stated by the European Council in Madrid in 1995. Public administration reform is being pursued across the region with some positive results such as framework strategies and legislation. Croatia has shown that it has considerable administrative capacity for implementing the Stabilisation and Association Agreement (SAA). Serbia also has considerable administrative capacity for implementing a SAA. They now need to build on this capacity and modernise it to align with the EU laws and policies. Administrative capacity elsewhere remains weak and affects implementation of reform and EU alignment; additional efforts are needed in this respect. Stronger commitment is needed in each country to establish a civil service that is efficient, stable and accountable, both at central and local level. In several countries the recruitment, promotion and dismissal of civil servants are not based on objective and transparent criteria. Ethical standards in the civil service need to be strengthened. Reforms of the police and security services remain to be implemented in Bosnia and Herzegovina and other countries.

Civil society is an essential element of European public life. Western Balkan countries have made efforts to adopt legislation and strategies that are more favourable to civil society development. Some first steps have been taken towards more participatory democracy. However, civil society remains weak in the region. Wars and ethnic strife have done major damage to the social fabric of the region. Local NGOs need training to adapt to present conditions. Further efforts are required to deepen the freedom of association, to put in place regulatory frameworks and public incentives for the development of civil society organisations.

Overall, economic growth has remained relatively high in the region and average wages increased. Inflation figures are modest and stable. Prudent fiscal and monetary policies have been implemented in most countries of the region. Financial systems further developed. Public finance management systems improved. Steps have been taken to improve the business climate. All Western Balkan countries are further restructuring and opening up their economies. The degree of economic integration with the EU is already high and growing. Stabilisation and Association Agreements and the new Central European Free Trade Agreement (CEFTA) agreement create together a framework conducive to trade and investments in the Balkans, as was the case in Central and Eastern Europe in the 1990s. Several countries have ambitious plans to upgrade physical infrastructure and modernise social security systems.

Raising competitiveness, reducing the high levels of unemployment and fostering human development and infrastructures are major challenges throughout the region. Significant fiscal risks persist and external imbalances are sizeable in a number of countries. Progress in job creation is uneven, while some countries in the region register unemployment rates of above 35% and the gap between available and necessary labour skills is increasing. Labour markets continue to lack an appropriate combination of flexibility and security for workers and employers and taxes on wages for registered companies are relatively high. Rural economies need further diversification. Fiscal consolidation and enterprise restructuring need to be pursued further. The countries' privatisation plans need to be implemented. Investments and SME growth need to be further stimulated, including through improved access to finance. Governments need to further improve the business environment and stimulate employment. They need to reduce red tape, strengthen the rule of law, ensure reliable land registration and transparent procedures for privatisation. In some countries, the legal framework ensuring the proper functioning of markets needs to be completed and enforced. Tax regimes need simplifying. This will stimulate economic activity and reduce the high levels of informality in the economy. In addition, measures are needed to facilitate access to finance and the use of e- technology.

Turkey

Since the December 1999 European Council granted candidate status to Turkey, the country has achieved major changes. The European perspective proved one of the main incentives for reforms of the political and legal system as well as the economy in Turkey. The death penalty was abolished, the functions and composition of the National Security Council were changed to increase civilian control over the military, and a series of constitutional amendments enhanced democratic freedoms. Progress was made in areas such as women's and children's rights, and the fight against torture, with a further overall decline of reported cases of torture and ill-treatment.

In economic terms, after the serious financial crisis of 2001, sound macroeconomic policies and structural reforms designed to ensure long-term sustainability of the economy allowed for a fast recovery of the economy and an improved investment climate. This resulted in high GDP growth, which reached 6.1% in 2006. Inflation dropped since 2001 and the Turkish lira remained strong. However, Turkey's development is still influenced to a significant extent by international financial trends. Since the establishment of the Customs Union in 1995, the value of trade with the European Union has tripled in current prices. This reflects a strong demand for EU products and services combined with good performance of the Turkish export industry. In addition, the level of foreign direct investment reached a new record of € 16 billion in 2006, that is 4.9% of the Turkish GDP, originating mainly in the European Union.

These reforms and the strategic importance of the EU’s relationship with Turkey led to the start of accession negotiations in October 2005. A core principle of this process is that the pace of the negotiations depends on the pace of the reforms in Turkey.

The implementation of reforms has been uneven and has slowed down since 2005. In the past year, Turkey went through a constitutional crisis concerning the election of the President of the Republic, which led to early parliamentary elections. The military made public statements beyond its remit. However, in the run up to the elections open debates took place on a number of traditionally sensitive issues and a vibrant civil society proclaimed its attachment to democracy and the secular state. The elections for the Grand National Assembly were held in full respect of democratic standards and of the rule of law. The new Parliament is representative of the country's political diversity. The President of the Republic was elected in accordance with constitutional rules and democracy prevailed in civil-military relations. The government has begun work on a new constitution.

Turkey now needs to renew the momentum of political reforms. Significant further efforts are needed in particular on freedom of expression, and the rights of non-Muslim religious communities. Further progress is needed in particular on the fight against corruption, judicial reform, trade union rights and women's and children's rights, and the accountability of the public administration needs to be strengthened. In the South-East, Turkey needs also to create the conditions for the predominantly Kurdish population there to enjoy full rights and freedoms. The Commission will continue monitoring closely the process of political reform, including civilian oversight of the security forces.

In response to a series of PKK armed attacks that caused multiple casualties, parliament adopted in October 2007 a motion authorising the government to intervene militarily in the northern part of Iraq. The EU Presidency reiterated on 22 October the Union's total condemnation of PKK terrorist violence in Turkey. It further stated that "the international community, in particular all the main stakeholders in the region, must support Turkey's efforts to protect its population and fight terrorism, while respecting the rule of law, preserving the international and regional peace and stability and refraining from taking any disproportionate military action".

Further structural economic reforms and fiscal consolidation are needed to address remaining risks to macroeconomic stability. Major challenges include structural weaknesses and rigidities in the labour market, the quality of skills of the labour force, low employment rates especially for women, a large informal sector and reforms in the social security system and in the energy sector. The diversification of the rural economy remains limited. The vulnerability of the Roma needs to be addressed. Turkey still needs to develop a comprehensive approach to economic and social development in the Southeast.

Good neighbourly relations remain key. Turkey is also expected to ensure full, non discriminatory implementation of the Additional Protocol to the Association Agreement.

3. THE ENLARGEMENT STRATEGY: ADDRESSING THE PRESENT AGENDA

3.1. The renewed enlargement consensus

The EU enlargement process contributes to peace and stability, reforms, and the promotion of European values. The effectiveness of conditionality in driving reforms depends on maintaining a credible prospect of eventual integration into the Union. This needs to be even more visible to the people of the countries concerned. The prospect of membership has never been more important than today to help the countries to overcome crisis, state weaknesses and challenges to democracy.

Rigorous conditionality at all stages of the enlargement process helps consolidating reforms in all candidate and potential candidate countries and preparing future Member States to fulfil their obligations upon accession. Each country's progress towards the European Union depends on its individual efforts to comply with the Copenhagen criteria and, for the Western Balkans, with the conditionality of the Stabilisation and Association Process.

