TABLE OF CONTENTS

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

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

1.2........ Context 3

1.3........ Relations between the EU and the former Yugoslav Republic of Macedonia. 4

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. 19

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

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

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

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

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

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

4.6........ Chapter 6: Company law.. 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 28

4.12...... Chapter 12: Food safety, veterinary and phytosanitary policy. 29

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. 35

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. 38

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. 47

4.25...... Chapter 25: Science and research. 51

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

4.27...... Chapter 27: Environment and climate change. 52

4.28...... Chapter 28: Consumer and health protection. 54

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

4.30...... Chapter 30: External relations. 56

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. 58

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 Union.

This report covers the period from October 2012 to September 2013.[1] 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[2] 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,[3] based on the technical analysis contained in this report.

1.2. Context

The European Council of December 2005 granted the former Yugoslav Republic of Macedonia the status of candidate country. The Stabilisation and Association Agreement between the former Yugoslav Republic of Macedonia and the EU entered into force in April 2004. In October 2009, the Commission made recommendations to the Council to open negotiations with the country and to move to the second phase of SAA implementation. These recommendations were reiterated in 2010, 2011 and 2012. The Council has not yet decided on the Commission’s proposals.

1.3. 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’). 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. A Protocol to the SAA to take account of Croatia’s accession to the EU has been agreed between the EU and the former Yugoslav Republic of Macedonia and is awaiting ratification.

Regular political and economic dialogue between the EU and the country has continued through the SAA structures. Meetings of the Stabilisation and Association Committee and the Stabilisation and Association Council took place in June and July 2013, respectively. Experts from the two sides met in seven sub-committees and a special group on public administration reform. The former Yugoslav Republic of Macedonia participates in multilateral economic dialogue with the Commission and the EU Member States to prepare for participation in multilateral surveillance and economic policy coordination under the EU’s Economic and Monetary Union.

A High-Level Accession Dialogue, launched in March 2012, has continued to provide an impetus to the process of reforms for EU integration, without overriding the standard pre-accession procedures. It focuses on five key areas: protecting freedom of expression in the media, strengthening the rule of law and fundamental rights, reforming public administration, electoral reform, and developing the market economy. A plenary meeting was held on 9 April to review progress. Over the past year, action has been taken in relation to almost all of the targets set in the framework of the Dialogue. As was reported in the ad hoc report by the Commission in April, in some areas goals have been achieved, for instance the decriminalisation of defamation, the introduction of systematic verification of statements of interest, and improved legislation on the interception of communications. The focus in 2013 is on achieving the remaining goals, as detailed in the relevant sections of this progress report.

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

Implementation of the enlargement strategy for the former Yugoslav Republic of Macedonia is supported by financial assistance under the Instrument for Pre-Accession Assistance (IPA). The Multiannual Indicative Planning Document (MIPD) for the period 2011 to 2013 identified the following priority areas for financial support: public administration reform, justice, home affairs and fundamental rights, private sector development, agriculture and rural development, transport, environment and climate change and social development.

Under the last National Programme within the current IPA component I, the Commission earmarked €56 million for the years 2012 and 2013 and adopted new allocations of €148 million for operational programmes under components III, IV and V. The former Yugoslav Republic of Macedonia also continued to benefit from various regional, cross-border cooperation and horizontal programmes. In the period 2007-2013 the Commission has committed over €610 million for projects to be implemented in the country, approximately a quarter of which has been contracted so far. Of this, the national authorities are directly responsible for managing over €480 million under the decentralised implementation system (DIS) for four out of five IPA components. There are, however, concerns that limited national capacity to programme and absorb IPA funds under the DIS may increase the risk of de-commitments. The national management and control systems remain uneven and need strengthening. A number of measures have been taken by the national authorities to improve capacity and performance and implementation of all IPA programmes is slowly making progress, but the backlog of projects continues to pose problems. Greater commitment is required from the authorities to accelerate implementation and increase the impact of financial assistance. The government and the Commission are currently preparing a comprehensive Country Strategy Paper for the period 2014-2020, which will provide a coherent and strategic framework for financial assistance under the new Instrument for Pre-Accession Assistance (IPA II).

The former Yugoslav Republic of Macedonia participates in the following EU Programmes: the Seventh Research Framework Programme, Progress, the Competitiveness and Innovation Programme, Culture, Europe for Citizens, Fiscalis 2013, Customs 2013, and the Intelligent Energy Europe Programme. It also ratified the memorandum of understanding for participation in the EU's Civil Protection Mechanism.

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, human rights and respect for and protection of minorities. It also covers regional cooperation, good neighbourly relations with enlargement countries and Member States and compliance with international obligations, such as cooperation with the International Criminal Tribunal for the former Yugoslavia.

2.1. Democracy and the rule of law

The year was marked by a political crisis following events in parliament in December 2012. A political agreement was reached on 1 March, enabling the return of all MPs to parliament, the holding of local elections, the continuation of relevant reforms, as well as an explicit commitment to the Euro-Atlantic agenda, the establishment of a Committee of Inquiry which proposed changes to the parliament’s rules of procedures to prevent a recurrence and a commitment to restoring dialogue with journalists.

Constitution

There have been no amendments to the Constitution since 2011, and it is broadly in line with European standards. The Constitutional Court received over 200 applications challenging laws and other acts in 2012. In around 15% of its rulings it annulled the provisions challenged, indicating a need for further improvements in the quality of legislation at the drafting stage. There is also a need for more systematic and transparent follow-up by the executive and legislature in cases where the Constitutional Court has annulled legislation. Although there is an obligation to propose new provisions, a number of laws are in practice left with gaps, thereby undermining legal certainty. In December 2012, the Venice Commission issued an amicus curiae opinion on the Lustration Law at the request of the President of the Constitutional Court, in view of a pending constitutional challenge. The Venice Commission raised potential concerns over, among other things, the initiation of lustration measures a long time after the start of the democratisation process, the misuse of political, ideological or party reasons as grounds for lustration measures and the application of lustration measures to private or semi-private organisations.

Elections

OSCE/ODIHR recommendations following the 2011 parliamentary elections were partially addressed through changes to the Electoral Code and to the Law on Financing of Political Parties in November 2012, and thorough revision of the voter lists. The Venice Commission found the amended Code to be an improvement especially as regards political party and campaign finance reporting, but stated that previous recommendations on thresholds for campaign donations, complaints and appeals procedures and arrangements for out-of-country voting had not been addressed. The Electoral Code was amended twice before the local elections to extend the deadline for candidates to register. Amending the Code so close to an election is not good electoral practice, but there was cross-party consensus and the extension allowed the opposition to participate in the elections.

Municipal elections were held in March/April 2013. The OSCE/ODIHR found that they were efficiently administered. Candidates were able to campaign freely and the campaign was active. Mayoral candidates in most regions signed a Code of Conduct for Free and Fair Elections. The election days were calm and polling well-organised in a majority of the polling stations. Voters were able to freely express their choice in a calm atmosphere, and the turnout was high. The OSCE/ODIHR reported, however, that allegations of voter intimidation and misuse of state resources persisted throughout the election campaign, and that the distinction between state and political party was blurred. The media covered the campaign extensively, but several broadcasters, including the public broadcaster, did not provide balanced coverage of the campaign. While there was greater confidence in the accuracy of voter lists, the procedures for compiling and maintaining the lists can be further improved.

Following the local elections, work on the outstanding OSCE/ODIHR recommendations has continued in two working groups on the electoral legislation and the voters’ lists. Representatives from relevant authorities and civil society, assisted by OSCE/ODIHR experts, participate in the working groups.

Parliament

The forcible removal of a large number of opposition MPs and journalists from parliament’s plenary hall on 24 December, during the adoption of the 2013 budget under controversial circumstances, triggered a political crisis which exposed deep divisions among political parties and affected the functioning of parliament. The resulting boycott of parliamentary proceedings and threatened boycott of the municipal elections by most of the opposition parties were resolved by a political agreement reached on 1 March, whereby opposition parties agreed to return to parliament and to participate in the elections. In practice, although it participated in the Committee of Inquiry, the main opposition bloc took little part in plenary debates until September.

The political crisis showed the degree of polarisation and highlighted the need for parties to show greater political commitment to resolving problems through dialogue and in full respect of the institutional framework, with both government and opposition playing constructive roles. The crisis also demonstrated the need for greater national consensus on how to meet the country’s strategic objectives.

