TABLE OF CONTENTS

1........... Introduction. 4

1.1........ Preface. 4

1.2........ Context 4

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

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

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

2.2........ Human rights and the protection of minorities. 13

2.3........ Regional issues and international obligations. 18

3........... Economic criteria. 20

3.1........ The existence of a functioning market economy. 20

3.2........ The capacity to cope with competitive pressure and market forces within the Union. 24

4........... Ability to take on the obligations of membership. 26

4.1........ Chapter 1: Free movement of goods. 26

4.2........ Chapter 2: Freedom of movement for workers. 27

4.3........ Chapter 3: Right of establishment and freedom to provide services. 28

4.4........ Chapter 4: Free movement of capital 29

4.5........ Chapter 5: Public procurement 30

4.6........ Chapter 6: Company law.. 31

4.7........ Chapter 7: Intellectual property law.. 32

4.8........ Chapter 8: Competition policy. 33

4.9........ Chapter 9: Financial services. 33

4.10...... Chapter 10: Information society and media. 35

4.11...... Chapter 11: Agriculture and rural development 36

4.12...... Chapter 12: Food safety, veterinary and phytosanitary policy. 38

4.13...... Chapter 13: Fisheries. 40

4.14...... Chapter 14: Transport policy. 40

4.15...... Chapter 15: Energy. 41

4.16...... Chapter 16: Taxation. 43

4.17...... Chapter 17: Economic and monetary policy. 43

4.18...... Chapter 18: Statistics. 44

4.19...... Chapter 19: Social policy and employment 45

4.20...... Chapter 20: Enterprise and industrial policy. 47

4.21...... Chapter 21: Trans-European networks. 48

4.22...... Chapter 22: Regional policy and coordination of structural instruments. 48

4.23...... Chapter 23: Judiciary and fundamental rights. 49

4.24...... Chapter 24: Justice, freedom and security. 55

4.25...... Chapter 25: Science and research. 59

4.26...... Chapter 26: Education and culture. 60

4.27...... Chapter 27: Environment and climate change. 61

4.28...... Chapter 28: Consumer and health protection. 62

4.29...... Chapter 29: Customs union. 64

4.30...... Chapter 30: External relations. 65

4.31...... Chapter 31: Foreign, security and defence policy. 65

4.32...... Chapter 32: Financial control 66

4.33...... Chapter 33: Financial and budgetary provisions. 67

1. Introduction 1.1. Preface

Since March 2002, the Commission has reported regularly to the Council and the Parliament on progress made by the countries of the Western Balkans region. This report on progress made by the former Yugoslav Republic of Macedonia in preparing for EU membership largely follows the same structure as in previous years. The report:

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

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

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

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

This report covers the period from October 2011 to September 2012. Progress is measured on the basis of decisions taken, legislation adopted and measures implemented. As a rule, legislation or measures which are under preparation or awaiting parliamentary approval have not been taken into account. This approach ensures equal treatment across all reports and enables an objective assessment.

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

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

1.2. Context

The European Council of December 2005 granted the status of candidate country to the former Yugoslav Republic of Macedonia. The Stabilisation and Association Agreement (SAA) between the former Yugoslav Republic of Macedonia and the EU was signed in April 2001 and entered into force in April 2004. In October 2009, the Commission made recommendations to the Council to open negotiations with the country and to move to the second phase of SAA Implementation. These recommendations were reiterated in 2010 and 2011. The Council has not yet decided on the Commission’s proposals.

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

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

The Stabilisation and Association Agreement (SAA) remained at the core of the relationship between the EU and the former Yugoslav Republic of Macedonia. The country has been implementing its commitments under the SAA with the EU, including all those relating to the first stage of implementation of Title V (Movement of workers, establishment, supply of services, capital). The Commission’s 2009 proposal on passage to the second stage of the Association, under Article 5 of the SAA, has been under consideration by the Council.

Regular political and economic dialogue between the EU and the country has continued through the SAA structures. Meetings of the highest joint bodies, namely the Stabilisation and Association Committee and the Stabilisation and Association Council, took place in October 2011 and January and July 2012. Experts from both sides have met in seven sub-committees and a special group on public administration reform. Multilateral economic dialogue between the Commission, the EU Member States and candidate countries on pre-accession fiscal surveillance continued, and included a ministerial meeting in Brussels in May. In December 2011, the government adopted its annual revision of the national programme for the adoption of the acquis.

A High Level Accession Dialogue (HLAD) was launched by the government and the Commission on 15 March 2012. The purpose of the HLAD is to inject new dynamism into the EU accession reform process, thereby strengthening confidence and boosting the country’s European prospects. It does not override the standard pre-accession procedures. The HLAD focuses on five key areas: protecting freedom of expression in the media; strengthening the rule of law; reforming public administration; improving the election process; and developing the market economy. It also discussed good neighbourly relations. Political-level meetings were held on 15 March, 7 May and 17 September. These reviewed progress in reforms on the basis of agreed targets and actions and a government roadmap. Technical consultations on various topics continued throughout the year. There has been good overall progress. The targets and actions are assessed in detail within the relevant sections of the Progress Report.

Visa liberalisation for citizens of the former Yugoslav Republic of Macedonia travelling to the Schengen area has been in force since December 2009. The Commission set up a post-visa-liberalisation monitoring mechanism to assess whether the implementation of all the reforms introduced by the country was consistent with the visa roadmap and sustainable. This was complemented by an alert mechanism to avoid abuses. The Commission presented its second monitoring report to the European Parliament and the Council in December 2011 and adopted the third in August 2012. A readmission agreement between the European Union and the former Yugoslav Republic of Macedonia has been in force since January 2008.

Financial assistance is provided through the Instrument for Pre-Accession Assistance (IPA). The revised Multiannual Indicative Financial Framework for 2012-13 allocates a total EU contribution of € 215 million to the country. The last national programme under the current IPA Component I was submitted to the Commission in July 2012 with a total EU allocation of € 56 million for the years 2012 and 2013. In addition, the country continued to benefit from various regional, cross-border cooperation and horizontal programmes. Implementation of all IPA programmes on the ground is slowly taken off. The government should, however, streamline and strengthen planning and horizontal coordination of policies, particularly in view of the forthcoming IPA 2014-2020 programming period.

Since 2007 the Commission has committed over € 490 million for projects to be implemented in the country, including € 101 million in 2012. This assistance focuses on further strengthening administrative capacity (with particular emphasis on the judiciary and public administration sectors), regional economic development, customs reforms, alignment with the EU acquis and technical support to ensure sound and efficient management of EU funds. In the context of pre-accession, since December 2010, the national authorities have been directly managing over € 250 million under the Decentralised Implementation System (DIS) for four out of five IPA components. There have been encouraging elements regarding the reinforcement of capacities across the administration in 2012, although further strengthening of the national management and control systems is still needed in order to ensure higher effectiveness, impact and absorption of EU funds.

Civil society has received extensive financial support from the EU under the IPA Civil Society Facility and national programmes, as well as through the European Instrument for Democracy and Human Rights. The programmes currently being implemented provide significant support for NGO management and resource mobilisation, for institutional cooperation between CSOs and central and local authorities as well as networking at regional level. Furthermore, under the DIS, civil society is involved in monitoring the implementation of EU aid, particularly the assistance given under the Transition and Institution-Building Component, via participation in the biannual IPA Monitoring Meetings. The first one was held in Skopje on 16 July 2012.

The former Yugoslav Republic of Macedonia actively participates in the following Union Programmes: the Seventh Research Framework Programme, the Entrepreneurship and Innovation Programme, ‘Progress’, ‘Culture’, ‘Europe for Citizens’, ‘Fiscalis 2013’, ‘Customs 2013’, and (since December 2011) the Intelligent Energy Programme.

2. Political criteria

This section examines the progress made by the former Yugoslav Republic of Macedonia towards meeting the Copenhagen political criteria, which require stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities. It also 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

Parliament

The functioning of Parliament and political dialogue have been maintained. Dialogue needs to be further strengthened, including on inter-ethnic issues.

All parties supported the High Level Accession Dialogue (HLAD) as an opportunity to inject new dynamism into the EU accession process. The Parliament adopted several laws related to EU accession, in particular as regards the reform targets of the HLAD.

The parliament is discussing government proposals for improvement of the legislative framework for elections, following the OSCE/ODIHR recommendations on the 2011 elections. The proposals aim to strengthen the Electoral Code, in particular by increasing transparency of campaign and political party financing and addressing gaps and ambiguities in the existing Code. The government has also proposed amendments of the Law on financing of political parties. The Voters’ List is in the process of being revised. On-going efforts will be necessary to fully address the recommendations of the OSCE/ODIHR, in particular as regards the separation of state and political parties, prevention of intimidation of voters and audit of the Voters’ List.