Full attention is paid to the EU's integration capacity at key stages of the accession process. Improvements in the quality of the enlargement process, decided at the December 2006 European Council, ensure that the progress of candidates and potential candidates towards EU membership is determined by their success in addressing key requirements. Benchmarks for opening and closing negotiation chapters, impact studies at key stages of the enlargement process on key policies of the EU, and linkages with political reform play an increasing role in that process.

3.2. Focusing on core issues

The challenges identified above warrant greater focus on key reform priorities which relate to state-building, governance, and socio-economic reforms. The Commission is now proposing revised Accession Partnerships and European Partnerships that mirror those priorities. The partnerships guide the countries in their European course and establish priorities for pre-accession financial support. They will give higher priority from an early stage to basic governance issues, including institution building, judicial and administrative reform and the prevention of organised crime and corruption. Greater emphasis will be placed on such difficult issues, in particular in the context of the political and economic dialogues. More cooperation is needed between Western Balkan countries, EU institutions and agencies, and the Member States to fight trans-national crime. Issues related to the implementation of the EU laws and policies need to be sequenced according to the countries' capacities and depending on progress achieved in undertaking basic reforms.

The pre-accession fiscal surveillance mechanism which is, since 2006, also in place for potential candidate countries, will continue to support economic reform in all candidate and potential candidate countries.

Regional cooperation and good neighbourly relations remain key to European integration. Progress in these areas strengthens confidence and brings concrete benefits through regional stability, better cross border links, and improved infrastructure. These also bring economic benefits in terms of faster growth and increased foreign direct investment.

Mutual knowledge and understanding require further development of civil society and of dialogue between the citizens of EU Member States and the enlargement countries. Since 2005, the Commission has granted financial support to dialogue projects with and between the Western Balkan countries, as well as with Turkey. Support for civil society is key to mutual understanding and to strengthening the fabric of democracy across society. The Commission will now take additional measures to promote civil society development and dialogue using the Instrument for Pre-Accession Assistance (IPA).

3.3. Furthering the accession negotiations

Accession negotiations with Croatia and Turkey opened in October 2005, upon unanimous decision of the Member States, following a series of major political and legal reforms. The negotiation process brings both countries closer to the EU and serves its strategic interests. Negotiations are conducted on the basis of the rigorous frameworks agreed by the Council. They advance hand in hand with progress in political and economic reform as well as in transposing and implementing EU legislation.

The December 2006 European Council took decisions regarding the conduct and quality of the accession process. Significant steps have been taken to implement the European Council conclusions. The Commission has made full use of the possibility to propose benchmarks to determine the conditions for opening and closing of chapter negotiations in the light of progress on the ground. It is issuing its first impact studies as key chapters come to the fore in the negotiations. In the Autumn, the Commission will issue an impact study on the Croatia's future entry into the EU's road cabotage sector. Subject to progress in negotiations, further impact studies will be presented in the coming year, covering free movement of workers in relation to Croatia, and energy supply in relation to Turkey. The Union is engaged in intense political and economic dialogues, the results of which are fed into the negotiation process. In this context, particular attention is paid to settling outstanding bilateral issues between candidates and Member States, as well as to developing good neighbourly relations. Issues related to the judiciary and fundamental rights are addressed in detail in a specific negotiation chapter. It should be recalled that negotiations may be suspended in the event of a serious and persistent breach of the principles of liberty, democracy, respect for human rights and fundamental freedoms and the rule of law on which the Union is founded.

Croatia 's progress towards membership sends a strong signal to other Western Balkan countries on their own membership prospects, once they fulfil the necessary conditions. Croatia's accession process contributes to addressing bilateral and regional issues and fosters reconciliation. It serves the EU's strategic interests in security and conflict prevention in a region which is bordered by Member States.

The current stage of the accession negotiations in the specific EU policy chapters requires tackling technical issues related to alignment. The Commission has submitted to the Council all screening reports for Croatia. Attention is now shifting to the fulfilment by Croatia of the benchmarks for opening the relevant chapters. Provided that benchmarks are met, substantial progress in accession negotiations with Croatia is possible in the coming year. Croatia still needs to make further progress in judicial and administrative reforms, minority rights, and refugee return as well as restructuring in heavy industries.

Turkey 's continued commitment to reform holds major strategic importance for the EU’s own security and stability. Turkey is a unique interface between the West and the Muslim world. This has been brought out clearly by the Alliance of Civilisations initiative to foster dialogue under UN auspices. Turkey's accession to the EU, based on profound democratic transformation, is followed with interest in the Middle East and the wider Muslim world. Turkey also supports the Middle East peace process as well as a dialogue with Iran on the nuclear issue. It holds important security assets and has provided them in a number of EU and NATO missions, from the Western Balkans to the Democratic Republic of Congo, and from Darfur to Afghanistan. Turkey has the potential of becoming a major energy route between the EU and the world's biggest oil and gas sources, and thus a key actor for the security of Europe's energy supply. Its alignment with EU policies will bring particular benefits in areas such as migration control and environment. Turkey consistently records high and steady economic growth and is among the EU's leading trade and investment partners.

Such strategic considerations have been present since the origins of the relationship between the EU and Turkey, in 1959. Turkey's EU membership prospect dates back to 1963, when it signed an association agreement with the European Economic Community. This agreement explicitly envisages accession, both in its preamble and in Article 28. This reflects Turkey's major strategic role from the early foundations of the European Union. Turkey is now the only country with which the EU has established a customs union, agreed in 1995. It received the status of a candidate country in 1999. The shared objective of the negotiations is accession, as agreed by all Member States in October 2005. The negotiations with Turkey are an open-ended process, the outcome of which cannot be guaranteed beforehand. Progress in the negotiation proceeds hand in hand with progress in implementing reforms and in aligning with EU laws and policies.

It is essential that the European Union honours its commitments and keeps the negotiation process on track and that chapters are opened as soon as the technical conditions are met, in line with the Negotiating Framework of October 2005 and the Council decision of 11 December 2006. The screening process with Turkey has reached its final phase, and the Commission will have submitted most reports to the Council by the end of this year. Turkey needs to engage the necessary efforts to meet the opening benchmarks defined by the Council for most chapters. Turkey's renewed momentum in the political reform process will have a direct impact on the pace of the accession negotiations. Provided that benchmarks are met, progress is possible in accession negotiations with Turkey in the coming year.

Good neighbourly relations remain key. In line with the Declaration of the EU of 21 September 2005 and the Council conclusions of 11 December 2006, Turkey needs to fulfil its obligation of full non-discriminatory implementation of the Additional Protocol to the Ankara agreement and to remove all obstacles to the free movement of goods, including restrictions on the means of transport vis-à-vis the Republic of Cyprus. Turkey is also expected to make progress towards normalisation of bilateral relations with the Republic of Cyprus.

3.4. Enhancing the European perspective of the Western Balkans and promoting regional cooperation

All the Western Balkan countries share a perspective of eventual EU membership. The future of the Western Balkans is within the European Union. The Stabilisation and Association Process and the 2003 Thessaloniki agenda continue to form the framework of EU policy towards this region. Regional cooperation brings tangible benefits for citizens in the Western Balkans and helps to promote reform and reconciliation.

The EU will continue to apply strict conditionality for the progress of the Western Balkan countries towards the EU. A satisfactory track record, particularly in implementing obligations under the Stabilisation and Association Agreements (SAA), including trade-related provisions, is an essential element on the way towards eventual membership. Solid institutions are crucial to implementation of provisions under the SAA, and to the smooth functioning of the various joint institutions.