The 1 March political agreement also required a Committee of Inquiry to be established to look into the events on and before 24 December, including their constitutionality, security in and outside of parliament, and revision of the parliamentary rules of procedure, among other issues. Due to disagreement between the political parties over its composition, the Committee only began work in mid-June and agreed a report on 26 August with recommendations about reforms to parliamentary procedures, a code of ethics for MPs, parliamentary security arrangements and treatment of journalists. The consensus on the final report showed that constructive solutions can be found, with political will, through dialogue and compromise. A cross-party Working Group of the Assembly began work immediately on implementing the recommendations. The 1 March political agreement also required the signature of a cross-party Memorandum of Understanding (MoU), confirming support for the Euro-Atlantic integration agenda, which was signed on 16 September.

Between 24 December 2012 and 1 March 2013, in the absence of most opposition representatives, parliament adopted 10 new laws and revised over 80 others, including some relating to acquis reforms, raising concerns about the inclusivity of the process. Parliament’s rules of procedure were also revised at that time, with the aim of limiting committee discussions on future budgets, and should now be further amended in line with the recommendations of the Committee of Inquiry.

A joint session of the Committee for European Affairs and the National Council for EU Integration (NCEI), chaired by the opposition and including representatives of all segments of society, was held on 9 April and the chair and co-chair of the NCEI participated in the High-Level Accession Dialogue meeting that day. Another NCEI session was held on 24 June. The NCEI has the potential to play an important and constructive role in assembling a broad national consensus on European integration. However, during the reporting period, discussions were affected by party political differences. Under parliament’s oversight system, civil society organisations and academia were consulted on 6 draft laws, in 14 public debates and in 2 oversight hearings.

The Parliamentary Institute, set up in 2009 to support the work of Members of parliament, has finally become operational.

Overall, parliament’s functioning of was affected by the political crisis which erupted on 24 December and the subsequent boycott by the main opposition bloc. The work of the Committee of Inquiry into the events of 24 December 2012 highlighted the importance of achieving political consensus through constructive dialogue and compromise. It is essential that work on the implementation of the agreed recommendations of the Committee of Inquiry continues as it has begun. Dialogue between the political parties in parliament needs to be improved. The NCEI should play a greater role in assembling a broad national consensus on European integration.

Government

The government coalition has remained stable. Dialogue between the parties in the coalition continued at all levels. There were two government reshuffles, in February and May 2013.

The Macedonian government continued its commitment to the EU accession process, most notably through the High-Level Accession Dialogue and the implementation of EU-related reforms. A new revised roadmap for accession was adopted in November 2012, and reports on its implementation were shared with the Commission in February and April 2013. Regular bi-weekly government discussions on EU integration were held.

The revised National Programme for Adoption of the Acquis (NPAA) for 2013 was adopted in December 2012. A first quarterly report was submitted to parliament on 9 May and debated by the NCEI on 24 June. The revised NPAA provides a useful framework of government plans but the lack of data on resources (financial and human), continues to make it difficult to assess its impact and the likelihood of successful implementation.

The population census, which did not take place in 2011 due to disagreements about the methodology for counting citizens abroad, has not yet been carried out. The use of administrative registries is being considered as a potential alternative solution.

With regard to decentralisation of government, a key element of the Ohrid Framework Agreement, the second phase of fiscal decentralisation has still not been completed. Some steps have been taken to review activities, including a new method of monitoring implementation of the decentralisation programme and action plan. The share of VAT transferred to municipalities remains insufficient to fully take on new tasks. Further efforts are required to ensure the financial sustainability of municipalities so they can carry out the responsibilities transferred to them. The relevant laws on regional development have not been fully implemented. The bodies responsible for regional economic development do not have sufficient resources. The regional development budget has decreased further.

Overall, the government has remained stable and has continued its commitment to EU-related reforms, which remain high on its agenda. There should be a more consensus-based approach to politics. A greater distinction is needed between political parties and state structures. Progress needs to be accelerated in the field of decentralisation of government and regional development, focussing in particular on full implementation of the relevant legal framework, on ensuring adequate resources, and on coordination between the relevant bodies.

Public administration

The government has embarked on wide-ranging public administration reforms with a dedicated forum under the SAA, which is being replicated elsewhere in the region, for discussion of such issues. The reform process enjoys political support, and the forum is co-chaired at ministerial level.

The legal framework for public administration continues to be fragmented, affecting its unity, transparency and accountability. Despite several amendments, the scope of the main laws setting out the status, rights, duties and accountability of people employed by the state remained limited in terms of the number of institutions covered. Large numbers of public employees are therefore instead subject to specific legislation and/or general labour law and collective bargaining. Fragmentation hampers the collection of relevant data on public administration. Official figures on the total numbers of employees in the public sector, both permanent and temporary, are still not available, which makes it difficult to measure progress in achieving transparency and reform objectives.

Policy improvements at both central and local level are still needed to combat politicisation. All ongoing recruitment of public employees, irrespective of civil service status, needs to fully respect the principles of transparency and accountability and be based on merit. There are still cases of tailor-made vacancies and irregular recruitment of staff. Some recruitment has been carried out as a social policy measure, rather than as a response to institutional needs.

Targets on equitable representation, though largely achieved for the civil service, have not been met across the entire public sector. The recruitment procedure for members of non-majority communities still needs to be harmonised with general recruitment procedures. Efforts to meet equitable representation targets must be in balance with the real staffing needs of institutions.

To address the above outstanding issues, the Macedonian authorities continued work on a new legislative framework that would replace the main laws on civil and public servants and enshrine the fundamental principles of transparency, merit and equitable representation.

Work also continued on a new framework for general administrative procedures, with a policy paper in January 2013 setting out the main objectives of the new law. Under the current legal framework, the principle of tacit administrative approval was applied inconsistently, causing uncertainty and delays for citizens. The state commission for administrative appeals became operational, but remains insufficiently equipped and staffed. E-government remains a useful tool in providing services to citizens.

Public awareness of the right to free access to public information remains low. The number of complaints received by the National Commission for Protecting Access to Information (NCPAI) tripled and more than half of the complaints were successful. Three quarters of the complaints were about public information holders failing to respond to requests for information in a timely manner. Enforcement of the Law on Free Access to Public Information is inefficient, with one third of information holders failing to submit their annual reports to the NCPAI, penalties not imposed in practice, and political parties excluded from the obligation to provide information to the public. The administrative capacity of the NCPAI to execute basic functions needs to be improved.

The State Audit Office has been increasingly contributing to public administration reform, building a track record in the area of auditing, including performance auditing. The quality of the Office’s reports and recommendations has contributed to identifying reform challenges. While its aggregate annual reports are reviewed by parliament, there is still limited follow-up of the reports’ findings.

Overall, work has continued on a new legislative framework for public employment to unify the rules and enshrine fundamental principles of transparency and merit. Additional efforts are needed to guarantee the professionalism and independence of the public administration, and equitable representation. Official figures on the total number of public and civil employees and temporary positions are still not available. Transparency and access to public information remains low.

Ombudsman

The Office of the Ombudsman continued its work as an independent organ for the protection of citizen’s rights, and is now in its seventeenth year of operation. The Office received 5 220 complaints in 2012 (a 3% increase from the previous year). About a quarter of the cases handled were confirmed to be violations, most of which related to consumer rights, pensions and disability insurance, property rights and social rights. Although the majority of the Ombudsman’s recommendations are respected by the state bodies to which they are addressed, greater efforts are needed from the Ministry of Interior, the Ministry of Finance, local self-government units and second-instance government commissions, which continue to be the least responsive. In 2013, seven deputy Ombudspersons were appointed by the parliament for an eight-year term, six of whom head the respective regional offices of the Ombudsman outside Skopje. Among them, a Roma deputy Ombudsperson was appointed for the first time. The Office’s role as National Preventive Mechanism under the Optional Protocol to the Convention against Torture continued to be pursued actively. The Office is accredited as partly compliant with the Paris Principles relating to national human rights institutions, but further improvements are needed as regards its funding and extending its mandate to human rights promotion as well as protection.

Civil society

An empowered civil society is a crucial component of any democratic system and is an asset in itself, contributing to building more accountable and legitimate states, enhanced social cohesion and more open and deeper democracies.[4]

In that respect, dialogue and cooperation between government and civil society needs to improve in practice, notably with those organisations dealing with social reform, gender equality, Roma, and lesbian, gay, bisexual, transgender and intersex (LGBTI) rights. The government needs to show greater openness to involving civil society.

Civil society has launched several initiatives for civil participation. Strengthened civil society coordination and networking for participation in the work of the National Council for European Integration is a positive development. Civil society remains underdeveloped in rural areas.