The Parliamentary Committee on EU Affairs (CEA) and the National Council on EU Integration (NCEI), which is chaired by the opposition and includes civil society representatives, held joint sessions on key EU topics. They debated the 2011 Progress Report, the annual revision of the National Programme for the Adoption of the Acquis (NPAA) and the HLAD roadmap for reforms. The CEA and NCEI consulted with the Commission as part of the HLAD meeting of 7 May and 17 September in Skopje. The two bodies held regular sessions and public hearings.

Agenda items proposed by the opposition were discussed in plenary, in line with the 2009 Law on Parliament and 2010 amendments to the rules of procedure.

Fourteen further public hearings, one public discussion and two oversight hearings were held. The legislative process involved consultations with civil society organisations and academia.

The 2011 amendments to the Law on Languages were implemented. The Committee on Inter-ethnic Relations continued its activities and held five sessions, including one on inter-ethnic incidents and tensions which arose in the first half of the year. The Committee on Labour and Social Policy continues to discuss the scope of the government proposed Law on Defenders concerning support to victims of the 2001 conflict. A mutually satisfactory solution should be found which facilitates reconciliation, on the basis of the recent government report on the Ohrid Framework Agreement.

The Code of Ethics for MPs was not adopted. The Committee of Inquiry set up to investigate the incident in the Parliament in 2010 has not come to any conclusions.

The Parliamentary Institute, established by the 2009 Law on Parliament in order to support the work of Members of Parliament, has not become operational. Further efforts are needed to resolve administrative blockages, such as delays in staff recruitment procedures.

Parliamentary oversight of the interception of communications has been strengthened by amendments to the legal framework. Oversight of intelligence and counter-intelligence services also need to be strengthened. There is insufficient cooperation between the two parliamentary committees responsible and the Ministry of the Interior.

Overall, the functioning of the parliament and political dialogue have been maintained. The parliament has consistently supported the accession process, including the High Level Accession Dialogue. The implementation of the Law on Languages and of the rules of procedure has progressed. The government has adopted proposals to for improvement of the framework for elections which are being considered by Parliament. On-going efforts will be needed to fully address the recommendations of the OSCE/ODIHR. Continued efforts are needed to develop the capacity of the parliament and political dialogue needs to be strengthened.

Government

The Macedonian government has deepened its commitment to the EU reform process by engaging fully with the High Level Accession Dialogue. On this basis, it adopted an ambitious roadmap for reforms in April 2012 and regularly reviewed its implementation at ministerial level. Civil society organisations were consulted, in an inclusive spirit. Through this dialogue, the EU accession process regained a central position in the political agenda of the country.

The revised National Programme for the Adoption of the Acquis for 2012 was adopted in December 2011. This would benefit from clearer deadlines, staffing requirements and budgetary implications. Implementation of some of the measures was affected by the cuts to the state budget.

In the first half of 2012 there were a number of incidents and killings in the country. Joint efforts by the coalition partners played an important role in alleviating the inter-ethnic tensions triggered by these incidents (See Respect for and protection of minorities, cultural rights). Relations in the government were affected by different points of view concerning the status of victims of the 2001 conflict. The coalition partners should pursue their dialogue in order to find solutions and ensure stability.

In October 2011, 10 days after the beginning of the census, the State Census Commission resigned due to disagreements concerning the methodology established by the State Statistical Office, notably the method for counting citizens working abroad. The coalition partners agreed to interrupt the census.

Decentralisation of government, a key element of the Ohrid Framework Agreement, continued. A programme for implementing decentralisation and local self-government for 2011-2014 and the corresponding action plan were adopted. All but one of the 85 municipalities entered the second phase of fiscal decentralisation, enabling a more substantial transfer of responsibilities and financial management to the local level. Under the Law on Financing the Units of Local Self-Government, the share of VAT transferred to municipalities increased to 4%, thus enhancing their financial capacity to take on new tasks. The provisions of the Law on Regional Development on financial allocations through the responsible bodies are not fully implemented. Capacity-building programmes are being implemented to assist municipalities.

Progress in meeting the objectives of decentralisation needs to be accelerated, driven in particular by the Ministry of Local Self-Government (MoLSG) and Ministry of Finance. Mechanisms for addressing the significant disparities in delivery of public services are limited, and rural and small municipalities are especially disadvantaged. Financial sustainability of municipalities remains the main challenge. Although there has been some increase in the collection of local taxes and fees, some municipalities have difficulties ensuring the collection of property tax.

The financial and legal framework for the implementation of all responsibilities transferred to municipalities needs to be developed with the participation of the local self-government units. Also, more transparency and coordination of central funding for municipal projects is needed.

Overall, cooperation within the government coalition has continued and has been successful in putting the accession process at the centre of the political agenda. The government has effectively coordinated the implementation of the HLAD on the basis of its own Roadmap. The government responded with maturity to inter-ethnic tensions and needs to build on this to further strengthen inter-ethnic relations and reconciliation, including on the status of victims of the 2001 conflict. The coalition partners should pursue their dialogue in order to find solutions and ensure stability. In the field of local government, progress on decentralization needs to be accelerated, in particular as regards the financial framework.

Public administration

Some progress was made in the area of public administration. The High Committee on Public Administration, led by the Prime Minister, maintained its overall coordination and political responsibility for public administration reforms. The administrative and operational capacity of the Ministry of Information Society and Administration (MISA) for managing public administration improved, and administrative inspection was reinforced with new staff and training. Additional efforts and resources are needed to further improve the MISA’s administrative capacity and administrative inspection to effectively cope with tasks throughout the country.

The Laws on Civil and Public Servants were amended, postponing until January 2013 the application of some staff appraisal methods previously criticised by EU experts. The mobility of civil and public servants has been partially improved. The registry of public servants is now operational, albeit with incomplete data from some institutions. The Constitutional Court excluded certain categories of staff from the scope of the Law on Public Servants retaining only those clearly exercising public authority. The recruitment and dismissal procedures for institutions finding themselves outside the public servants law are now governed by general labour law provisions and collective bargaining. The area of civil and public service therefore remains fragmented. To consolidate regulation in this area and to address persisting shortcomings regarding in particular the recruitment, promotion and termination of employment, preparations for a new comprehensive Law on Administration have commenced.

Eligibility criteria for recruiting staff remain inconsistent. While some progress has been observed in eliminating tailor-made vacancies, concerns remain that the principle of merit-based recruitment is not always respected. The regulations on hiring temporary staff remain unaligned with general recruitment procedures for civil and public servants. The Government has not made available official figures on existing or transferred temporary positions.

Regarding equitable representation, approximately one quarter of all newly employed civil servants came from the non-majority communities. The co-ordination of the recruitment process, in particular by the Secretariat for Implementation of the Ohrid Framework Agreement (SIOFA), needs substantial improvement. The trend of recruiting employees on a quantitative basis without sufficient regard to the real needs of the institutions continued. Most of the recruits have not reached their designated institutions while already receiving remuneration by SIOFA. The recruitment procedure for non-majority members is not harmonised with the general recruitment procedures and remains vulnerable to undue political influence.

The salary framework remains fragmented. The practice continued of paying ad hoc allowances to public servants for certain duty-related tasks without giving a transparent justification.

The Parliament introduced the principle of tacit approval in administrative proceedings (‘silence is consent’) by amending over 130 laws in line with recent amendments to the Law on General Administrative Procedures. A complex appeals procedure seriously undermines the application of this principle. To address this and other issues, preparations for a contemporary Law on General Administrative Procedures have commenced.

The Parliament appointed members of the Second Instance State Commission for appeals administrative procedures. The State Commission is not yet fully operational and lacks administrative capacity.

MISA continued efforts to improve the services offered to citizens. E-government is promoted as a tool to increase transparency and prevent petty corruption. The ‘scoreboard’ grading system for use by citizens has been expanded to additional institutions. Responsibility for management of regulatory impact assessment (RIA) and the Single Electronic Register of Legislation (ENER) shifted from the Secretariat General to MISA. Steps have been taken to improve the legislative drafting process through RIA. It has not, however, been applied systematically. Public awareness of the citizens’ charter offering satisfaction surveys needs to be increased.

As regards financial management, managerial accountability is not yet fully taking into account the principles of public internal financial control. The reports of the State Audit Office repeatedly draw attention to various shortcomings with regard to the application of procurement rules and human resources policy. The quality of strategic planning in central and local institutions needs to be enhanced.

The Constitutional Court annulled provisions of nearly 15% of laws that were challenged at the Court in the course of 2011, a decrease compared to 2010.

The number of complaints received by the National Commission for Protecting Access to Information (NCPAI) fell by 25% in 2011. The majority of the complaints were made against state administrative bodies for administrative silence. More than half of the complaints resulted with the submission of the requested information. No sanctions were imposed. The administrative capacities of the NCPAI have not improved and the state funding was reduced. The NCPAI continued to hold frequent training sessions to increase the awareness of the right to free access to public information.

The Ombudsman Office’s recommendations continued to be respected by the public bodies in the majority of cases (78%). The least responsive bodies in this regard remained the second-instance government commissions, followed by the Ministry of Finance, the Ministry of the Interior and local self-government units. The majority of violations concerned consumer rights, property rights, labour rights and prisons.

