TABLE OF CONTENTS

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

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

1.2........ Context.......................................................................................................................... 3

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

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

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

2.2........ Human rights and the protection of minorities................................................................. 15

2.3........ Regional issues and international obligations................................................................... 22

3........... Economic criteria.......................................................................................................... 24

3.1........ The existence of a functioning market economy.............................................................. 24

3.2........ The capacity to cope with competitive pressure and market forces within the Union........ 28

4........... Ability to assume the obligations of membership............................................................. 32

4.1........ Chapter 1: Free movement of goods............................................................................. 32

4.2........ Chapter 2: Freedom of movement for workers.............................................................. 34

4.3........ Chapter 3: Right of establishment and freedom to provide services................................. 35

4.4........ Chapter 4: Free movement of capital............................................................................. 36

4.5........ Chapter 5: Public procurement...................................................................................... 37

4.6........ Chapter 6: Company law.............................................................................................. 39

4.7........ Chapter 7: Intellectual property law............................................................................... 40

4.8........ Chapter 8: Competition policy....................................................................................... 41

4.9........ Chapter 9: Financial Services........................................................................................ 42

4.10...... Chapter 10: Information society and media.................................................................... 44

4.11...... Chapter 11: Agriculture and rural development.............................................................. 45

4.12...... Chapter 12: Food safety, veterinary and phytosanitary policy......................................... 46

4.13...... Chapter 13: Fisheries.................................................................................................... 47

4.14...... Chapter 14: Transport policy........................................................................................ 48

4.15...... Chapter 15: Energy....................................................................................................... 49

4.16...... Chapter 16: Taxation.................................................................................................... 51

4.17...... Chapter 17: Economic and Monetary policy.................................................................. 52

4.18...... Chapter 18: Statistics.................................................................................................... 53

4.19...... Chapter 19: Social policy and employment.................................................................... 54

4.20...... Chapter 20: Enterprise and industrial policy................................................................... 56

4.21...... Chapter 21: Trans European Networks......................................................................... 57

4.22...... Chapter 22: Regional policy and coordination of structural instruments........................... 58

4.23...... Chapter 23: Judiciary and fundamental rights................................................................. 59

4.24...... Chapter 24: Justice, freedom and security...................................................................... 64

4.25...... Chapter 25: Science and research................................................................................. 69

4.26...... Chapter 26: Education and culture................................................................................. 70

4.27...... Chapter 27: Environment.............................................................................................. 71

4.28...... Chapter 28: Consumer and health protection................................................................. 73

4.29...... Chapter 29: Customs Union.......................................................................................... 75

4.30...... Chapter 30: External relations....................................................................................... 76

4.31...... Chapter 31: Foreign, Security and Defence Policy......................................................... 77

4.32...... Chapter 32: Financial control........................................................................................ 78

4.33...... Chapter 33: Financial and budgetary provisions............................................................. 79

Statistical Annex......................................................................................................................... 80

1. Introduction 1.1. Preface

Since March 2002, the Commission has reported regularly to the Council and Parliament on progress made by the countries of the Western Balkans region. This is the first report on Montenegro's progress since the Commission published its Opinion on the country's application for membership of the European Union in November 2010 and the European Council granted Montenegro candidate status in December 2010.

This report on progress made by Montenegro on preparing for EU membership:

– briefly describes relations between Montenegro and the Union;

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

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

– reviews developments as regards Montenegro's capacity to assume the obligations of membership, that is the acquis expressed in the Treaties, the secondary legislation and the policies of the Union.

This report covers the period from October 2010 to September 2011. Progress is measured on the basis of decisions taken, legislation adopted and measures implemented. As a rule, legislation or measures which are being prepared or awaiting parliamentary approval have not been taken into account. This approach ensures equal treatment across all reports and permits 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 Montenegro, the EU Member States, European Parliament reports[1] and information from various international and non-governmental organisations.

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

1.2. Context

The Stabilisation and Association Agreement between Montenegro and the EU was signed in October 2007 and entered into force in May 2010.

Montenegro presented its application for membership of the European Union on 15 December 2008. Following a request by the Council, the Commission submitted its Opinion on Montenegro's application in November 2010. In December 2010, the European Council granted Montenegro candidate country status. In its conclusions, the Council noted that the opening of accession negotiations will be considered by the European Council, in line with established practice, once the Commission has assessed that the country has achieved the necessary degree of compliance with the membership criteria and, in particular, has met the key priorities set out in the Commission's Opinion[3]. The Council invited the Commission to focus its 2011 progress report on implementation of these key priorities in particular.

1.3. Relations between the EU and Montenegro

Montenegro is participating in the Stabilisation and Association Process.

Overall, Montenegro continued to implement its obligations under the Stabilisation and Association Agreement (SAA) smoothly.

The political and economic dialogue between the EU and Montenegro has continued, notably within the SAA bodies. The Stabilisation and Association Committee met in May 2011 and the Stabilisation and Association Council in June 2011. Seven sub-committee meetings have been held since October 2010. In June 2011, the Stabilisation and Association Council decided to establish two Joint Consultative Committees as fora for dialogue between the EU Committee of the Regions (CoR) and Montenegro's local authorities on the one hand and between the European Economic and Social Committee (EESC) and social and economic stakeholders in the country on the other. Montenegro participated for the first time (including by submitting a pre-accession economic programme) in the multilateral economic dialogue between the Commission, EU Member States and candidate countries in the context of the EU fiscal surveillance procedure, including by attending a meeting at ministerial level in May 2011.

The EU maintains a dialogue with the authorities and provides guidance on reform priorities. Progress on reforms is encouraged and monitored by the SAA bodies. Following the release of the Commission Opinion in November 2010, the Commission has held an intense dialogue with Montenegro with a view to monitoring implementation of the key priorities set out in the Opinion. The government adopted an action plan to address the key priorities which, overall, has been implemented consistently and systematically. Furthermore, Montenegro is currently preparing an updated version of its National Programme for Integration, the country's programme for the adoption of the acquis.

Visa liberalisation for Montenegrin citizens travelling to the Schengen area has been in force since 19 December 2009. Implementation of the visa-free regime has been smooth so far. To ensure the continued implementation of the commitments, a post visa liberalisation monitoring mechanism was established in view of increased numbers of asylum seekers from the region. The Commission presented its first monitoring report to the European Parliament and the Council in June 2011. An agreement on readmission between the European Union and Montenegro has been in force since January 2008.

The EU provides financial assistance to Montenegro under the Instrument for Pre-accession Assistance (IPA). For the period 2007-2013, IPA allocations to Montenegro total € 235.2 million. The IPA allocation for 2011 is € 34.1 million. The 2011-2013 Multiannual Indicative Planning Document (MIPD) for Montenegro was presented to the IPA Committee in March 2011. The main sectors for EU support during this period will be justice and home affairs, public administration, the environment and climate change, transport, social development and agriculture and rural development. Assistance is also being provided to help the country prepare for decentralised management of the IPA programme. Montenegro benefits also from regional and horizontal IPA programmes. It is participating in four cross-border cooperation programmes with neighbouring Western Balkan countries and a fifth, with Kosovo[4], is under preparation. Montenegro is also participating in the transnational cooperation programmes under the European Regional Development Fund and in the IPA Adriatic cross-border programme with Member States.

EU financial support has been provided for development of civil society under the Civil Society Facility.

The IPA programme is currently managed by the EU Delegation in Podgorica. Montenegro's preparations for transfer of management of component I of the IPA programme from the EU to the national authorities have further advanced.

Montenegro is participating in the following EU programmes: the Seventh Research Framework Programme; the Entrepreneurship and Innovation Programme and the Information Communication Technologies Policy Support Programme, both under the Competitiveness and Innovation Framework Programme, Culture and Customs 2013.

2. Political criteria

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

2.1. Democracy and the rule of law

Establishment of the legal and institutional set-up required for an independent country is complete. The political consensus on State-building has been further consolidated.

Parliament

As regards the legislative framework for elections, one of the key priorities set out in the Opinion, amendments to the Law on election of municipal councillors and members of parliament were adopted by a two-thirds majority in parliament in September 2011, thus harmonising it with the Constitution and addressing the main OSCE/ODIHR and Venice Commission recommendations on elections. These amendments implement the constitutional commitment to authentic representation of minorities by introducing a system of affirmative action for representation in parliamentary elections extended to all minorities. They improve the technical side of voting and offer better safeguards for equality of votes.

The powers of the State Election Commission and the system of appointments of its members have been further clarified and political representation of opposition parties in local election commissions has been strengthened. The law also provides for establishing a secretariat of the State Election Commission to assist in administration of elections, as recommended by the Venice Commission and the OSCE/ODIHR. Issues related to the allocation of mandates have been clarified and transparency has been introduced in the publication of results. Exit polls are explicitly allowed. Provisions on media and the prohibition to use State resources for electoral campaigning have been strengthened.