The government has made modest progress in implementing the second strategy (2012-2017) and action plan for cooperation with civil society organisations. Administrative capacity is weak. Training on consulting civil society has been provided, albeit often using donor support or civil society organisations. Implementation of the code of good practice for participation of civil society organisations in policy-making processes continues, unevenly, across institutions. The single Electronic Register of Legislation is being used more consistently for online stakeholder consultations on draft legislation but a consistent approach to public participation in decision-making, including appropriate institutional mechanisms, is needed.

At national level, implementation of the code of good practice for financial support to associations and foundations continues, but the system for allocating state funds to civil society has still not been standardised so the sector remains heavily dependent on donor funding. Local government lacks sufficient capacity to ensure standardised cooperation and financing of local civil society organisations. Lack of progress in harmonising tax legislation (limiting access to tax benefits and to certain types of economic activities) hampers the development of an enabling environment for civil society as intended by the Law on Association and Foundations. For the same reason, the government commission for public benefit status (established in 2011) is not fully operational. The Ministry of Justice has not made progress on the amendments to the Law on Donations and Sponsorships in Public Activities that were expected to have been adopted.

The Law on the Prevention of Money Laundering and Terrorism Financing is not in line with the relevant UN guidelines, e.g. as regards the disproportionate fines relating to the obligation on civil society organisations to draft annual programmes.

Judicial system

The country’s judicial reform was carried out from 2004 to 2010 and included significant changes to the Constitution, the Law on Courts and the Judicial Council, the establishment of the Academy for Judges and Prosecutors, the introduction of stricter professional requirements, the establishment of an Administrative Court and High Administrative Court, the shift towards enforcement of court judgments by professional bailiffs, the elimination of court backlogs, the introduction of legal aid and mediation, the establishment of an automated case management system and e-justice, as well as the complete overhaul of the criminal procedure legislation and reform of the police. The key long-term reforms in this area have therefore already been completed over the course of the last decade, in line with European standards. Nevertheless, there are concerns about how the courts currently operate in practice, which need to be addressed. These relate to the independence of the courts (and law enforcement in general) as well as the general quality of justice overall.

As regards independence, there are claims of selective justice, indirect political pressure, judgments which are unusually expedited in terms of outcome or speed, as well as the content of judgments sometimes having direct consequences for the career of the judge concerned, particularly in high-profile or politically sensitive cases. Given that justice must not only be done, but it must also be seen to be done, the fact that such doubts persist in itself constitutes a problem for the independence of the judiciary and for public confidence in it.

As regards quality of justice, improvements are needed to ensure that the way in which the court system and the career structure of judges are organised does not drive them towards formalistic decision-making in order to reach short-term productivity targets, rather than actually solving disputes, building a stable jurisprudence, issuing clear, well-reasoned judgments and providing long-term legal certainty in the interest of the citizen. The quality of justice also depends on the competence and training of judges, and the principle of merit-based recruitment to the judiciary therefore needs to be implemented in full. There is still a problem of excessively long court proceedings, including repeatedly quashed judgments and remittals for re-trial or re-hearing by higher courts to lower courts. The number of complaints by citizens to national and international bodies remains high. Tackling this requires training and attitudinal change at the level of individual judges but also at the level of the bodies shaping the development of the judiciary, in particular the Judicial Council and the Supreme Court.

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

Fight against corruption

In the area of anti-corruption policy, the legislative framework is largely in place and has undergone repeated rounds of GRECO evaluation between 2002 and 2012. Numerous national bodies and agencies are involved in combating corruption and administrative capacity is being strengthened. A track-record of criminal investigations, prosecutions and convictions by law enforcement and courts is being developed, as are the corruption-prevention activities of the State Commission for the Prevention of Corruption. However, corruption remains prevalent in many areas and continues to be a serious problem, indicating that the implementation of existing legislation has yet to make a concrete impact and the effectiveness of existing measures has to be improved. At present, too many prosecutions fail to reach the judgment and sentencing stage, or take too long to do so due to repeated re-trials. Penalties intended to prevent corruption are not used to their full, deterrent effect. The general capacity of courts and law enforcement to deal with corruption cases, in particular high-level cases, must be improved and concerns about selective justice must be dealt with. Enforcement agencies and supervisory bodies need to become more visible and proactive, and to improve cooperation with each other. Problem areas such as corruption in public procurement and transparency of political party funding need to be given special attention. The country needs to demonstrate tangible results in the reduction and deterrence of corruption in practice.

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 necessary legal framework is in place, including a new Law on Criminal Procedure, which enters into force at the end of 2013 and aims to improve the capacity to tackle complex organised crime and corruption cases by strengthening the role of the public prosecutor, establishing a judicial police, streamlining the investigation phase and introducing new investigative techniques. The competence and professionalism of the relevant institutions, in particular the Centre for Suppression of Organised and Serious Crime and the specialised Public Prosecution Office for Organised Crime and Corruption, is relatively high. Regional and international cooperation is good. Capacity to implement legislation, however, needs to be further strengthened, notably as regards inter-disciplinary training, the use of special investigative techniques and investigation of complex financial crimes.

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

Despite legislative progress in the area of freedom of expression, the country’s reputation in relation to media freedom has continued to deteriorate, both domestically and internationally. Trust between the government and media representatives was seriously damaged by the events of 24 December 2012. The Media Dialogue, which had served as a positive example for the region since its launch in 2011, was interrupted. The media environment remains highly polarised. During local elections in March, both the Broadcasting Council and the OSCE/ODIHR reported a lack of balanced coverage by several broadcasters, including the public service broadcaster. Extensive consultations were held with both international experts and stakeholders on the preparation of two new draft media laws, however key differences remained unresolved. There are continued concerns about government advertising spending, which is claimed by many to be directed only towards pro-government media, giving them a significant financial advantage. High-quality investigative journalism and the public’s access to balanced reporting and a wide variety of views need to be strengthened. A system of self-regulation for the media and a coherent, profession-driven strategy for raising journalistic standards, have yet to be developed. Further efforts are needed in all of these areas in order to improve the media environment.

There have been signs of increased intolerance towards LGBTI people, such as repeated physical attacks on the LGBT Support Centre in Skopje and homophobic media content. While the police have reacted appropriately to violent incidents, full investigations need to be carried out and far more needs to be done by public officials and by media professionals, owners and organisations to publicly denounce intolerance and ignorance.

Progress on respect for and protection of minorities remains hampered by limited financial resources, inadequate cooperation between authorities concerned and a significant need for more proactive implementation of the relevant policies, notably the Roma strategy.

With regard to inter-community relations, the Ohrid Framework Agreement (OFA) has been in force in 2001, but progress is still needed on systemic issues relating to decentralisation, non-discrimination, equitable representation, use of languages and education. Monitoring of issues such as the use of languages and the implementation of the Law on Use of Flags of the Communities is lacking, and the local committees for relations between the communities continue to be under-resourced, with ill-defined roles and competencies in relation to the municipal councils, leading to their under-utilisation. State funding has yet to be allocated for the implementation of the Strategy on Integrated Education. The trend of separation along ethnic lines in schools and incidents of inter-ethnic violence continues.

The first phase of the review of the implementation of the OFA was published on 11 April. Workshops, open to the public, involving experts, academia and civil society organisations, were organised. The conference to present the final outcome of the review, and its recommendations has not yet taken place and these should, when presented, be implemented. Coordination between the Secretariat for the Implementation of the Ohrid Framework Agreement (SIOFA) and other relevant institutions, including the Agency for the Protection of Minorities Representing less than 20% of the Population and the Minister without Portfolio in charge of implementing the Roma Strategy, needs to be improved. Although SIOFA’s budget increased in 2013, this was not matched by efforts to strengthen its capacity and internal functioning. In 2012, the overall representation of civil servants from non-majority communities increased slightly to one third of the total, but a large number (some 1 500) have not yet been assigned to any state administrative body. Roma, Turks and other smaller communities continue to be underrepresented in the public administration, notably at senior level. At the same time, the merit principle needs to be strengthened in the recruitment of non-majority members in state institutions.

The issue of social benefits for some of the participants in the 2001 conflict (the security forces, known as ‘defenders’) remains a serious point of contention between the members of the governing coalition and between communities.

There were some inter-ethnic incidents during the reporting period. Incidents between young people continued to strain inter-community dialogue and trust. Hate speech during sports events, violence in public spaces and demonstrations increased tensions, exacerbated by often biased reporting by the media. Initiatives to promote inter-community harmony are scarce. The OSCE/ODIHR found that ethnically divisive rhetoric heightened tensions in some municipalities during the local elections in March.