There was moderate progress in police reform with ongoing implementation of the Act of Systematisation aimed at strengthening the efficiency of police services. Additional human resources are needed to implement the act, especially in regional police commands. There is a need for continued training, professionalization and depoliticisation of police personnel. To that end, an independent oversight mechanism for law-enforcement agencies is needed to combat impunity and ensure democratic and accountable policing services. The Law on Interception of Communications was amended, strengthening the efficiency and transparency of this special investigative measure.

Overall, there was some progress as regards public administration. Services to citizens were improved and e-government has been gradually introduced. Steps on fundamental reforms of the administrative framework and public and civil service have been launched. Additional efforts are needed to guarantee the transparency, professionalism and independence of the public administration. In particular, respect for the principle of merit-based recruitment together with the principle of equitable representation needs to be ensured.

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

The main bodies tasked with ensuring the independence, impartiality, accountability and professionalism of the judiciary continued to carry out their functions.

The Judicial Council appointed 63 judges to courts of all levels in 2011, and 6 new court presidents. When appointing first instance judges, it continued to give preference to applicants who had not graduated from the Academy for Judges and Prosecutors (AJP), despite the legislative requirement that 50% of such appointments should be AJP graduates. This raises concerns about the credibility of the current recruitment provisions and the Judicial Council’s commitment to merit-based recruitment. The Judicial Council initiated 4 dismissal procedures during 2011 (down from 12 the previous year) and 1 disciplinary procedure. There are at present numerous grounds for the dismissal of judges, but the one which is used in most cases is broad and general (unprofessional, untimely or inattentive exercise of judicial office). Efforts are needed to further safeguard the security of tenure of judges by ensuring that the grounds for dismissal are clear, precise and predictable, and that the application of the rules respects the principle of proportionality. The Judicial Council completed the professional evaluation of 612 judges for the year 2011: 77% were rated as very good, 20% as good, 2.45% as satisfactory and 0.49% (3 judges) as unsatisfactory. The assessment criteria applied by the Judicial Council under the current legislation are predominantly quantitative rather than qualitative, and no link is made between the professional evaluation of judges and identification of their future training needs.

The Council of Public Prosecutors appointed 18 prosecutors in 2011. No prosecutors were dismissed. The Council service remains understaffed. It is financially dependent on a budget line from funds allocated to Public Prosecutor’s Office and is accommodated in rented offices.

The principle of equitable representation and gender balance continues to be observed in both the judiciary and the prosecution service.

The Academy for Judges and Prosecutors (AJP) continued to provide both initial training for future judges and prosecutors and ongoing training for the members and staff of the judiciary, law enforcement agencies and other institutions and bodies. However, the fifth annual intake of candidate judges and prosecutors scheduled for autumn 2011 was postponed and combined with the autumn 2012 intake. This delay resulted from uncertainty over the newly introduced integrity component of the entrance exam for the AJP, which was partly annulled by the Constitutional Court in February 2012. Of the 80 candidates who have successfully graduated from the AJP since January 2009, 56 have so far been recruited as judges and prosecutors, while 24 remain to be appointed in their first posts.

As regards efficiency, progress is being made to reduce the overall backlogs in the court system as a whole. The global number of pending cases in national courts at all levels at the end of 2011 was 295,769 (as compared with 678,670 in 2010). A significant number of enforcement cases and non-contentious cases (around 330,000) were removed from the court system in the second half of 2011 as a result of a transfer of competences to professional bailiffs and notaries. However, the main reason for the reduction in backlogs was the high clearance rate of the basic courts over the last three years (up to 170% in 2011), due to greater procedural discipline and monitoring at the level of individual judges. Only the Supreme Court and the Administrative Court continued to accumulate backlogs rather than progressively reduce them, and urgent attention needs to be given to adequate distribution of human resources in order to address this problem. While the improvement in the efficiency of justice is an important achievement, care needs to be taken that the quality of justice is given equally high priority.

Following on from the significant reforms of the justice sector between 2004 and 2010, there is currently no comprehensive judicial reform strategy or action plan in place. The Courts Budget Council completed a project to determine the average cost of court proceedings, with a view to establishing the human and budgetary resources needed by the national courts. The 2011 methodology for judicial statistics is not yet being implemented systematically and there has not been adequate training or awareness-raising among courts on how to use new statistical tools. The 2011-2013 strategy determining the number of judges and prosecutors does not contain any analysis which would inform the management or distribution of existing resources to make it more efficient across the court network, nor does it project future needs in terms of clear, verifiable indicators. The IT strategy for the judiciary still remains to be fully implemented and extended to the prosecution service. Efforts are needed to either improve the implementation of individual strategies, or to develop an overall strategy which brings these together in a coherent way and focuses on the remaining challenges within the judicial sector. The Council for Judicial Reform should intensify its work and take a lead in defining the new strategic framework for continuation of the judicial reform.

Overall as regards the judiciary, legislative and institutional safeguards are in place, but further efforts are needed to guarantee independence and impartiality in practice. Progress has been made, notably in reducing the backlog of cases. Further efforts are needed to create clear and transparent grounds ensuring proportionate dismissal procedures and to improve significantly the implementation of merit-based judicial appointment and career development. The AJP should be further supported in its key role in the development of a professional and highly-skilled judiciary and prosecution service.

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

Further amendments were made to the legal framework. Changes were made to the Law on Financing of Political Parties and the Law on Prevention of Conflicts of Interests, which improved the verification and enforcement powers of the relevant authorities. New State Programmes for Prevention and Repression of Corruption and for Prevention and Reduction of Conflict of Interest were adopted by the State Commission for the Prevention of Corruption (SCPC), along with a corresponding Action Plan for 2011-2015. However, weak preparation for the entry into force of the new Law on Criminal Procedure has meant further delays in its implementation, with entry into effect now postponed until December 2013.

Stricter sentences for corruption-related offences were imposed by the courts in comparison with 2010. However, orders for the seizure and confiscation of assets remain exceptional. A track record of investigations, prosecutions and convictions, including the full use of available enforcement means and special investigative techniques, has yet to be established. The general capacity of the judiciary to deal with corruption cases remains low. Only a handful of high-level corruption cases have been prosecuted, and almost all of them remain in the court system after many years, having been returned for retrial following appeals, due to inadequate examination of evidence by the first instance court.

The Law on the Financing of Political Parties was amended in October 2011 to strengthen the system for controlling party and campaign funding. However the State Audit Office (SAO) remains ill-equipped to carry out its new functions under the legislation. Implementation of the rules on party financing needs to improve significantly, especially taking into account GRECO recommendations. The SAO has so far audited 11 political parties’ financial statements for 2010 and has not yet audited any for 2011. It has not taken measures against any political parties for breaches of the reporting obligation, despite having received financial statements from only 16 out of over 40 registered parties for 2011.

Following the 2011 elections, in May the Court of Appeal upheld the conviction of an opposition party leader who was sentenced to 5 years imprisonment for illegal financing of election campaign and misuse of position. This has raised questions about selectivity.

The number of police officers subjected to disciplinary proceedings remained steady, while the Customs Administration strengthened its internal control system, doubling the number of disciplinary procedures initiated against customs officers.

Corruption in public procurement continues to be a serious problem. The institutional framework and measures taken remain ill-suited to effectively addressing this phenomenon. Existing legislation requires further improvement to address corruption risks and increase transparency in public procurement. The internal control system in central and local administration remains weak. Effective whistle-blowing mechanisms in the public and private sectors have yet to be established. There are few criminal prosecutions for abuse of public procurement.

There is a lack of analysis of corruption and ways to tackle it. Operational cooperation and information sharing between institutions needs to be further strengthened. Supervision and enforcement of the law by the SAO, the SCPC and other bodies is hampered by the lack of any coordinated system of follow-up concerning the outcome of those misdemeanour or criminal proceedings which are initiated. The statistics system for monitoring anti-corruption policies is underdeveloped. Public anti-corruption awareness remains low. Resources to ensure effective action against corruption remain insufficient.

Overall, the legislative framework is in place and capacity has been strengthened slightly, but greater efforts are needed as regards implementation of existing laws. Steps have been taken to improve verification capacities and enforcement powers of the authorities. However, there has been little visible progress in terms of end-results. A track record of handling high-level corruption cases has yet to be established. A more proactive and coordinated approach by supervisory bodies and enforcement agencies is needed. Collection and analysis of statistical data should be improved to focus efforts where they are most needed. 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 and fundamental rights)

Observance of international human rights law

Progress was made as regards international human rights instruments, with the ratification of the revised European Social Charter and the UN Convention on the Rights of Persons with Disabilities and the corresponding Optional Protocol. The European Charter for Regional or Minority Languages has not yet been ratified.

During the reporting period, the European Court of Human Rights (ECtHR) delivered judgements on seven applications finding that the country had violated rights guaranteed by the European Convention on Human Rights (ECHR). A total of 341 new applications have been submitted to the ECtHR since September 2011, bringing the total of pending applications to 969.