These legal advances need to be complemented in the future as regards a number of pending OSCE/ODIHR and Venice Commission recommendations, in particular those related to the dissolution of coalitions and their funding obligations, and the extension of the mandate of the Central Election Commission to municipal elections. The issue of the constitutional two-year residency requirement before citizens can obtain the right to vote (while reduced to six months for local elections) remains unaddressed for national elections. Although the new provisions provide for 30% of female candidates on the candidate list, gender equality is still not guaranteed in practice as the law does not stipulate that candidates of each gender should be ranked high enough on the list to have a realistic opportunity for being allocated a mandate.

Mechanisms to ensure transparency, accountability and control of financing of election campaigns have been enhanced by a new Law on financing of political parties. Significant efforts will be needed to implement it fully, following its entry into force in January 2012.

With regard to parliament's legislative and oversight role, another key priority set out in the Opinion, parliament has continued its intensive legislative activity. Its administrative capacity to support parliamentary committees has been strengthened, in particular the International Relations and European Integration Committee, which is in charge of coordinating relations with the EU and making sure that new legislation is compatible with the EU acquis. Since February 2011, the secretary of each parliamentary committee prepares a report on each proposed draft law with the aim of streamlining discussions and adoption. The technical and documentary support provided by the research department has been considerably strengthened. Most parliamentary committees have adopted an annual work plan and parliament's internal document management procedures have been improved. European integration is a key priority for parliamentary work and consensus between parliamentary parties on EU-related matters remains high. The National Council for European Integration (NCEI) held a conference on the seven key priority areas identified in the Opinion in May 2011, providing a forum for discussion between parliamentary political forces, the government and other stakeholders. However, the NCEI's work and administrative capacity remain uneven. Its role in Montenegro's EU integration process still needs to be further clarified and developed.

Parliament's role of oversight and control of the government has been strengthened, in particular in the areas of security and defence. A number of hearings, including a control hearing, were held. The number of parliamentary questions increased. Measures have been taken to improve transparency and interaction with civil society.

However, parliament is not yet using the full array of oversight tools. In oversight hearings, parliamentary committees do not systematically adopt conclusions and follow-up is limited. Parliament's rules of procedure have not been changed to make it easier for opposition parties to initiate oversight proceedings. In the case of oversight of anti-corruption activities, the members of the national branch of the global organisation of parliamentarians against corruption were appointed in July 2011, as provided for in a 2007 parliament resolution. However, no special committee of inquiry has been established. Parliament's cooperation with civil society needs to be further enhanced.

The role of the Parliamentary Committee for International Relations and European Integration is often limited to formal checks of the statement of compatibility of new legislation with the EU acquis provided by the government. No further compatibility checks take place. The administrative capacity of parliament – albeit strengthened – remains weak and needs to be further consolidated. Parliament's capacity to ensure high-quality legislation in general remains limited and needs to be enhanced. All parliamentary committees still lack sufficient qualified staff.

Efforts to strengthen parliament's administrative and expert capacity and to upgrade its administration have continued. Staff numbers increased from 73 in December 2010 to 90 in May 2011. A large number of training sessions have been provided for staff. However, administrative capacity and other resources required for professional, efficient and transparent work by parliament, including expert support for committees, are limited overall. The lack of office space and technical equipment persists, including for Members of Parliament. Financial and other constraints need to be addressed. Training of existing staff and recruitment of qualified new staff are to be pursued.

Overall, the legislative and institutional framework for elections has been considerably enhanced, in line with the recommendations made by the Venice Commission and OSCE/ODIHR. Parliament's functioning has further improved. Consensus between parliamentary parties on EU-related matters remains high. Progress has been made on strengthening parliament's legislative and oversight functions, by means of stronger support to parliamentary committees, better planning of parliamentary work and closer oversight, notably in the areas of defence and security. However, further sustainable efforts are needed to consolidate parliament's legislative and oversight role and to enhance its administrative capacity. Parliament's capacity and means to scrutinise draft legislation against the EU acquis need to be upgraded. The role of the National Council for European Integration in Montenegro's EU integration process remains to be further developed. Parliament's cooperation with civil society is to be further enhanced.

Government

On 21 December 2010, then Prime Minister Milo Đukanović resigned from office. On 31 December, parliament approved the new government led by Prime Minister Igor Lukšić, formed by the same coalition as the outgoing government. It has two Deputy Prime Ministers and 15 ministers, one of whom is female.

A number of changes were made to the structure of the government. The Ministry for Foreign Affairs and European Integration took over coordination of European integration from the stand-alone Ministry for European Integration, which was abolished.

The main priorities of the government remain European integration and economic reform, while action has also been taken to strengthen the partnership and consultation mechanisms with the various stakeholders, including civil society. In February 2011, following consultations with a broad range of stakeholders, the government adopted an action plan addressing the key priorities set out in the Commission Opinion. Overall, this action plan has been implemented consistently and systematically. Responsibility for overall coordination of implementation of the action plan lies with the Prime Minister, while the Ministry for Foreign Affairs and European Integration provides technical support and prepares regular oral and written progress reports to the government.

Due to the focus on the key priorities, progress in other areas of European integration remained uneven. While results remain satisfactory, the abolition of the stand-alone Ministry for European Integration has had a negative effect on the administrative capacity involved in coordination of European integration, which needs to be substantially strengthened.

With regard to local self-government, amendments to the Law on local finances and to the Law on property tax were adopted in December 2010 and entered into force on 1 January 2011. In October 2010, Montenegro ratified the additional protocol to the European Charter of Local Self-Government on the right to participate in the affairs of a local authority. In June 2011, the Government adopted the 2011-2016 development strategy for inter-municipal cooperation in Montenegro, together with the 2011-2013 Action Plan for its implementation. However, enactment of the Law on territorial organisation and of amendments to the sectoral laws is still pending.

Overall, with the new government in office, government coordination and policy-making has further improved, particularly the quality of consultations with civil society. However, the overall capacity of ministries to produce high-quality legislation and impact assessments remains limited. The administrative capacity involved in coordination of European integration, including financial assistance, remains weak and needs to be substantially strengthened. Legislative amendments with a view to establishing a transparent, efficient and accountable administration at local level are still pending.

Public administration

One of the main government activities in the reporting period was to complete essential steps in public administration reform, a key priority set out in the Opinion.

The Public Administration Reform Strategy for 2011-2016, with the accompanying action plan (AURUM), was adopted by the government in March 2011. The strategy includes introducing European standards covering recruitment and promotion and measures to increase the efficiency of the State administration. It also envisages an overall reduction of employment in the public sector; yet, it does not specify how this would be achieved without affecting the performance and efficiency of services. Some measures have already been taken to introduce economies of scale and integrate bodies whose activities have been disparate and uncoordinated (e.g. the various State inspection services).

Some important steps forward have been taken to reform the legal framework governing the civil service, in particular by adopting two essential pieces of legislation: the Law on civil servants and State employees and the Law on general administrative procedure.

Amendments to the Law on general administrative procedure were enacted by the parliament in June 2011. These amendments constitute a first step towards the reform of administrative procedures. Work has been launched to prepare a comprehensive reform with a view to laying the foundations for a modern, citizen-oriented administration. To this end, in July the government adopted a policy paper, containing the main principles and elements for a new law on administrative procedures in line with European values, legislation and practice. It simplifies processes in public administration in line with the principles of efficiency and effectiveness, enforcing transparency and objectivity, accessibility to citizens and NGOs and openness to the use of modern information and communication technologies.

A new Law on civil servants and State employees, based on the principles of merit-based recruitment and promotion, was adopted by the parliament in July 2011. It lays down the main foundations for the establishment of a de-politicised and professional public administration acting effectively and impartially. It improves protection of persons who report possible cases of corruption (whistleblowers) and prescribe the obligation to adopt plans of integrity in the public sector. The law will start applying in January 2013 after the end of a transition period. Preparations for its application are under way. In July the parliament adopted amendments to the Law on salaries of civil servants and state employees, which provides for a transparent salary system for employees financed from the State budget.

In a further positive development, amendments to the Law on public administration, enacted by parliament in July, envisage streamlining of the existing fragmented public administration structure, enforcing accountability and improving the implementation of long-term reform plans. The introduction of the functions of State secretaries and Directors general splits clearly the political and the administrative levels in ministries.