The coalition partners made joint efforts to alleviate inter-ethnic tensions. The authorities and community leaders took rapid and effective action to prevent escalation of a number of protests at the appointment, in a government reshuffle, of a former member of the National Liberation Army as Defence Minister. The political leaders should continue to deal with inter-ethnic challenges in a spirit of mutual respect and tolerance.

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 (ICTY). 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. This does not comply 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.

In March 2013, there were 2 240 refugees and internally displaced persons (IDPs) in the former Yugoslav Republic of Macedonia, of whom 1 043 were Roma from Kosovo*. 59 persons were voluntarily repatriated to Kosovo and Serbia in 2012 and 2013. The unresolved legal status of the majority of the refugees limits their access to basic services and full local integration. Court procedures concerning IDPs relating to damages claims from the 2001 conflict are still ongoing and the majority are still housed in collective centres.

Regional cooperation and good neighbourly relations form an essential part of the country’s progress towards the European Union. The country has continued to actively participate in regional initiatives, including chairing the South East European Cooperation Process (SEECP) from June 2012 to 2013 and hosting the Fifth Annual Meeting of the Regional Cooperation Council (RCC), the Central European Free Trade Agreement (CEFTA), the Energy Community Treaty and the European Common Aviation Area Agreement. The country continued to contribute to the EUFOR Althea mission in Bosnia and Herzegovina.A regional conference ‘Sustainable reforms – towards EU 2020 objectives‘ was held in Skopje in November 2012.

The former Yugoslav Republic of Macedonia continues to play a generally constructive role as regards bilateral relations with other enlargement countries and neighbouring EU Member States, with no outstanding border demarcation issues. A bilateral convention, under Article 12 of the SAA, should be concluded with Serbia following the recent entry into force of its SAA.

Relations with Albania continued to develop. A celebration of the 100th anniversary of Albania’s independence, hosted in Skopje, was attended by both the Albanian and Kosovan Prime Ministers. A bilateral agreement on mutual recognition of driving licences was signed and a new joint border crossing point was opened.

Relations with Bosnia and Herzegovina continued to be good. Agreements on cooperation in the field of health and medical sciences entered into force.

Cooperation with Montenegro was further strengthened. Agreement on police cooperation entered into force, while the agreements on the conditions for travel by nationals of the two countries and on readmission of persons residing without authorisation were ratified. An agreement on cooperation and mutual assistance on customs issues entered into force.

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

The wide-ranging contractual framework for cooperation with Kosovo has continued to develop with the ratification of agreements on mutual recognition of pensions, and on advancement and intensification of cultural cooperation. Joint monitoring patrols along the border need to tackle illegal trafficking of goods and illegal migration. A trade dispute took place with Kosovo in September 2013. The manner in which the situation at the border escalated over a number of days before being resolved bilaterally, outside of CEFTA procedures, is a matter of concern.

Close relations with Turkey continued. An agreement on setting up cultural information centres in the two countries was signed in December 2012.

Relations with Bulgaria have been affected by differences primarily concerning interpretations of history. High-profile contacts intensified during the reporting period. Negotiations took place on a bilateral agreement on good neighbourly relations, although open issues remain. As detailed in the April 2013 Report, consultations take place at official and expert level on EU-related issues. Cross-border, sectoral and trade relations and defence cooperation continued. People-to-people contacts continue normally.

Relations with Croatia continued to be good, including sharing of experience. A Euro-Atlantic partnership was signed on 31 May.

Relations with Greece continued to be affected by the name issue. Formal talks on the name issue, under the auspices of the UN, led by the United Nations Secretary General’s Personal Envoy Matthew Nimetz, included visits to both Athens and Skopje and talks in New York on the proposal presented to the parties in April 2013. Mr Nimetz reported, following a visit to both Athens and Skopje in early September, that gaps remained between the parties’ positions. He has invited the representatives of the parties to New York in late October with a view to narrowing differences and to seek further convergences. As detailed in the April 2013 Report, official and expert-level contacts continued on the economy, trade, police, customs and military cooperation, as well as cooperation on EU issues between the two foreign ministries and people-to-people contacts continue normally. High-level visits also took place during the reporting period.

Overall, the former Yugoslav Republic of Macedonia is participating actively in regional cooperation and further developing bilateral relations with its neighbours. Although steps have been taken in relation to the name issue, it remains unresolved. 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 relations with neighbours remains important and actions and statements which could 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.

3.1. The existence of a functioning market economy

Economic policy essentials

Domestic consensus on the fundamentals of economic policies was broadly maintained, even though the parliament adopted the 2013 central government budget under controversial circumstances. Macroeconomic stability was preserved against the background of a continuously challenging external environment and high unemployment.

The 2013 Pre-accession Economic Programme (PEP) for the period 2013-2015 was submitted in January 2013 and outlines key economic, fiscal and structural policies and planned reform measures. The key objectives remain promotion of growth and employment. The World Bank accorded €155 million under the Public Expenditure Policy based guarantee programme in January 2013, to help the country secure a foreign commercial loan for the financing of the 2013 central government budget deficit. Cooperation with the international financial institutions continued as planned. The country’s two-year arrangement under the IMF’s Precautionary and Liquidity Line ended on 18 January 2013. Overall, a broad consensus on the fundamentals of economic policies was maintained.

Macroeconomic stability

The economy has gradually returned to growth, after the economic situation had deteriorated somewhat during 2012. The output declined by 0.2% in 2012, mainly due to lower private consumption and a worsening merchandise trade balance, while investment growth continued to be strong. The economy has recovered gradually since the third quarter 2012, and in the second quarter 2013 GDP growth reached 3.9% compared to a year earlier. This was carried by strong increases in investment, even though its growth slowed down, from an average 16% in 2012, to an average 8.2% in the first half of 2013. Private consumption contributed to growth in the second quarter, for the first time since the beginning of 2012, as did the trade balance, through strong exports of goods of newly established foreign investors. Encouraging signals emerged from industrial production, which increased by 2.2% in the first seven months of the year, compared to the same period a year earlier, after a 2.8% drop in 2012. Average per capita income in purchasing power standards stayed at 35% of the EU-27 level. Overall, the renewed growth of the economy remains narrowly based on investment, with only gradual strengthening of the external sector and also marginal support from private consumption.

External imbalances increased in 2012, with the difficult global environment leaving its mark on the current account deficit, which increased to 3.9% in 2012, up from 3% in 2011. This was mainly due to a widening merchandise trade deficit, which reached 24% of GDP. Its financing relied increasingly on foreign credit, as net foreign direct investment (FDI) inflows declined by about two thirds in 2012 to 1.4% of GDP, on account of large outflows of intercompany loans. Private transfers remained strong at some 21% of GDP, with the share of workers’ remittances resilient. In the first half of 2013, FDI inflows picked up again, reaching 2.7% of GDP, 21% higher than in the same period a year earlier (how much). However, private transfers declined by 11% to about 18% of GDP.

Gross external debt rose to 65% of GDP at the end of the first quarter 2013, from 62% a year earlier. The increase was driven mainly by government external financing, which raised public external debt to 27.3% of GDP, compared to 24.4% a year earlier. Private external debt, including intercompany lending, increased by 0.9 percentage points to 38.4%. The international reserve position weakened slightly. At the end of August, foreign reserves amounted to €2.1 billion or about 26% of GDP, compared to 30% of GDP a year earlier. The reserves covered about 4 months of prospective imports of goods and services, which is slightly less than a year earlier. Overall, there is at present limited risk to macroeconomic stability from the external side. The current account balance has been gradually improving with a pick-up in export activity, yet it is increasingly relying on foreign credit financing, with uncertain prospects for the development of private transfers.

Unemployment remained persistently high, in particular youth and long-term unemployment, pointing to deep-rooted structural impediments in the labour market. There was some gradual improvement in the official employment and unemployment rates. In June 2013, total unemployment stood at 28.8% of the labour force, having declined by 2.4 percentage points compared to a year earlier. For workers aged 15 to 24 years, the unemployment rate reached 51.7%, down from 54.9% a year earlier. The employment rate increased to 40.7%, compared to 38.8% a year earlier. The recorded employment creation derives to a large part from an increase in part-time and self-employed occupations, and from a rise in public sector employment. Overall, in spite of some incremental improvement in the official labour market figures, labour market policy had limited success in addressing the persistently high unemployment. Structural challenges in the labour market remain to be tackled.