Limited progress can be reported in the promotion and enforcement of human rights. Efforts were made to strengthen the implementation of the legal framework, and increase staff in institutions. The Ombudsman still needs a full mandate to promote and protect human rights in compliance with the Paris Principles.

Civil and political rights

The Ombudsman’s Office’s national prevention mechanism remains an important tool for the prevention of torture and ill-treatment. The Ministry of the Interior’s Sector for Internal Control and Professional Standards further improved the professionalism of its staff members and its regular monitoring of police work continues; however, the results remain limited. Efforts were made to increase police officers’ knowledge of European standards and to enforce safeguards against ill-treatment in police stations. Gaps remain, in practice, as regards the implementation of formal safeguards against ill-treatment, including the zero-tolerance strategy for ill-treatment. Weaknesses in the complaints system and the related data-collection system remain a concern. Efforts were made to improve the procedures for and treatment of detained persons, including an Action Plan for the renovation of detention facilities; however, conditions in a number of detention facilities remain below required standards.

There was no response to the European Parliament’s recommendation of 2007 on follow-up of the Khaled El-Masri case of alleged extra-judicial detention.

There was some progress as regards the prison system. Prison reconstruction and training of prison staff continued. Standardised procedures for management and risk assessment were adopted. However, the prison system remains seriously underfunded and understaffed. Poor management, poor material conditions, limited health care provision, a lack of educational and rehabilitation activities, in particular for juveniles, and the lack of an independent inspection mechanism to address violations and punish perpetrators remain matters of concern. Overcrowding continues at an average of 20%.

Access to justice recorded a positive trend in providing legal aid via counselling by the Ministry of Justice to 24 out of 85 citizens. Asylum seekers are also eligible for legal aid.

Some progress has been made in the field of freedom of expression and the media. The overall constitutional and legal framework protecting freedom of expression is generally in place. The roundtable process of dialogue between the government and the Association of Journalists has proved an important forum for addressing key challenges relating to the media. A memorandum of understanding was signed, which identified five areas to be discussed, including the decriminalisation of defamation and ‘insult’, the strengthening of the public broadcaster, transparency of government advertising and improving journalists’ and editors’ respect for professional standards. In September 2012, the government adopted proposals for a new Law on Civil Liability for Insult and Defamation aiming at alignment with relevant ECHR principles. The Criminal Code needs to be revised in line with this approach. Training of the judiciary on Article 10 of the European Convention on Human Rights has been conducted, and translations made of key European Court of Human Rights judgments. Further efforts are needed to ensure that these standards are consistently applied. Professional standards in journalism also need to be strengthened. At the same time, there are continued concerns about lack of pluralism and self-censorship. There is currently no active self-regulatory body for the media.

The Broadcasting Council improved its enforcement record as regards illegal concentration of ownership and conflicts of interest, and a number of television channels were required to amend their ownership structure. The Broadcasting Council also revoked the licence of the television channel A2 TV on the grounds that the programming content was not in line with the licence requirements. The Broadcasting Council needs to demonstrate that it is following a non-discriminatory and transparent approach. There continues to be concern that a large share of government-funded advertising campaigns is being directed to media supportive of the government. The State Labour Inspectorate should continue to enforce the labour rights of media workers to ensure job security and independence.

Freedom of assembly and association are generally ensured. There were no cases of misuse of the legislation or prohibited registration.

A new Strategy for Cooperation with Civil Society (2012-2017) and Action Plan (2012-2014) were adopted in June 2012. A Council for Cooperation with Civil Society is proposed under the strategy, while a legally binding framework will standardise rules for state financing for civil society organisations. The new strategy aims to ensure that all measures carried forward from the previous strategy are implemented. Preparation of the new strategy was broadly participatory.

The Government Commission for Public Benefit Status set up in September 2011 has yet to become fully operational. Tax legislation is still not in line with the Law on Associations and Foundations, preventing access to tax benefits and certain types of economic activity. The system for allocating state financing to civil society organisations needs to be improved and standardised. Civil society organisations remain heavily dependent on foreign funding. Existing government systems for implementing the Strategy for Cooperation with Civil Society needed further strengthening, including the NGO Cooperation Unit in the General Secretariat. No measures have been taken to develop civil society in rural areas and/or at municipal level. Local self-government units lack sufficient capacity in this area to ensure standardised cooperation with and financing of local civil society organisations.

The new law on lustration enacted in June replaces the previous law which was contested twice by the Constitutional Court. The period covered by the law goes beyond 1991, as in the previous laws. Furthermore the new law allows for publication of the names of former collaborators of the secret service as well as of the supporting evidence. The scope of application includes journalists, academics, past holders of public office, members of civil society organisations and individuals who made a profit during the privatisation process. Concerns have been raised about the proportionality and constitutionality of the law.

With regard to freedom of thought, conscience and religion, two more religious entities were registered under the Law on the Legal Status of Churches, Religious Communities and Religious Groups, bringing the total number to 30. Two applications for registration were rejected. The Bektashi community from Tetovo remains unregistered. It has filed a case with the European Court of Human Rights relating to restitution of property.

Overall, civil and political rights are broadly respected and some further progress was made. The ongoing reform of the prison system needs to be pursued. Significant efforts are needed to improve management of the prisons, in particular for juveniles. The dialogue between the government and journalists on issues relating to freedom of expression was deepened. The government adopted a proposal to decriminalise defamation through a Law on Civil Liability for Insult and Defamation. The Criminal Code needs to be revised in line with this approach. The Broadcasting Council has begun to enforce legal provisions against concentration of ownership and conflicts of interest with the political sphere. There are widespread concerns about lack of pluralism and self-censorship and the Broadcasting Council needs to demonstrate that it is following a non-discriminatory and transparent approach. Continued efforts are necessary to address related challenges such as transparency of government advertising and the labour rights of journalists.

Economic and social rights (See also Chapter 19 – Social policy and employment)

As regards women’s rights and gender equality, discriminatory customs, traditions and stereotypes are widespread and undermine women’s basic rights, especially those of women in rural areas. Active participation by women in political life remains low, particularly at local level. Women are also under-represented on the labour market. Some very limited actions targeting Roma women were implemented. Institutions do not appropriately exercise their role in ensuring better integration of the gender perspective into other policy areas. There is no strategic approach to implementing national strategies and action plans.

Some limited progress was made in the area of children’s rights. Amendments to the Juvenile Justice Law provide for more rights and better protection of child victims and introduce special protection measures for child witnesses. Juvenile justice professionals from all relevant institutions benefited from comprehensive training. Collection of statistical data on juvenile justice has improved. Eleven municipal councils for the prevention of juvenile delinquency were set up. The relevant institutions remained underfunded and understaffed as regards administration of juvenile justice. Leadership and coordination of the reform process need to be strengthened.

Juvenile detention conditions in police stations fail to meet legal requirements. Free legal aid was not systematically provided to juveniles. The programme to compensate juvenile victims is not operational. The situation in the educational‑correctional facility in Veles remains a matter of serious concern, in particular with regard to the treatment of juveniles in the closed wing, provision of external healthcare, education and rehabilitation services. The number of specialist staff such as psychologists and social workers remains insufficient.

Prevention, protection, outreach and care services still lack sufficient financial and human resources notably with reference to children with disabilities, street children, children using drugs and children who are victims of domestic violence, sexual abuse or trafficking.

Some limited progress can be reported in the treatment of the socially vulnerable and/or persons with disabilities. The UN Convention on the Rights of Persons with Disabilities was ratified. Social services are slowly being deinstitutionalised and civil society is slowly increasing its provision of social care services. However, the fiscal and administrative decentralisation of social services is still limited. The implementation of adopted policies is slow. Poor material conditions and inhumane and degrading treatment in psychiatric institutions need to be addressed. Social integration of people with disabilities is very limited. The poverty rate remains very high.

Some progress can be reported in the area of anti-discrimination policies. The Commission for Protection against Discrimination became an observer member of the European Network of Equality Bodies. It was active in processing complaints, mainly in the areas of labour relations, social security, the judiciary and administration. The overall capacity of the Commission remains weak and its public visibility and accessibility levels are low. Public awareness of the need for non-discrimination is very limited. The Anti-Discrimination Law is still not fully in line with the acquis; discrimination on the grounds of sexual orientation is still omitted. The Lesbian, Gay, Bisexual and Transgender (LGBT) community continue to suffer from discrimination and stigmatisation.

There has been progress as regards labour and trade unions rights. The Economic and Social Council (ESC) continued to meet regularly. The ESC agreed on the minimum wage and Parliament adopted the Law on the Minimum Wage. Training on peaceful settlements in labour disputes and for negotiators and mediators were provided to the relevant stakeholders. Bipartite social dialogue remains weak, particularly in the private sector. The capacity of social partners remains weak as trade unions lack stable finances and management capacity.