The Commission continues to support all Western Balkan countries on their European course, as they make progress along the road-map put forward in 2005. It will give full priority to Kosovo's stability and EU perspective.

The May 2007 summit of the South-East Europe Cooperation Process (SEECP) in Zagreb heralded a move towards regional ownership of the process of regional cooperation. The Stability Pact has largely accomplished its mission and will be replaced by a new Regional Cooperation Council (RCC) linked to the SEECP. A Secretary-general of the RCC was appointed, and Sarajevo was designated as the seat of its secretariat. Under the Bulgarian Chairmanship in office, the host country agreement was signed with Bosnia and Herzegovina and the Secretariat is being set up. It is expected that the last meeting of the Stability Pact Regional Table and the first meeting of the RCC will be held in Sofia in early 2008, when the Special Coordinator of the Stability Pact will hand over to the RCC Secretary-general. The new structures need to become operational swiftly, in particular the secretariat and its Brussels liaison office. The SEECP and the RCC will provide a general umbrella for regional cooperation. The Commission will participate in the RCC and encourages all parties concerned to play an active role. Building on the relevant experience of the Stability Pact, the Commission intends to co-operate with SEECP and RCC on the implementation of the implementation of the EC Disaster Risk Reduction Initiative, as well as the Disaster Prevention and Preparedness Initiative (DPPI) launched under the Stability Pact. The Commission also intends to further associate the Western Balkans countries with work related to the Community Civil Protection Mechanism dealing with n emergency situations such as floods, forest fires or earthquakes.

In July the new Central European Free Trade Agreement (CEFTA) entered into force. Ratification by all signatories has recently been completed and this regional free trade area is now effective throughout the region. The European Commission intends to support CEFTA, both through technical assistance and through initial three-year funding of the CEFTA secretariat. All countries cooperate in the framework of the European Charter for Small Enterprises. The implementation of the Energy Community Treaty has advanced. Ratification of the European Common Aviation Area is underway. Remaining signatories now need to proceed with ratifying these instruments. These agreements allow early integration into the EU internal market for energy and aviation. Detailed roadmaps and action plans on electricity and gas have been drawn up.

In order to raise awareness of the EU laws and policies, the Commission's TAIEX[6] office will organise technical information sessions in the potential candidate countries for the benefit of stakeholders in government, business and society. The Regional School of Public Administration will contribute to the strengthening of administrative capacity in the Western Balkans. EU funds have been mobilised to transform the existing network into a school based in the Western Balkan region.

The citizens of the Western Balkans need to feel tangible improvements resulting from their countries' European integration. This is essential for them to assume ownership of reconciliation and of necessary reforms. People-to-people contacts should be maximised between the Member States and the countries in the region, and across the region itself.

Easier travel to the European Union is an issue of utmost importance to the peoples and governments of the Western Balkans. In Thessaloniki, the EU recognised this fact and committed to steps for achieving this goal. Steps towards liberalising travel need to take into account the internal security and migration interests of the EU. A visa-free regime has been in place with Croatia for many years. The Commission recently negotiated visa facilitation agreements together with readmission agreements with the other countries of the region. These were signed in September and are expected to be approved by the Council shortly, so that they can enter into force on 1 January 2008. The agreements will improve substantially the conditions for obtaining visas for travel to the EU. It is important that Member States ensure their proper implementation.

The facilitation agreements are an important step towards full liberalisation of the visa regime. The Commission considers that it is now time to gradually move towards visa liberalisation with the Western Balkan countries through further concrete steps. To that end the Commission proposes to open a dialogue with each of the countries concerned with a view to establishing a road-map on the conditions to be met. These would cover effective implementation of readmission agreements, as well as progress on key areas such as border management, document security, or the fight against organised crime. Such road-maps will allow the countries concerned to better focus their reform efforts, while also reinforcing the visibility of the EU’s commitment to the peoples of the region.

Measures aimed at improving people-to-people contacts also include the expansion of education cooperation and mobility opportunities for undergraduate and graduate students under the Tempus and Erasmus-Mundus and Tempus programmes. A further 100 students from the region may undertake postgraduate studies in EU in 2007/2008. From 2008, up to 500 undergraduate students will benefit annually from exchange programmes between the EU Member States and the region. The Commission will explore, together with the Member States and other bilateral donors, possibilities for further scholarship opportunities. Pre-accession financial support will also be provided for participation of Western Balkan young people, youth organisation, cultural operators, civil society organisations and researchers into EU programmes. The Commission will encourage initiatives and projects related to the 2008 European Year for Inter-cultural Dialogue. Under the Commission's new civil society facility, measures will be taken to support networking and exchange between civil society groups and their counterparts in the region and at European level.

Active involvement of parliaments is key to countries' progress on the way to the EU. Parliamentary cooperation has further grown both within the Western Balkans and with the EU. In cooperation with the European Parliament, the Commission will encourage activities focusing on European integration.

3.5. Strengthening support for reforms

On 1 January, the Instrument for Pre-Accession Assistance (IPA) was introduced. The aim is to provide a coherent framework for assistance to the candidate and potential candidate countries. The Community will continue to support these countries in their efforts to strengthen democratic institutions and the rule of law, to reform public administration and to establish functioning market economies. Support will take the form of institution-building and cross-border cooperation projects, as well as, subject to the countries' level of preparations, support to regional, human resources and rural development measures.

Progress has been made in preparing a smooth transition in aid implementation from the European Agency for Reconstruction (EAR) to Commission delegations and offices in Belgrade, Podgorica, Pristina and Skopje. The process will be completed by the end of 2008. The Agency has been instrumental in delivering reconstruction assistance to the countries after conflict. With the introduction of IPA, beneficiary authorities have more ownership in the programming of pre-accession assistance. They need to prepare themselves to take over responsibility for the management of the EU funds.

Kosovo merits particular attention. Its important external financing needs will have to be largely shouldered by donors. The EU and the Member States will need to take the lead in the international community in line with the EU's crucial role in a post-status Kosovo.

IPA will help beneficiaries strengthen their capacities through institution building, good governance, SME development. Special attention will be given to administrative and judicial reform and the rule of law. Efforts will also be made to enhance the partners' public finance management as well as their capacity to make full use of pre-accession support. TAIEX offers rapid-response assistance from public sector officials to enlargement countries’ public institutions. Building on results from SIGMA[7] and TAIEX, twinning between public administrations will provide medium-term support for governance, in addition to the traditional twinning projects related to EU laws or policies.

The Commission will establish a new financing facility under IPA to promote civil society development and dialogue. National and multi-beneficiary projects will be programmed in a coordinated manner to stimulate civil society development in each country. The goal will be to strengthen civil society bodies and their role in the political process, enhance the capacity of civil society organisations to develop cross-border projects and networks, and familiarise civil society representatives and opinion leaders with EU affairs. The facility will enhance the capacity of local civil society organisations for civic mobilisation, advocacy, project development and management to encourage networking, and will support their dialogue with corresponding bodies in the EU. Sectors covered will include human rights, gender equality, social inclusion, health, environment, business advocacy and representation, and consumer protection. The facility will promote cooperation and transfer of know-how between business, trade union, and professional organisations in the partner countries and the corresponding EU-level organisations. A visitors' programme will be set up to familiarise with EU affairs key opinion makers active in national and local politics, religion, journalism, trade union, business associations, and to bring them together with their EU counterparts.