Monetary policy remained consistent and adequate given the economic environment and the situation of the domestic banking sector. The exchange rate policy and the de facto peg to the Euro continued to be an integral part of the central bank’s strategy targeting price stability. In order to support the economic recovery and combat sluggish credit growth, the central bank relaxed monetary conditions at several occasions since the beginning of 2013. It lowered two key policy rates: the maximum rate on central bank bill auctions, from 3.75% to 3.25%; and the 7-day deposit rate, from 2% to 1.50%%. The interest rate on overnight deposits was reduced from 1% to 0.75%. It also eased reserve requirements for loans to net exporters and to energy producers. Consumer price inflation was markedly higher than a year before, with an average inflation in the first eight months of 2013 of 3.5%, compared to 2.5% in the same period a year earlier. Higher prices for electricity and food, but also higher administrative prices were the main drivers bringing year-on-year inflation to above 4% in the last months of 2012. As of July, regulated electricity prices for households were lowered. With energy costs abating, more recent inflationary pressures derived mainly from domestic factors, in particular adverse climate conditions impacting on food prices. Overall, monetary policy remained stability-oriented. Energy costs and food prices were the main drivers of rising inflation.

Fiscal discipline was relaxed in 2012, and the quality of public spending deteriorated further. The general government budget deficit reached 3.8%, thus overshooting even the revised deficit target, which the authorities had raised by 1 percentage point to 3.5% in autumn. Another budget rebalancing reduced mainly investment spending, due to severe revenue shortfalls. Total expenditure as share of GDP rose from 31% in 2011 to 34% in 2012, and is estimated to reach 35% in 2013. The primary government budget deficit rose to 3.1% of GDP in 2012, compared to 1.7% in 2011. Capital spending was almost unchanged in 2012 compared to 2011, at 12% of total expenditure, or just over 4% of GDP, projected to decline to 11.3% of total expenditure in 2013, or 3.9% of GDP. The share of social transfers in total expenditure declined slightly in 2012, to 44.7% from 45.2% a year earlier, and is projected to stay largely unchanged in 2013. As a share of GDP, social transfers increased somewhat, to 15% of GDP, up by 0.4 percentage points.

The 2013 budget foresees a slight reduction in the deficit, to 3.5%, based on rather optimistic expectations of strong growth of revenues, which are projected to be 7.2% higher than in 2012. Yet, after the first seven months of 2013, the central government budget deficit amounted to over 80% of the targeted full-year deficit. This was mainly on account of repayment of arrears in VAT returns, contracted works, and social benefits, which led to an increase in expenditures in the first seven months of about 6% compared to the same period 2012. The government started settling the outstanding amounts as of September 2012.

Even though government debt is still at a moderate level, the increases over the last years give rise to concern. Central government debt stood at 33.6% of GDP by the end of July 2013, compared to 27.8% at end-2011. Moreover, as the budget of the newly created public enterprise for state roads was excluded from the central budget as of 2013, its debt is no longer included in central government debt. Overall, fiscal governance and fiscal discipline deteriorated and would benefit from the implementation of a medium-term strategy.

The policy mix slightly deteriorated. While monetary policy provided key support for macroeconomic stability, fiscal discipline weakened and the debt ratio further increased. Public finance could make a bigger contribution to stability, for example by better aligning spending priorities with structural challenges, and by focusing on growth-enhancing capital expenditure. Furthermore, the fast rise in mainly foreign financed debt increases the country’s vulnerability.

Interplay of market forces

The role of the public sector in the economy remained largely unchanged. In terms of value added, the private sector accounted for about 85%, as in 2012. The asset value of fully or partly state-controlled enterprises increased to 15.7% of GDP in mid-2013, compared to 12.7% a year earlier, due to capital increases in public companies. The number of fully-owned state companies increased from 12 to 15, due to restructuring in the public sector. The majority of state capital is concentrated in five companies, which are mainly public utilities. The share of public sector employment in total employment remained stable at about 25%. Administered and regulated prices continued to account for some 13% of the Consumer Price Index (CPI) basket. In general, regulated prices, which account for about 12% of the CPI basket, usually cover costs, while administered prices, such as for water supply and waste disposal, usually do not fully cover costs. Overall, the economy is mainly driven by the private sector, with the role of the state remaining limited, even though share of the public ownership increased slightly.

Market entry and exit

The business environment was further improved through the simplification of business registration and operation, for example by the establishment of a one-stop shop system for domestic and foreign investors. While companies enjoy a low level of taxation, corporate liquidity suffered in 2012 from the accumulation of government arrears for VAT refunds and contracted works. Implementation of the third (reduction of administrative burdens) and fourth phase (SME measures) of the ‘regulatory guillotine’ project continued, and procedures for obtaining construction licenses were simplified.

There has been more limited progress on reforming market exit procedures. The deletion from the central registry of companies that were not operational for a long time has started. However, improving exit options through facilitated bankruptcy procedures proves more challenging. In May 2013, an amendment to the Law on Bankruptcy was adopted, which foresees an acceleration of proceedings. Yet, the number of bankruptcy procedures between October 2012 and July 2013 was lower by 29% compared to a year earlier. The average duration of voluntary company liquidation diminished only slightly. Overall, while business registration and operation was further facilitated, weaknesses in bankruptcy and liquidation procedures continue to pose a significant impediment to investment and access to finance.

Legal system

The legal system was further strengthened in some parts, notably the clearance rates of courts at all levels improved and there are no significant backlogs remaining. However, the overall duration of court proceedings remains a concern. The registration of real estate property is finalised and the land register covers 100% of the country’s territory. The authorities implemented a number of reforms to reduce the work load of courts, in particular through the transfer of enforcement cases to private bailiffs. While the legal and financial independence of some regulatory and supervisory bodies has been further strengthened in formal terms, the impact on the business environment has remained limited. Institutional and administrative capacities, such as insufficiently skilled human resources and insufficient physical resources continue to hamper the proper functioning of some of these agencies like the State Appeals Commission for Public Procurement and the State Audit Office. Overall, the legal system for a functioning market economy is largely in place, yet weaknesses related to lengthy procedures, contract enforcement and corruption remain.

Financial sector development

The economic weight of the banking sector remained stable, with total assets of commercial banks amounting to about 87% of GDP. The sector remains highly concentrated, with two thirds of total assets owned by the three largest banks, the biggest bank alone accounting for about a quarter of total assets.

Liquidity and solvency of the banking sector proved resilient to the subdued global economic and market environment. The average ratio of liquid to total assets improved throughout 2012, and stood at 29.6% at the end of the first quarter 2013, compared to 26.5% a year earlier. Liquid assets cover just over half of household deposits, slightly less than a year earlier. Regulatory capital in relation to risk-weighted assets stood at a comfortable 17.3% at the end of the second quarter.

The credit growth continued to decelerate. Annual growth of credit to the private sector has been declining since May 2012 reaching 3.5% at end-July 2013. Growth was driven almost entirely by loans to households, which increased by 7.8%. Credit growth to corporates declined to 0.5%, against the backdrop of a further deteriorating quality of corporate loan portfolios. The share of non-performing loans (households and corporates) in total loans stood at 12.3% at the end of June 2013, compared to 10% a year earlier, with the largest share accounted for by corporate loans. Given the easing of monetary policy earlier this year, it appears that impediments to faster credit growth lie outside the transmission mechanism of monetary policy, and are possibly rooted in a combination of strong adverse risk perceptions of lenders, and a lack of quality investment projects on the demand side. In spite of the deteriorating portfolio quality, banks managed to avoid significant losses in profitability. Performance was somewhat weaker in the second quarter 2013 than a year earlier, as manifested by the decline in the return on assets (0.2%, compared with 0.4% a year earlier) and in the return on equity (1.8% compared with 3.2%). Lending in foreign currency decreased somewhat, but still accounts for close to 40% of total loans outstanding, which poses a potential stability risk given the de facto currency peg.

The relevance of non-banking financial intermediaries is generally low, at just over 10% of total sector assets, or 8% of GDP. Pension funds hold just over 4% of total assets and experienced strong asset growth in the reporting period. Assets in the mandatory fully funded pension insurance grew by 30% between February 2012 and February 2013, and those of the voluntary fully funded pension insurance by about 66%. The insurance sector continued to account for less than 4% of total assets. 4 new insurance brokers and 3 new agencies entered the market in 2012. While gross written premiums increased by over 3%, their share in GDP was almost unchanged, at over 1.4%, compared to 2011. The insurance sector remained well capitalised, solvent, and even improved its technical provision coverage from 96% in 2011 to 103%.

Overall, the financial sector remained well capitalised and liquid. However, credit growth was sluggish and non-performing loans increasingly pose a challenge.