As regards property rights, progress was made. The process of returning property confiscated under the Socialist Federal Republic of Yugoslavia has so far resulted in the resolution of 30,744 cases filed between May 2000 and December 2007. About 10% of the decisions taken were dealt with at second instance or by the Administrative Court. Property which could not be returned was compensated for in the form of bonds and 11 issues worth € 301 million were made during the period 2001-2011.

Overall, some progress can be reported in the strengthening of social and economic rights. The Macedonian institutions have taken a more proactive role on behalf of children’s rights, notably juvenile justice and street children. Social dialogue has developed through the Economic and Social Council. The Commission for Protection against Discrimination is engaged in processing complaints although its resources are limited. The Anti-Discrimination Law needs to be fully aligned with the acquis, notably as regards discrimination on grounds of sexual orientation. There is a need for better protection of the rights of women, including those in vulnerable groups, as well as further efforts to increase their participation in the labour market and in political life. Social integration of people with disabilities remains weak.

Respect for and protection of minorities, cultural rights

In the first half of 2012, there were a number of incidents and killings in the country, which led to heightened tension between ethnic communities and public protests. The government responded in a calm and measured way. Political leaders also made statements calling for restraint and mutual respect. This approach needs to continue in order to avoid politicising the incidents. It is crucial that the judiciary and law enforcement agencies conduct rigorous and objective investigations in order to ensure that the perpetrators of any crime committed are brought to justice.

A review of the implementation of the Ohrid Framework Agreement has been launched by the Secretariat for the Implementation of the Ohrid Framework Agreement (SIOFA) and the government adopted a report for the first time since the signature of the Agreement. The report covers all aspects of the Agreement, showing where there has been progress and highlighting the main challenges. The report provides an important tool for strengthening inter-community dialogue. The review needs to be continued and the recommendations should be followed up in a concrete manner.

Relations in the government were affected by different points of view concerning the status of victims of the 2001 conflict. The coalition partners should pursue their dialogue in order to find solutions and ensure stability. The parliamentary Committee on Labour and Social Policy continues to discuss the government proposed Law on Defenders which aims to provide support to the victims of the 2001 conflict. A mutually satisfactory solution should be found which facilitates reconciliation, on the basis of the recent government report on the Ohrid Framework Agreement.

The SIOFA recruited new senior staff. Nonetheless, further significant efforts are necessary to strengthen the capacity of the SIOFA.

The agency for protecting the rights of minorities which represent less than 20% of the population increased its visibility, for example through participative fora with other institutions and civil society. However, the agency was not able to carry out many of its tasks due to limited resources.

The Ministry of Education and Science promoted access to education for the communities, for instance through the development of relevant textbooks. Access to education in the languages of the smaller communities remains uneven due to the limited numbers of qualified teachers and teaching material.

Committees for relations between communities continued to exist in many municipalities. However, their potential to lead inter-community dialogue at local level is not fully used.

The law on languages continued to be implemented well in the Parliament. Its scope was widened to include officials elected or appointed by the Parliament. An evaluation and monitoring mechanism needs to be established.

Regarding the Ministry of Education and Science’s strategy on integrated education, donors funded some activities but no state budget was allocated to implement the strategy. Segregation in schools along ethnic and language lines remains widespread. There have been repeated cases of inter-ethnic violence in secondary schools.

As regards equitable representation, the overall proportion of civil servants from non-majority communities is satisfactory and remains at approximately 29%. However, the distribution between ministries is uneven and equitable representation at senior level remains insufficient. Some of the small communities, in particular the Roma and the Turks, remain underrepresented.

Some progress was made regarding the Roma. The strategy on social inclusion of Roma 2012-2014 was adopted, along with an action plan. Despite budgetary restrictions, financial support for Roma programmes was maintained at the 2009 and 2011 level. The country presided over the Decade of Roma Inclusion and organised several regional conferences and seminars. It has undertaken to implement the operational conclusions of the July 2011 social inclusion seminar on Roma. The Roma health mediator programme started in 16 municipalities. Requests for the legalisation of illegal houses were submitted to the municipalities in line with the legislation and the process is ongoing. To address the problem of persons without documents, new Roma information centres were opened. Education projects continued to be implemented and the enrolment rates of Roma children in secondary education increased slightly.

Recent legislative changes aiming to address the overrepresentation of Roma children in special schools have not been implemented. Access to basic health services remains difficult. Roma have above average rates of infant mortality and many children are either not fully vaccinated or not vaccinated at all. High unemployment rates persist and access to unemployment benefits remains problematic. Discrimination against Roma persists, including continued stereotyping in the media and in social networks on the internet. Roma women and Roma with disabilities face precarious living conditions because of double discrimination.

In July 2012 there were 1,162 refugees and internally displaced persons (IDPs) in the country, the majority of whom are Roma from Kosovo*. 257 persons were voluntarily repatriated to Kosovo and Serbia in 2011. The government continued to implement integration policies for Roma refugees. Access to the public health service and active market labour measures was formalised and access to housing was improved.

The number of internally displaced persons (IDPs) decreased from 611 in 2010 to 474 in 2011. Most of the complaints lodged by IDPs against the state for damages from the 2001 conflict are still before the courts.

Overall, some progress was achieved in the area of cultural rights and minorities. A review of the Ohrid Framework Agreement was launched which includes recommendations for addressing the on-going challenges. This momentum needs to be maintained through concrete follow up. Tension between communities following violent incidents caused concern. The government responded with maturity and needs to build on this by further strengthening inter-ethnic relations and reconciliation. Concerning the Roma, several measures were taken, notably to address the issue of persons without documents and to integrate IDPs and Roma refugees. However, implementation of existing strategies and interinstitutional cooperation needs to be significantly strengthened. Several institutions mandated to promote the rights of the communities lack financial and administrative resources.

2.3. Regional issues and international obligations

The former Yugoslav Republic of Macedonia continued to cooperate fully with the International Criminal Tribunal for the former Yugoslavia (ICTY). There are no remaining cases or appeals pending in The Hague. Of the four cases that the ICTY transferred to the national authorities in 2008, one was dismissed in 2011 by the domestic court system and the other three were dismissed in 2012, at the request of the public prosecution and on the basis of the Amnesty Law.

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

Regional cooperation and good neighbourly relations form an essential part of the country’s progress towards the European Union. The country has continued to actively participate in regional initiatives, including the South East European Cooperation Process (SEECP), the Regional Cooperation Council (RCC), the Central European Free Trade Agreement (CEFTA), the Energy Community Treaty and the European Common Aviation Area Agreement. The country took over the Chairmanship-in-Office of the SEECP in June 2012. The seat of the Secretariat of the South-Eastern European Health Network (SEEHN) was established in Skopje. The country continued to contribute to the EUFOR Althea mission in Bosnia and Herzegovina.

The former Yugoslav Republic of Macedonia has maintained an overall constructive role as regards bilateral relations with other enlargement countries and neighbouring EU Member States.

Relations with Albania continued to develop, with the entry into force of agreements on travel by citizens between the two countries and on cooperation as part of EU accession process. An agreement was signed on setting up a joint centre for the exchange of information between their respective border and migration police corps.

Relations with Bosnia and Herzegovina continued to be good. Several agreements on judicial cooperation and on cooperation in the areas of health and of education were signed.

Relations with Croatia continued to be good, leading to regular bilateral high-level visits.

Cooperation with Montenegro was further strengthened. The extradition agreement entered into force, as did agreements on economic cooperation and on the EU accession process. Agreements on readmission of persons residing without authorisation and on police cooperation were signed.

Relations with Serbia remained good. There were reciprocal presidential visits in December 2011 and January 2012, which took place in a positive atmosphere. Agreements on travel conditions and on compensation for health protection were signed. There were no developments regarding the dispute between the Orthodox churches in the two countries.

Cooperation with Kosovo continued to develop with the entry into force of an agreement on railway transport border regulations, and with the signing of an agreement on joint border control and supervision. The joint monitoring patrols along the border with Kosovo need to address the challenge of illegal trafficking of goods and illegal migration.

Close relations with Turkey further advanced in the diplomatic, economic and cultural fields. An agreement on regular air traffic between the two countries entered into force.

There continue to be close ties with Bulgaria, notably in the economic sphere. Developments during the reporting period highlighted the need for more dialogue to overcome possible misunderstandings and different perceptions concerning historical, cultural and ethnicity based issues. Recent statements at the highest level have confirmed the willingness to move forward.

Relations with Greece continued to be close, notably in the economic sphere and tourism. However, relations between the two countries remained affected by the name issue. The International Court of Justice adopted a judgment concerning the Interim Agreement with Greece. The country has kept engaged in talks under the auspices of the UN and in direct contacts with Greece. The talks under the UN auspices for a negotiated and mutually acceptable solution should be pursued with increased vigour, as should direct bilateral meetings and contacts. Actions and statements which could negatively impact on good neighbourly relations should be avoided.

Overall, the former Yugoslav Republic of Macedonia is participating actively in regional cooperation and further developing bilateral relations with its neighbours. The name issue continues to affect relations with Greece. A constructive approach to challenges with neighbours is important.