Closer donor coordination is an important element of the new IPA Regulation, notably in view of budgetary limitations. The Commission will coordinate closely IPA support with that of International Financial Institutions and of other donors in order to address basic needs in terms of economic and social development. The Commission is setting up an Infrastructure Facility, funded by IPA as from 2008, that will help prepare infrastructure projects. Sectors covered will include transport, energy and environment infrastructure, but also investments in the social sector, such as health, education, housing, and refugees. Other initiatives include the European Fund for South East Europe (EFSE), geared towards private sector development, and the energy efficiency facility. In this way, IPA support will seek to achieve the most cost-effective mix of grants and loans. This concerted effort will notably involve the EIB, as well as the EBRD and other international financial institutions such as the World Bank and the Bank of the Council of Europe.

3.6. Ensuring public support for enlargement

Communication is a cornerstone of the EU's enlargement strategy. The benefits and challenges of enlargement need to be better communicated to the public. EU public opinion on future enlargement is influenced by perceptions of past enlargements. It is essential to listen to citizens, address their concerns, and provide further information. The EU needs to present further factual information about enlargement so that the public can see both the benefits and the challenges clearly.

The EU faces challenges to communicate enlargement both in the Member States and in the candidate and potential candidate countries.

In the Member States , the main challenges are to provide facts on the fifth enlargement, in particular its impact in terms of economic success and strengthening the EU's global role and to highlight the benefits and challenges of the current enlargement process. EU institutions and Member States need to provide the EU public with information about the candidate and potential candidate countries and explain how enlargement works as a gradual and carefully managed process. We need to promote debate at all levels of society on issues related to enlargement.

In the candidate and potential candidate countries , the main challenges are to emphasise the Union's commitment to their European perspective and to explain the conditions for progress of each country towards the EU, each being judged on its own merits. People need to see that progress towards the EU depends on the pace of reforms in each country. The faster and more effective the reform process within the countries, the more rapid will be their progress on the road to membership and all its benefits. The EU needs to support the governments of these countries in their efforts to explain the nature of the EU and to demonstrate how their citizens benefit from closer relations with the EU while preparing for membership. Citizens need to know more about benefits such as pre-accession financial assistance and technical advice, visa facilitation, scholarships.

To help communicate enlargement more effectively, the Commission invites the governments of the Member States and the candidate and potential candidate countries to draw up communication plans. These plans should target opinion formers in politics, the media, academics, business community, social partners, youth. The Commission's new facility to promote civil society development and dialogue will also contribute to this effort.

Member states must take the lead in explaining and defending the policies they have agreed, promoting dialogue and explaining the benefits of enlargement. Members of the European Parliament and of national parliaments, as well as regional and local authorities and civil society, also have a crucial role to play. These actors, who are closest to the public, have a key role in generating informed debate about enlargement.

The Commission will complement these efforts by communicating the EU's enlargement policy, including pre-accession support. It will tackle myths by providing facts. It will make full use of its representations in the Member States and its delegations in the enlargement countries. The Commission will seek to engage in a dialogue on enlargement with key opinion formers and will build on experience gained in 2007 from a number of successful communication projects, in particular those with chambers of commerce and with student organisations.

4. CONCLUSIONS AND RECOMMENDATIONS

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

1) Enlargement has contributed to peace, democracy and stability throughout the continent and brought concrete benefits in terms of increased trade, investment and economic growth. The Union is now more competitive and better able to respond to the challenges of globalisation. Enlargement has enhanced the EU's weight in the world.

2) The EU enlargement process is carefully managed in line with the renewed consensus defined by the December 2006 European Council. This consensus is based on the principles of consolidation of commitments, fair and rigorous conditionality and better communication with the public, combined with the EU's capacity to integrate new members. The present enlargement agenda covers the Western Balkans and Turkey, which have been given the prospect of EU membership once they fulfil the conditions.

3) The Commission has taken steps to improve the quality of the enlargement process. Difficult reform issues are now being addressed at an early stage. Feedback is ensured between the political and economic dialogues and the enlargement process. In the accession negotiations, full use is now made of benchmarks as conditions for opening and closing chapters. The Commission is promoting greater transparency, for example by making screening reports publicly available, and is preparing the first impact studies. Each country progresses from one stage to the next in its course towards the EU, when it has fulfilled the necessary conditions, in accordance with the 2005 road-map for the Western Balkans.

4) The enlargement countries still face major challenges. It is crucial to maintain the visibility and credibility of their accession prospects. Each country will be judged on its own merits. More remains to be done to address fundamental issues, such as state-building, rule of law, reconciliation, administrative and judicial reform, and to fight corruption and organised crime. Good neighbourly relations remain key.

5) Accession negotiations with Croatia are advancing well and are entering a decisive phase. This demonstrates to the region as a whole that the European perspective is real. Croatia still needs to make further progress particularly in judicial and administrative reform, minority rights, and refugee return, as well as in restructuring of steel and shipbuilding industries.

6) Turkey has introduced major reforms since becoming a candidate country in 1999. In the past year, Turkey went through a constitutional crisis which led to early parliamentary elections. These were free and fair, and the new parliament is representative of the country's political diversity. The President of the Republic was elected in accordance with constitutional rules, and democracy prevailed in civil- military relations. Turkey now needs to renew the momentum of its political reforms. Significant further efforts are needed without delay in particular on freedom of expression (article 301 of the Penal Code and other relevant legislation) and the rights of non-Muslim religious communities. Further improvements are also needed in particular on judicial reform, in the fight against corruption, strengthened rights for women, children and trade unions, cultural rights, as well as on civilian oversight of the security forces.

Turkey has not fulfilled its obligation of full non-discriminatory implementation of the Additional Protocol to the Association Agreement nor made progress towards normalisation of bilateral relations with the Republic of Cyprus. The Commission will continue reporting in its forthcoming annual reports, in accordance with the 11 December 2006 Council Conclusions endorsed by the European Council.

7) Clarity needs to be reached as rapidly as possible on the status of Kosovo. EU unity is essential in this respect. The Commission fully supports the work of the Troïka. There is a need for a sustainable solution that will ensure a democratic and multi-ethnic Kosovo and contribute to regional stability.

8) The former Yugoslav Republic of Macedonia has made progress but it still needs to accelerate the pace of reforms in key areas. Albania and Montenegro have made progress in a number of areas but still face major challenges. Bosnia and Herzegovina has yet to assume full ownership of its governance and needs to move ahead in reforms, in particular of the police. Serbia has shown that it has the administrative capacity to make substantial progress towards realising its European perspective. This was proven by its efficient conduct of the technical negotiations on the Stabilisation and Association Agreement. However, to sign the SAA, Serbia still has to achieve full cooperation with the ICTY. The region as a whole needs to move forward in building modern democracies and developing a political culture of dialogue and tolerance.

Accordingly:

(a) The Commission expects substantial progress in accession negotiations with Croatia in the course of the year ahead, leading to a significant number of chapters being opened and to several chapters being provisionally closed, provided that the country maintains the necessary reform momentum and meets benchmarks.

(b) The Commission expects progress in the accession negotiations with Turkey in the course of the year. Chapters for which technical preparations have been completed should be opened in accordance with established procedures.