In April 2011, the government adopted a revised rulebook on the internal organisation and job descriptions of the Human Resources Management Authority (HRMA). Its legal mandate is further enhanced by the new Law on civil servants and State employees, which a gives the HRMA a stronger role in monitoring implementation of civil service legislation and developing policies for human resources management.

The capacity of the State Audit Institution (SAI) has been strengthened but it needs to recruit more auditors to enhance its capacity to perform audits; also, its managerial and administrative autonomy has to be enhanced. The principles of sound financial management in the public administration have been reinforced by the Law on public internal financial control adopted in March 2011. (See also Chapter 32 - Financial control.)

Key e-government legislation has been put in place and campaigns to promote it were launched by the new Information Society Ministry. The relevant parts of the Strategy for Development of the Information Society for 2009-2013 are being implemented and this needs to continue.

Cooperation between the Ombudsman, government and civil society has been tightened. His influence has increased substantially and in the vast majority of cases the Ombudsman's recommendations are followed by the relevant institutions, albeit with significant delays. The current financial and human resources of the Ombudsman's Office are not sufficient to carry out all its tasks efficiently. The new Law on the Ombudsman was adopted in July.

Overall, Montenegro has taken important steps to address the main challenges posed by the public administration reform. The Government adopted and started to implement a public administration reform strategy. An improved legal framework in the area of civil service and state administration aiming at efficiency, de-politicisation and merit-based recruitment has been adopted. Legislation regulating administrative procedures has been amended and a further comprehensive reform has been launched. The HRMA has been strengthened. Preparations for implementation of the adopted legislation have to be stepped up and focus on enforcing de-politicisation, professionalism and effectiveness and impartiality of the administration, including through merit-based recruitment and promotion. The capacity of the Ombudsman and of the State Audit Institution needs to be further enhanced. Implementation of the Public Administration Reform Strategy needs to take due account of the need to rationalise administrative structures and strengthen administrative capacity, notably in areas related to European integration, while ensuring the financial sustainability of public administration.

Civilian oversight of the security forces

Parliament adopted a new Law on parliamentary oversight in the fields of security and defence, which provided additional clarity regarding parliament's role in civilian oversight by defining the obligations of all parties involved.

Judicial system (See also Chapter 23 - Judiciary and fundamental rights)

Montenegro has made progress on judicial reform, notably in the form of reinforcing the independence, accountability, impartiality and efficiency of judges and prosecutors, one of the key priorities set out in the Opinion.

Preparations have focused on legislative reforms at sub-constitutional level with the aim of strengthening judicial independence and impartiality within the limits provided by the current Constitution. Amendments to the Laws on courts, the Judicial Council and the State prosecution office were enacted by the parliament in July 2011. In parallel, the process of amending the Constitution was launched and advanced, with a view to further enhance judicial independence by means of de-politicised and merit-based appointments of the Judicial and Prosecutorial Councils' members and of State prosecutors, and strengthen the accountability of the judiciary.

With regard to the independence of the judiciary, amendments to the Law on the State prosecution office provided for changes in the composition of the Prosecutorial Council and broadened its scope of action, including on the appointment of the Special prosecutor and in disciplinary proceedings. Amendments to the Law on the Judicial Council provided for increased transparency and involvement of the judiciary in the procedure of appointment of judges and renowned jurists to the Judicial Council, and the involvement of the latter in the process of proposing candidates for the post of Supreme Court President. Candidates for this position have to meet henceforth stricter criteria, introduced by the amendments to the Law on courts. Criteria for first-time appointment of judges and deputy State prosecutors and their subsequent promotion, as well as for the appointment of court presidents and the permanent tenure of State prosecutors have also been laid down. A legal obligation to apply written, anonymous tests for selection of magistrates has been introduced. In September 2011, the Judicial Council appointed the members of the Commission responsible for conducting these tests for the selection of judges. The new criteria for selecting entrants to the judicial system reduce the room for discretion by the Judicial and Prosecutorial Councils and thereby improve transparency in the selection process. However, these selection criteria have not yet been applied in practice. Some of them lack clarity, while the weighting of individual criteria is not fully satisfactory. The merit-based elements of the career system need to be further strengthened.

The procedure to amend the Constitution in the area of the judiciary was launched by the government in June 2011. In July the parliament enacted the decision in principle and charged its Committee for Legal and Constitutional affairs to draft constitutional amendments. A number of alternative amendments were drafted and sent to the members of parliament in July. The amendments envisage new arrangements on the set-up of judicial institutions, aimed at limiting political influence in appointments and broadening judicial independence, notably through the increase of the number of Judicial Council members coming from the judiciary and a new appointment procedure of the Supreme Court President, involving the Judicial Council. Provisions enhancing the capacity and the independence of the Constitutional Court are also envisaged.

With regard to the accountability of the judiciary, amendments to the Law on courts provided an exhaustive list of all possible reasons for disciplinary action against judges and – for the first time – presidents of courts. Amendments to the Law on the Judicial Council provided for the establishment of a commission for monitoring implementation of the code of ethics for judges and the autonomy of action of the disciplinary commission. Members of the latter were appointed in September 2011. Disciplinary sanctions have also been strengthened. Amendments to the Law on the State prosecution office provided for the adoption of a code of ethics by the enlarged session of the Supreme State Prosecutor's Office and list all possible reasons for disciplinary action against prosecutors. Initial efforts have been made to establish a track record on fighting corruption within the judiciary. Nonetheless, corruption and conflict of interest rules are still insufficiently monitored in the judiciary. Both judges and prosecutors continue to enjoy functional immunity from prosecution. Since the entry into force of the Constitution in 2007, two judges have been stripped from their functional immunity. Procedures for removing functional immunity need to be strengthened to ensure full accountability of judges and prosecutors under criminal law. Publicity of court rulings, although foreseen, is not implemented in practice.

Concerning the impartiality of judges, random allocation of cases is being consistently implemented in a number of courts with the aid of an IT system. However, de facto limitations, particularly in smaller courts, do not fully guarantee random allocation in every case. The IT system in place allows case-tracking and automatic allocation of cases but not statistical reporting or electronic filing of judicial acts.

The envisaged constitutional amendments are expected to significantly reduce the legal possibilities for disproportionate political influence over appointments of magistrates and prosecutors, thus reinforcing judicial independence and prosecutorial autonomy. The envisaged provisions notably foresee that state prosecutors will not longer be appointed by the parliament as well as a new composition of the Prosecutorial Council. Once adopted and in order to become fully operational, these amendments are to be completed with provisions for merit-based judicial appointments via a country-wide single recruitment system and a coherent and stronger system of accountability.

Regarding the efficiency of the judiciary, Montenegro has taken further measures to reduce the backlog of cases. With circa 12,000 unresolved complex cases from previous years in all courts in Montenegro at the end of 2010, the backlog was approximately 7% lower in 2010 than in 2009. However, concerns persist about the reliability of the statistics and the soundness of the method used. The statistical indicators do not provide complete information about courts' performance, the duration of case-handling and the human and financial resources allocated, thus creating problems with the consistency of data and effective follow-up. The Law on notaries introduced a notary system aiming to reduce the burden on courts and administrative bodies. 34 notaries took up duties in July 2011. The new Law on enforcement and security of claims, enacted by the parliament in July 2011, transferred powers for civil enforcement to the bailiffs. However, enforcement of civil decisions in particular remains weak. Concerns persist over the long duration of court proceedings. The Law on the right to trial within a reasonable time is not yet implemented effectively, as a majority of complaints are rejected on procedural grounds and parties are not properly notified. The constitutional provision on the right to legal remedy does not fully comply with Article 13 of the European Convention on Human Rights.

The 2011 budget for the judiciary amounts to € 26,5 million, which represents 0,83 % of the GDP. Yet, the majority of the funds have been allocated for the salaries of magistrates, prosecutors and administrative staff. Efforts have been made by the authorities to remedy shortfalls in the judiciary's infrastructure and equipment, but they continue to hinder efficiency. The deadlines for a number of measures in the action plan for implementation of the judicial reform strategy (2007-2012) have been revised. No developments can be reported as regards streamlining the court network. Montenegro continues to be one of the countries with the highest number of basic courts, magistrates, prosecutors and administrative staff in Europe. Determined steps are to be taken to streamline the courts system.

As of 26 August 2011, the new Criminal Procedure Code (CPC) is applied in all Montenegrin courts. The Law on misdemeanours was amended in December 2010. Also, the Law on free legal aid and the Law amending the Criminal Code were adopted in April 2011, aligning their provisions with the new CPC and allowing its application. Twenty nine additional deputy State prosecutors have been appointed and a number of trainings on CPC provisions have been delivered to prosecutors and judges. However, shortcomings remain with regard to the training of judges and prosecutors. There are no permanent mandatory courses and no set curricula. In addition, the Judicial Training Centre depends on scarce financing from the central budget and international donors. Training with set curricula for all members of the judiciary remains to be established. The training provided on implementation of the new CPC remains insufficient, in particular for judges, and is to be enhanced following the full entry into force of the CPC.