3. Economic criteria

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

3.1. The existence of a functioning market economy

Economic policy essentials

A broad consensus has been maintained on the fundamental features of the country’s economic policy set-up. The medium-term policy framework was described in various programmes, such as the sixth pre-accession economic programme (PEP), covering the period 2012-2014, the labour market strategy for 2015 and the national employment action plan for 2011-2013. In addition, the authorities embarked on a high-level accession dialogue (HLAD) with the EU, which provided another platform for accelerating accession-related reforms in the economy. Cooperation with the IFIs, such as the World Bank and the IMF continued, although the IMF’s second review of the current financial arrangement could not be completed yet. Structured dialogue with the business community continued. Overall, a broad political consensus has been maintained on the fundamentals of economic policy.

Macroeconomic stability

The economy grew by about 3% in 2011, but shrank by about 1% year-on-year in the first half of 2012, compared with growth of nearly 5% in the first half the year before. Rather resilient private consumption helped to prevent a sharper slowdown, while the reduction in public consumption had a negative contribution to growth. Indicators on domestic production point to a marked year-on-year deceleration during the reporting period, with industrial production being on average nearly 9% lower since October 2011 than in the same period the year before. Average per capita GDP improved in relation to the EU average, increasing from 35% of the EU average in 2010 to 36% in 2011. Overall, economic activity has decelerated since autumn 2011, although private consumption and investment remained rather resilient in view of the markedly weaker international environment.

External imbalances declined, but their financing deteriorated. In the first half of 2012, the current account deficit was at about -2.8% of the estimated full-year GDP, compared to -3.5% of GDP the year before. The most important factor for the improvement was a further increase of current transfers to about 10% of the estimated full-year GDP. The trade balance of goods and services deteriorated slightly, reaching ‑12% of estimated full-year GDP, compared to ‑11% of GDP the year before, mainly as a result of weaker export revenues. The capital and financial account surplus shrank to a similar extent, declining to about 2.6% of GDP by June 2012, compared to a surplus of 4% a year before. FDI inflows and other investment declined to about 1% of the estimated full-year GDP and 0.6% of GDP respectively, compared to 2% of GDP and 4% of GDP a year before. As a result, the financing of the current account deficit was less based on investment inflows but on external credits.

Gross external debt rose slightly to 61.2% of GDP in the first quarter of 2012, compared to 59.7% a year before. The main reason for this increase was public external debt, which rose by 2.2 percentage points of GDP, while private debt declined by 0.7 percentage points. Foreign reserves stood at € 2.1 billion (about 30% of GDP) in July, compared with € 1.8 billion (29% of GDP) the year before. The coverage of prospective imports by reserves improved slightly, reflecting not only an increase in the level of foreign reserves, but also expected lower imports. Overall, the current account deficit shrank. However, the financing of the deficit increasingly relied on foreign loans, leading to an increase in public gross external debt.

Unemployment was very high at 31.2% and remained largely unchanged year-on-year in the second quarter of 2012, while during winter it had been about 1 percentage point higher than in the year before. Employment was about 1% higher than a year before but its impact on unemployment was limited, as most newly employed persons appear not to have been registered in the labour market before. The main sectors with employment growth in the second quarter of 2012 were education, the textile industry and municipal services. Youth unemployment increased slightly, from 54.6% in the second quarter of 2011 to 54.9% in the second quarter of 2012. The young account for about 10% of the labour force, but their share in unemployment rose from 18.5% in the second quarter of 2011 to 18.8% in the second quarter of 2012. Unemployment among the less-well educated, who make up nearly 30% of the labour force, has declined, from 39% in the second quarter of 2011 to 36% in the second quarter of 2012. Employment in the public sector increased by about 1% year-on-year, mainly in the education sector. However, as a share in total employment the share of public sector employment has declined from 22% in mid-2011 to 21% in mid-2012. Overall, the situation in the labour market remains weak. Unemployment continues to be very high, particularly among the young and less educated.

Monetary policy cautiously supported the gradual recovery, while the exchange rate policy remained geared to maintaining price stability and the de facto peg to the euro. The Central Bank has slightly lowered its key policy rate, from 4% to 3¾%. In order to support the lending activities of the financial sector, the Central Bank amended the rules on minimum reserve requirements and collateral. It also introduced a number of measures to stimulate financial market activity, such as establishing new monetary instruments, a new overnight deposit facility and a one-week deposit facility, a standing 7-day repo facility and by lowering the interest spreads between overnight deposit rates and Central Bank bills. Overall, the exchange rate and monetary policies have remained sound.

Inflation was markedly lower than a year before, with an average inflation in the first eight months of 2012 of 2.4%, compared to 4.4% the same period a year before. However, during recent months, inflationary pressures have increased. The main sources for the increase lie in higher energy prices, but also rising food prices and rent costs. Prices for food and beverages account for about 40% of the consumer basket. Core inflation, which excludes the impact of energy and food prices on the overall price level, remained fairly stable and below 2%.

The published central government deficit for 2011 was in line with the 2.5% of GDP target. Revenue, which accounts for some 30% of GDP, was some 7.5% lower than initially expected. In order to meet the deficit target, spending was reduced by about 7%, mainly on purchases of goods and services, which were kept some 19% below their initial budget target. Capital investment was also kept some 16% lower than originally planned. However, as a share of GDP capital spending rose, from 3.5% in 2010 to 3.8% in 2011, while overall spending declined from 32.0% of GDP to 31.2%. In 2012, revenues have so far remained below forecasts and dropped by 3% in real terms. To compensate for the shortfall, the authorities adopted a supplementary budget and raised the deficit target for 2012 from -2.5% of GDP to -3.5%. So far, the main area of spending cuts was again capital spending, accounting in July for about 1.8% of the estimated full-year GDP, compared to 2.4% a year before. In the first seven months of 2012, published data point to a deficit of about 2% of the estimated full-year GDP, which is a similar level as the year before. The government debt ratio rose to about 30% of GDP in July 2012, compared to around 25% the year before, mainly due to increased domestic lending. In spite of existing legal obligations, neither the fiscal and public debt strategy nor the Public Investment Programme have been updated yet for the period 2012-2014. Furthermore, the authorities did not submit a Fiscal Notification, which should present central government data in a format comparable to EU standards.

Fiscal decentralisation has continued. By mid-2012, 84 of the 85 municipalities had advanced to the second stage of decentralisation. Furthermore, municipalities’ share of revenue allocation has increased. The efficiency of the local units in charge of financial management still needs to be strengthened by improving management and competences, by ensuring adequate staffing levels and shortening administrative procedures.

Fiscal policy remained geared to meeting the deficit target, although due to a weaker-than-expected revenue performance the fiscal target had to be raised in autumn 2012. Budgetary planning and execution have deteriorated and the quality of public spending continues to be low. The budgetary process continues to be plagued by overly optimistic revenue estimates, a lack of medium-term planning, short-term oriented spending decisions and a deterioration in public spending management, resulting in increasing payment arrears, a further reduced transparency of spending decisions and weakened reliability of public sector accounts. This not only blurs the information on the countries’ fiscal position, but also has negative knock-on effects on the liquidity situation of the private sector

Overall, the policy mix continued to be directed towards stability. Monetary conditions were supportive to growth, while taking into account the country’s policy of a de facto peg to the euro. Public spending was kept largely in line with revenue. However, budgetary planning and the management of public expenditure have deteriorated markedly and the quality of public spending has remained weak. Unemployment continues to be very high, in particular among the young, posing a persistent major policy challenge. Macro-fiscal risks are mainly related to external shocks, such as a further decline in external demand, higher import prices and/or a drop in current transfers.

Interplay of market forces

Privatisation is largely completed and the economy is mainly driven by market forces. The role of the private sector increased slightly from 82% of total value added in 2010 to 82.4% in spring 2012, mainly as a result of an increase in value added in construction and trade. The government took some decisions which increased the state’s role in the economy, such as agreeing to a debt-equity swap with a few troubled companies. At the same time, the government scheme to sell state land generated revenue, but also lowered the level of state assets. Attempts to privatise several state-owned companies failed. Overall, the asset value of fully or partly state-controlled property remains largely unchanged at some 13% of GDP. The majority of state capital — nearly 80% — is concentrated in five companies, mainly public utilities. The public sector employs some 20% of the labour force and public procurement accounts for about 11% of GDP. The share of administered and regulated prices in the CPI basket remained unchanged at 13.1%. Regulated prices, which account for about 12% of the CPI basket, usually cover costs. However the electricity prices are still distorted as a result of persistently high technical losses and non-cost covering input prices. Administered prices, such as for water supply and waste disposal which account for about 1.4% of the CPI basket, usually are not cost recovering. Overall, the role of the state has remained largely unchanged and limited.