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

Existence of a functioning market economy

While persistently high unemployment points to serious difficulties to the functioning of the labour market, overall macroeconomic stability has been maintained. The quality of public finance planning and management has deteriorated further, with productive investment remaining below needs. Market entry procedures have improved, while the reform of market exit procedures still needs to gain pace. Enforcement of contracts remains difficult, which impacts negatively on the business environment.

Human and physical capital endowment

Further steps were taken towards improving the infrastructure and the quality of education at all levels, such as the recruitment of about 250 additional teachers for primary and secondary schools for the academic year 2012/13; investment in the education infrastructure; and a reinforced focus of secondary school curricula on entrepreneurial skills. Yet, the general qualification of the workforce remains low, and matching the skills of graduates with the needs of potential employers remains a major challenge. A strategy for vocational training reform was adopted, and practical experience during education was made mandatory. There was little progress in implementing the adopted reforms.

The country’s capital stock remains low and relatively outdated given the underinvestment of the past. Gross fixed capital formation was strong in the last quarter of 2012, at 36% of GDP, partly due to a boost in public capital spending, but fell to 26% of GDP in the first half of 2013. Public investment stayed at over 5% of GDP in 2012. It was concentrated on transport and utilities infrastructures, with some investment also in the physical infrastructure of education. Its impact on growth and employment is, however, difficult to assess due to lack of recent disaggregated data and implementation details. Spending is not sufficiently focused on building a knowledge-based society, but is used for less productive purposes, such as the decoration of the capital. Weak implementation capacity continues to impede the authorities’ efforts to add to, and to modernise the public capital stock. Foreign direct investment, which in the past was more evenly distributed among manufacturing and services sectors, shifted towards more traditional manufacturing sectors recently. The stock of foreign investment amounted to just below 50% of GDP in mid-2013, down from 53% a year earlier. Overall, there was some gradual progress in addressing reform needs in the education system. The capital stock remains modest and public spending was not sufficiently focussed on growth-enhancing activities.

Sector and enterprise structure

In 2012, the economic activity shifted slightly from the industrial sectors to services activities. The share of the mining, manufacturing and utilities sectors in total value added declined from 21.3% in 2011 to just under 20% in 2012, while the share of financial and community, social and personal services rose from 18.9% to 19.6%. The enterprise structure remained largely unchanged in 2012. The share of SMEs (national definition) in total private sector employment increased slightly compared to 2011. Access to finance was eased somewhat by the use of the credit line from the European Investment Bank. However, SME development continues to be impeded by poor access to financing. Competition in the network industries remains constrained by the small number of incumbent suppliers. In spite of some improvements in employment registration, the informal sector remains sizeable and poses a challenge for policymakers, as it reduces the tax base and the efficiency of economic policies. Overall, the enterprise structure remained largely unchanged, with further SME development hampered mainly by difficult access to finance. There has been limited progress in tackling the large informal sector.

Some further progress towards diversification into manufacturing activities with higher value added is evidenced by the export structure, partly reflecting the new operations of a few foreign investors. The share of machinery and transport equipment in total exports amounted to 9.9% in 2012, an increase by 2 percentage points compared to 2011. Still, clothing, chemicals, and manufactured iron and steel products account for almost half of exports. Overall, in 2012, 70% of total exports were accounted for by 15 products. Overall, some gradual, further diversification of economic production is visible in terms of value added and exports.

State influence on competitiveness

Government’s influence on the economy’s competitiveness remains limited and is mainly exerted through direct subsidies to and tax exemptions for companies, including in particular foreign investors, and through active labour market programmes. Official data points to a decline in state aid in 2012 to about 0.1% of GDP, from about 0.4% in 2011. Reporting on state aid and comparability with EU standards remain limited. The legal framework for state aid was strengthened by the adoption of regulations on regional aid, horizontal aid and Services of General Economic Interest. Yet, their impact remains limited given the low reporting awareness in state aid providers. Overall, while state aid laws have been strengthened, there is a lack of transparency about implementation details and amounts due to shortcomings in reporting.

Economic integration and convergence with the EU

The country’s total trade in goods and services remained largely unchanged in 2012, at about 128% of GDP. Trade integration with the EU progressed further: over 73% of total exports were destined to the EU in the first half of 2013, compared to 65% a year earlier. FDI from the EU accounts for close to 80% of total FDI stock, with the Netherlands, Austria, Slovenia and Greece as the biggest foreign investors, providing over half of the total foreign investment stock. Labour productivity declined by 1% in 2012. Price competitiveness also remained broadly unchanged: the real effective exchange rate, adjusted by the consumer price index, appreciated slightly, on average, by about 0.2 percentage points. Wage developments were not conducive to a pick up in private consumption: in the first quarter 2013, real net wages dropped by an average 2.3% on the year. Overall, trade integration with the EU is quite advanced. The export structure continues to improve, even though traditional manufacturing products still dominate. International price competitiveness remained largely unchanged.

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 Union. It also analyses the former Yugoslav Republic of Macedonia’s administrative capacity to implement the acquis. The analysis is structured in accordance with the list of 33 acquis chapters. In each sector, the Commission’s assessment covers progress achieved during the reporting period and summarises the country’s overall level of preparations.

4.1. Chapter 1: Free movement of goods

In the area of general principles, reforms to align the law with Articles 34 to 36 of the Treaty on the Functioning of the European Union continue. By September 2013, 30 out of 42 identified legal acts had been amended.

As concerns horizontal measures, in the field of standardisation a total of 22 552 European standards and standardisation documents had been adopted as national standards by September 2013 compared to 16 500 a year earlier. The Institute of Standardisation (ISRM) adopted 18 317 EU standards, i.e. more than 98% of CEN/CENELEC standards, as national standards and issued two national standards. The European Committee for Standardisation and the European Committee for Electrotechnical Standardisation were regularly notified about nationally adopted standards. The Assembly of the ISRM had 114 members, compared to 97 a year earlier, and 26 technical committees.

In the area of the new legislative framework for conformity assessment ten authorised conformity assessment bodies operate in the regulated area. The Ministry of Economy issued a new list of standards through the application of which the product is considered to be safe to be placed in the market.

In the area of accreditation, the Institute of Accreditation accredited a total of 113 conformity assessment bodies and had withdrawn 11 accreditations by September 2013. The Institute signed an agreement in October 2012 for mutual recognition of accreditations in the area of testing and calibration with the International Organisation for Accreditation of Laboratories. The institute still needs to establish capacity in new fields. A new accreditation scheme for medical laboratories following ISO 15189:2010 was developed.

A national strategy and an action plan for the development of the Bureau of Metrology 2013-2015 were adopted. The bureau introduced fully automated electronic processing of documents on the verification of measuring instruments and vehicles. The number of calibration and verification certificates issued by the bureau continues to increase and its laboratory for electric measurements served as a pilot laboratory in the inter-regional comparison exercise.

Concerning market surveillance, in 2012 the State Market Inspectorate conducted 338 inspections following the Law on Product Safety and 98 inspections following the Law on Construction Products, an increase of 15% on 2011. Subsequently, the Inspectorate initiated 16 administrative procedures and 1 misdemeanour procedure. A national programme for coordination and execution of measures for market supervision for 2013-2014 was adopted.

In the area of ‘Old Approach’ product legislation, a rulebook on methods for quantitative analysis of two-component fibre and a rulebook on approval of biocides, aligning national legislation with the corresponding acquis, were adopted. Local stakeholders received training on liabilities deriving from the new Law on Chemicals and the EU Chemicals Regulation. Preparations in the area of ‘old approach’ product legislation are advanced.

In the area of ‘New and Global Approach’ product legislation, four local bodies were designated for conformity assessment under the Law on Construction Products. Only three national annexes to Eurocodes have been developed and adopted. Preparations in the area of ‘New and Global Approach’ product legislation are advanced.

As regards procedural measures, a new decree was issued on procedures for notifying the European Commission of draft technical non-harmonised acts, technical specifications and standards, transposing the relevant EU directives. With the exception of articles on notification by the Institute for Standardisation, the decree applies as from EU accession or the signing of the Agreement on Conformity Assessment and Acceptance of Industrial Products (ACAA). Preparations in this area are advanced.

Conclusion

Some progress was made in the field of free movement of goods. The country is close to fully complying with Articles 34 to 36 of the Treaty on the Functioning of the European Union. The number of European standards adopted as national standards continues to increase. However, the national annexes to all Eurocodes need to be adopted. Certain areas of the framework horizontal acquis are still not harmonised. Preparations in the area of free movement of goods are advanced.