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

Anti-corruption policy (See also Chapter 23 - Judiciary and fundamental rights)

Progress can be reported in the fight against corruption, one of the key priorities set out in the Opinion. Montenegro has made significant efforts to strengthen the legal framework needed for combating corruption and to address outstanding recommendations of the Group of States against Corruption (GRECO). Amendments to the Law on conflict of interest were enacted in July 2011, with the aim of remedying legislative gaps identified in GRECO first and second evaluation rounds. Steps have also been taken to address the recommendations made in the third GRECO evaluation round covering the financing of political parties and incriminations. The provisions of the Criminal Code regulating criminal offences of active and passive bribery have been amended, with a view to ensure alignment with the Council of Europe's Criminal Law Convention on Corruption and its additional protocol. A new Law on political party financing, enacted in July 2011, brought important legislative improvements in this area. A new Law on public procurement was enacted in July 2011, aimed at reducing opportunities for corruption and increasing transparency in this field. The new Law on civil servants and State employees provided legal protection for whistleblowers.

Some progress has been made on repressing corruption. Steps have been taken to strengthen the institutional and administrative capacity of the prosecutors and police to fight corruption. A special anti-corruption investigation team has been established, made up of representatives of the police administration, the Office for prevention of money laundering and terrorism financing, the tax and customs administrations, and reporting to the Special Prosecutor for organised crime, corruption, terrorism and war crimes. Montenegro has made efforts to establish a solid track record of proactive investigations, prosecutions and convictions in corruption cases at all levels, which is part of the Opinion key priority on anti-corruption. In December 2010, a High court judge was sentenced in second instance to seven years of imprisonment for passive bribery. Nine persons were sentenced in first instance to imprisonment for abuse of official positions and bribery in June 2011. During the reporting period, 28 persons have been indicted in three cases of abuse of official position and bribery. Among them is a high level corruption case, involving the at the time Mayor of Budva, his Deputy and a Member of Parliament.

Prevention has been tightened, with a number of awareness-raising campaigns and opinion polls conducted by the Directorate for Anti-corruption Initiatives (DACI). In July 2011, the Government adopted a risk assessment of areas vulnerable to corruption. Six areas of particular risk have been identified: local self-government, spatial planning, public procurement, privatisation, education and healthcare. The assessment acknowledged the need for more precise mechanisms for implementation and monitoring of anti-corruption initiatives as well as improvement of the reporting methodology used by the Tripartite Commission for corruption and organised crime cases. The Judicial Training Centre adopted training programme for judges and prosecutors in the area of anti-corruption and conducted a number of trainings and seminars in this field. Specific trainings have been provided to judges and prosecutors to facilitate implementation of the new Criminal Procedure Code.

Progress has been made in the implementation of the government's anti-corruption strategy and action plan, which is part of the key priority set out in the Opinion. In July, the Government adopted a revised 2011-2012 Action Plan for the implementation of the Strategy for fighting corruption and organised crime, comprising a number of new measures and improved indicators. The National Commission responsible for monitoring the implementation of the Action Plan adopted its first report in April 2011. It approved new rules of procedure, providing the possibility for the National Commission to centralise corruption-related complaints and request ad hoc reports on corruption from State agencies. The sessions of the National Commission became fully open to the public in June 2011. Cooperation with civil society in the fight against corruption has improved significantly. NGOs have actively contributed to enhancing the strategic framework, providing evidence for initiating corruption cases and producing surveys.

However, corruption remains a serious concern. Implementation of the new anti-corruption legislation is yet to start. Proper impact assessments need to be developed, including plans for the necessary human and financial resources and preparations for implementation. The full entry into force of the new provisions of the CPC and the Criminal Code has not been sufficiently prepared and will require additional training, in particular for judges. The independence of the judiciary remains a matter of concern affecting the determination to combat corruption.

Despite a positive trend, the track record in combating corruption needs to be further developed. Final convictions remain limited, in particular for high-level corruption cases. The number of corruption cases in which seizure or confiscation of assets were ordered is still very low. Provisions of the CPC and the Criminal Code on extended confiscation of criminal assets have not yet been used. No progress can be reported as regards the work of the State agency responsible for the confiscation of criminal assets. Further efforts are needed to strengthen its institutional and administrative capacity. The capacity of prosecutors and police to conduct financial investigations, trace criminal assets and present related evidence before the courts remains to be improved. The level of inter-agency cooperation and information exchange between the different law enforcement agencies and the prosecutor's office remains to be enhanced. Cooperation and coordination between police and prosecutors in particular need to be improved. Prosecutors' lack of access to the national database of the police and their possibility to delegate investigation to the police only in exceptional circumstances considerably hamper implementation of the new CPC. Use of special investigative measures is impeded by the lack of adequate equipment and specialised human resources.

Implementation of the new legislation on financing of political parties and election campaigns is yet to start. Concern remains over the insufficiently dissuasive and undifferentiated sanctioning system, the regime and ceiling of membership fees, as well as the capacity of the State Electoral Commission (SEC) to ensure a fully effective independent oversight. Few sanctions for non-compliance with the law have been applied by the supervisory bodies. The asset declarations of civil servants are still not being checked on substance to identify illicit enrichment. There is still no second-instance body responsible for supervising implementation of the Law on free access to information, nor have there been amendments to the law. The rules of procedure of the public administration, including appointment and internal control, have not fully integrated every aspect of prevention of corruption and conflicts of interest. Disciplinary provisions remain inefficiently implemented in practice.

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

2.2. Human rights and the protection of minorities (see also chapter 23 - Judiciary & fundamental rights)

Observance of international human rights law

With regard to ratification of international human rights instruments, Montenegro has complied with all its formal post-accession commitments before the Council of Europe and has also ratified the Convention on the Protection of Children against Sexual Exploitation and Sexual Abuse. It has also signed the Council of Europe Convention on Preventing and Combating Violence against Women and Domestic Violence. However, the Constitution (Article 20) has not yet been aligned with Article 13 of the European Convention on Human Rights (ECHR) to safeguard the right to an effective remedy before national authorities for violations of rights under the Convention. Implementation of international human rights standards continues to be restricted to cases of conflicts with domestic legislation.

As regards the European Court of Human Rights (ECtHR), efforts are being made to improve national courts' compliance with ECtHR case law, in particular by providing training for judges and prosecutors and ensuring better dissemination of the relevant case law. During the reporting period, the Court delivered 2 judgements finding that Montenegro had violated rights guaranteed by the European Convention on Human Rights (ECHR). One related to freedom of expression, the other to the right to a trial within a reasonable time. A total of 275 new applications allocated to a decision body have been made to the ECtHR since October 2010. In September 2011, 820 allocated applications regarding Montenegro were pending before the ECtHR. Most of these cases are related to non-implementation of court decisions, non-alignment of domestic jurisprudence with the case law of the Court, freedom of information, access to justice and length of procedures, .

As regards promotion and enforcement of human rights, some progress has been made. The influence of the Protector of Human Rights and Freedoms (Ombudsman's) Office is increasing considerably. Its cooperation with civil society has been enhanced substantially, along with its involvement in promoting the rights of the most vulnerable groups. The law establishing the Ombudsman as the national authority for combating discrimination and preventing torture and ill-treatment was adopted in July. For this law to be properly implemented, the Ombudsman's Office needs to be provided with sufficient financial and human resources to carry out its tasks efficiently.

The Ministry for Human and Minority Rights is involved in anti-discrimination training and awareness-raising. However, its broader role and leadership of the fight against discrimination remain limited. The Parliamentary Committee for Human Rights and Freedoms has stepped up its activities and cooperation with civil society. Its influence nonetheless needs to be further strengthened. Courts have started to refer to ECtHR case law. However, protection of human rights by law enforcement authorities presents shortcomings, particularly as regards alignment with European standards and ECtHR case law.

Civil and political rights

Montenegro made progress on enhancing media freedom, one of the key priorities set out in the Opinion; the legal framework has been improved and a sustainable implementation needs now to be ensured.

Some progress has been made on prevention of torture and ill-treatment and the fight against impunity. The new Law on the Ombudsman has given him competences in preventing torture and ill-treatment. Prison staff and members of the security department responsible for human rights and resolution of incidents have undergone further training. However, occasional cases of violence continue to be reported, in particular in police stations. Processing of reported cases continues to be slow. The number of final judicial decisions remains low.

