TABLE OF CONTENTS

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

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

1.1......... Context 3

1.2......... Relations between the EU and the former Yugoslav Republic of Macedonia. 3

2............ Political criteria. 5

2.1......... Democracy and the rule of law.. 5

2.2......... Human rights and the protection of minorities. 12

2.3......... Regional issues and international obligations. 13

3............ Economic criteria. 15

3.1......... The existence of a functioning market economy. 15

3.2......... The capacity to cope with competitive pressure and market forces within the Union. 20

4............ Ability to take on the obligations of membership. 22

4.1......... Chapter 1: Free movement of goods. 22

4.2......... Chapter 2: Freedom of movement for workers. 23

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

4.4......... Chapter 4: Free movement of capital 24

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

4.6......... Chapter 6: Company law.. 25

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

4.8......... Chapter 8: Competition policy. 26

4.9......... Chapter 9: Financial services. 27

4.10....... Chapter 10: Information society and media. 28

4.11....... Chapter 11: Agriculture and rural development 29

4.12....... Chapter 12: Food safety, veterinary and phytosanitary policy. 30

4.13....... Chapter 13: Fisheries. 31

4.14....... Chapter 14: Transport policy. 31

4.15....... Chapter 15: Energy. 32

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

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

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

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

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

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

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

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

4.24....... Chapter 24: Justice, freedom and security. 48

4.25....... Chapter 25: Science and research. 52

4.26....... Chapter 26: Education and culture. 52

4.27....... Chapter 27: Environment and climate change. 53

4.28....... Chapter 28: Consumer and health protection. 55

4.29....... Chapter 29: Customs union. 56

4.30....... Chapter 30: External relations. 57

4.31....... Chapter 31: Foreign, security and defence policy. 57

4.32....... Chapter 32: Financial control 58

4.33....... Chapter 33: Financial and budgetary provisions. 59

Statistical Annex. 60

1. Introduction 1.1. Preface

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

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

– briefly describes the relations between the former Yugoslav Republic of Macedonia and the European Union;

– analyses the situation in the former Yugoslav Republic of Macedonia in terms of the political criteria for membership;

– analyses the situation in the former Yugoslav Republic of Macedonia on the basis of the economic criteria for membership;

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

This report covers the period from October 2013 to September 2014. Progress is measured on the basis of decisions taken, legislation adopted and measures implemented. As a rule, legislation or measures which are under preparation or awaiting parliamentary approval have not been taken into account. This approach ensures equal treatment across all reports and enables an objective assessment.

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

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

1.1. Context

The European Council granted the status of candidate country to the former Yugoslav Republic of Macedonia in December 2005. The Stabilisation and Association Agreement between the former Yugoslav Republic of Macedonia and the EU entered into force in April 2004.

1.2. Relations between the EU and the former Yugoslav Republic of Macedonia

The former Yugoslav Republic of Macedonia is participating in the Stabilisation and Association Process.

The country has been implementing its commitments under the Stabilisation and Association Agreement (SAA) with the EU, including all those relating to the first stage of implementation of Title V (‘Movement of workers, establishment, supply of services, capital’). The Council has not yet decided on the Commission’s 2009 proposal on passage to the second stage of the Association, under Article 5 of the SAA. The protocol on the adaptation of the SAA, to take account of Croatia’s accession to the EU, was signed in July 2014; pending its ratification, the protocol is applied on a provisional basis with effect from 1 July 2013.

Regular political and economic dialogue between the EU and the country has continued through the structures set up by the SAA. Meetings of the Stabilisation and Association Committee and the Stabilisation and Association Council took place in June and July 2014, respectively. Experts met in seven sub-committees and in a special group on public administration reform. The former Yugoslav Republic of Macedonia is engaging in the reinforced multilateral economic dialogue with the Commission and with EU Member States, in order to prepare for participation in multilateral surveillance and economic policy coordination under the EU’s Economic and Monetary Union. No meetings of the High Level Accession Dialogue took place during the reporting period.

Visa liberalisation for citizens of the former Yugoslav Republic of Macedonia travelling to the Schengen area has been in force since December 2009. As part of the monitoring mechanism in place since visa liberalisation, the Commission has been regularly assessing the progress made by the country in implementing reforms introduced under the visa roadmap. The monitoring mechanism also includes an alert mechanism to prevent abuses, coordinated by Frontex. The Commission has regularly submitted its post-visa liberalisation monitoring reports to the European Parliament and the Council. The next report will be presented by the end of 2014. A visa-waiver suspension mechanism entered into force in January 2014. On this basis, EU Member States can request the Commission, in an emergency situation and as a measure of last resort, to examine the possibility of temporarily suspending the visa waiver for third-country nationals. A readmission agreement between the European Union and the former Yugoslav Republic of Macedonia has been in force since 2008.

Over the period 2007-13, the EU provided financial assistance to the former Yugoslav Republic of Macedonia under the Instrument for Pre-accession Assistance (IPA). It has allocated a total of € 610 million to the country, complemented by IPA multi-beneficiary programmes. The 2012-13 IPA National Programme, worth € 56 million, will help to modernise the country in a several areas that are critical to its accession process, including the justice system, the economy, the agricultural sector and the environment.

Of this overall amount, the national authorities are directly responsible for managing about € 470 million under the decentralised implementation system. There have, however, been delays in procurement under that system, resulting in the loss of more than € 21 million by the end of 2013. There continue to be concerns that limited national capacity to programme and absorb IPA funds under the decentralised implementation system (DIS) may cause further losses in the future. The authorities therefore need to demonstrate greater commitment to increasing the capacity of the administration, in order to accelerate implementation and increase the impact of financial assistance.

Under IPA II, the country will continue to benefit from pre-accession assistance over the period 2014-20, with total indicative funding of € 664 million. The Commission drafted an indicative strategy paper for this timeframe, in consultation with the national authorities and other stakeholders, which was adopted in August 2014. IPA II assistance will be directed towards supporting reform efforts in the areas of the rule of law and governance, and competitiveness and growth. Bilateral IPA II assistance will continue to be complemented by IPA II multi-beneficiary assistance. The National Programme for 2014 addresses the sectors of democracy and governance, rule of law and fundamental rights, competitiveness and innovation, transport and environment and agriculture.

The former Yugoslav Republic of Macedonia participates in the following EU programmes: the Seventh Research Framework Programme, Progress, the Competitiveness and Innovation Framework Programme, Culture, Europe for Citizens, Customs, and Fiscalis. The country has also recently concluded or is in the process of concluding new agreements for a number of programmes, including: Horizon 2020, Erasmus+, Competitiveness of Enterprises and Small and Medium-sized Enterprises, Creative Europe, and Employment and Social Innovation.

2. Political criteria

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

2.1. Democracy and the rule of law

Since independence in 1991, democracy has been consolidated. Inter-ethnic relations, which remain fragile, continue however to pose a challenge for the country. The Ohrid Framework Agreement, which brought to an end the conflict of 2001, provides the framework for preserving the multi-ethnic character of the society. There continues to be a lack of trust between the communities, however, and further initiatives to proactively promote an inclusive multi-ethnic society are needed. In recent years, an increasingly divisive political culture has resulted in two political crises and a breakdown in political dialogue. Parties in government have also blurred the line between the state and party, thus eroding trust in public institutions. There are serious concerns about government control over public institutions and the media. Issues — which also feature in last year’s report — about freedom of expression and the media, independence of the judiciary and quality of justice need to be addressed.

Constitution

In July 2014, the government proposed to the parliament a package of seven constitutional changes in a broad range of areas. These included the expansion of the system of constitutional complaint and the safeguarding of the independence of the Central Bank and the State Audit Office. However, the package of amendments was prepared in a very short time and without the necessary implementing legislation. Its compatibility with the EU acquis and European standards is being assessed. Moreover, any amendments to the Constitution need to be based on broad consensus.

In November 2013, a majority of the Constitutional Court judges elected a new President from among their number, following the retirement of the incumbent President. The Constitutional Court also moved into fully equipped, modern premises. Its work remains hampered, however, by inadequate human resources, in particular a shortage of expert associates. The number of constitutional challenges received and handled annually remained on a par with previous years, but there have still not been any steps taken to improve legal certainty as regards legislation which has been annulled due to unconstitutionality, and this often creates gaps in the legal framework. The executive and legislative branches need to ensure a more systematic follow-up procedure to address this. There are also concerns that changes in the composition of the Constitutional Court in recent years have affected its independence, and that it has started to delay and compromise on decisions. In January 2014, it rejected an initiative to examine the constitutionality of the controversial 2013 budget, only after considerable delay and on technical grounds. In April 2014, the Constitutional Court rejected an initiative to examine the constitutionality of the controversial Lustration Law, despite having already asked for, and received, the opinion of the Venice Commission.

Elections

Presidential elections took place in April, together with early parliamentary elections.