Market entry and exit

The government has continued its efforts to facilitate market entry and exit. However, partly due to the less supportive international economic environment, the number of newly established companies has declined to slightly below 10% of the total number of enterprises. Limited access to finance is still impeding the growth of many companies, in particular of small and medium-sized enterprises (SMEs). The third phase of the ‘regulatory guillotine’ project, which focuses on reducing administrative burdens, is being implemented and the fourth phase, concentrating on measures for SMEs, has started. Further progress has been made towards closing down non-operating companies. In the period October 2011 and August 2012, the number of bankruptcy procedures was some 32% higher than a year before. The average duration of company liquidation has been reduced. Overall, some further progress was made on facilitating market entry and exit.

Legal system

The legal system for a functioning market economy is largely in place. Real estate property registration is practically completed. The authorities adopted a number of reforms to increase the efficiency and transparency of courts, and to expedite legal procedures. The number of pending commercial court cases declined, from 5,782 at the end of 2011 to 2,152 cases in mid-2012. The duration of court proceedings remained largely unchanged. About one third of the cases are resolved within three months and about 60% within six months. The share of cases taking more than five years fell further, from 1.2% in 2010 to 0.8% in 2011. Despite simplified procedures and introduction of new legal instruments strengthening payment discipline, contract enforcement is still difficult, hampering the business environment, in particular for SMEs. Sometimes, the legislative process suffers from insufficient discussion with the stakeholders, leading to the need of frequent revisions of recently adopted legislation. Implementation of existing legislation needs to be further strengthened.

The legal and financial independence and the resource endowment of some regulatory and supervisory bodies has been strengthened. However, in some cases such as the Agency for supervision of fully-funded pension insurances (MAPAS), the State Appeals Commission for Public Procurement and the State Commission for Prevention of Corruption, the endowment with human and IT resources and/or the leverage are still insufficient. The quality of the decisions of the Commission for Protection of Competition needs to be further improved. The follow-up of the State Audit Office (SAO), reports by the Parliament is inadequate and government mechanisms to deal with systemic shortcomings identified in SAO’s reports are lacking.

Overall, the functioning of the legal system has continued to gradually improve. However, weaknesses related to lengthy procedures, corruption and difficult contract enforcement are continuing to hamper the business environment.

Financial sector

The significance of the financial sector and its intermediation function have both improved further. Despite the international financial crisis, the sector’s assets rose slightly from 71% of GDP the end of September 2011 to 72% at the end of June 2012. Deposits remained largely unchanged at about 50%. Gross loans rose from 44% of GDP to 47%, mainly due to increased lending of medium-sized banks. Deposits remain the sector’s main source of liquidity, covering more than 112% of outstanding loans. The sector continues to be owned predominantly by foreign companies, with 13 out of 17 banks dominated by foreign owners. The share of foreign ownership rose to 75% of GDP in mid-2012, compared to 73% a year before. The share of state ownership in the sector remains low, at some 7% of the sector’s assets. The main state assets in this sector are still its majority share in the country’s only development bank and a limited number of remaining minority shares. Market concentration remains high, but decreased slightly. The assets of the five biggest banks in terms of their share of total assets declined slightly, from 67% in mid-2011 to 66% in mid-2012. The efficiency of the banking sector has improved slightly. The profitability of the sector as a whole recovered slightly in the second quarter of 2012. Credit growth has recovered since autumn last year, reaching some 8.5% in the first seven months of 2012. Private-sector weighted lending rates declined to some 8.4% in July, while deposit rates dropped slightly faster, to some 5%. As a result, spreads widened slightly to 3.4 percentage points. Financial stability has been maintained, with sound liquidity, solvency and capital adequacy ratios. The share of non-performing-loans increased slightly in the case of large and small-sized companies, while in the group of medium-sized banks, the loan performance improved. The sectors average ratio of non-performing loans remained close to 10% with provisions still exceeding the amount of identified non-performing loans.

Banking regulation and supervision are largely in line with international standards. The relevance of non-banking financial market intermediaries continues to be limited, with assets equivalent to some 10% of the financial sector’s assets or around 8% of GDP. Insurance institutions account for some 4% of the sector’s assets and leasing companies and pension funds for about 3% each. The value of the capital market accounts has continued is decline to about 30% of GDP.

Overall, the trend towards further deepening and widening of the financial sector continued. However, the levels of financial intermediation and competition in the market are still low, constraining more dynamic growth in the private sector, particularly for SMEs. Furthermore, some regulatory and supervisory agencies continued to be impeded by insufficient levels of resource endowment and leverage.

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

Existence of a functioning market economy

Overall, macroeconomic stability has been maintained. Market entry and exit procedures have improved. Some steps have been taken to strengthen the rule of law. However, so far, those measures have not had significant impact yet. The quality of public finance planning and management has deteriorated and the quality of spending has remained low. Unemployment remains very high, particularly among the young. The business environment continues to suffer from institutional and administrative weaknesses, difficult contract enforcement and corruption.

Human and physical capital endowment

The level of human capital endowment is still low. The authorities continued to improve the physical infrastructure for education, to increase the numbers of teachers and to modernise the curricula. The number of teachers rose by 1.5% in the school-year 2011-12, after an increase by 4.4% the year before. As in the previous year, the increase was mainly due to additional recruitments in primary and lower-secondary schools. Measures have been taken to raise enrolment rates, although in some areas this policy faced difficulties. Budget allocations for education rose marginally in 2011, from 4.6% of GDP in 2010 to 4.7% of GDP, while for 2012 the budget envisages a decline to 4.5% of GDP. Despite continued efforts, the overall level of education of the labour force is still relatively low and the mismatch of skills is still substantial. There is significant room for improving the efficiency of public spending on education and for raising the quality of education. Overall, measures to improve qualification levels have continued. However, the still low level of education calls for further sustained efforts in order to improve the country’s human capital endowment.

The country’s capital endowment remains relatively low and its quality is hampered by decades of underinvestment in the past. Public investment increased to some 3.8% of GDP in 2011. However, there is very limited information on the actual spending priorities. Gross fixed capital formation was still high at some 36% of GDP in the last quarter of 2011, but dropped to 22% in the first quarter of 2012. The authorities do not provide recent disaggregated gross investment data, which would allow a better understanding of the driving factors behind the investment decisions. Some limited steps have been taken to improve the country’s transport infrastructure. The stock of foreign investment increased from 51.5% of GDP in mid-2011 to 53% in mid-2012. Overall, spending on strengthening the knowledge-based economy has remained low. The efforts to increase the public capital stock continue to be impeded by weak implementation capacity, but also by use of funds for less productive purposes, such as the decoration of the capital. Overall, the country’s capital stock remains low.

Sectoral and enterprise structure

There were no major changes in the area of restructuring enterprises. Network industries are dominated by a very small number of incumbent suppliers, which often undermines effective competition. SMEs continue to be by far the biggest group of companies, providing more than 80% of private-sector employment or nearly 60% of total employment. Access to finance improved, partly thanks to additional international credit facilities, primarily provided by the European Investment Bank (EIB). Furthermore, the government continues to subsidise interest costs for SME loans, although on a declining scale in the 2012 budget.

The informal sector, fuelled by weaknesses in tax and expenditure policies and in law enforcement, remains a major challenge. It reduces the tax base and the efficiency of economic policies.

Overall, structural change towards diversification and activities with higher value added has remained limited. Competition in network industries remains constrained by dominant incumbent suppliers. SMEs still face difficulties in accessing capital and markets, despite increased support.

State influence on competitiveness

The overall level of systematic state intervention is limited. The data available suggest a relatively low level of State aid, i.e. less than 1% of GDP. However, this figure is not comparable with the State aid data compiled in accordance with EU standards. The Competition Commission is in place. However, the quality of its decisions should be further improved and the reporting awareness of state-aid providers is not sufficiently developed. Overall, state influence on competitiveness remained limited.

Economic integration with the EU

The country is a small, open economy, with total trade in goods and services accounting for about 120% of GDP in 2011. Trade integration with the EU is advanced. About 64% of all exports currently go to the EU-27 and about 56% of imports originate there. The country’s second largest trading area is the CEFTA, which accounts for around 24% of exports and around 11% of imports. The export structure has improved, with an increase in the share of higher unit-value commodities, such as car emission catalysts. However, textiles, clothing and manufactured iron products still account for more than one third of total exports. FDI accounts for about 50% of GDP, with 80% of the investment stock coming from the EU. The exchange rate against the euro has remained stable in nominal terms. Price competitiveness has remained largely unchanged. This is reflected in the largely unchanged real effective exchange rate, which in mid-2012 was some 1% lower than a year before. Overall, trade integration with the EU is well advanced. The commodity composition of exports has improved, although traditional products, such as textiles, clothing and steel, still predominate. International price competitiveness remained largely unchanged.

4. Ability to take on the obligations of membership

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

4.1. Chapter 1: Free movement of goods

Limited progress can be reported in the area of general principles. Implementation of the action plan to align with Articles 34 to 36 of the Treaty on the Functioning of the European Union is progressing as 26 legal acts (out of identified 42) were amended.