Some progress has been made regarding the prison system. The Parliament enacted amendments to the law on execution of criminal sanctions in July 2011, providing for the establishment of a probation department within the Ministry of Justice and introducing alternative sanction measures for minor criminal offenders. Preparations for its implementation are underway. However, the position of the new Deputy Minister foreseen to lead the department has not been filled yet. Some rehabilitation work has been carried out on prison facilities and four new buildings were constructed and put in use. Furthermore, an amnesty law passed in July last year resulted in the reduction in the number of detained persons. Yet, prison overcrowding remains a problem and conditions, although improving, are still not in line with international standards, notably regarding provision of medical treatment and family rooms. Detention conditions in Spuz prison have improved, while those in Bijelo Polje facility remain an issue of concern.

Progress has been achieved on access to justice, with the adoption of the Law on free legal aid in April. However, the duration of court proceedings remains a cause for concern.

Freedom of expression is, overall, respected in Montenegro. Progress has been made towards enhancing media freedom, one of the key priorities set out in the Opinion. Provisions related to defamation and insult have been removed from the Criminal Code. The Supreme Court laid down guidelines for the courts regulating the level of pecuniary compensation in defamation cases against media in line with the case law of the European Court of Human Rights and organised related training for judges. The number of cases lodged against media for defamation was reduced. Courts have started to use ECtHR case law to shape their rulings. There have been no further incidents of physical violence against journalists. High State officials have promoted a more favourable and safer environment for investigative journalism.

However, there have been a few incidents whereby vehicles belonging to a daily newspaper were set on fire. The attacks were condemned by high state officials, but no progress was made yet in investigating the case. Furthermore, previous cases of violence against journalists, including a murder case, have not yet been properly investigated and processed. Further efforts are needed in this area. Sound implementation by all courts of the Supreme Court guidelines on the treatment of defamation remains to be confirmed, including in the appeal cases pending before the High Court. Compliance of journalists with professional ethics and standards is still not satisfactory, notably regarding respect of the privacy and dignity of children in the media. The media self-regulatory body is not functioning.

The financial independence of the audiovisual regulator and strengthening of its monitoring capacity are still lagging behind, pending full adoption and implementation of administrative decisions and by-laws. Efficiency, professionalism and independence of the public broadcaster have still not been fully achieved, notably due to problems with its financial sustainability, an insufficiently merit-based approach to staff management and adequacy of the representation of civil society on its board.

Freedom of assembly and association are, overall, respected in Montenegro. Very good progress has been made on cooperation between State institutions and civil society organisations, which is one of the key priorities set out in the Opinion. The institutional framework for such cooperation has been strengthened. The Council for Cooperation with NGOs has started functioning as an independent advisory body to the government on issues related to civil society. Contact points for cooperation with NGOs have been established in all the ministries and most other State bodies. NGOs are now regularly involved in the legislative and policy-making or monitoring process, including in such sensitive fields as the fight against corruption or the efficiency of the judiciary. The highest State authorities have regular contacts with NGOs, and the attitude of all stakeholders has become open and constructive. Efforts to improve cooperation with civil society are also being made at local level. The legal and regulatory frameworks for NGOs' activities and State financial support to these organisations have been improved, notably through the adoption of a new Law on NGOs. The register for civil society organisations has been updated and digitalised, and it is now available on the website of the Ministry of Interior. The dialogue with NGOs representing or dealing with the most vulnerable groups and gender equality is still not fully satisfactory. No amendments have been made to the Law on volunteer work to alleviate the conditions for voluntary activities in NGOs.

Regarding freedom of thought, conscience and religion, inter-faith relations have remained smooth overall. However, tensions remain between the Serbian and Montenegrin Orthodox Churches over canonical recognition and property issues, which have occasionally become factors in party-political relations.

Overall, progress has been made on improving the legal and regulatory framework and enforcing civil and political rights in Montenegro. However, shortcomings remain with the fight against ill-treatment and impunity, access to justice and the prison system. The role of law enforcement authorities in protecting media freedom remains to be strengthened, in line with European standards and the case law of the European Court for Human Rights. The quality and sustainability of the dialogue between the State institutions and civil society representatives, in particular with NGOs dealing with the most vulnerable groups, remain to be further strengthened.

Economic and social rights

Montenegro has made progress on anti-discrimination, which is a key priority set out in the Opinion. The legal and policy framework has been strengthened; however, implementation remains a challenge. There has been some progress with promoting women's rights and gender equality. Training for labour inspectors and trade unions has been launched, along with public awareness-raising campaigns on gender equality. Activities to empower women in employment have been carried out, including in rural areas. The arrangements guaranteeing equal earnings have been improved. Awareness-raising and legislative efforts have been undertaken to increase women's representation in elected offices at national and local levels.

Some progress has been made also on enforcement of women's rights. The government adopted in June the Strategy for protection against domestic violence for the period 2011-2015. Awareness-raising campaigns against domestic violence have been carried out. One of the NGO-run shelters for victims of domestic violence has received State financial support until the end of 2011 but it is still not clear whether new funds will be allocated for 2012. A service has been set up to provide victims with information on procedures and the steps to be taken. However, state activities to protect victims of domestic violence are lagging behind. In particular, sustainable financing of shelters, setting up multidisciplinary support teams and processing reported cases of violence are not always satisfactory. Violations of women's employment rights, including to equal pay, are rather widespread. Women remain under represented in decision making positions in the public and the private sector.

Some progress has been made on protecting children's rights. The capacities of the Council for the Rights of the Child have been strengthened. A network of day-care centres has been set up for children with disabilities. Awareness-raising campaigns on children's rights have been stepped up (e.g. for Roma, Ashkalis and Egyptians and for children with disabilities). However, institutions dealing with enforcement of children's rights lack the necessary capacity and efficiency. Additional efforts are required to secure better inclusion and access to education for children with disabilities, particularly those with mental difficulties. Deinstitutionalisation and foster or community-based care remain at an early stage, notably for children from the Komanski Most institution. Implementation of the strategy on early and pre-school education and adoption of the Law on juvenile justice are still pending. Serious violations of children's rights to privacy and dignity by the media continue to occur.

Progress has been made with enforcing the rights of socially vulnerable persons and/or persons with disabilities. The Law against discrimination against persons with disabilities and the Law on professional rehabilitation and employment of persons with disabilities have been adopted. Awareness-raising campaigns and training sessions for civil servants have been carried out. Inclusive educational activities have been launched, in cooperation with relevant international organisations. The network of day-care centres for children with disabilities has been extended. Efforts have been made to promote employment of persons with disabilities, notably by improving the legal framework and stepping up the activities of employment offices.

However, the legal framework governing the rights of persons with disabilities is still not fully satisfactory, both regarding positive action and the sanctions mechanisms. Awareness-raising activities have not been coordinated with representatives of persons with disabilities. Access to education and deinstitutionalisation of children, in particular those with a mental disability, is at a rather early stage. Persons with disabilities have very limited access to employment, including in public institutions. Operation of the Fund for employment of persons with disabilities is not fully satisfactory. Public places remain poorly adapted to the needs of these persons. Conditions in the Komanski Most institution are not fully aligned with European and international standards, notably regarding accommodation of female inmates and insufficient separation of adult from juvenile patients. State assistance to persons with disabilities and their primary carers remains to be strengthened, including the role of social care centres in this field.

As regards anti-discrimination policies, one of the key priorities set out in the Opinion, progress has been made. The Law on the Ombudsman was passed in July; with the new legal provisions, he has now responsibility over cases of anti-discrimination. The commitment of the government on this issue has been strengthened; an advisor on human rights and anti-discrimination was appointed in September in the Prime Minister's office. A Council for the protection against discrimination has been established, chaired by the same Prime Minister; it is tasked to monitor and coordinate activities on anti-discrimination by different authorities. Awareness-raising campaigns on the inclusion of the most vulnerable groups have been carried out, along with training for law enforcement agencies and civil servants. A reporting mechanism has been defined. However, effective implementation of the anti-discrimination law still remains a challenge; Roma, Ashkalis and Egyptians, persons with disabilities and lesbian, gay, bisexual and transgender (LGBT) persons are still subject to discrimination in practice, including on the part of State authorities. The capacity of the Ombudsman's Office to effectively address cases of anti-discrimination remains limited, as well as processing discrimination cases by law enforcement bodies. Furthermore, the alignment of anti-discrimination law with the acquis remains limited as there are cases in which it still permits direct discrimination and it fails to include an obligation for employers to provide reasonable accommodation for persons with disabilities.