In the presidential elections, President Ivanov, from the ruling party VMRO-DPMNE,[3] was re-elected for a second five-year term. He won the second round with 55 % of the vote against 41 % for the candidate from the main opposition party, SDSM.[4] Two ethnic Albanian parties, one in government (DUI[5]) and one in opposition (NDR[6]), contested his legitimacy. DUI had proposed to have a ‘consensual’ presidential candidate, acceptable to all communities and, when this was not accepted, exerted what the OSCE’s Office for Democratic Institutions and Human Rights (OSCE/ODIHR) considers undue pressure on its voters not to vote. These parties and SDSM, were absent from the President’s inauguration.

Parliamentary elections were held alongside the second round of presidential polls on 27 April, 14 months before the end of the government term. The VMRO-DPMNE led coalition won 61 seats (out of a total of 123), DUI 19 seats, the SDSM-led coalition 34 seats, DPA[7] seven seats, minor parties GROM[8] and NDR one seat each. As polls closed, the main opposition party SDSM announced that it would not recognise the results of the presidential or parliamentary elections, alleging a series of irregularities, including vote buying, intimidation, phantom voters, and bias on the part of the national broadcaster.

The results increased the number of seats for both VMRO-DPMNE and DUI, which again formed a coalition. This reinforced mandate came against the backdrop of observations by OSCE/ODIHR that both elections were efficiently administered, that candidates had been able to campaign without obstruction and that freedom of assembly and association had been respected. They noted, however, that the governing parties did not provide for a level playing field due to a lack of adequate separation between the party and state and that allegations of voter intimidation persisted throughout the campaign. OSCE/ODIHR media monitoring showed that the majority of monitored media, including the public broadcaster, was biased in favour of the ruling party, and that the media often failed to distinguish between the coverage of officials in their capacity as ministers and as candidates. The State Election Commission met almost all of its obligations and held regular sessions, but continued to be divided along party lines on contentious issues. Concerns were also raised about the management and accuracy of the voters’ list. During summer 2014, two working groups tasked with the implementation of recommendations of the OSCE/ODIHR resumed their activities.

Parliament

A new parliament was formed and took office on 10 May 2014, although without MPs from the SDSM opposition bloc. The ruling coalition maintained a stable majority. Out of the 34 MPs from the SDSM-led coalition, 3 have accepted their mandates. The remaining mandates have not yet been procedurally rejected. At the end of August, after an altercation between DPA and DUI MPs, DPA temporarily withdrew from parliament. The absence of most opposition MPs raises concerns about the inclusive nature of parliament’s work.

The parliament remained active prior to the elections, adopting legislation, and conducting debates, including on Euro-Atlantic integration. Opposition parties participated in the work of the parliament until the elections. There was broad cross-party consensus on amendments to about 60 laws, including to the Electoral Code and the Criminal Code, but not on amendments to the laws relating to the media. The parliament held debates on three motions submitted by the opposition.

The working group on the implementation of the recommendations made by the Committee of Inquiry into the events of 24 December 2012, when a large number of MPs and journalists were forcibly removed from the plenary hall, was active until October 2013, when SDSM members suspended their participation in protest at the arrest of the chair of Skopje Centar municipal council. As a result, the working group did not manage to complete its work on the Committee’s recommendations, and in particular on changes to parliament’s rules of procedure.

The Committee for EU Affairs reviewed all 19 laws enacted under the National Programme for the Adoption of the Acquis, and conducted an evaluation of the use of IPA funds, with the participation of the executive, academia and civil society organisations. Before the elections, the National Council for EU Integration met only twice, the Committee on Inter-Ethnic Relations once and the Permanent Oversight Committee on Human Rights did not meet. Of the 399 laws adopted during the reporting period, the shortened procedure was applied to 175.

The Parliamentary Institute provided training and support to the newly elected MPs (45 out of 123).

Overall, the functioning of parliament continued to be hindered by the lack of constructive political dialogue and the ongoing deep divisions between the political parties. The absence of most opposition MPs from parliament hampered its work on adopting new reforms, and its ability to provide the necessary checks and balances on the activities of government. It is the responsibility of both government and opposition to ensure that political debate takes place primarily in parliament and to contribute to creating the conditions for its proper functioning. The recommendations made by the Committee of Inquiry should be implemented.

Government

The new government formed in June 2014 is again a multi-ethnic coalition with VMRO-DPMNE and DUI as the main partners. The government work programme for 2014-18 remains largely the same as under the previous two governments: increasing economic growth, integration into the EU and NATO, fighting corruption and economic crime, maintaining good inter-ethnic relations on the basis of the Ohrid Framework Agreement and investment in education and science. The government also committed itself to implementing EU-related reform priorities. In general, the Macedonian government needs to function better as a unit in order to take proactive joint measures to increase trust between communities.

With respect to EU integration activities and EU assistance, the office of the Deputy Prime Minister for European Affairs plays a key role.

The use of administrative registries is being considered as an alternative methodology to a population census, which was not carried out in 2011 due to disagreements about the methodology for counting citizens abroad. The use of an alternative methodology would require broad cross-party consensus.

Decentralisation of government is a central part of the Ohrid Framework Agreement, but one municipality has still not completed the second phase of fiscal decentralisation. Some municipalities, such as Centar, were subject to a disproportionate number of inspections by state inspectorates. There has been insufficient follow-up by the authorities to the attacks and vandalism on the buildings of the municipality of Centar.

Extra efforts are required to ensure the transparent distribution of capital grants to the municipalities and to ensure that they have the necessary financial sustainability to carry out the responsibilities transferred to them. The relevant laws on regional development have not yet been fully implemented. The regional development budget remains insufficient.

Overall, the coalition government needs to work in a more integrated, coordinated and transparent manner, in order to take proactive measures on national, inter-community and EU-related issues. Actions should be taken to address OSCE/ODIHR concerns about the blurring of state and governing parties. Adequate resources are needed to complete the process of decentralisation of government and to support local development.

Public administration

The country has engaged in wide-ranging reforms of public administration. The Special Group on public administration reform, the oldest in the region, continued its work. Over the years, the Macedonian public administration has built up skilled staff who need to be retained. However, politicisation at both central and local level remains a serious concern. Confidence in the independence of state institutions is low due to widely-held perceptions that the public administration is politicised and lacks transparency. As reported by OSCE/ODIHR, credible allegations have been made that pressure was exerted on public sector employees during the April elections.

A public administration reform strategy, in place since 2010, provides a comprehensive strategic framework for public administration reform. It aims to improve the legislative and administrative framework, in order to increase the capacity, efficiency and transparency of public administration and to improve the service provided to the general public. The Ministry of Information Society and Public Administration is formally in charge of coordinating this reform process, while major policy decisions remain with the Prime Minister’s office.

Procedures for policy development and coordination across the sectors are well defined, but are not always efficiently implemented. Thorough analysis and assessment of policies is often lacking. Procedures for monitoring and reporting on government performance have also only been partially implemented. The use of the single Electronic Register of Legislation has improved.

With regard to public service and human resources management, employment in the public sector continued to increase, in particular in public enterprises. The routine practice of creating new posts on social or political grounds has artificially inflated the public service, undermining the principle of merit and the overall goal of an efficient public administration. Prior to the 2014 elections, the ruling party announced plans to fill a number of vacant posts at all levels, including managerial, in municipal and public offices and enterprises.

Some improvement has been seen in the representation of minorities, but smaller minorities continue to be under-represented. Efforts to meet targets for equitable representation must also take account of institutions’ real staffing needs.

A new legislative framework for civil service and public employment was adopted in February 2014 and is scheduled to be fully implemented in 2015. This is a step towards ensuring a unified, transparent and accountable public administration, by introducing common principles to be respected by all state employees and by creating a common regulatory framework. The legislative framework streamlines recruitment for both majority and non-majority communities, putting more emphasis on merit. The new legislative framework will require detailed data on public sector employees to be made publicly available, which should contribute to improving transparency.

The full assessment of the new laws will only be possible once all implementing rules, including key regulations on defining and fulfilling targets for equitable representation, are in place and applied. A number of exceptions allow staff in some institutions to be partially or totally regulated by special laws or general labour law and collective bargaining. There continue to be concerns about the transparency of the staff dismissal and mobility procedures, and about the methodology of the testing phase in the selection process.

As part of improving service delivery, the government continued to promote and develop e-government and one-stop shops as useful tools for providing services to the general public. The interoperability framework needs to be completed. The principle of tacit administrative approval continued to be implemented inconsistently, with complex appeal procedures and fees causing uncertainty and delays. The state commission for administrative appeals is still insufficiently equipped and understaffed, despite the scope of its work and its responsibilities having been increased. The new draft legal framework on general administrative procedures needs to bring major changes to the approach taken, to the proceedings themselves, the remedies used in cases where appeals are upheld and the enforcement of decisions.

With regard to accountability, the enforcement of the Law on Free Access to Public Information remains inadequate. A Law on Use of Public Data, adopted in February 2014, is expected to increase transparency and encourage public institutions to publish data. The number of complaints received by the National Commission for Protecting Access to Information, primarily against state administrative bodies, local authorities and the judiciary, decreased by more than half in 2013. As was the case in the previous year, three quarters of the complaints related to the failure to respond promptly to requests. For the law to be enforced efficiently, the National Commission needs to have the capacity and the power to impose penalties for misdemeanours.