4.2. Chapter 2: Freedom of movement for workers

In the area of access to the labour market, the legislation does not allow EU citizens access to posts in the public service.

There were no developments as regards preparation for participation in the EURES (European Employment Services) network. As regards coordination of social security systems, there are 19 bilateral agreements on coordination of social security systems, of which 11 are with EU Member States. Ratification/signature of agreements with Denmark, Hungary and Italy is pending. Negotiations on relevant agreements with Kosovo and Albania are ongoing. The government adopted a draft decision of the Stabilisation and Association Council on the coordination of social security systems. In this area, the country is moderately advanced.

An agreement on the use of the European Health Insurance Card was signed with Austria and entered into force, bringing the number of agreements to eight. Preparations in this area are slowly progressing.

Conclusion

Little progress was made in the area of freedom of movement for workers during the report period. Preparations in the area of free movement of workers are still at an early stage.

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

As regards the right of establishment, a single database was set up, creating a single database for all licences and permits.

As regards the freedom to provide cross-border services, the Law on Lawyers was amended to enable them to provide permanent, cross-border services. Shortcomings remain in service sectors including veterinary medicine, private education, construction, tourism and the regulated professions. Preparations in this area are on track.

In the area of postal services, the level of alignment and administrative capacity is already very high. The regulator issued new general authorisations to provide postal services to businesses. Shortcomings remain as far as the period for designation of the universal service provider, a separate accounting system and the financing of the net costs of the universal service obligation are concerned. The administrative capacity of the Postal Agency is satisfactory.

In the area of mutual recognition of professional qualifications, regulations were adopted to establish and manage records and registers for professional qualifications for sectoral professions and regulated professions. Full alignment of the Law on Recognition of Professional Qualifications with the acquis remains to be achieved as regards directives on layers, commercial agents and professional use of toxic products. Alignment with the acquis in the area of mutual recognition of professional qualifications is moderately advanced.

Conclusion

Overall, there was little progress in the areas of the right of establishment and freedom to provide services. In the area of postal services, the level of alignment is advanced. There is not yet full alignment with the acquis, particularly as regards mutual recognition of professional qualifications, free movement of services and establishment.

4.4. Chapter 4: Free movement of capital

In the area of capital movements and payments, the country already meets the requirements of the first stage of the Stabilisation and Association Agreement (SAA). Further liberalisation is scheduled after the transition to the second stage of the SAA. Nationals are still not allowed to buy foreign securities or to buy real estate abroad, and opening foreign bank accounts is restricted. EU citizens are not allowed to buy agricultural land. Restrictions remain on the amounts that non-residents can transfer through their local and foreign currency accounts. Preparations in the area of capital movements and payments are moderately advanced.

As regards payment systems, the Law on Payment Operations was amended to regulate micro-payment operations, bringing it closer into line with the Directive on Payment Services (2007/64/EC). The National Payment System Council adopted a strategy for the development of the payment system 2013-2017, which provides for further harmonisation of national legislation with European and international standards and convergence of payment instruments. Most of the charges for cross-border electronic payment transactions remain disproportionate to those for domestic electronic payment transactions. In the area of payment systems, the country partially meets its targets.

Preparations for the fight against money laundering are moderately advanced. Inter-institutional coordination is gradually being strengthened within the framework of the Council on Combating Money Laundering and Financing of Terrorism. Co-operation with foreign financial intelligence units, investigative and prosecuting bodies continues to improve. In order to address the inadequate level of reporting and operational efficiency, the Financial Intelligence Unit (FIU) is implementing a new reporting and analytical IT system. The number of reports on suspicious transactions increased by 53% in 2012 to 239, from 156 in 2011. The FIU sent 36 notifications relating to money laundering and financing of terrorism to law enforcement institutions. However, there were only two new prosecutions and four convictions in 2012.

Conclusion

In the area of free movement of capital, there was limited progress during the last year. Preparations are on track and gradual harmonisation of the regulatory framework for payment systems is under way. Preparations are being made to strengthen institutional capacity to combat money laundering and terrorism financing. Further liberalisation of capital movements and payments is scheduled after the transition to the second stage of the SAA.

4.5. Chapter 5: Public procurement

As regards general principles, the Public Procurement Bureau continued to provide training, which is mandatory for contracting authorities only. A qualification system for public procurement was introduced for entities operating in the energy sector. Out of 14 sectoral laws, 13 were harmonised with the Law on Concessions and Public-Private Partnerships (PPPs). The relevant unit in the Ministry of Economy has limited capacity to ensure effective implementation of the Law on Concessions and PPPs. A PPP council was set up. Economic operators continue to be excluded from participation in future tenders for 1 to 5 years because of grave professional misconduct; the negative reference list is not yet aligned with Case C-465/11 of the Court of Justice of the EU. The EU Directive on Defence and Sensitive Security Procurement has not yet been transposed. As regards general principles, the country is well on track.

As regards the award of public contracts, the use of e-procurement system was expanded to include concessions and PPP contract notices. A register of contracts awarded is still not set up by the Ministry of Economy. Concerns remain over the transparency, confidentiality and equity of e-auctions. The ‘lowest price’ award criterion is widely used in e-auctions, which could lead to lower quality rather than value for money; prior public opening of bids entails a risk of collusive behaviour. Data on budget savings from mandatory use of e-auctions shows savings of 13%. Some of the criteria, including amounts, for the work contracts under ‘Skopje 2014’ were repeatedly amended. Tender requirements have yet to ensure wider participation by small and medium-sized enterprises in public procurement. With regard to the award of public contracts, the country is moderately advanced.

As regards the remedies system, the total number of State Appeals Commission (SAC) cases further decreased from 690 in 2011 to 585 in 2012; 96% were resolved. Appeals against tenders launched dropped from 14% in 2011 to 5% in 2012. The SAC publishes all of its decisions online, which has helped to reduce the number of appeals. The SAC dealt with 5 cases in the field of concessions and PPP. The administrative court overruled 17 decisions by the SAC, more than in the previous year; court proceedings are lengthy. Some economic operators were withdrawn from the negative reference list following SAC decisions but the right to appeal against the list per se has yet to be safeguarded in the Law on Public Procurement. Comparative court statistics on public procurement-related cases are available and the methodology for their collection has been improved. Enforcement is gaining momentum with 13 people convicted in 2012 for abuse of public procurement or PPP procedures (there were no convictions in 2011); 8 court decisions became final. The SAC remains severely understaffed and under-budgeted, with a large number of vacant posts. The professional requirements for president of the SAC were reduced and aligned with those of first-instance courts. Full alignment with the amended EU Directive on Remedies has yet to be achieved. As regards the remedies system, the country is advanced.

Conclusion

Good progress was made in the area of public procurement. There is a medium-term strategy for the public procurement system. Legislation on concessions and public-private partnerships is almost harmonised at sector level but its implementation has been delayed. The negative reference list has yet to be aligned with the acquis, including on the right of economic operators to appeal against their inclusion. Administrative capacity in the public procurement field is sufficient, with the exception of concessions and PPPs. Overall, preparations in the area of public procurement are advanced.

4.6. Chapter 6: Company law

In the area of company law, a new law on takeovers of companies with shareholders, aiming at transposing Directive 2004/25/EC on Takeover Bids, was enacted in May 2013. Company law was amended in May 2013 to allow the Central Registry to automatically delete long-term inactive companies. In 2012, the Academy for Judges and Prosecutors provided training for 201 judges from all court instances, including judges dealing with business-related disputes. Article 16 of the Tenth Company Law Directive on cross-border mergers has yet to be transposed. Overall, in this area the country remains on track.

As regards corporate accounting, the legislative framework required by the Law on Accounting to regulate performance of accounting activities is complete. Implementing legislation relating to the Law on Performing Accounting Activities was enacted and enabled the certification of more than 4 000 accountants. Chartered accountants were empowered to perform procedures for registering a company.

An Institute for Chartered Accountants was established and its supervisory board was set up.

As regards auditing, the work of the Institute for Chartered Auditors is now supervised by the Council for Audit Promotion and Supervision. The staff of the Institute increased from three to four but remains insufficient to perform effective quality control. Overall, in the area of corporate accounting and auditing the country is moderately advanced. Chartered auditors’ qualifications obtained abroad are not yet recognised.

Conclusion

Good progress was made in the area of company law. A Council for Audit Promotion and Supervision was put in place as a regulatory body independent of the Ministry of Finance. An Institute for Chartered Accountants became operational and the number of staff was further increased. Qualifications obtained abroad by chartered auditors have not yet been recognised. Overall, preparations in the area of company law as a whole are moderately advanced.