There was progress on horizontal measures. Quality infrastructure was improved following the strategic plan for implementation of the acquis in the area of free movement of goods. As regards standardisation, good progress can be reported. The Law on standardisation was amended to improve the organisational set up of the Institute of Standardisation (ISRM). A total of 16,500 European standards (ENs) have been adopted as national standards. Out of them, 3,210 are so called harmonised ENs in the meaning of the ‘new approach’ directives. All Yugoslav standards and conflicting standards were withdrawn. The ISRM became a full member of the European Committee for Standardisation (CEN) and of the European Committee for Electrotechnical Standardisation (CENELEC). The membership of the ISRM assembly expanded to 97 stakeholders. The administrative capacity of the ISRM was improved with a new document/standards management system which also allowed electronic sale of standards. The ISRM was certified in line with the EN ISO 9001:2009 standard.

In the area of conformity assessment, little progress can be reported. The number of designations issued to the conformity assessment bodies increased by one to nine. Product certification is at an early stage of development. Full alignment of the Law on Product Safety with the horizontal acquis of 2008 (New Legislative Framework) has yet to be ensured. A national regulation on common framework for placing goods on the market and notification to the EC was adopted. This regulation aims to take on board horizontal elements of the sui generis Decision 768/2008/EC, but alignment remains to be confirmed.

There was some progress in the area of accreditation. The Institute of Accreditation (IARM) has adequate capacity for management of the current scope of accreditations. It has accredited a total of 107 conformity assessment bodies, which is a significant increase from 76 one year earlier. However the IARM should establish or upgrade its accreditation capacities in new fields. The IARM signed the Multilateral Agreement for testing laboratories, calibration laboratories, inspection bodies and product certification bodies with European Cooperation for Accreditation (EA-MLA) and Mutual Recognition Agreement with International Laboratory Accreditation Cooperation (ILAC-MRA).

Good progress can be reported on metrology. The Law on Metrology was amended to simplify issuing of certificates and to provide a legal basis for inspection and supervision of measuring instruments. The number of calibration and verification certificates issued by the Bureau of Metrology (BoM) increased by 43% in 2011 compared with 2010. The equipment of the BoM’s various laboratories was re-calibrated and laboratories for weight, temperature, volume, flow and pressure were accredited by the national accreditation body. However, the capacity of the BoM for calibration of measuring instruments is under-used.

Little further progress can be reported with market surveillance. In 2011 the coordination body for market surveillance performed a total of 390 coordinated inspections and 340 surveillance actions, most of which (80%) were related to the legislation on the safety of toys. The State Market Inspectorate recruited four inspectors for product safety surveillance activities. The human and financial resources are insufficient to conduct comprehensive checks on technical compliance of products. Preparations in the area of horizontal measures are advanced, but full alignment of the Law on market surveillance with the acquis remains to be achieved.

Progress was achieved on the ‘old approach’ product legislation. To implement the Law on Chemicals, the list of high-risk substances and the rulebook on methods for testing and registration of chemicals were adopted. In October 2011, reports on the status of chemicals and the national action plan for a strategic approach to chemical management were also adopted. The intra-sectoral body for coordination of activities related to the Law on Chemicals was established. Staff from the State Sanitary and Health Inspectorate received specialised training. Preparations in the area of the ‘old approach’ product legislation are advanced.

Some progress can also be reported on the ‘new and global approach’ product legislation. Amendments were adopted to rulebooks on machinery, cables, lifts, pressure equipment, simple pressure vessels, and other to allow application of the Multilateral Agreement for European Cooperation for Accreditation (EA-MLA). Further harmonisation with relevant EU Directives was achieved for machinery, toys, medical devices and low voltage equipment electromagnetic compatibility; alignment with the acquis remains to be confirmed. Three national annexes on Eurocodes EC1, EC7 and EC8 for the structural design of construction works were adopted. In the area of ‘new and global approach’ product legislation, the country is advanced.

In the case of procedural measures, some progress can be reported. The Decree on notification to the European Commission of technical and non–harmonised regulations and technical standards was amended. However, full alignment has not yet been achieved. The country is advanced in this area.

Conclusion

In the area of free movement of goods, good progress can be reported, particularly on standardisation, accreditation and metrology. Certain areas of the framework horizontal acquis remain to be fully harmonised. Alignment with the Articles 34 to 36 of the Treaty on the Functioning of the European Union remains to be achieved. Preparations in the area of free movement of goods are advanced.

4.2. Chapter 2: Freedom of movement for workers

Some progress can be reported as regards access to the labour market. The Law on Public Servants remains to be amended to give EU citizens access to posts in the public sector.

No progress was made towards preparing for participation in the EURES (European Employment Services) network.

Little progress can be reported in the area of coordination of social security systems. The bilateral agreement with Canada for coordination of social security systems came into force and negotiations for signing agreements with Italy and Albania continued. Work to resolve social insurance issues with Kosovo also continued. Preparations in this area are moderately advanced.

There has been some progress in the area of the European health insurance card (EHIC). Hungary and Romania accepted the inititive of the health Insurance Fund to start negotiations on EHIC. Agreements on lump sum compensation of the costs for health protection with Montenegro and Serbia were signed. Preparations in this area are moderately advanced.

Conclusion

Some progress has been made in the area of freedom of movement for workers. Alignment with the acquis is at an early stage.

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

There was some progress on the right of establishment. Efforts to simplify the procedures and decrease the costs of establishment and permits continued. The portal for electronic submission of applications for establishment came into operation. However, awareness about electronic establishment remains low. Efforts continue on establishment of a one-stop shop (register) system for domestic and foreign investors, which is equivalent to the ‘point of single contact’ under the Services Directive.

Some progress can be reported in alignment with the Services Directive, concerning both establishment and cross-border services. Screening of national legislation is continuing as part of the action plan for harmonisation with the Services Directive. The Ministry of Economic Affairs ensures coordination between the authorising bodies. However, requirements prohibited by the Services Directive remain in several service sectors, including veterinary medicine, private education, tourism and regulated professions. Awareness of the Services Directive remains low and the administrative capacities of various authorising bodies should be strengthened. The minimum tariffs set by the Law on Construction are not in line with the acquis. Preparations in the area of the right of establishment are on track.

Little progress can be reported on freedom to provide cross-border services. The requirement for permanent establishment remains the general rule for foreign operators providing services in the country. This is not in line with the acquis. For some services the establishment requirement has been removed, but this will apply as of the date of accession of the country to the EU. In the area of freedom to provide cross-border services the country has partly met its priorities.

There was good progress on postal services. The existing Law on Postal Services is largely in line with the acquis. However, full harmonisation has yet to be completed as far as the period for designation of the universal service provider and the financing of the net costs of the universal service obligation are concerned. Principles of the method of conducting a separate accounting and cost accounting of the universal service provider were regulated. In its capacity as the national regulatory authority, the Postal Agency continued to adopt implementing legislation on regulation of the postal market. Market supervision and oversight rules were adopted and general conditions for providing the universal service and for access to that service were established. The regulator’s inspection service came into operation. The provider of the universal service is under an obligation to allow other providers of postal services access to the postal network. Quality standards for services covered by the universal service were decided and the method to be applied by the universal service provider in this respect was adopted. However, the universal service provider has yet to establish separate accounting for its universal service. New notification procedures encouraged growth of the postal market, with many operators active on the market. However, it remains to be consolidated. The volume of items posted increased. The regulator adopted a rulebook on obligations for postal service providers. The performance of the universal postal service provider holding the monopoly over services for consignments weighing below 50 grams is weak. There is no progress concerning the privatisation of the state-owned universal postal service provider. Regarding administrative capacity, the Postal Agency has a sufficient number of staff to carry out its tasks. The policy-making capacity of the Ministry of Transport and Communications in the field of postal services remains insufficient. Preparations in the area of postal services are well on track.

Some progress can be reported on mutual recognition of professional qualifications. An inter-sectoral coordination group, bringing together representatives of different authorising bodies, was formed and defined its mandate. The organisational framework is developed, with clear roles and responsibilities for the individual institutions and a stakeholder analysis was provided. A national coordinator for recognition of professional qualifications was nominated, as required by the Professional Qualifications Directive. However, the administrative capacity of the various bodies remains weak. The Law on Recognition of Professional Qualifications is still not fully aligned with the acquis. Alignment with the specific sectoral directives on lawyers, commercial agents and professional use of toxic products remains to be achieved. Preparations on mutual recognition of professional qualifications are moderately advanced.

Conclusion

Some progress can be reported in the areas of the right of establishment and freedom to provide services, particularly in the case of postal services. Further efforts are needed to align the legislation with the acquis, notably with a view to implementation of the Services Directive, establishment of the single point of contact and mutual recognition of professional qualifications. Overall, in the areas of the right of establishment and freedom to provide services the country is moderately advanced.

4.4. Chapter 4: Free movement of capital

The country met the requirements of the first stage of the Stabilisation and Association Agreement (SAA) in the field of capital movements and payments in 2008. Recent progress was limited to relaxing some of the restrictions on opening and holding accounts abroad, but only for residents temporarily staying ther