The essential elements of the legal framework for public financial management are in place, but progress in implementation has been limited and patchy. There is not yet a public financial management reform programme to address more systematically the necessary reforms in the different parts of the public financial management system. A public finance review is under way and could be used as a starting point for preparing such programme. Strategic planning and budgeting needs to be strengthened and a medium-term budgetary framework established. To address some of the challenges, compulsory recording of multiannual commitments in the treasury system has been introduced. Annual budget planning and execution needs to be improved, in order to avoid cuts in growth-enhancing investment spending, under-execution of capital expenditure and an accumulation of arrears. The Law on financial discipline, dealing with late payments, was amended to extend its scope to the public sector. However, outstanding arrears from the delayed payment of VAT refunds and obligations for public contracts still exist. There is a lack of transparency around the full extent of public debt. The legal framework for awarding public contracts is relatively advanced but uses lowest price as the main criterion for selection, as opposed to best value for money, which may have a negative effect on the quality of public spending. The procedure for awarding contracts needs to be made more transparent. Implementation of public internal financial control is still at an early stage. The State Audit Office performs all types of audits, and performance audit is gradually being developed. Its resources are not sufficient to fully cover its mandate.

Overall, public administration remains fragmented and subject to political influence, despite progress on legislation. Additional efforts are needed to ensure that the principles of transparency and accountability, merit and equitable representation are applied. The basic structure and processes of a public financial management system are in place, but fiscal transparency needs to improve. There are also weaknesses in the implementation of public financial management systems, and a more comprehensive approach to reform is needed.

Ombudsman

The Office of the Ombudsman was established in 1997 and has built up a significant practice of monitoring and reporting. It is mandated by the Constitution and the Law on the Ombudsman to protect citizens’ rights. In 2013, the Office received 3 780 complaints (a decrease of 27.5 % compared to 2012). Violations were confirmed in 1 174 cases, most of which concerned the judiciary, consumer rights and property rights. Increased numbers of violations were confirmed in the areas of anti-discrimination and prisons, among others. As in previous years, the level of acceptance and follow-up of the Ombudsman’s recommendations by state bodies remained high, at around 80 %. More efforts are still needed from the Ministries of Health and Finance, as well as local self-government bodies, to follow up on pending recommendations. The Office continued actively to pursue its role as National Preventive Mechanism under the Optional Protocol to the Convention against Torture. The Law on the Ombudsman needs to be amended in order to ensure full compliance with the Paris Principles relating to human rights bodies, notably to extend the Office’s mandate to human rights promotion and to secure its financial independence. A legislative proposal has been presented to the government; however this has not been acted upon.

Civil society

An empowered civil society is a crucial component of any democratic system and should be recognised and treated as such by the government. There have been formal improvements in terms of legislation and consultation mechanisms, but civil society organisations continue to express concern about the difficult climate in which they operate and the limited government commitment to dialogue.

The Secretariat for European Affairs took steps to improve consultation of and coordination with civil society organisations. The government’s second Strategy and Action Plan for cooperation with civil society was inadequately implemented, due to a lack of political commitment, administrative capacity and resources. Preparations for setting up an advisory council on cooperation with civil society, one of the main obligations in the government Strategy and the open government action plan, have not yet started. The code of good practice for participation of civil society organisations in policymaking processes has been applied inconsistently, with the result that the consultation process has largely continued to be a formality.

Granting of state funds to civil society organisations has not yet been fully regulated, leaving the sector largely dependent on donor funding. The relevant laws related to financing and tax incentives for the civil sector remain complex and inconsistent. The new law on money laundering and financing terrorism no longer imposes an obligation on civil society organisations to prepare annual programmes, or stipulates fines disproportionate to their annual budgets. Civil society in rural areas remains underdeveloped.

Civil society organisations have started to coordinate more with one another on specific topics, such as IPA II, and have proposed more structured mechanisms for consulting with the government, based on the sectoral approach.

Judicial system

The legislative framework governing the country’s judiciary, as well as its physical and technical infrastructure, has developed considerably as a result of the comprehensive reforms carried out over the past decade. Many of the overarching issues facing all candidate countries have been tackled, including the elimination of court backlogs, the establishment of the Academy for Judges and Prosecutors, the formal independence of the judicial governance body (the Judicial Council), the introduction of a system of administrative justice and improvements to both civil and criminal procedure legislation. As a result, the country is now in an advanced phase requiring more complex and challenging improvements. These relate to the need to secure not only structural but functional independence of judges, improving the quality of justice and standards of service to the citizen, increasing the cost-effectiveness and value of the court system, better strategic planning, increased use of non-judicial remedies and alternative dispute resolution and improved access to justice for more vulnerable members of society.

One of the main challenges is the growing concern voiced about the selectivity of, and influence over, law enforcement and the judiciary. The basic rule of law principle, that justice must not only be done but must also be seen to be done, is not fully understood or respected by the authorities in terms of law enforcement actions targeted at specific persons or sectors. Questions continue to be raised both inside and outside the country about possible political influence over certain court proceedings. Although the court structure is formally independent from external influence of the parliamentary and executive branches, individual judges must also appear to be acting independently of any form of pressure, otherwise public trust will be lost and the rule of law called into question. Systemic improvements to the quality of justice are also needed, notably clearer reasoning and transparency of court judgments (to increase public trust and address concerns about independence); greater and more consistent use of superior court and ECHR case-law (to improve the predictability and legal certainty for individuals and businesses using the courts) and more widespread implementation of the existing Codes of Ethics. Strengthened safeguards are also needed to ensure that judicial appointments and promotions are merit-based.

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

Fight against corruption

The legal and institutional framework is in place and the country is steadily building a track record of investigations, prosecutions and convictions. Data has been gathered on several hundreds of corruption cases initiated since 2009 and over 30 high-level corruption cases initiated since 2004, all of which are now subject to continuous monitoring from investigation until final sentencing. However, more concrete results need to be seen in practice, both in terms of reduction and deterrence of corruption. The human and financial resources of the various enforcement bodies and supervisory agencies remain weak and their powers, status, independence and visibility need to be strengthened in order to engage in effective operations. Inter-agency cooperation and communication still needs to improve further and data exchange and sharing is limited. Problems include the lack of IT interconnectivity between the courts and the prosecution service and the absence of a central register of public officials, which hampers the supervisory work of the State Commission for the Prevention of Corruption. The lessons learned from past anti-corruption policies and measures need to be put to use much more effectively. There is currently little strategic planning in this area, and future policies should be better targeted towards the real problem areas, including public procurement, political corruption and high-level corruption. Awareness-raising measures and greater political commitment are urgently needed. Claims of selective enforcement and political influence in this area persist, and a more proactive stance is needed to eliminate these serious concerns. Public trust in anti-corruption bodies remains low. As is the case elsewhere in the region, corruption remains prevalent in many areas and continues to be a serious problem.

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

Fight against organised crime

The legal and institutional framework is in place and there is active regional and international cooperation, including through Eurojust and Europol. The country gained access to Europol’s SIENA platform in 2013, which considerably strengthened information exchange with EU law enforcement bodies. As was the case in previous years, a number of successful police operations against organised groups were carried out, notably cutting off international routes for drug trafficking and smuggling of migrants. A track record has been developed of all organised crime and corruption cases initiated by the Ministry of Interior (Department for Suppression of Organised and Serious Crime) since 2008, but more efforts are needed to monitor all cases from investigation until final sentencing, including through improved feedback and information exchange between law enforcement, the prosecution service and the courts. The capacity to fight organised crime remains hampered by the fact that neither the National Coordination Centre for the Fight against Organised Crime nor the National Intelligence Database has yet become operational, and delays persist in setting up the Investigative Centres foreseen under the new Law on Criminal Procedure.

For a detailed analysis of the developments in the fight against organised crime, see Chapter 24 — Justice, freedom and security.

2.2. Human rights and the protection of minorities

The overall framework for the protection of fundamental rights is in place but more focus needs to be placed on its effective implementation.

The situation as regards freedom of expression continues to be highly problematic. This is in spite of the introduction of comprehensive new media legislation at the end of 2013, following extensive public consultations and advice from international organisations.

There is indirect state control of media output through government advertising and government-favoured (and favourable) media outlets. The public broadcaster does not fully play its role as the provider of balanced and informative media content, and its political bias was noted by OSCE/ODIHR during both this year’s and last year’s elections. This results in a scarcity of truly independent reporting and a lack of accurate and objective information being made available to the public by the mainstream media. Poor journalistic standards and ethics contribute to the situation. A positive development has been the establishment of a self-regulatory body, set up in December 2013 by media actors themselves. This should be supported in order to become operational as soon as possible. In September 2014, the government made data on government advertising, including partial figures, publicly available; however it is still unclear which media outlets are the primary beneficiaries of such campaigns and according to what criteria public funds are disbursed. Defamation actions continued to be raised by journalists against other journalists (highlighting the low level of solidarity within the profession), by politicians against journalists (creating a chilling effect on the freedom of expression) and by politicians against other politicians (in the place of open public debate). Court judgments upholding claims of defamation have been relatively low in number and have been relatively conservative in their award of damages; however there are exceptions, including cases involving public figures. This sends a damaging message, both as regards the freedom of expression and the impartiality of the courts. Non-judicial means for resolving such cases should be developed and strongly promoted by the government and by journalists and public figures should lead by example.