As regards the rights of lesbian, gay, bisexual and transgender (LGBT) persons, some progress has been made. The State authorities, notably at the highest level, have shown greater openness to respecting the rights and situation of this population. Government work towards finalising an LGBT action plan has advanced and a conference to promote anti-discrimination was organised by the government in September in Podgorica. The Police Directorate signed a Memorandum of Understanding with the relevant NGO, in order to ensure a peaceful rally of the gay population. However, LGBT persons continue to be subject to serious threats, while some cases of violence have been reported. Legal processing of cases reported to the police has not started. Involvement of the Ministry of Human and Minority Rights in protecting the rights of LGBT persons is insufficient. Public homophobic statements are still being made, including by politicians.

Some progress has been made as regards labour and trade union rights. The amendments to the Law on the Social Council enhanced the independence and administrative, technical and coordination capacity of the national Social Council and strengthened the work of the social councils at municipal level. However, bipartite social dialogue and the development of autonomous social dialogue remain insufficient, especially at local level; the Social Council secretariat provided by the law has not been set up yet. Yet, implementation and enforcement of labour law remains a serious challenge. The law on trade union representativeness is being implemented but procedures to check member lists are not in line with European standards on data protection.

Limited progress has been made on property rights. The government set up specific commissions to deal with denationalisation issues, but the process of restitution remains very slow and needs to be accelerated. Furthermore, the transparency of the procedure is not fully ensured. No efforts were made to solve cases of property subject to restitution which has been privatised in the meantime. The Parliament adopted in June amendments to the Law on State Survey and Immovable Property Cadastre; however, the operations of the land register system remain to be improved, particularly regarding the completeness and accuracy of the data and its national coverage. No progress has been reported on legal regulation of the restitution of property taken from religious communities after 1945. Due to several cases of forgery of property documents, measures have been taken to strengthen control over the land registry offices.

Overall, Montenegro has made some progress on improving the legal framework, awareness-raising and training of civil servants regarding economic and social rights. However, enforcement of these rights remains rather limited, in particular for the most vulnerable groups and gender equality, including the fight against domestic violence.

Respect for and protection of minorities, cultural rights

Some progress has been made in the area of protection of minorities and cultural rights. The Law on minority rights was amended to harmonise it with the Constitution and introduce a guarantee of authentic representation of minorities in parliament and local assemblies. The amendments also set more precise criteria for the composition and functioning of Minority Councils. Some progress has been made as regards cooperation between the authorities and Minority Councils, notably in the form of regular meetings with the Ministry of Human and Minority Rights. Inter-ethnic relations are good, overall, including management of sensitive issues of ethnicity and language in the population census. There have been occasional tensions, in particular between Montenegrins and Serbians as regards identity and language questions. Yet, a broad consensus has been reached on the use of the official language, and other languages in official use, in schools' curricula according to the constitutional guarantee to persons belonging to minority nations and other national communities to obtain education in their own language. In implementing this agreement attention should be made to the respect of the sensitivities of the various communities. Persons belonging to minorities remain under-represented in public institutions. Functioning of the Minority Fund is still not fully satisfactory when it comes to allocating funds and monitoring the use made of them.

Progress on inclusion of Roma, Ashkali and Egyptian (RAE) persons still remains rather limited, despite continuing efforts by the authorities at national and local levels in cooperation with relevant international organisations and civil society representatives. Efforts have been made to implement the strategy for 2008-2012 to improve the status of Roma, Ashkali and Egyptian population, with the support of a monitoring commission where representatives of the RAE society are involved. The State has financed the setting-up of a Roma radio station.

Progress has been made to facilitate civil registration of RAE population. The amendments made to the law on citizenship in March 2011 have extended the deadline to request the Montenegrin citizenship by 31 July 2012, under easier conditions, for those who already resided in Montenegro before June 2006. However, lack of proper civil registration continues to affect a large number of RAE persons; a number of domiciled RAE persons still have not been able to obtain Montenegrin citizenship. Insufficient pre-school and secondary education enrolment and high drop-out rates, particularly among girls, remain to be addressed. Scholarships and other forms of financial support are available for RAE students; however it needs to be strengthened and mainstreamed through the relevant strategies, aiming at a better coordination between the different programs in support to education. Illiteracy remains widespread. Discrimination is prevalent in access to employment, despite incentives for employers; vocational trainings are offered to RAE job seekers, but they are not fully adapted to the need of these persons nor to the opportunities offered by the job market. Recruitment of RAE graduates in the public sector is at an early stage. Problems still exist with access for RAE persons to satisfactory living conditions and to social and health care. Efforts to fight child begging and domestic violence in RAE families need to be intensified, taking into account the gender dimension in the formulation of adequate policies. No progress has been achieved regarding political representation of RAE persons.

Some progress has been made on improving the situation of displaced persons, which is one of the key priorities set out in the Opinion. There are currently over 15,000 displaced persons originating from Croatia, Bosnia and Herzegovina and Kosovo in Montenegro. Since February 2011, the authorities have stepped up their efforts to give these persons legal status, notably via awareness-raising campaigns in cooperation with relevant international organisations and closer cooperation with the countries of origin to facilitate access by the persons concerned to the necessary supporting personal documents. In July 2011, the government adopted the "Strategy for Durable Solutions of Issues Regarding Displaced and Internally Displaced Persons in Montenegro, with special emphasis on the Konik area". The new strategy replaces the 2009 Action Plan and confirms the extension of the 7 November 2011 deadline for applications for foreigner with permanent residence. The deadline for adoption of the amendment to the law is October 2011. The strategy outlines action for facilitating access to documents for vulnerable persons. However, mainly due to cumbersome procedures, including the costs of collecting supporting documents from their countries of origin, around 30 % of displaced persons submitted relevant applications and less than 20 % of them obtained legal resident status. Smaller numbers have obtained temporary status, while around 600 have qualified for citizenship rights. Return to countries of origin continued but overall numbers remain limited. Efforts to accelerate the process of voluntary return for persons originating from Kosovo have been made, but results remain limited. Further efforts are needed by both Montenegro and Kosovo to remove remaining obstacles and facilitate return.

According to the strategy and in line with the extension of the deadline for applying for permanent residence, the validity of the decree which currently gives displaced persons access to social and economic rights will be extended. The strategy also commits to harmonise basic laws with the Law on Foreigners to ensure full access of displaced persons to economic and social rights. Several laws still have to be adopted or amended to this effect. Currently, enforcement of these rights remains insufficient. The new strategy outlines a durable solution to the Konik area but implementation is still at a very early stage.

Overall, interethnic relations remain smooth in Montenegro. However, progress on economic, social, cultural and political inclusion of Roma, Ashkali and Egyptian persons remains limited.

2.3. Regional issues and international obligations

With regard to cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY), in the reporting period Montenegro neither received requests for assistance nor had cases referred back to its national authorities from the ICTY for possible further investigation. Out of the four local war crimes cases in Montenegro, three are in the trial phase and one in the pre-trial phase. The government supported the campaign to construct a memorial for victims of the 1992 deportation war crimes. Yet, so far, treatment by the Montenegrin court of the case of deportation of Bosniaks in 1992 is not fully aligned with ICTY case law.

Montenegro has aligned with the Council Decision advancing universal support for the International Criminal Court and promoting the widest possible participation in it[5]. However, it still maintains the 2007 bilateral immunity agreement with the United States granting exemptions 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 the related EU guiding principles on bilateral immunity agreements. Montenegro needs to align with the EU position.

Significant progress was made with regard to the Sarajevo Declaration Process, launched on 31 January 2005. Bosnia and Herzegovina, Croatia, Montenegro and Serbia are cooperating within this process to find solutions for refugees who were displaced as a result of the armed conflicts in the former Yugoslavia between 1991 and 1995. The countries have continued to make progress on a number of outstanding issues, such as data exchange, civil documentation, public information, pensions and trust fund mechanisms, in the established regional working groups. Following the meetings of June and September 2011, Bosnia and Herzegovina, Croatia, Montenegro and Serbia agreed on a number of issues, including on the text of a joint declaration to be signed at a ministerial conference in November 2011 in Belgrade. A regional multi-year programme aimed at addressing the needs of the most vulnerable refugees, has also been agreed, together with a donors' conference to be held in the first half of 2012 in Sarajevo.