The pace of negotiations depends on the results of the reforms in Turkey. Turkey's progress could gather momentum if it succeeds in meeting opening benchmarks.

The Commission has proposed to the Council that revision of freedom of expression provisions in the Turkish Penal Code (article 301 and other relevant articles) should be a benchmark for opening the key chapter on judiciary and fundamental rights.

Turkey should fulfil the commitments related to full non-discriminatory implementation of the Additional Protocol to the Association Agreement in accordance with the Council conclusions of 11 December 2006, and until Turkey does so, eight chapters will not be opened.

(c) The EU stands ready to provide further support for stability in Kosovo and in the region, and to respond to developments by making full use of its policy instruments.

(d) Provided the conditions are fulfilled, the Stabilisation and Association Agreements can be completed with all Western Balkan countries in 2008, with agreements either signed or in force.

(e) The Western Balkan countries will take over responsibility for regional cooperation with the transition from the Stability Pact to the new Regional Co-operation Council within the framework of the South-East Europe Cooperation Process. The EU will continue to support local ownership of initiatives in regional cooperation.

(f) Priority attention will be given to promoting people-to-people contacts between the Western Balkans and the EU. The Commission will initiate a dialogue on visa liberalisation for citizens of the Western Balkan countries as the next step following visa facilitation and readmission agreements.

(g) Early in 2008, the Commission will adopt a communication which will take stock of developments and point the way forward in following up on the Thessaloniki agenda and the Salzburg Communication on promoting the course of the Western Balkans towards the EU.

(h) The Commission is now proposing revised Accession and European Partnerships that set out updated reform priorities. Fundamental issues related to state-building, governance and administrative and judicial reform need to be tackled at an early stage.

(i) These priorities will be reflected in programming financial assistance under the new Instrument for Pre-Accession Assistance (IPA). The Commission will also establish under IPA a financing facility to promote dialogue and civil society development, notably through capacity-building and exchange projects. It will ensure closer coordination with other donors, and intensify cooperation with the EIB, as well as with the EBRD and other international financial institutions.

(j) It remains essential to ensure public support for enlargement. It is important to listen to citizens and to respond to their concerns through the provision of clear and factual information. Communicating enlargement is a shared responsibility. It needs active involvement of the Member States. The Commission will continue to play its part together with the European Parliament, national, regional and local authorities and civil society.

ANNEX

Conclusions on Albania, Bosnia and Herzegovina, Croatia, the former Yugoslav Republic of Macedonia, Montenegro, Serbia, Kosovo [8], Turkey

Albania

As regards political criteria , Albania has made some progress on democracy and the rule of law. Albania has continued to play a positive role in maintaining regional stability. However, democratic culture and in particular constructive dialogue between parties need to be developed to enable the political system to function effectively and transparently. The parliament needs to make considerable further progress in pushing forward reform. The fight against corruption and organised crime represents a major challenge.

Some progress has been made on democracy and the rule of law . Albania's parliament fulfilled its constitutional role in the election of a new president. However, political parties' lack of will to co-operate continued to hold back reforms, particularly in the electoral and judicial fields. Albania has made some progress in strengthening its government structures to implement its EU commitments and to address its development needs. Co-ordination and capacity remain weak and strategic planning needs improvement. There has been less turn-over in Albania's public administration . However, major efforts are needed to ensure efficiency and impartiality, including by fully implementing the civil service law. The authority of the Department of Public Administration needs to be strengthened. There remain widespread weaknesses in human resources management in the public administration.

There has been limited progress on reforming the judicial system . The procedures for evaluating judges have improved, the court system rationalised and the execution of judgements somewhat accelerated. However, the judiciary has continued to function poorly due to corruption and shortfalls in independence, transparency and efficiency. Legislation planned to address these issues is delayed.

The government is taking a more strategic approach to the fight against corruption , which is a key European Partnership priority. Legislation has improved in the field of public procurement. Anti-corruption investigations led to the arrest of a number of high-level officials. However, corruption is widespread and constitutes a very serious problem. Much work is still needed on all aspects of the issue, including judicial accountability and transparency of political party funding.

Some progress has been achieved regarding human rights and the protection of minorities . Albania has now abolished the death penalty in all circumstances. A new law targets instigators of blood feuds. Formal instructions to prosecutors and judicial police have underlined the need to respect human rights in criminal proceedings. Detention standards remain poor. Some improvements have been made to conditions in detention facilities and most pre-trial detainees have been transferred to new dedicated sections in prisons. However, prisons remain overcrowded. Considerably better enforcement of human rights rules and systematic prosecution of abusers are still required. Legislation on provision of free legal aid remains inadequate.

Albania has made some progress on freedom of expression , a key European Partnership priority. An action plan to develop new broadcasting legislation was agreed. The public radio and television steering committee now includes civil society representatives. The framework for competition in the sector strengthened. However, government decisions on media licensing and tax enforcement led to accusations of bias. More consensual and co-ordinated reform is necessary, in particular on broadcasting and transparency of media ownership. Better implementation of existing legislation is required.

There is a favourable legal framework for civil society organisations. However, civil society groups remain weak. They are not sufficiently involved in policy-making and lack resources, organisational capacity, advocacy skills and regional links.

There has been some progress on strengthening women's rights . New legislation addressed domestic violence and allowed the creation of a ministry section specifically for gender equality issues. However, the protection of women against all forms of violence still remains insufficient. Legislation needs to be strengthened and fully implemented. There has been some progress on children's rights . Juvenile justice, child rights monitoring and primary education have been strengthened. Further progress is hindered by delays in key legislation, especially on birth registration, and by lack of resources. Social services have somewhat improved, with increased resources for people. However, measures to support socially vulnerable people and people with disabilities remain limited. Better co-ordination of government agencies could improve results.

There has been progress on strengthening property rights , a key European Partnership priority. The government has adopted a strategy which links the processes of initial registration of real estate, restitution, compensation and legalisation of informally constructed buildings. Better management of restitution and compensation has somewhat accelerated the processing of claims, but it remains slow. Proper co-ordination of registration, restitution, compensation and legalisation and further acceleration of the handling of related claims are needed.

Albania took some measures to fulfil its commitments on the protection of minorities , notably to support the use of minority languages and traditional place names. Further improvement is hindered by the lack of sound data on the size and situation of minorities. Some steps have been taken to improve the situation of Roma people, but the impact of these measures has been limited. The Roma minority still faces very difficult living conditions and discrimination, especially in the areas of education, social protection, health care, housing and employment.

Regarding regional issues and international obligations, Albania has continued to foster good relations with other Western Balkan and neighbouring EU countries, both multilaterally and bilaterally. The country continues to participate actively in regional co-operation including the South East Europe Cooperation Process (SEECP) and the Regional Cooperation Council (RCC), as well as the amended Central European Free Trade Agreement (CEFTA). Albania has maintained its constructive stance on the Kosovo status process. This has contributed to stability in the region. As regards the International Criminal Court, the bilateral immunity agreement with the United States is not in line with the relevant EU common position and guiding principles.

Albania’s economy has continued to expand strongly. Overall macroeconomic stability has been maintained, but external deficits widened further, mainly due to the crisis in the energy sector. Inadequate implementation of the rule of law continues to impede the smooth functioning of the market economy and affects the business climate. Poor infrastructure and unreliable energy supply continued to hinder economic development.