As regards the rights of lesbian, gay, bisexual, transgender and intersex (LGBTI) persons, the violent incidents against the LGBTI Support Centre have not been repeated. Nevertheless, the perpetrators of these incidents are yet to be prosecuted. Considerable efforts are needed to increase awareness of and respect for diversity within society, and to counteract the intolerance perpetuated through the media and social networks. Data on the reporting, investigation and prosecution of hate speech and hate crime is not collected systematically and training of law enforcement, prosecutors and judges needs to be stepped up. The Law on Prevention and Protection against Discrimination still needs to be aligned with the EU acquis as it does not prohibit discrimination on the grounds of sexual orientation.

Progress on the protection of minorities continues to be hampered by insufficient financial and human resources and inadequate cooperation between the authorities concerned. A more proactive approach is needed to guarantee the ethnic, cultural and linguistic identities of all communities.

The Roma community continues to live in deep poverty and to suffer from poor social and economic conditions. Prejudice and discrimination against Roma persists, particularly in the area of employment. Projects are ongoing in several priority areas, but they are driven mainly by donor funding as state budget allocations remain unchanged. A new Roma strategy was adopted recently by the government.

The main priorities of the Ohrid Framework Agreement continued to provide a basis for inter-community relations. There is room for improvement in the areas of non-discrimination, fair representation, and the use of languages and education. The Law on Use of Languages and the Law on Use of Flags of the Communities have still not been properly implemented. Local committees for relations between the communities are suffering from a lack of resources. A review of the implementation of the Ohrid Framework Agreement is still incomplete and the resulting recommendations have not yet been published. The budget of the Secretariat for the implementation of the Ohrid Framework Agreement has been increased, mostly to take account of the salaries of around 1 700 civil servants who are yet to be assigned to the state administrative bodies. The Secretariat and the Secretariat General continued recruiting civil servants from non-majority communities, but without specifying defined posts or job descriptions, often at the expense of the principle of merit. In 2013, the overall proportion of civil servants coming from non-majority communities increased slightly to reach 19 %. Measures to address the underrepresentation of smaller minorities, such as the Roma, Turks and others, remain inadequate. Increased political support and state funding are necessary for efficient implementation of the Strategy on Integrated Education.

Major protests by the ethnic Albanian community started in July after the court verdict on the so-called ‘Monster’ case relating to murders carried out in 2012. The murder of a teenager in the Skopje municipality of Gjorče Petrov in May, while not ethnically motivated, triggered protests and increased inter-ethnic tension, again exposing the lack of trust between communities. The coalition partners made joint efforts to calm the protests but some political leaders from both communities continued to use ethno-centric and divisive language, particularly during election campaigns. More effort is needed, under the Ohrid Framework Agreement, to proactively promote positive inter-community relations.

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

2.3. Regional issues and international obligations

The former Yugoslav Republic of Macedonia continued to cooperate fully with the International Criminal Tribunal for the former Yugoslavia. There are no remaining cases or appeals pending in The Hague.

The former Yugoslav Republic of Macedonia still maintains a 2003 bilateral immunity agreement with the United States, granting exemptions for US citizens from the jurisdiction of the International Criminal Court. In doing so, it is not complying with the EU Common Positions on the integrity of the Rome Statute or with the related EU guiding principles on bilateral immunity agreements. The country needs to align with the EU position.

As of 1 January 2014, there were a total of 2 074 refugees in the former Yugoslav Republic of Macedonia, of which 955 were Roma refugees from Kosovo* and 229 internally displaced persons. In 2013, 82 persons were voluntarily repatriated to Kosovo and Serbia. The Ministry of Employment and Social Policy continues to provide financial support to families for rented housing and utilities, in accordance with the Strategy for Integration and the Law on Asylum and Temporary Protection. A committee was formed to represent Roma refugees. Some social housing units were provided. Roma refugees continue to live in poverty, in substandard living conditions, with a high level of unemployment. Access to education, housing, health and employment continues to be a concern. Court procedures concerning internally displaced persons, in relation to claims for damages resulting from the 2001 conflict, are still ongoing and the majority of those affected remain housed with host families.

Regional cooperation and good neighbourly relations form an essential part of the country’s process of moving towards the EU. The country has continued to actively participate in regional initiatives, including the South-East European Cooperation Process, the Regional Cooperation Council, the Energy Community Treaty, the European Common Aviation Area Agreement and the Central European Free Trade Agreement, which it is chairing in 2014. The country is continuing to contribute to the EUFOR ALTHEA mission in Bosnia and Herzegovina.

On 29 September 2014, the former Yugoslav Republic of Macedonia, Bosnia and Herzegovina, Montenegro and Serbia signed an agreement on reducing the prices of roaming services on public mobile communications networks.

The former Yugoslav Republic of Macedonia has continued to play a generally constructive role as regards bilateral relations with other enlargement countries and neighbouring EU Member States. A bilateral convention on regional cooperation, under Article 12 of the SAA, has not yet been concluded with Serbia.

Good bilateral relations with Albania continued. Short-lived tensions following demonstrations and statements in July due to the verdict in the ‘Monster’ case did not interrupt the frequent high-level bilateral visits, which continued throughout the year. In March, the two countries signed a memorandum of cooperation in the field of tourism.

Relations with Bosnia and Herzegovina continued to develop well. Amendments to a number of agreements were ratified. Rescue teams were sent and funds collected to support relief efforts following the May floods.

Cooperation with Montenegro was further strengthened. The countries signed an agreement on sharing diplomatic and consular services and a protocol on cooperation in the area of military training. The former Yugoslav Republic of Macedonia also signed agreements on legal assistance in civil and criminal matters, on mutual enforcement of court rulings, and on cooperation in the field of information and communication technologies with both Montenegro and Serbia.

Relations with Serbia remained good. A joint centre for police cooperation was opened at the Tabanovce border crossing point and a protocol on cooperation between Ministries of the Interior was signed. The two countries also signed agreements on the exchange and mutual protection of classified information, on mutual recognition of diplomas, and on mutual sharing of premises for diplomatic and consular offices. They also signed a protocol for cooperation in the field of tourism. The dispute relating to the Orthodox churches in both countries remained unresolved but did not prevent closer political cooperation. Rescue teams were sent and funds collected to support relief efforts following the May floods.

Cooperation with Kosovo continued to improve. Agreements on mutual recognition of pensions and on strengthening cultural cooperation entered into force. An agreement for the opening of a new joint border crossing point at Belanovce-Stančik was ratified.

Close relations with Turkey were maintained. The countries ratified agreements on cooperation in the fields of employment, social security and employment, and on activities linked to setting up cultural centres. Foreign direct investment from Turkey has grown steadily in the past few years, reaching 4 % of the country’s total FDI stock in 2013.

Relations with Bulgaria remain affected by differences primarily concerning interpretation of history. A number of high-level visits took place. In December, consultations on EU-related issues were held at official and expert level. Negotiations on a bilateral agreement on good neighbourly relations continued. There was also an exchange of letters between Presidents Ivanov and Plevneliev on this subject. However, open issues remain. The countries continued to cooperate on defence issues, and cross-border, sectoral and trade relations continued, with good cooperation including on infrastructure priorities. People to people contacts continued normally.

Good relations with Croatia continued, promoted by high-level visits. An agreement on the Euro-Atlantic Partnership entered into force. Amendments to the agreement on economic cooperation and trade were signed, as was the joint declaration on the adoption of the regional strategy for research and innovation development for the period 2014-20.

Relations with Greece continued to be affected by the name issue. Formal talks on the name issue, under the auspices of the UN and led by the UN Secretary General’s Personal Envoy Matthew Nimetz, included visits to both Athens and Skopje, and three rounds of talks in New York, but did not bring a resolution of the dispute. High-level visits took place including a visit by Foreign Minister Venizelos, in his capacity as chair of the Council of Ministers of the EU. The respective Ministries of Defence signed a cooperation protocol. Economic and trade relations continued normally.

Overall, the former Yugoslav Republic of Macedonia is participating actively in regional cooperation and further developing bilateral relations with its neighbours. The name issue continues to affect relations with Greece. Maintaining good neighbourly relations, including a negotiated and mutually acceptable solution to the name issue, under the auspices of the UN, remains essential. Open issues remain in the negotiation of a bilateral agreement with Bulgaria. A constructive approach to challenges with neighbours is important and actions and statements which negatively impact good neighbourly relations should be avoided.

