TABLE OF CONTENTS

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

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

1.2........ Context 4

1.3........ Relations between the EU and Serbia. 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. 22

3.1........ The existence of a functioning market economy. 22

3.2........ The capacity to cope with competitive pressure and market forces within the Union. 27

4........... Ability to take on the obligations of membership. 29

4.1........ Chapter 1: Free movement of goods. 29

4.2........ Chapter 2: Freedom of movement for workers. 30

4.3........ Chapter 3: Right of establishment and freedom to provide services. 31

4.4........ Chapter 4: Free movement of capital 31

4.5........ Chapter 5: Public procurement 32

4.6........ Chapter 6: Company law.. 33

4.7........ Chapter 7: Intellectual property law.. 33

4.8........ Chapter 8: Competition. 34

4.9........ Chapter 9: Financial services. 35

4.10...... Chapter 10: Information society and media. 36

4.11...... Chapter 11: Agriculture and rural development 37

4.12...... Chapter 12: Food safety, veterinary and phytosanitary policy. 39

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

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

4.15...... Chapter 15: Energy. 42

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

4.17...... Chapter 17: Economic and monetary policy. 44

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. 47

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. 52

4.25...... Chapter 25: Science and research. 55

4.26...... Chapter 26: Education and culture. 56

4.27...... Chapter 27: Environment and climate change. 57

4.28...... Chapter 28: Consumer and health protection. 60

4.29...... Chapter 29: Customs union. 61

4.30...... Chapter 30: External relations. 62

4.31...... Chapter 31: Foreign, security and defence policy. 62

4.32...... Chapter 32: Financial control 63

4.33...... Chapter 33: Financial and budgetary provisions. 64

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 Serbia in preparing for EU membership largely follows the same structure as in previous years. The report:

– briefly describes the relations between Serbia and the Union;

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

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

– reviews Serbia’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 Serbia, the EU Member States, European Parliament reports[1] and information from various international and non-governmental organisations.

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

1.2. Context

The European Council granted Serbia the status of candidate country on 1 March 2012, on the basis of the Commission Opinion on Serbia’s membership application adopted on 12 October 2011. The Council concluded on 5 December 2011 that the opening of accession negotiations will be considered by the European Council, in line with established practice, once the Commission has assessed that Serbia has achieved the necessary degree of compliance with the membership criteria, in particular the key priority of taking steps towards a visible and sustainable improvement of relations with Kosovo*, in line with the conditions of the Stabilisation and Association Process.

1.3. Relations between the EU and Serbia

Serbia is participating in the Stabilisation and Association Process.

The Stabilisation and Association Agreement was signed, along with the Interim Agreement on trade and trade-related matters, in April 2008. It provides a framework of mutual commitments on a wide range of political, trade and economic issues. The Interim Agreement entered into force on 1 February 2010. At the 14 June 2010 Foreign Affairs Council, Ministers agreed to submit the Stabilisation and Association Agreement to their parliaments for ratification. The process is close to completion, with ratification still pending in only one Member State.

Serbia has built a positive track record in implementing the obligations of the Stabilisation and Association Agreement and the Interim Agreement on trade and trade-related matters. An interim committee and a number of sub-committees meet annually, to discuss topics including the internal market, competition, transit traffic, trade, customs, taxation, agriculture and fisheries. In general terms, Serbia is meeting its SAA/IA commitments in these areas and cooperation is progressing well.

In January 2012, the Serbian government adopted a revised and updated version of the National Programme for the Integration of Serbia in the European Union for the period 2008–2012, taking account of the Commission’s Opinion.

Political dialogue meetings at ministerial level have been held since 2003. Policy dialogue between the European Commission and the Serbian authorities has been taking place as part of Enhanced Permanent Dialogue (EPD) since 2003. Inter-parliamentary meetings between members of the European Parliament and of the Serbian parliament have been held annually since 2006. Several EPD meetings covered sectors of the SAA that are not included in the Interim Agreement, such as energy, the environment, social policy, justice, freedom and security.

Serbia participates in the multilateral economic dialogue with the Commission and the EU Member States. The aim of this dialogue is to prepare Serbia for participation in multilateral surveillance and economic policy coordination under the EU’s Economic and Monetary Union. In this context, was invited for the first time to the Council meeting on pre-accession fiscal surveillance in May 2012.