As regards economic criteria , Albania has made progress towards establishing a functioning market economy. Major reforms are still needed to enable it to cope over the long term with competitive pressures and market forces within the Union.

Political consensus on the essentials of economic policy has generally been maintained. Macroeconomic stability was largely maintained. Economic growth continued to be strong despite energy shortages. Monetary policy remained credible, ensuring very low inflation. The level of registered unemployment, though still high, continued to decline. Fiscal revenue performance was broadly in line with targets and budget implementation improved. Public finance reforms have further advanced but fiscal risks remain. In general, the macroeconomic policy mix was broadly adequate. Following significant delays in 2006, privatisation gained new momentum in 2007. The privately-owned banking sector is growing and generally sound. Credit expansion remained strong. The regulatory framework for banking supervision is well developed. Trade integration with the EU remained fairly high.

However, external deficits widened further, mainly due to difficulties in the energy sector. Some progress was made as regards the enforcement of court rulings and the establishment of property rights, but the shortcomings in the judicial system and law implementation affect the business climate. While company registration procedures have started to improve, administrative inefficiencies hamper market entry and exit. Some progress has been achieved in the area of supervising financial actors other than banks, but there remains scope for strengthening it, in particular regarding the pension industry. Structural unemployment persists. Shortages of qualified staff and poor infrastructure hold back the development of a private sector that can make a sustained contribution to the country's development. The large informal sector, fuelled by persistent weaknesses in law enforcement and the regulatory framework, reduces the tax base, hampers the government's capacity to implement economic policies and affects negatively the business environment.

Albania has made progress in aligning its legislation, policies and capacity with European standards and is implementing its Interim Agreement trade commitments. In some areas, such as customs, competition and fighting organised crime, progress made in previous years has been sustained. In other areas, such as energy, transport and intellectual property rights, progress has remained limited. Pushing forward reform in areas such as veterinary and phytosanitary control is vital to making full use of the Stabilisation and Association Agreement (SAA). Administrative capacity for the non-trade-related provisions of the SAA and effective implementation of laws present a challenge in terms of achieving a sustained track record of SAA implementation.

There has been progress in some internal market fields, but further efforts are needed to fulfil Albania's SAA obligations. Progress in adopting standards and in accreditation has been good. Capacity for metrology and market surveillance is being strengthened, but legislative improvements are needed. On consumer protection improvements are needed in the handling of complaints and the settlement of disputes. Uncertainties related to property rights discourage establishment . Certain restrictions on capital movement remain in place.

Progress was made on customs computerisation. This helped Albania to implement trade-related provisions of the SAA more effectively. Customs revenue continued to rise. Albania implemented the tariff reductions provided for in the Interim Agreement. However, improvements in infrastructure and alignment with EU practices are required. The administration of taxation has been rationalised and progress has been made on computerisation and on handling of taxpayers' appeals. However, tax collection remains low. A comprehensive tax collection and control strategy and further alignment with EU legislation and practices are needed.

There has been progress in the area of competition . The Competition Authority (ACA) was strengthened. It assessed several merger notifications and imposed fines for violation of competition rules. However, further efforts are needed to provide training to ACA staff. Albania has made progress towards its SAA obligations regarding state aid. The State Aid Department has been given independence from the Ministry of Economy as regards reporting. The State Aid Department continued to assess and update the inventory of state aid schemes.

New public procurement legislation which is more in line with EU standards has been approved. The Public Procurement Agency is being strengthened but its administrative capacity requires further upgrading to ensure it can implement the new legislation properly. The impartiality of the review procedures needs to be guaranteed. Regarding intellectual property rights (IPR), the copyright office has become operational and Albania ratified international instruments on registration of industrial designs. However, IPR enforcement remains weak. Both the Directorate General for Patents and Trademarks and the copyright office lack adequate resources and expertise. New industrial property legislation in line with European standards is required. Considerable further efforts are required to fulfil Interim Agreement obligations on IPR.

There has been some progress concerning European standards on employment and social policies . Programmes have been put in place to foster the employment of vulnerable groups and the institutional and regulatory framework has been improved with the adoption of a law on labour inspection. However, the capacity of the labour inspectorate remains limited and occupational health and safety remains poor. Deficient information and administrative systems hamper the diagnosis of the social development and employment situation and the development of appropriate employment and social inclusion strategies. Some progress has been made concerning European standards on education. Budget provisions for education have been markedly increased. Implementation of the national strategies for pre-university education and vocational training has started and a new law on higher education has been approved.

Progress can be reported on some sectoral policies . Regarding industry and SMEs , a National Registration Centre has been established to facilitate business registration. A strategy to promote SME competitiveness was approved. An updated action plan to address the informal economy and to remove administrative barriers to investment is in place. Export guarantee funds have been established. An updated action plan to remove administrative barriers to investment is in place. However, further progress is needed on tackling the informal economy and improving the business environment. Progress on agriculture has been limited. Some incentives to increase production have been introduced, but the competitiveness of the farming sector remains low. Compliance with EU veterinary and phytosanitary standards, required to benefit from SAA and Interim Agreement trade concessions, remains poor. There has been some progress in the area of fisheries control and inspection, although over-exploitation and illegal fishing continue.

Regarding environment , some progress has been made on horizontal legislation, but implementation remains weak. Further efforts are required in the areas of waste management and water quality. Administrative capacity needs to be strengthened in order to implement already transposed legislation. Progress in the field of transport has been limited. Albania ratified the European Common Aviation Area Agreement and is working towards the implementation of its first transitional phase. Albania is actively participating in the development of the Core Regional Transport Network and in the South East Europe Transport Observatory, particularly by approving the second rolling five year Multi-Annual Plan 2007-2011 (MAP). Substantial improvements are required as regards the safety of maritime transport.

In the energy sector, Albania has not been able to ensure security of electricity supply. Considerable efforts are required to meet the requirements of the Energy Community Treaty (ECT). Being a party to the ECT, Albania is obliged to implement the relevant EU legislation, in particular on energy, as from July 2007. Despite some progress, including new legislation on hydroelectric generation concessions and a limited increase in bill collection, the energy sector remains in a critical state. This is hampering the social and economic development of the country.

Work towards fulfilling Albania's SAA commitments on information society and media is lagging behind. Market liberalisation in the areas of electronic communications and information technologies remains at an early stage. The regulatory framework is not yet in line with the acquis and the telecommunications regulator needs to develop its capacity. Regarding financial control , a new law on internal audit was adopted. An appropriate inspection service remains to be developed. Progress has been reasonable in the field of statistics . Most major statistical classifications are in place and comply with EU standards.

In the field of justice, freedom and security progress has been made in some areas. Further improvement is needed overall. Technology for visa issuing and for security of diplomatic and service passports has been improved. An EU-Albania visa facilitation agreement was signed. Biometric passports in line with EU standards need to be issued. Further amendments are required to the Law on foreigners for it to reach EU standards.

New infrastructure, extension of IT links and better inter-agency and cross-border police co-operation have improved border control . An integrated border management strategy has been adopted by the government. Border crossing point infrastructure nonetheless remains below EU standards. Laws on asylum comply with international standards but no coherent asylum strategy is yet in place and implementation remains weak. A unit to oversee the implementation of the national migration strategy was established. Migration checks at borders are now somewhat more effective, but there is still considerable room for improvement. Albania has signed a readmission protocol with Austria under the 2006 EC-Albania Readmission Agreement. However, more effective data management and better co-operation with neighbouring countries are needed. Border police staffing needs to be more stable, in particular to implement the EC-Albania Readmission Agreement properly.