3. Economic criteria

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

Monitoring of the economic criteria needs to be seen in the context of the increased role of economic governance in the enlargement process, as welcomed by the General Affairs Council of 17 December 2013. To this end, the ECOFIN Council in May adopted targeted policy guidance for the country, based on its Pre-accession Economic Programme.

3.1. The existence of a functioning market economy

Driven by a strong external sector and foreign direct investment, the economic recovery progressed and external imbalances declined somewhat. Yet, structural rigidities continue to impede the proper functioning of the labour market, and fiscal discipline and transparency suffer from being driven by short-term, ad hoc concerns. While the involvement of the state in the economy remains moderate, in terms of its share in productive capital and its intervention in price setting, the development of a competitive private sector is hampered by difficult contract enforcement, frequent legal changes without adequate consultation of stakeholders, and uneven enforcement of regulatory compliance requirements. Implementation of reforms to improve the business environment remains sluggish. The development of the domestic economy depends on building better linkages between foreign investment companies and local businesses which, in turn, requires government and local businesses to work on better skills-matching and investment in higher-productivity activities. Improvements in market entry and exit would also help.

Economic policy

The government remains committed to growth and employment-enhancing policies focusing on foreign investment and the development of the domestic private sector. The labour market situation improved somewhat, but unemployment remains persistently high, in particular among the young. Fiscal discipline and transparency deteriorated further, affecting growth-enhancing capital spending. In January 2014, the authorities submitted the eighth Pre-accession Economic Programme (PEP), outlining key economic, fiscal and structural reforms for the period 2014-2016. Its macroeconomic and fiscal framework is somewhat optimistic with gradually increasing growth averaging close to 4 %, driven by domestic demand, and a gradual reduction in the general government deficit ratio to 2.6 % in 2016. The country would need to step up its efforts, in line with the Conclusions of the Ministerial Dialogue between the Economic and Finance Ministers of the EU and the Candidate Countries from May 2014, in order to strengthen medium-term budget planning and execution and to improve the employability of workers. In line with the same Conclusions, further efforts will be needed to improve the business environment, in particular market exit procedures and access to finance. Overall, the political consensus on the fundamentals of a market economy was maintained, but economic policy and public expenditure management remain driven by ad hoc concerns rather than the long-term requirements of the economy.

Macroeconomic stability

The economic recovery that began cautiously in the second half of 2012 has gained firmer ground. Driven by the external sector, output expanded by 2.9 % in real terms in 2013. Growth increased to 3.9 % year-on-year in the first half of 2014. Investment activity slowed down considerably in 2013, improving temporarily in the first quarter of 2014, before slowing thereafter. Private consumption contributed positively to GDP growth in 2013, and remained resilient in 2014. Industrial production has picked up significantly since the fourth quarter of 2013, mainly due to a strong recovery in manufacturing. GDP per capita remains at about 35 % of the EU average.

The current account deficit narrowed in 2013 to 1.8 % of GDP, as the merchandise trade balance improved, and in spite of a drop in current transfers. In the same period, foreign direct investment (FDI) inflows strengthened– in 2013, they accounted for 3.5 % of GDP, and stayed at the same level in the first half of 2014. For the same period the current account deficit declined, by 1.7 % in annual terms, on the back of a renewed pick-up in transfers, and in spite of a widening deficit in foreign trade. Increased government borrowing abroad and a surge in foreign loans to public enterprises were the main forces behind the gradual increase of gross external debt. At the end of the first quarter of 2014, it stood at 66 % of projected GDP, and increased further since then, as a result of the government’s € 500 million Eurobond issue in July. Looking ahead, as transfer inflows are expected to remain volatile, foreign investment and government external borrowing will have to carry the brunt of financing the current account deficit, which is likely to widen somewhat in the short term, given the substantial import needs arising from public infrastructure projects and the establishment of the new foreign entities. This is expected to be followed by a pick-up in export activity starting in 2015, when the new capacities are taking up operations. Overall, output growth needs to be more broadly based, and external imbalances are likely to widen again temporarily in view of investment-related imports.

Labour market conditions improved marginally, but remained challenging. The unemployment rate fell gradually, to 28.2 % in the second quarter of 2014, from an average of 29 % in 2013. However, youth unemployment remains at over 50 %, and four out of five registered unemployed have been so for a year or more. In 2013 employment rate remained relatively low at 50.3 % while labour force participation rate was 70.4 %. While employment was 1.3 % higher in the second quarter of 2014 than a year earlier, a large share of the new jobs, as in previous years, was in low-productivity sectors in the informal economy and — spurred by public subsidies — in agriculture, as well as in the public sector, aided by a significant increase in active labour market measures. More recently, the employment impact of the new foreign entities became visible in a pick-up in manufacturing jobs. Although complete information on public sector employment has not been provided or published, it is estimated that its share of total employment remained at about 20 %. The labour market remains marked by structural rigidities such as low labour force participation, a lack of mobility of workers between sectors, a skills mismatch and slow reforms of the training and education system, subdued innovation activity by firms, and low labour productivity. Overall, reforms to tackle the structural rigidities of the labour market have made only limited progress. The employability of workers should be improved through structural measures as well as through better targeting of the active labour market measures.

Monetary policy remained successful in defending the currency peg. The inflation environment remained benign, creating room for monetary policy to stimulate sluggish credit growth. The increase in the consumer price index (CPI) averaged 2.8 % in 2013, down by about 0.5 percentage points since 2012 and fell further in spring 2014, mainly due to declining prices for food and housing and utilities. Following a three-month long deflation, consumer prices rose again in July, as regulated electricity prices for households were raised and food prices stopped falling. After several cuts in the key monetary policy rates in January and July 2013, and an adjustment of reserve requirements to incentivise bank lending in local currency, the Central Bank reduced remuneration on banks’ required reserve deposits to zero in November 2013, but loan and deposit rates declined only slowly.

Fiscal discipline and the quality of public spending deteriorated further in 2013 and 2014. In both years, the government was again forced to adopt a supplementary budget due to pressures arising from revenue shortfalls and repayment of accumulated arrears owed to private companies in the first half of the year. The 2013 central government deficit target was raised from 3.6 % to 3.9 % of GDP, accounting for a substantial increase in pension payments and for the arrears, while the actual deficit, at 4.1 %, exceeded even the revised target. With a budget rebalance the planned budget deficit for 2014 was raised from 3.5 % of GDP, to 3.9 %. Spending was heavily concentrated in the pre-electoral period, and by end-July about 85 % of the original deficit target had been reached. Furthermore, capital expenditure makes up a relatively small part of overall spending — it accounted for 12 % of total expenditure in the 2013 supplementary budget — and is prone to under-execution, with only four fifths of budgeted sums executed.

The government’s medium-term strategy for 2014-2016 foresees a gradually declining general government deficit, to reach 2.6 % in 2016. However, the government’s stated goal of current expenditure-based consolidation is not sustained by policy measures. Pensions and agricultural subsidies were raised in spring 2014, and increases in public wages are planned. Deficiencies in public financial management led to a marked decline in fiscal transparency and fiscal discipline in recent years. To address these shortcomings, government budget users have been required, since January 2014, to record multi-year liabilities and to respect multi-year expenditure ceilings. In July, the government proposed the introduction of constitutionally-anchored ceilings on the central government deficit and on public debt, but did not provide adequate implementation details ensuring a sound, rules-based application of these provisions. An amendment to the Law on financial discipline, dealing with late payments, extended the law’s scope to the public sector, which could possibly alleviate the problems of government payment arrears to the private sector. However, the law contains a number of derogations and delayed entry into force for government entities, thus impeding its effectiveness. Overall, fiscal discipline needs to be improved, and there is significant scope for enhancing fiscal transparency. The government’s fiscal consolidation plans need to be underpinned by concrete measures.

The general government debt ratio, still comparatively moderate, has been rising continuously since 2008, mainly on account of increasing primary budget deficits. Central government debt stood at 40.8 % of GDP at end-July 2014 — before the launch of the Eurobond — compared to 34.1 % at end-2012 and 20.6 % at end-2008. Debt accumulated by public enterprises, and related contingent government liabilities due to debt guarantees — estimated at some 8 % of GDP — are a particular concern, as the government has shifted a large share of its spending on road construction off-budget to a new public enterprise. Hence, total public debt stands at close to 50 % of GDP, and is likely to rise further in the short- to mid-term, given the considerable financing needs related to planned investment projects. Overall, the continued increase in the levels of government and public debt gives rise to concern about its long-term sustainability. The government needs to take steps to stabilise debt levels.

Interplay of market forces

The economic importance of the public sector remained largely unchanged, with the private sector share in total assets of the economy at 85 %. While the overall number of enterprises with government participation decreased by 2, the number of enterprises in full state ownership remained unchanged, at 15, as did the level of capital in the five companies — mainly public utilities — with the largest share of state participation. In addition a Public Enterprise for State Roads started operations in January.