Regional cooperation and good neighbourly relations form an essential part of Montenegro's process of moving towards the European Union. Montenegro continues to be strongly involved in developing regional cooperation. Over the reporting period, it chaired the Central European Initiative (CEI), the South-East European Cooperation Process (SEECP), the US-Adriatic Charter, the Adriatic-Ionian Initiative (AII), the Regional Anti-Corruption Initiative (RAI) and the Multinational Advisory Group of the Centre for Security Cooperation. Montenegro has also renewed its partner status in the sectoral dialogue in the Organisation for Black Sea Economic Cooperation (BSEC). Within the SEECP, in March Montenegro endorsed the Regional Strategic Document and Action Plan on Justice and Home Affairs 2011-2013. Montenegro is also continuing to participate actively in the Regional Cooperation Council (RCC), the Central European Free Trade Agreement (CEFTA), the Energy Community Treaty, the European Common Aviation Area Agreement, and the EU Strategy for the Danube region. Montenegro continues actively to support the Igman initiative on reconciliation, which brings together NGOs from Bosnia and Herzegovina, Croatia, Serbia and Montenegro. Montenegro supports the RECOM initiative.

As regards regional judicial and police cooperation, Montenegro has ratified and started to implement extradition agreements with Croatia and Serbia covering own nationals involved in serious and organised crime. An equivalent agreement was also signed with the former Yugoslav Republic of Macedonia. Agreements on police cooperation were signed with Croatia and Serbia. Montenegro ratified the agreements with Bosnia and Herzegovina on mutual legal assistance in civil and criminal matters and on mutual recognition of decisions in criminal matters.

Montenegro continues to maintain good bilateral relations with other enlargement countries and the neighbouring EU Member State Italy. However, delimitation of borders with Croatia, Serbia, Bosnia and Herzegovina and Kosovo remains pending. The agreement on dual citizenship with the former Yugoslav Republic of Macedonia remains the only agreement of this kind with another country in the region.

Relations with Albania have remained good. Cooperation between the two countries focused on economic and trade relations.

Relations with Bosnia and Herzegovina have continued to improve. Three agreements were signed relating to border crossings for local and international transport and defence. Agreements on cooperation in the field of tourism and exchange of data with regard to social insurance entered into force.

Montenegro continued to maintain good relations with Croatia. The two countries signed an agreement on the extradition of citizens sentenced for corruption and organised crime. A number of technical meetings have been held to prepare the joint submission of the Prevlaka border delimitation to the International Court of Justice, but no substantial progress has been achieved to date. The temporary agreement continues to function smoothly, but a permanent solution is necessary.

Relations with the former Yugoslav Republic of Macedonia remained good. Bilateral agreements were signed on economic and social cooperation and on cooperation in the fields of education, science and technology. Agreements on bilateral investment protection and on coordination of social security systems were concluded. Furthermore, the two countries have also signed an agreement on extradition of citizens involved in organised crime, corruption and money laundering.

Relations with Serbia remained good, overall. Cooperation is developing, in particular in the economic, environmental and scientific fields. Serbia opened a consulate-general in Herceg Novi. However, some issues concerning the dissolution of the State Union still remain to be solved, such as finalisation of the distribution of assets and liabilities and citizenship rights, particularly concerning dual citizenship.

Montenegro continued to maintain good relations with Kosovo. A bilateral agreement relating to registration of displaced persons from Kosovo living in Montenegro entered into force on 29 June. A readmission agreement was signed on the same day. Yet, the demarcation process has not progressed, notwithstanding the existence of a commission specifically responsible for it. The issue of explicit recognition of the Montenegrin minority in Kosovo remains pending.

Relations with Turkey are good. Turkey provided humanitarian assistance to Montenegro following the floods that affected the country in December 2010.

Overall, Montenegro continues to satisfy the Stabilisation and Association Process conditionality on cooperation with the ICTY and regional cooperation, despite some outstanding bilateral issues.

3. Economic criteria

The Commission's approach in its examination of economic developments in Montenegro 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

Montenegro has been playing an active part in the EC fiscal surveillance and reporting arrangements applying to potential candidate countries since 2006. It participated for the first time in the EU multilateral fiscal surveillance procedure for candidate countries, including the ministerial dialogue with the ECOFIN Council in May 2011. The country's 2011 Economic and Fiscal Programme presented a cautious macroeconomic baseline accompanied by an expenditure-based fiscal consolidation framework, plus a wide structural reform agenda that was consistent with past priorities. Meanwhile, a domestic political consensus was maintained on the fundamentals of a market economy. Overall, economic policy remained consistent.

Macroeconomic stability

The economy started to recover in 2010 from the effects of the crisis, growing by 2.5%, after contracting by 5.7% a year earlier. The first signs of revitalisation appeared in the second quarter of 2010 after 18 months of continuous contraction. Growth was driven by net exports, private consumption and changes in inventories. From the supply side, the turn around of the global metal market gave an additional boost to local industries, raising total industrial production by 17.5% in 2010. Manufacturing output accelerated further by 9.6% on average during the first seven months of 2011. However, the overall industrial production rose much more modestly, by 0.2% year-on-year in July, as the utility sector output still remained below previous year level by -30%. The construction sector accelerated rapidly in the last quarter of 2010, with the value of performed construction works expanding by 13% in 2010, compared with the contraction of 21% recorded a year earlier. The value of finalised construction works expanded in the first six months of 2011 by 30.8% year-on-year. Retail sales which had shown a modest increased in 2010 (1.6%) increased further during the first half of 2011 by 14.3% year-on-year. Average per-capita income in purchasing power standards amounted to 40% of the EU-27 average in 2010, down from 41% in 2009. Overall, a modest recovery of the economy is underway.

While domestic demand remained subdued in 2010, industry's recovery contributed to a 20% increase of total merchandise exports, with exports of aluminium accounting for 41% of this increase. At the same time, merchandise imports remained virtually flat. As a result, the large trade deficit dropped to 42% of GDP in 2010, from 46% a year earlier. After a successful tourism season the surplus in services increased by 16%, supporting the contraction of the current account deficit in 2010 down to a still very high 25% of GDP, from 30% a year earlier. The current account deficit contracted further during the first half of 2011 by 12.5% year-on-year to 22.4% of GDP in annualised terms. The improvement was mainly driven by a widening surplus on the services and income accounts. In 2010 the current account deficit was largely covered by net FDI and net portfolio investments, contributing 17% and 6% of GDP respectively. In the first half of 2011 net FDI inflows contracted by 45% year-on-year to 13% of GDP or 60% of the current account deficit. The surge in net portfolio investments during the same period contributed with additional 11% of GDP, financing 40% of the deficit. Overall, despite the continuous expansion of merchandise exports, these still remain below pre-crisis levels.

Unemployment in 2010 remained high at 19.7%, up from 19.1% a year earlier. Employment contracted by 7.1% in the same period. The unemployment rate continued growing in 2011. It reached 19.9% in the second quarter of 2011. According to the Agency for Employment (AEM), recorded employment improved during the first half of 2011; increasing by 6.6% year-on-year, while job vacancies increased by 18% year-on-year. The AEM registered unemployment rate decreased to 11% in July 2011, down from 12.2% at the end of 2010. There remain significant discrepancies in labour statistics between Labour Force Surveys (LFS) and the Agency for Employment (AEM) administrative records. Further efforts are also needed to address the high level of informal employment, estimated by the AEM at 20% of total employment in 2010. Overall, the labour market deteriorated during 2010, but shows mixed signs of improvement in 2011.

Consumer prices remained subdued during 2010, thanks to a reduction in food prices, and the reduction of annually adjusted electricity prices. Headline inflation averaged at 0.5% in 2010 and picked up slightly to reach 0.7% year-on-year in December. Inflation accelerated further in 2011, averaging 2.9% on the first seven months of the year driven by food, transport, health and communication prices, as well as the increases in excise rates on alcohol and tobacco. Overall, price stability was generally maintained amid recent external pressures.

Unilateral euroisation implies that there is only limited scope for the use of domestic monetary policy instruments. The Central Bank's capabilities as lender of last resort are restricted and the ultimate stability of the financial system relies on its banks' supervision and on the soundness of the government fiscal policy. The banking system seems to have stabilised somewhat in 2010 and the Central Bank has been strengthening its supervisory capacities. Bank deposits contracted by 1.9% in 2010 but they recorded positive growth rates during the first half of 2011. However, the aggregated level of bank loans remained in negative territory during the same period, contracting by 12.4% year-on-year at the end of June 2011. The seven mid-sized and smaller banks recorded 12% annual credit growth in the first half of 2011, while the four largest registered 32% contraction. Overall, the largest banks could not support the economy by providing new credits as they were pursuing their consolidation.