4.7. Chapter 7: Intellectual property law

The law on copyright and neighbouring rights is not aligned with the World Intellectual Property Organisation (WIPO) Performances and Phonograms Treaty. The exclusion of phonogram rights and several disputes impeded the work of the two licensed collective rights management societies. The head of unit for copyright and neighbouring rights in the Ministry of Culture was dismissed, reducing the capacity of the unit, and co-operation between the unit and relevant institutions remains limited.

In the area of industrial property rights, WIPO’s electronic document management system was customised for the State Office for Industrial Property and linked with the automated court case management information system applied in all courts. In 2012, the Academy for Judges and Prosecutors trained 218 members of the judiciary on protection of intellectual property rights (IPR). In the area of industrial property rights, the country is on track.

As regards enforcement, a methodology for collecting data on was adopted; the improved statistics on IPR enforcement will be available from 2013 onwards. The Law on Customs Measures for the Protection of IPR was amended in May 2013 to introduce fines for counterfeit recidivism and to allow use of seized counterfeit clothing items for disaster recovery or social assistance packages. A user manual for the platform of the World Customs Organisation for IPR infringements was adopted, allowing recognition of originality of products. The Coordination Body for Intellectual Property undertook 25 coordinated actions in 2012, twice as many as in 2011; co-operation with the Agency for Managing Confiscated Property continued. In 2012, a total of 126 court proceedings were brought for violations of IPR. Courts imposed some 15 prison sentences and a number of fines for criminal offences on individuals. Counterfeit foodstuffs, cosmetics, hygiene products, medicines, toys, technical and electronic equipment are still widely available and awareness of their threats to health and safety is limited. Laboratory results confirming that medicines are counterfeit are not allowed as court evidence, which hampers the prosecution of counterfeiters. The IPR enforcement system remains complex rather than effective. Counterfeiting is not considered organised crime and efforts to combat it are insufficient. Co-operation at both national and international level has yet to be promoted. Preparations in this area are moderately advanced.

Conclusion

Some progress was made in the area of intellectual property law. A track record on investigation, prosecution and trial for IPR offences has been established. There are shortcomings in the procedures for prosecuting counterfeiters, with laboratory results on counterfeit medicines excluded as court evidence. There is no legal basis for collective management of phonogram rights. Awareness of IPR among institutions and the public remains low. Overall, preparations in the field of IPR are moderately advanced.

4.8. Chapter 8: Competition policy

In the area of anti-trust and mergers, the enforcement record of the Commission for Protection of Competition (CPC) slightly deteriorated. The CPC adopted two decisions on prohibited agreements, one on abuse of dominant position and 20 on concentrations. The CPC helped to draft secondary legislation in the broadcasting and energy sectors and the national strategy for development of the public procurement system. CPC staff participated in various workshops and training, which strengthened already good basic skills, but would benefit from more advanced training. However, staff dealing with anti-trust and mergers is not used efficiently. The operational budget of the CPC remains limited. Effective implementation of the leniency measures provided for in the Law on Protection of Competition remains limited because of conflicting provisions in the criminal code. Enforcement of CPC decisions in misdemeanour cases is suspended on appeal until a final decision is taken by the Administrative Court. The number of decisions upheld by the Administrative Court has increased from six in 2012 to seven by September 2013. Judges of the Administrative Court received additional training on anti-trust and mergers. Preparations in the area of anti-trust, including mergers, are at an advanced stage.

The legal framework in the field of state aid has improved with the adoption of decrees on regional aid, horizontal aid and services of general economic interest. The CPC took five decisions on compatibility of state aid by September 2013, which is a decrease compared with 11 in 2012. The administrative capacity of the state aid department was strengthened through IPA twinning assistance for state aid control, including some specialised training, workshops and study visits for CPC staff. The number of staff dealing with state aid is adequate. In the area of state aid, the country is on track.

Conclusion

Good progress was made in the field of competition policy. The legislative framework is in place and the enforcement record continued to improve. The budgetary resources of the CPC remain limited. The number of staff is adequate but they need to be used more efficiently. Overall, preparations in this area are advanced.

4.9. Chapter 9: Financial services

In the field of banks and financial conglomerates, the Banking Law was amended, with the aim of aligning it with Directive 2006/48/EC on the taking-up and pursuit of the business of credit institutions, and with the three pillars of Basel II. Savings societies are to be restructured either by closure, transformation into financial companies, or continuation as saving societies but under the same conditions as banks. The central bank further upgraded the regulations on credit risk management and introduced an internal capital adequacy assessment process. It introduced a procedure for determining the banking stability index and developed a methodology for identifying systemically important banks. The bank also set up a special team to deal with consumer complaints but its administrative capacity (three employees) needs to be reinforced; consumer protection remains a challenge. Preparations in the areas of banks and financial conglomerates are well on track.

In the fields of insurance and occupational pensions, preparations for implementing the Solvency II Directive (2009/138/EC) are ongoing. The capacity of the Insurance Supervisory Agency and its cooperation with the supervisory authorities of insurance companies that have local subsidiaries are adequate. Capital and solvency margins are still well above the levels required and the guarantee fund against insurer insolvency is sufficient. The Ministry of the Interior estimates the number of uninsured vehicles at 10%, but no solid data is available. Initiatives for improving the enforcement record on combating offences committed by uninsured drivers are launched, but enhanced efforts are needed to tackle uninsured driving. The Law on Compulsory Insurance of Road Vehicles still authorises the Ministry of Finance to set premiums for motor vehicle insurance, which is a barrier to competition between insurance companies and is not in line with the EU acquis.

The Agency for Supervision of Fully Funded Pension Insurance (MAPAS) implements and enforces risk-based supervision. The 50% limit on investing in non-domestic securities remained, which is contrary to the EU acquis. Parliament appointed new management and MAPAS moved to new premises. Its overall enforcement capacity and leverage over the institutions it supervises improved. In the area of insurance and occupational pensions, the country is moderately advanced.

As regards financial market infrastructure, alignment with the Financial Collateral Directive (2003/47/EC) is partial and alignment with Settlement Finality Directive (98/26/EC) has not begun.

In the area of securities markets and investment services, the Securities Law was amended to increase protection of smaller shareholders and boost stock exchange trading. The management structure of the Securities and Exchange Commission was changed and parliament appointed new members. Preparations in the areas of securities markets and investment services are well advanced.

Conclusion

There was, overall, progress in financial services. Laws on banks and on securities were amended. MAPAS reinforced its capacity and leverage over the institutions it supervises. The measures taken to combat uninsured driving should be pursued further. Alignment with key parts of the acquis on financial market infrastructure has not yet been achieved. In the area of financial services, alignment with the acquis is moderately advanced.

4.10. Chapter 10: Information society and media

In the area of electronic communications and information and communications technologies (ICT) the Agency for Electronic Communications, as the regulator, introduced cost-oriented prices for access to wholesale services in the electronic communications market. It strengthened its complaints system to protect consumer rights and continued with the second round of market analyses. The Agency’s use of surplus funds for purposes other than for the development of electronic communications continued to be of concern, undermining its credibility. The Rules on the manner of calculation of the annual fee for the use of radio frequencies were amended to reduce the annual fees for the digital dividend in the band 790 – 862 MHz. The Agency also announced a 20% reduction in the frequency fees for other bands from 2015. Authorisations were given for the use of the radio frequency bands 790-862 MHz and 1710-1880 MHz to provide public mobile communication networks and services from the fourth generation networks. The introduction of the 112 emergency phone number was further delayed. The capacity of the Ministry of Information Society and Administration in the field of electronic communications and the information society has yet to be strengthened. The fixed broadband penetration reached 14.4% of the population according to the latest available data, compared to the EU average of 28.2%. In the area of information society services, initiatives were launched to facilitate and enhance companies’ use of online channels, especially for SMEs. Preparations were launched for liberalising the internet domain name market, with the introduction of a system of multiple registrars. The process for setting up a national body for dealing with computer incidents was started. Barriers to internet trading remain.

As regards audiovisual policy, draft laws on Media and on Audiovisual Media Services include provisions to align national legislation with the audiovisual media services Directive. The draft laws were published on the internet and made available for comments and relevant international organisations were consulted. A number of stakeholders continued to raise concerns that the proposed laws might be used to restrict media freedom. The Broadcasting Council adopted guidelines on promoting media pluralism, on enforcement of sanctions, and on fair competition in the media sector. The council improved its capacity for monitoring of content and oversight of media ownership and concentration; such efforts need to continue. Concerns with regard to its independence remain. The public service broadcaster i