Administered and regulated prices account for some 13 % of the CPI basket. Regulated prices — about 12 % of the basket — usually cover production costs. Administered prices, such as for water and waste, account for only about 1 % of the basket and usually do not cover costs. Overall, the state’s share in the economy’s assets and in price setting remains moderate.

Market entry and exit

The ‘regulatory guillotine’ project of the government has made some progress in facilitating market entry, focusing on the reduction of administrative burdens and on measures for small and medium enterprises. However, business still faces difficulties in obtaining licenses and permits — the ‘one-stop shop’ procedure is advancing only slowly, and needs to be extended to business activities beyond construction permits. Obstacles to setting up a private business are a particular concern, as they tend to hamper the establishment of (import substituting) supply chains between the more technologically advanced foreign entities, and the domestic private economy. Improvements in market exit procedures remain even more limited. The number of bankruptcy procedures and deletions from the trade registry decreased in 2013 — between September 2013 and May 2014 it was lower by over 40 % compared to a year earlier. Despite previous reforms to speed up proceedings, only 20 % of bankruptcy procedures were concluded in 2013, significantly less than in 2012 (35 %). In order to further strengthen market exit procedures, the legislation was amended to introduce shorter deadlines for bankruptcy procedures and allow out-of-court settlement in case of insolvency.

Regarding the free economic zones, domestic companies do not enjoy a level playing field with foreign companies as regards incentives. Conditions for obtaining public support implicitly favour (bigger) foreign firms, as local firms can rarely meet the required investment size. Government arrears still pose a problem for business’ liquidity, despite the recently tightened legal requirements. Overall, while setting up a business has become slightly easier, difficulties remain as regards obtaining permits. Market exit remains lengthy, although the government has taken some reform steps in the right direction.

Legal system

The government continued to implement judicial reforms aimed at speeding up procedures and improving capacities, notably by upgrading information and electronic delivery systems. At the end of 2013, the number of pending cases had been reduced by 9 %. Contract enforcement remains difficult for private companies, with lengthy and costly legal procedures, inefficient licensing procedures, and often uneven application of laws. The large size of the informal economy continues to hamper competition and the development of a formal private sector. There is little available information on the Labour Ministry’s 2013 action plan for reducing the shadow economy, and the Minister presented a similar plan for 2014 without clear evidence of a results-based assessment of previous measures.

Business is still burdened by frequent new legislation without sufficient public consultation. Only 44.5 % of draft laws were published on the national electronic register in 2013 as opposed to 61.3 % in 2012. Overall, the legal system for a functioning market economy is largely in place, but inefficiencies arise in practice from lengthy procedures hampering enforcement of laws. Frequent changes of laws create legal uncertainty.

Financial sector development

The country’s financial system is dominated by the banking sector, about 89 % of the system’s total assets, while the insurance sector, including fully-funded pensions, represents roughly 4 % of total assets. The size of banks’ financial intermediation is important, with the assets-to-GDP ratio having risen gradually over recent years to about 80 % by the end of the first quarter 2014. On the positive side, concentration in the banking sector diminished somewhat, though 60 % of total assets are still owned by the three largest institutions. Banks are mainly funded by deposits, which recorded a sound annual growth rate of 7 % in the first quarter.

Financial stability indicators are resilient. Regulatory capital has diminished slightly, but is still far above levels required by banking regulation, and liquidity of banks remains ample. Profitability indicators point to strong performance, in particular in the second half of 2013 and beyond. The quality of loan portfolios has improved gradually since summer 2013, yet the ratio of non-performing to total loans to non-financial entities remains elevated, at 11.1 % at the end of March 2014. However, non-performing loans do not appear to pose a systemic risk, and are fully provisioned for. Private sector credit growth picked up again since the summer of 2013, after having declined since May 2012. Loan growth to companies began increasing only towards the end of 2013. Even though the share of domestic currency in total loans is increasing, about 50 % of loans are still denominated in foreign currency, posing potential market risks in case of adverse foreign exchange developments. A further risk might arise, in the mid-term, from potential parent-led restructuring, with negative impact on two of the biggest banks in the country, which together account for about 40 % of the sectors’ assets. The capacities of supervisory bodies were strengthened through amendments, in March 2014, to the Law on Insurance Supervision and to the Securities Law, tightening selection criteria for members of the supervisors’ decision-making bodies. Overall, the financial system remains stable, and supervisory capacities have been further strengthened. However, access to finance continues to be difficult, and the non-banking segments of the market need to be further developed, with a view to widening funding opportunities for the private sector. Measures should continue to be taken to repair the bank lending channel, including by fostering the clean-up of non-performing loan portfolios.

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

Human and physical capital endowment

Low labour market participation, in particular of women, and limited job opportunities in advanced industrial sectors restrict the opportunities for developing the skills of the workforce. The level of education and training of the workforce does not correspond adequately to the needs of the economy. Recent improvements in access to education have produced good results, as the number of early school leavers dropped, and the rate of pre-school enrolment increased. The number of graduates from tertiary institutions dropped in 2013, but the overall share of workers with tertiary education has risen by 4pp to some 18 % of the workforce between 2009 and 2013. However, one quarter of them is unemployed, as most of the job creation in recent years took place in low-productivity sectors.

Labour productivity remains low at about 18.4 % of the EU average and has not recovered since the crisis-related drop in 2008/2009, in particular in manufacturing. The sectoral structure of employment is stagnant — the economy remains focused on agriculture (19 % of total employment) and trade, the much-needed transition to higher-earnings jobs has not yet taken place. Foreign companies, many of which are active in higher-end manufacturing activities, often face difficulties in finding the necessary skills in the workforce or set up supply chains with local companies to substitute for imports. The government continues to address the labour market challenges primarily through a wide variety of active labour market measures, including subsidised employment schemes and grants for start-ups. These measures are insufficiently prioritised on the basis of performance evaluation, and do not adequately address the underlying structural causes of unemployment. The variety of measures and the number of workers covered by these schemes has increased significantly in 2014. While the government has adopted a number of strategies addressing structural rigidities in the labour market, such as a vocational training plan, actual implementation is lagging.

Capital investment remains modest — in 2013, gross capital formation amounted to about 29 % of nominal GDP, which is below the levels of the preceding two years. There is an emerging dichotomy in the country’s capital stock, with foreign investment increasingly focused on higher-productivity, technology-intensive sectors, while the capital stock in the local economy remains low and relatively outdated. The state of transport and energy infrastructure hampers economic development in many areas — the government is addressing this obstacle through large-scale public investment projects, co-financed by international donors and commercial banks. The share of foreign direct investment in GDP remained relatively low, and only 40 % of the inflows took the form of greenfield investment in 2013. The overall stock of FDI is also relatively low at about 50 % of GDP. Yet its recent change in structure — from services and utilities to machinery and transport equipment — makes a small, but positive contribution to updating the capital stock. Overall, the government has made some progress in addressing the prevalent shortcomings in the country’s human and physical capital endowment, but the challenges of the investment required to accelerate labour productivity growth and the structural transformation of the economy remain very large. The government should continue to improve the composition of spending, by prioritising investment projects according to their productive potential on the basis of cost-benefit evaluations.

Sector and enterprise structure

There was no notable change in the sectoral structure of the economy. At 36 %, trade, together with automotive-related services, dominated the enterprise sector. The share of agricultural output in the economy remains stagnant at about 10 %. Mainly due to the hesitant recovery of the manufacturing sector in 2013, the share of mining, manufacturing and utilities declined from about 21 % in 2011 to 16 % in 2013. The construction industry gained in importance, accounting for about 10 % of gross value added in 2013, up from 7 % in 2011, driven to some extent by public infrastructure investment, and by foreign investment.

In terms of size, the economy remains dominated by micro- and small enterprises, which accounted for more than 98 % of all companies in 2013. The number of large companies more than doubled, induced by the establishment of companies with foreign investment, even though their share remained well below 1 %. Small and medium enterprises accounted for over 80 % of total employment, with the share of large companies diminishing slightly to below 20 %. Overall, the sectoral and enterprise structure of the economy remains stagnant and focused on low-productivity activities. The recent increase in the number of large companies suggests that the share of more advanced manufacturing activities in the economy might strengthen somewhat in the coming years, but a genuine sectoral transformation remains elusive.

State influence on competitiveness

The state’s ownership of economic assets remained relatively moderate at about 15 % of GDP. The legal framework for state aid was strengthened by the adoption of regulations on regional aid, horizontal aid and Services of General Economic Interest, transposing the relevant EU legislation into national law. There is limited reporting on state aid. In the course of the second phase of the deregulation of the electricity market, which began in April 2014, 222 medium and large companies and started to purchase electricity on the open market. However, notwithstanding these developments, there is a wide range of policy instruments through which the government increasingly has an impact on the economy’s — and on different sectors’ and companies’ — competitiveness, such as direct subsidies and tax exemptions, in particular for foreign investors; on-site firm inspections and fines; involuntary rescheduling of payment contracts; public guarantees for loans to state-owned enterprises; public infrastructure projects; and active labour market programmes. Overall, against the overall background of a low share of the state in the economy’s assets, improved state aid legislation, and further deregulation of the electricity market, the state’s influence on competitiveness through the implementation of other policy instruments seems to have increased.