In 2010, the consolidated budget deficit stood at 5% of GDP, including tax arrears worth some 2% of GDP. Moreover, the level of contingent liabilities due to extended guarantees represented 10.3% of GDP at the end of 2010. Budget revenues totalled 42% of GDP. The effects of the crisis translated into the contraction of 1.8% in VAT revenues and tax receipts down by 5.1%, plus the sharp 63% contraction of corporate income tax owing to the weak financial position of businesses. Revenues from personal income tax, social security contributions and local taxes exceeded the plan. Public expenditures reached 45% of GDP, as gross wages increased by 2.4% and social protection transfers (mostly pensions) by 4%, while subsidies contracted by 12% compared with the planned spending level. Implementation of capital expenditure remained flat and lower than planned as the highway works were postponed. The consolidated deficit reached 1.6% of GDP in the first half of 2011. Public debt without state guarantees accounted for 41% of GDP in 2010 as against 38% a year earlier. The increase was a consequence of the rapid expansion of the external debt, which accounts for 72% of the total. The public debt increased further following the new issue of Eurobonds in April 2011, reaching 45% of GDP by the end of June. Overall, past efforts at expenditure control have resulted in large arrears accumulation and led to substantial contingent liabilities.

The global economic and financial crisis has posed a challenge to Montenegro's policy framework. The fact that Montenegro is using the euro as its sole legal tender, and has therefore abandoned standard monetary policy tools, leaves fiscal policy as the main effective policy instrument. The quality of public finances was improved with the adoption of important structural reforms, such as the public pension system, the streamlining of public employment, or a new financing scheme for local self-governments, although the full effect of these reforms will take still some time to get through. The Montenegrin economy remains constrained by limited diversification and competitiveness. Overall, despite the implicit constraints in the form of a limited set of policy tools, the overall macroeconomic stability improved compared to 2010.

Interplay of market forces

The majority of state ownership in the economy remains predominantly concentrated in transport (rail, port, airline and airports), and to a lesser extent in the metal and electric power industries, as well as in a few miscellaneous companies. In 2010, only maritime operator services of the port of Bar were successfully privatised, as well as some property of tourist company Budvanska Rivijera and the Bijela shipyard. The privatisation process suffered from the global crisis. Some companies repeatedly failed to attract interest from investors (in the case of the port container terminal and rail cargo due to the need for prior reconstruction of the railways) or went into bankruptcy proceedings (the steel mill and the tobacco factory). In August 2011 Italian power utility A2A, which owns 44% of Montenegro state power company EPCG, waived its right to acquire majority ownership after the government reversed a 2009 decision to majority-privatise the company. Overall, majority state ownership remains concentrated in network industries.

Only a limited number of products are currently subject to administrative price control, including medicines, bread and fuels. Meanwhile the Energy Regulatory Agency (ERA) establishes electricity prices in relation to production cost thresholds. In addition, local authorities may control the prices of certain utility services (water supply, sewerage, refuse collection). In the absence of controls on the price of food other than bread, the government approved the payment of two one-off cash benefits in 2011 (totalling € 2 million) targeting the most vulnerable social groups. Administered prices accounted for 10.7% of the harmonised index of consumer price (HICP) in 2010. Overall, the influence of the state in price dynamics remains limited.

Market entry and exit

In 2010 there were 3,695 new companies registered in Montenegro, which is an increase of 6.8% in the number of new registrations compared with 2009. Improvement in market entry was achieved with the establishment in May 2011 of a 'one-stop shop' for new company registration and simultaneous tax and customs listing instead of having to deal with three different institutions and procedures as was previously the case. So far, registration is possible at the central registry of the commercial court, but not yet at the regional units of the tax administration. Additional support to the business environment was provided in the form of amendments to the Law on Administrative Fees adopted in March 2011, which reduced or simply abolished payment for a series of administrative and customs documents. The number of bankruptcy cases in 2010 fell to 2,196, compared to 6,150 a year earlier. A new Bankruptcy Law came into force in January 2011. The new law significantly shortens deadlines and enables submitting a legally enforceable restructuration plan together with the bankruptcy petition, against which creditors' claims are to be settled. Another novelty is the possibility for the debtor's company to be sold as a single legal entity, which increases its chances of survival. Overall, market entry and exit mechanisms were further improved.

Legal system

For the acquisition of real estate the Property Relations Law and the entry into force of the Stabilisation and Association Agreement provide the same treatment to both EU citizens and nationals. The Law on State Surveying and Immovable Property Cadastre was adopted by the parliament in June 2011. The main improvement concerns the shortening of deadlines for registration of immovable property to eight days compared with thirty days before, while authorities are obliged under the new law to make a decision within fifteen days of the submission of the request. Meanwhile, the modernisation of the current cadastre register continues with the addition of a newer digitalised information system. Overall, property registration procedures continue to improve.

In July 2011 the parliament adopted the Law on Enforcement and Securing of Claims. The new law shortens delays in procedure and recognises mortgage contracts and notarial deeds as enforceable documents. It also allows enforcement against immovable property, including their public sale within a limit of 50% of its market value. Enforcement against monetary claims is also tightened up. Although the strategic and legislative framework to combat corruption has been strengthened, its implementation remains uneven and corruption continues to be a cause for concern. Overall, the new law on Enforcement and Securing of Claims laid the basis for swifter enforcement of contracts. However, weaknesses in the rule of law and prevalent corruption continue to have an adverse effect on the business environment and remain a major challenge.

Financial sector development

Total bank loans accounted for 71% of GDP in 2010, compared to 80.4% the year before. Loans to the private sector remained constant at 98% of total credit. The ownership structure is largely dominated by foreign capital (83% of total), followed by private domestic shares (15%) and state ownership (2%). The banking sector remains highly concentrated, with four banks accounting for 68% of total assets. Financial intermediation remained subdued until May 2011 when two of the largest banks recovered from a long period of credit inactivity. In the case of Crnogorska Komercijalna Banka (CKB) it had to clearout its balance sheet, while Prva Banka's lending was banned by the Central Bank for a period of two and half years until the bank was recapitalised and improved its liquidity. The Central Bank has remained very active, developing secondary legislation with a view to strengthening the resilience of the system to future shocks. In 2011 it adopted several decisions, namely on open market operations, on conditions for lending to banks to maintain their liquidity, on approving last resort financial aid to banks, on international reserves management, on the establishment of the Investment Committee, on capital adequacy and, on mandatory reserves. Overall, financial legislation improved.

The interest rate spreads have been widening, as lending rates have been rising (from 9.63% in 2010 up to 9.72% in June 2011) while deposits rates contracted from 3.26% in 2010 to 3.06% in June 2011, the latter trend reflecting an overall improvement of banks' liquidity. The capital adequacy ratio (CAR) rose from 11% in 2009 to 15.9% in 2010 and 15.3% in June 2011, remaining above the minimum legal threshold of 10%. However, the share of non-performing loans (NPL) raises concerns. It has been increasing, reaching 25.3% of total loans in June 2011. Some banks still recorded losses and weak profitability. In the first half of 2011 the aggregated loss of banks totalled € 9 million, compared to 47 million loss a year earlier. At the end of 2010, the combined return on average assets (ROA) was ‑2.7% and the return on average equity (ROE) ‑27.3%. During the first half of 2011 the situation improved relatively, recording ROA of ‑0.6% and ROE of ‑6.3% by the end of June. Overall, the financial situation of the banking sector and the increasing share of non-performing loans continued to reflect the fallout of the crisis, and remain a cause for concern.

The leasing market remained virtually stagnant during 2010 as the value of their contracts was less than 0.9% of GDP compared with 1.1% a year earlier. Leasing showed signs of recovery in the first half of 2011, expanding by 3.3% year-on-year. The insurance market recorded a new entrant in 2011, raising the number of active companies in the country to 12. However, the sector still remains highly concentrated, with one company accounting for 53% of total premiums. Non‑life insurance dominates the market (86.6% of the total in 2010), of which compulsory motor vehicle insurance accounts for 56%. In 2010, the combined turnover of the two stock exchanges experienced a sharp contraction of 86% year-on-year, mostly as a result of the high base level following the partial privatisation of the electric power company a year earlier. In October 2010 the two stock exchanges merged to form the Montenegro Stock Exchange, operating as a single entity from January 2011 onwards. The parliament adopted a law on takeover of joint stock companies in March 2011 to improve the protection of shareholders, while streamlining takeover procedures. In June 2011, the Securities Commission issued the first licence to a domestic brokerage company for margin trading. The stock market turnover further declined in 2011, contracting by 31% year-on-year in August. Overall, non-banking financial institutions continued to play a limited role as a source of private sector financing.

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

Existence of a functioning market economy

The financial sector has still to recover from the fallout of the crisis. The persistence of external and internal imbalances and the risks as regards public finances from contingent liabilities present a challenge for the economy. Unemployment remained high. The stabilisation measures taken, coupled with a prudent fiscal stance, have reinforced the overall macroeconomic stability. Overall, market mechanisms endured the global turmoil but potential vulnerabilities remain.

Human and physical capital endowment

The reform of the education and training system remains very important given the mismatch of ski