The banking system is better used to fight money laundering; most public administration salaries are now paid through banks. Handling of stolen goods is now a criminal offence. A joint investigation unit links the Ministries of Interior and Finance, the General Prosecution Office and the State Intelligence Service. However, concrete results in the fight against money laundering remain poor. Legislation, investigative resources and expertise, technological support and inter-institutional co-operation need to be improved.

Greater use is being made of cross-service anti- narcotics task forces. Co-operation with foreign partners is improving. Proper storage infrastructure for seized drugs is being built. However, drug trafficking remains a serious concern. Significant quantities of drugs were seized but were still low compared with the amounts which are estimated to be trafficked through Albania. More determination and improved co-operation between the police and the judiciary is required to prosecute suspected drug traffickers and corrupt officials on appropriate charges. Detection measures and equipment at borders need to be improved.

A new state police law has been adopted which should help de-politicise the police. The South East Europe Police Co-operation Convention, now ratified, and a strategic agreement with Europol provide for intensified international co-operation. However, police staff have been reduced without due attention to maintaining the capacity and continuity of key units. Success in investigation and prosecution remains hampered by poor communication between police and prosecutors. Police management and internal control structures need to be strengthened.

Organised crime remains a very serious problem. A number of high-profile organised crime arrests were made. Police response to serious crimes has improved. New tactical and investigative equipment has been introduced. Co-operation with Interpol has improved, allowing a number of international arrest warrants to be executed. However, many international arrest requests have not yet been acted upon. Efforts against organised crime remain hampered by corruption and weak witness protection. IT problems hinder the use of criminal intelligence. Although co-operation with neighbouring countries on vehicle theft has improved, domestic inter-agency co-operation is poor, reducing efficiency.

Albania has continued to investigate and prosecute trafficking in human beings vigorously. Border controls have become somewhat more effective and international co-operation has improved. However, Albania is still a significant transit country and levels of sex trafficking within the country have risen. Few victims are willing to testify against traffickers, due to weak witness protection. Poor co-ordination hampers implementation of the national anti-trafficking strategy.

Counter- terrorism structures in the police and the intelligence service now co-operate better. Co-operation with international actors has been good. Albania adopted an export control law for military equipment which is in line with the acquis . However, equipment and training for counter-terrorist analysts and investigators remain insufficient.

The law on protection of personal data is being revised to bring it into line with European standards. However, an independent data protection supervisory authority with sufficient powers resources is not yet in place.

Bosnia and Herzegovina

As regards the political criteria, Bosnia and Herzegovina's progress has slowed down. Complex institutional arrangements, disregard for the Dayton/Paris peace agreement and nationalist rhetoric have undermined the country's reform agenda. Key European Partnership priorities remain to be addressed. Bosnia and Herzegovina's political leaders failed to achieve police reform. Lack of progress on this and other important issues is delaying the conclusion of the Stabilisation and Association Agreement (SAA).

Limited progress has been made in the area of democracy and the rule of law. Bosnia and Herzegovina's system of governance continues to involve significant international presence. The Office of the High Representative/EU Special Representative (OHR) has been working closely with the European Commission to bring Bosnia and Herzegovina closer to the EU. However, the authorities of Bosnia and Herzegovina have not demonstrated the capacity to take further political ownership and responsibility. Urgent measures are needed to ensure effective functioning of the state level institutions. The Peace Implementation Council decided to postpone the closure of OHR to 30 June 2008 and to review the situation in February 2008.

The elections in October 2006 were generally in line with international standards. The government of Republika Srpska was formed in November, but the state-level government and that of the Federation of Bosnia and Herzegovina needed more than four months to be constituted. Some progress has been made in improving the technical and human resources of the State-level parliamentary assembly , but important committees such as the committee for European integration require further strengthening. No progress has been made in improving state-entity co-ordination. Overall performance of the executive and legislative institutions has remained poor. Discussions on constitutional reform have stalled.

Some progress has been made in the area of public administration but significant further efforts are needed. The public administration reform co-ordinator's office has been strengthened and initial steps have been taken to implement the public administration reform strategy, which is a key European Partnership priority. An EU supported public administration reform fund has been set up. The civil service agencies have improved their efficiency and there have been further steps towards equipping the state-level ministries and institutions, especially in terms of staffing and office space. Sustained efforts are necessary to ensure the proper implementation of the national strategy for the public administration and to progress towards an efficient, professional, stable, transparent and accountable civil service.

As regards the judicial system , Bosnia and Herzegovina has made progress in reducing its dependence on the international community through the replacement of international judges and prosecutors by local ones. However, the fragmentation of the judicial system and disparities in the legal framework continue to hamper the operation of the judiciary. The independence and efficiency of the judicial system need to be further enhanced. The state level war crime chamber continued to function effectively. However, criminals need to be prosecuted more vigorously at entity-level.

Bosnia and Herzegovina has achieved little progress in the fight against corruption , which remains widespread and constitutes a serious problem. The National Anti-Corruption Strategy has not been properly implemented. More determined action against corruption is necessary.

Little progress has been made in relation to human rights and protection of minorities . Overall implementation of international human rights conventions needs to improve; full compatibility of Bosnia and Herzegovina's legislation with the European Convention of Human Rights is yet to be achieved. There is also room for improvement as regards the prevention of ill-treatment by law enforcement bodies and the fight against impunity, as well as access to justice and equality before the law. Further efforts are necessary to address the functioning of the prisons system in general, including the poor living conditions of inmates. Religious intolerance remains an issue. In the field of freedom of expression and media, the Federation public broadcasting law has not been adopted; this is necessary to meet a key European Partnership priority. Bosnia and Herzegovina has made progress in addressing the backlog of human rights-related cases, but court rulings have not always been properly implemented.

Bosnia and Herzegovina's legal framework includes provisions to protect the rights of women , children and socially vulnerable people , but implementation is poor overall. There is no comprehensive anti-discrimination law. There has been no progress on the registration of the trade-union confederation. The complex system of government and the fragmentation of legislation across the country continue to hamper social dialogue. Some progress has been made as regards the support provided by the authorities to civil society development, even though the sector remains weak overall.

In the area of protection of minorities further efforts are necessary to combat intolerance and ethnic discrimination, as well as to improve the implementation of legislation concerning minorities. The state-level Council of National Minorities and corresponding entity-level bodies are not operational. Many refugees and internally displaced persons do not benefit from basic pension and health provisions. Socio-economic integration of returnees remains a problem. The Roma minority still faces very difficult living conditions and discrimination, especially in the areas of education, social protection, health care, housing and employment. Concrete action is required to implement the national strategy for the Roma.

Some progress has been achieved in relation to regional issues and international obligations . Bosnia and Herzegovina participates actively in regional co-operation and has given its support to the South East Europe Co-operation Process (SEECP) and the Regional Co-operation Council (RCC). It has concluded a number of regional agreements, including the amended Central European Free Trade Agreement (CEFTA), which now require proper implementation. Bosnia and Herzegovina's co-operation with the International Criminal Tribunal for the former Yugoslavia (ICTY) has improved and is now at a generally satisfactory level. However, full co-operation with the ICTY remains necessary to sign the SAA and meet a key European Partnership priority. While Bosnia and Herzegovina has met most of the Council of Europe post-accession requirements, their implementation is lagging behind. As regards the International Criminal Court, the bilateral immunity agreement with the United States is not in line with the relevant EU common position and guiding principles.