Economic integration and convergence with the EU

Total trade in goods and services remained high at about 126 % of GDP with exports totalling 54 % of GDP. In 2013, about 70 % of total exports went to the EU, some 7 % more than in 2012, and some 60 % (+2pp) of imports originated there. CEFTA was the second most important trading partner, at some 20 % of exports — less than in 2012 — and some 12 % of imports. Exports remain highly concentrated — 48 % of exports consisted of iron and steel, chemicals, and clothes. Yet, diversification continued, mainly on account of foreign investors, supporting a gradual shift to higher value-added products, such as machinery and transport equipment — its share in total trade increased to more than 13 % in 2013, from less than 5 % in 2008. Companies from the EU accounted for some 80 % of total FDI stock at end -2013. GDP per capita remained at about 35 % of the EU average in 2013. Overall, trade linkages with the EU have increased further in 2013, both on the export and import side, and the EU continues to account for the bulk of foreign direct investment.

4. Ability to take on the obligations of membership

This section examines the former Yugoslav Republic of Macedonia’s ability to take on the obligations of membership — that is, the acquis, as expressed in the Treaties, the secondary legislation and the policies of the European Union. It also analyses the country’s administrative capacity to implement the acquis. The analysis is structured according to the list of 33 acquis chapters. For each of these, the Commission assesses the progress achieved during the reporting period and summarises the country’s overall level of preparation.

4.1. Chapter 1: Free movement of goods

As concerns general principles, three additional measures relating to fulfilment of Articles 34 to 36 of the Treaty on the Functioning of the European Union were implemented. A further nine legislative amendments (out of a total of 42 identified as necessary) still need to be made.

Regarding preparations for an Agreement on Conformity Assessment and Acceptance of industrial products (ACAA), further efforts are required.

With regard to horizontal measures for standardisation, the country continued to adopt European standards, maintaining the high volume of the previous year. The Institute of Standardisation issued 25 773 standards and standardisation documents (as compared with 22, 552 a year earlier) of which 23 110 are European standards. Five national standards (for waste, geotechnical equipment, gas equipment and tobacco products and liquid petroleum gas) were issued. The capacity of the Institute is sufficient and six additional staff members were appointed. The Institute operates 26 technical committees all of which act as observers in EU standardisation bodies. Six legal entities conduct conformity assessments in regulated areas, mainly of lifts, pressure equipment, machines and cable transport devices.

In accordance with the new national legal framework on accreditation, all public administration bodies were obliged to introduce quality management systems based on international or local standards. The ISO 9001 standard is a minimum requirement. The Law on Accreditation, however, only recognises certificates issued by bodies accredited by the relevant national institute, and not those issued by EU certification bodies, which distorts competition and raises concerns about the implementation of the obligations under the Multilateral Agreement on Mutual Recognition of Certifications. The capacity of the Institute of Accreditation is sufficient. The Institute had accredited a total of 136 conformity assessment bodies and has withdrawn 13 accreditations. The Institute started the accreditation procedure for a medical laboratory in accordance with the new standard, ISO 15189:2010. The capacity of the Metrology Office was significantly strengthened by the appointment of 9 new employees, a 30 % increase in staff numbers.

During 2013, the State Market Inspectorate conducted 147 market surveillance inspections relating to the Law on Product Safety (less than half as many as in 2012) and 360 inspections relating to the Law on Construction Products (an almost four-fold increase on the previous year). These inspections identified, respectively, five and 23 misdemeanours. A total of 978 inspections were conducted relating to the application of the Law on Metrology and 87 abuses were identified.

In the area of ‘Old Approach’ product legislation, a list of prohibited chemicals and a list of high concern chemicals were published. There were some new developments regarding the ‘New and Global Approach’ product legislation and procedural measures, where the country is already at an advanced stage, with 58 Eurocodes endorsed and translated.

Conclusion

Little progress was made in this chapter. The creation of a legal framework for the introduction of ISO quality systems in the public administration is the most notable development. There are concerns over the limits imposed on the recognition of certificates, as this distorts competition. Overall, preparation in the area of free movement of goods remains at an advanced stage.

4.2. Chapter 2: Freedom of movement for workers

As regards access to the labour market, EU citizens are still not permitted to occupy public service posts. Preparations have begun for participation in the cooperation network European Employment Services. The time allowed for the Employment Agency to issue its opinion on a foreign worker’s request for a work permit was reduced from 45 to five days.

In the area of coordination of social security systems, an agreement with Kosovo on the contribution period entitling individuals to pension rights came into force in November 2013. Negotiations were launched with Slovakia on a bilateral social security agreement and with Hungary on the use of the European Health Insurance Card.

Conclusion

Some progress has been made in the area of freedom of movement for workers. Overall, preparations are still at an early stage.

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

With regard to the right of establishment, an electronic online application system for registration of companies is increasingly being used. Waiting times for obtaining permits were shortened and costs reduced. All construction-related permits for companies are issued electronically by the Ministry of Transport.

As regards freedom to provide cross-border services the regulations on veterinary medicine, private education, construction, tourism and regulated professions still contain restrictions that are not in line with the acquis.

Liberalisation of the universal postal services was postponed until 2017. The national regulatory authority has sufficient capacity and systematically monitors the quality of universal services, including delivery times and complaint handling. There continue to be concerns over the unlimited period set for designating the universal service provider and over the financing of the net costs of the universal service obligation.

A number of authorising bodies still do not apply the principle of mutual recognition of professional qualifications as required by the Professional Qualifications Directive. Legislation on commercial agents and professional use of toxic products has not yet been aligned with the acquis.

Conclusion

Limited progress was made in this chapter. Further action is needed to fully align national legislation with the acquis, particularly as regards the mutual recognition of professional qualifications and the services directive. Overall, in the areas of the right of establishment and freedom to provide services the country remains on track.

4.4. Chapter 4: Free movement of capital

The country already meets the requirements of the first stage of the Stabilisation and Association Agreement in the field of capital movements and payments. There are, however, restrictions on capital movements not allowed by the EU acquis. EU citizens are not allowed to purchase agricultural land. Further liberalisation of capital movements and payments is foreseen after the transition to the second stage of the SAA.

The National Payment System Council adopted an action plan for the implementation of the 2013-17 strategy for the development of payment systems and the working groups in the area of payment card operations have stepped up their activities.

As regards the fight against money laundering, the Law on the Prevention of Money Laundering and Financing of Terrorism was amended, improving compliance with the recommendations of the Financial Action Task Force. The number of suspicious transactions referred to the Financial Intelligence Unit fell from 239 in 2012 to 169 in 2013, which represents a drop of 29 %. In 2013 the Financial Intelligence Unit submitted to law enforcement institutions 25 notifications relating to money laundering and financing of terrorism, which is 31 % less than the previous year. There were 3 prosecutions against 25 persons for money laundering and final convictions in 4 cases against 41 persons.

Conclusion

Limited progress was made in this chapter. The main developments were related to payment systems and to the institutional capacity for combating money laundering and financing of terrorism. Overall, preparations in the area of free movement of capital remain on track.

4.5. Chapter 5: Public procurement

As concerns general principles, the 2014-18 strategy for public procurement systems was adopted. The Law on Public Procurement has been amended on a number of occasions to bring the requirements for providers and subcontractors of transport services into line with the acquis. National legislation has not yet been aligned with the EU Directive on Defence and Sensitive Security Procurement.

Legislation on the awarding of public contracts requiring tender documents to be published in an electronic form and free of charge has increased the transparency of the public procurement process. A new oversight body, the Public Procurement Council, became operational. The Law on Public Procurement stipulates that, in general, the ‘lowest price’ criterion must be used when awarding contracts. The most economically advantageous tender can only be chosen with the approval of the Public Procurement Council. This system is not in line with the acquis. The obligation for contracting authorities to obtain consent from the Public Procurement Council prior to publishing a contract notice creates an unnecessary administrative burden. Irregularities were also suspected in the ‘Skopje 2014’ project, a government-funded urban project. The municipality of Centar, where the project is mainly located, commissioned a report, which found the decisions taken on works tenders to have been biased. To date, neither the State Audit Office, nor the State Commission for Prevention of Corruption or the Public Prosecutor’s Office has taken any action in response to the findings of the report. Supplements to works contracts are very frequent, as the Law on Public Procurement does not make technical dialogue a mandatory requirement prior to awarding contracts. Tender requirements do not facilitate wide participation on the part of small and medium-sized enterprises. The administrative capacity of the Ministry of Economy remains insufficient to ensure effective implementation of the Law on Concessions and Public-Private Partnerships. The Public-Private Partnership Council is not yet operational.

The human and financial resources of the State Appeals Commission, part of the remedies system, remain insufficient. The total number of cases further decreased from 585 in 2012 to 553 in 2013; resolution rate remains stable at 95 %. Contracting authorities placed about 40 economic operators on the negative reference list in 2013, of which 11 submitted an appeal. The use of the negative reference list has not yet been aligned with Case C-465/11 of the Court of Justice of the EU. Prison sentences from one to five years were introduced for illegal profits and professional misconduct. Where violations of procurement procedures were identified, these were not followed up systematically, and resulted in only one conviction for abuse of public procurement or public-private partnership procedures. National legislation has not yet been fully aligned with the EU Directive on Remedies.

Conclusion

Progress in the area of public procurement was only limited during the reporting period. There are concerns about the overall quality of implementation of the laws. Greater efforts need to be made to ensure that the use of public funds is efficient and transparent. From a legislative point of view, preparations remain at an advanced stage.

4.6. Chapter 6: Company law

The legislative framework for company law was further amended to enforce mandatory submission of annual accounts by inactive companies and to introduce mandatory e-submission of annual accounts by large and medium-sized companies. The e-registration system established by the Central Registry was made mandatory for start-ups, and there are now around 200 registration agents. In 2013, the Academy for Judges and Prosecutors provided training courses to 176 judges in the area of company law and to 45 judges in the area of international company law. Specialised training was given to 15 newly appointed judges dealing with civil matters and business-related disputes. Alignment with the Directive on cross-border mergers remains to be completed.

As regards corporate accounting, the validity of temporary certificates for accountants and certified accountants was extended from 24 to 48 months. Some 3 000 permanent and 7 300 temporary licences were issued by the Ministry of Finance. The Institute of Chartered Accountants is not yet operational and responsibility for licensing remains with the Ministry of Finance. There have also been delays in providing continuous training to professional accountants.

With regard to auditing, the Institute of Chartered Auditors became a full member of the International Federation of Accountants. The Council for Audit Promotion and Supervision adopted the implementing legislation on recognition of auditors’ qualifications obtained abroad, and those qualifications were recognised by the institute.

Conclusion

Good progress was made in the area of company law, especially as regards auditing. The Institute of Chartered Auditors joined the International Federation of Accountants. Recognition of auditors’ qualifications obtained abroad was regulated. The Council for Audit Promotion and Supervision is operational, but the Institute of Chartered Accountants has not yet assumed its responsibilities. Overall, preparations in the area of company law are advanced.

4.7. Chapter 7: Intellectual property law

The Law on copyright and neighbouring rights was amended to regulate phonogram rights and to ensure alignment with the World Intellectual Property Organisation Performances and Phonograms Treaty. The government appointed the members of the commission for mediation in the field of copyright and neighbouring rights. The capacity of the unit for copyright and neighbouring rights (part of the Ministry of Culture) remains insufficient. Cooperation among the institutions responsible for industrial property needs to improve.

The Law on industrial property rights was amended to regulate intellectual property rights, in accordance with the Strategy on Innovation. A system for electronic filing of patent applications became operational. In 2013, the Academy for Judges and Prosecutors delivered nine training programmes to 205 members of the judiciary on protection of intellectual property rights. The State Office for Industrial Property does not have sufficient staff to ensure a quality service vis-à-vis businesses and to support innovations. Training for small and medium-sized enterprises on protection and enforcement of intellectual property rights is limited.

As regards enforcement, the Coordination Body for Intellectual Property launched 16 actions in 2013 and seized approximately 2, 000 counterfeit items. There were 24 criminal prosecutions and 11 charges for misdemeanours relating to intellectual property rights. The State Market Inspectorate carried out around 120 inspections. Only 1 % of the fines imposed were collected in 2013. The Agency for Audio and Audiovisual Media Services issued 18 banning orders to broadcasters to prevent further violations of copyright and neighbouring rights. Cooperation between the Ministry for the Interior and Interpol on uncovering regional counterfeit channels resulted in the seizure of 70 000 counterfeit items, closure of a number of factories producing counterfeit goods and detention of 330 people. The overall number of controls and seizures is falling however, and commitment to combating violations of intellectual property rights is not improving. Counterfeit foodstuffs, cosmetics, toiletries, medicines, toys, technical and electronic equipment continued to be sold on stalls in streets markets and in outlets. Awareness of violations of intellectual property rights and of the threats to health and safety remains limited. Training for small and medium-sized enterprises on protection and enforcement of intellectual property rights is limited. The three public laboratories are not legally authorised to detect counterfeit medicines and their analyses are not accepted as expert evidence by the courts. Counterfeiting is not considered to be organised crime and efforts to combat it remain insufficient. Data on investigations, prosecutions and trials for offences relating to intellectual property rights have been collected systematically since 2013, but the State Statistical Office has not yet produced a reliable enforcement record.

Conclusion

Some legislative progress was made in the area of intellectual property law. Enforcement efforts by all institutions continue, but the complexity of the enforcement system impedes effective protection of intellectual property rights. A track record of investigations, prosecutions and trials for offences relating to intellectual property rights is not yet available and public awareness remains limited. Overall, preparations in this area are at a moderately advanced stage.

4.8. Chapter 8: Competition policy

In the area of anti-trust and mergers, the Commission for the Protection of Competition took two decisions on anti-competitive agreements, four on abuses of dominant position and 18 on market concentrations. A further nine procedures are ongoing. The Administrative Court overruled seven decisions made by the Commission for the Protection of Competition for procedural reasons, six of which were subsequently confirmed by the Higher Administrative Court. The Criminal Code was brought into line with the Law on Protection of Competition, allowing leniency measures to be applied. Guidelines on vertical restraints and on horizontal agreements were adopted, ensuring further alignment of the competition acquis. A market analysis of the banking sector was carried out in 2013. The Commission for the Protection of Competition, in cooperation with the Academy for Judges and Prosecutors, delivered training in specialist areas to judges and court staff of both the Administrative and the Higher Administrative Courts. Since 2012, the Commission for the Protection of Competition has not issued any rulings on cartels. Its operational budget remains limited and it continues to make insufficient use of administrative capacity in the area of anti-trust and mergers.

The Commission for the Protection of Competition adopted six decisions approving the granting of state aid (for both schemes and individual aid), of which two were for regional state aid. The capacity of the state aid department was further strengthened and staff numbers remain adequate. Awareness among state aid providers of the systems for reporting on its use remains low, undermining the monitoring mechanisms which are in place. The de minimis threshold of € 200 000 is too high and disproportional to the country’s market and presents a risk for competition distortion. Overall, the legislative framework on state aid remains stable, but transparency regarding the details and amounts of state aid granted needs to be improved.

Conclusion

Good progress was made in the field of competition policy. Legislation was further aligned with the acquis and the Criminal Code was brought into line with the Law on Protection of Competition. The country maintained its record in terms of enforcing laws. The Commission for the Protection of Competition continues to operate with an insufficient budget, while staff numbers are sufficient. Overall, preparations in this area are at an advanced stage.

4.9. Chapter 9: Financial services

In the area of banks and financial conglomerates, the Central Bank developed a new methodology for assessment of Bank’s Internal Capital Adequacy Assessment Process (ICAAP). Regulations on capital adequacy requirements were amended to include performance guarantees and to align with the EU Regulation on prudential requirements for credit institutions and investment firms. The amended legislation on the credit registry expanded the use of IT tools to improve availability of information. The scope of external audit of banks was expanded to comply with Basel principles for external audit of banks. Guidelines on liquidity risk management allow the establishment of funds to support longer-term lending. The modest number of complaints submitted indicates a low level of awareness of consumer rights, which remains a concern.

New regulations on standards for statistics and IT systems in insurance and reinsurance companies were adopted. New stickers certifying the registration and insurance of vehicles were introduced. The Ministry for the Interior has still however not produced reliable data on uninsured vehicles. Reliable data is needed in order to keep a better record of the enforcement of measures taken to combat uninsured driving. The planned liberalisation of the motor insurance market was postponed to protect the insurance industry. Current legislation, which authorises the Ministry of Finance to set premiums for motor vehicle insurance, is not in line with the EU acquis and prevents competition in the largest segment of the insurance market.

Amendments to the Law on Fully-Funded Pension Schemes further upgraded the requirements for pension funds agents. The relevant agency continued to increase its overall enforcement capacity, and thus its leverage over the institutions it supervises. The 50 % limit on investing in non-domestic securities is not in line with the EU acquis.

The legislation on financial market infrastructure is only partially aligned with the Financial Collateral Directive (2003/47/EC), while alignment with the Settlement Finality Directive (98/26/EC) has not yet begun.

In the area of securities markets and investment services, the Securities Law was amended to extend the definition of private offers of securities and to extend the reporting obligations placed on securities depositories so as to include shareholders owning more than 5 % of shares in a company. The capacity of the Securities and Exchange Commission to regulate and supervise has improved.

Conclusion

Overall, there was some progress in the area of financial services. Legislation relating to banks, securities, investment funds, and fully-funded pension schemes has been improved. Good quality statistics are needed in order to keep a record of measures taken to combat uninsured driving. Legislation o