On the whole Bosnia and Herzegovina's relations with its neighbours have been good, although certain strains have appeared in particular in relation to the ruling of the International Court of Justice on Bosnia and Herzegovina's lawsuit against Serbia and Montenegro for genocide. Little progress has been made in addressing the outstanding trade and border-related matters.

Bosnia and Herzegovina’s economy has continued to expand rapidly. Overall macroeconomic stability has been maintained, but threats to fiscal sustainability persist. The persistence of very high unemployment remains a major cause of concern. The deterioration of the overall political climate in the country was reflected in a slow-down in structural reform and in the business environment. Country-wide economic integration across entities has still to be fully achieved.

As regards economic criteria , Bosnia and Herzegovina has made little progress towards establishing a functioning market economy. Major reforms are needed to enable it to cope over the long term with competitive pressure and market forces within the Union.

Economic growth remained high and accelerated, while the external balance improved markedly in 2006. The currency board arrangement continued to underpin macroeconomic stability and inflation receded to the low levels recorded before the introduction of the VAT in January 2006. The introduction of VAT has increased fiscal revenue in 2006. The Federation took steps to replicate the January 2007 reform of direct taxation in the Republika Srpska, which simplified the tax system and reduced the fiscal burden. Privatisation progressed in Republika Srpska, led by major sales in the telecommunication and oil sectors. Foreign direct investment (FDI) increased significantly in 2007 and helped finance the external deficit. The financial sector developed rapidly while price competitiveness was to a large extent preserved.

However, the overall political climate and weak domestic consensus on the fundamentals of economic policy led to a slow-down of reforms both at entity and other levels of government. The lack of coherence and consensus in the implementation of reforms was manifest in particular in the Federation where the privatisation and restructuring of publicly-owned enterprises slowed down. Despite robust economic growth, unemployment remains very high. Public spending, and in particular social spending, rose significantly, weakening the quality of fiscal adjustment and adding to fiscal risks. Significant structural rigidities hamper the functioning of the labour market. The restructuring of state-owned enterprises advanced slowly and progress in the liberalisation of network industries was limited. The business environment is still affected by significant administrative inefficiencies, weak enforcement of creditor and property rights and sizeable intervention of the state in the productive sector. The large informal sector, fuelled by weaknesses in law enforcement and the regulatory framework, reduces the tax base, hampers the government's capacity to implement economic policies and affects negatively the business environment.

Overall, Bosnia and Herzegovina has made limited progress in aligning its legislation and policies with European standards. In areas such as competition, transport, energy visa management and asylum, some progress has been made. In other areas, such as social policies and employment, little has been achieved. Bosnia and Herzegovina's administration conducted the SAA negotiations in a professional and efficient manner; however, the country's overall administrative capacity needs strengthening.

Regarding the internal market , some developments have taken place in the area of free movement of goods . Preparations in the field of standardisation, certification and market surveillance have advanced, though slowly. A lack of conformity assessment bodies and procedures continues to hinder export capacity. The establishment of a market surveillance structure based on appropriate product legislation and the phasing out of pre-market controls remain pending.

Limited progress has been made as regards services , right of establishment and company law . Registering businesses and obtaining licenses remain burdensome. Banking supervision has not been brought to the State level and remains an Entity responsibility.

No significant further development has taken place in the area of free movement of capital , but Bosnia and Herzegovina's preparations in this area are on track. Limited additional progress has been made in relation to customs rules . Issues which deserve particular attention are rules of origin, valuation and free zones. As for taxation , VAT collection has been higher than expected, but no system for the reallocation of the collected revenue to the Entities and the Brčko District has been agreed. Some action has been taken regarding harmonization of direct taxation.

As regards competition , Bosnia and Herzegovina is progressing steadily in the area of anti-trust control. Some progress has also been made with regard to state aid through the establishment of a preliminary state aid inventory. However, an adequate regulatory framework for state aid is still missing. Some developments have taken place in the field of public procurement , in particular as regards improved operation of the Public Procurement Agency and the Procurement Review Body. Little progress has been made regarding the enforcement of intellectual property rights .

No progress has been made as regards the European standards on social policies and few developments have occurred in meeting the European standards on employment policies. Social and employment legislation and policies remain extremely fragmented. The institutional set-up of the country continues to be a serious handicap to the development of the necessary co-ordinated approaches. Some progress has been made with the European standards in the field of education , notably through the adoption of a higher education law supporting the participation in the Bologna process. Efforts are needed to increase co-ordination between the authorities involved in education at all levels of government. Separation of children in schools along ethnic lines remains an issue.

Little additional progress has been made towards ensuring the existence of a real internal market within Bosnia and Herzegovina, which is a key European Partnership priority. In this context, the State laws on obligations, leasing and pharmaceutical products have not been adopted.

As far as sectoral policies are concerned, no significant developments can be reported in the area of industry and small and medium enterprises (SME) . The industry policy strategy and the SME Development strategy have not been adopted.

Little progress has been made in the field of agriculture. Policy is still being developed at Entity level and co-ordination is insufficient. The development of a comprehensive agricultural strategy is delayed, although some steps have been taken to establish the necessary State-level legal framework. Implementation of the food safety, veterinary and phytosanitary legislation is poor, mainly due to inadequate human and financial resources and weak co-ordination between State and Entity services. Bosnia and Herzegovina's preparations in the field of environment remain at an early stage. A State-level environmental law to create the framework for a nationwide, harmonised environmental protection has not been adopted and the state environment agency has not been set up.

Sustained, albeit slow, progress continues regarding Bosnia and Herzegovina’s involvement in developing the trans-European transport network as it is actively participating in the development of the Core Regional Transport Network and in the South East Europe Transport Observatory (SEETO). Bosnia and Herzegovina is working towards the implementation of the first transitional phase the European Common Aviation Area Agreement (ECAA).

Little additional progress has been made in the field of energy . As a party to the Energy Community Treaty, Bosnia and Herzegovina needs to implement the relevant EU energy legislation, in particular that related to the gas sector. In the electricity sector, transmission has been unbundled, and the independent system operator (ISO) and the transmission company (Transco) are in place. Some problems persist with the transfer of liabilities between ISO and Transco with an adverse impact in the operation of the system. Reforms in the gas sector are particularly delayed. A country-wide energy strategy has not yet been developed.

As regards information society and media , some progress has been made in terms of liberalisation of the telecommunication sector and approximation of audiovisual legislation with the acquis by the Communications Regulatory Agency. No progress has been made on public broadcasting and the establishment of a State-level information agency. Some limited progress has been made in the area of financial control .

In the field of statistics , the co-operation agreement between the country's statistics institutions at State and Entity level has not been properly implemented. Significant efforts are necessary to establish an effective, EU-compliant statistical system in Bosnia and Herzegovina.

In the area of justice, freedom and security , some progress has been made in the fields of visa administration , border management, asylum and migration . The lifting of visa requirements for all EU citizens has been confirmed. The readmission and visa facilitation agreements at EU-level have been signed. Further progress has been made in establishing a functioning asylum system. There have been better results in preventing illegal migration, even though there is still considerable room for improvement as regard