Visa liberalisation for citizens of Serbia 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 reforms introduced by the country was consistent with the visa roadmap and sustainable. This was complemented by an alert mechanism to prevent 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 Serbia has been in force since January 2008.

Financial assistance is provided through the Instrument for Pre-Accession Assistance (IPA). IPA assistance is currently managed centrally by the EU Delegation in Belgrade. Serbia is preparing for decentralised management of IPA funds. The Multiannual Indicative Planning Document for the period 2011–2013 adopts a sector-based approach focusing assistance on the following seven sectors: justice and home affairs; public administration reform; social development; private sector development; transport; the environment, climate change and energy; and agriculture and rural development. In addition, the country continues to benefit from various regional and horizontal programmes. Cross-border cooperation is also used to promote capacity building and dialogue between the local and regional authorities of neighbouring countries, namely Bulgaria, Hungary, Romania, Bosnia and Herzegovina, Croatia and Montenegro.

Overall, between 2001 and 2012, the EU committed over € 2.2 billion to Serbia in the form of grants and € 5.8 billion in the form of soft loans. For the period 2007-2012, the Commission has earmarked € 1,176 million for IPA projects to be implemented in the country.

Civil society in Serbia 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. Aid objectives include involving civil society more widely in decision-making and increasing the capacity of independent civil society organisations. Support for civil society under 2011 programmes stands at over € 4.2 million.

Serbia participates in a number of EU programmes: the Seventh Framework Programme for research and technological development, PROGRESS, the Competitiveness and Innovation Programme, the Information and Communication Technologies Policy Support Programme, the Culture Programme, the Customs Programme and the Fiscalis Programme.

2. Political Criteria

This section examines the progress made by Serbia 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

Constitution

The Constitution is largely in line with European standards. However, some provisions still need to fully reflect the recommendations of the Venice Commission in its Opinion of March 2007, in particular those allowing control by political parties over parliamentary mandates and those providing for an excessive parliamentary role in appointments and dismissals, particularly in the judicial system.

Parliament

Serbia held parliamentary and local elections at their normal term in May 2012, together with provincial elections in Vojvodina. Early presidential elections were also held in May 2012, after the incumbent, President Boris Tadic, decided to resign, which streamlined the electoral calendar. Serbia agreed to OSCE facilitation in organising electoral operations for its parliamentary and presidential elections in Kosovo. The Anti-Corruption Agency started to implement the 2011 legislation on the financing of political parties and to monitor the electoral campaigns. The elections were free, fair and peaceful and were described as ‘competitive, held in a conducive environment and professionally organised’ by international observation bodies in spite of a certain lack of transparency in the proceedings of the State Electoral Commission and in the administration of the new single voters’ registry. These bodies made recommendations to improve the electoral administration. Media reporting was also noted as insufficiently balanced and analytical, which pointed to the wider need to clarify the issue of media ownership. Several opposition parties made allegations of fraud which have not been elucidated by the authorities so far.

The leader of the Serbian Progressive Party (SNS), Tomislav Nikolic, won in the presidential election against the incumbent Boris Tadic, the leader of the Democratic Party (DS). The SNS list secured the largest number of MPs, with 73 seats out of 250, followed by the DS list with 67 seats. The list led by the Socialist Party of Serbia (SPS) came third with 44 seats. The Democratic Party of Serbia (DSS) secured 21 seats, the list led by the Liberal Democratic Party (LDP) 19 seats and the Union of Regions of Serbia (URS) 16 seats. The remaining 10 seats were gained by parties representing minorities. Most of these parties are in favour of Serbia’s joining the EU. The Serbian Radical Party, which opposes Serbia’s EU integration efforts, did not reach the threshold for entering parliament.

The new parliament was constituted in May 2012. In line with the 2011 electoral reform, MPs were for the first time appointed in the order in which they appeared on the electoral lists and the practice of ‘blank resignations’, by which MPs tendered resignation letters to their parties at the beginning of their term of office, is now prohibited. There are 84 women in parliament, representing 34% of all MPs. Members of ethnic minorities continue to be represented in parliament. In line with the 2010 rules of procedure, working bodies were streamlined, with the aim of making the parliament more effective. Opposition chairs a number of committees, including the Committee for European Integration, but no longer those covering finance and security and internal affairs.

In the 2011 autumn session, several laws arising from the National Plan for Integration into the EU were adopted. Parliamentary activities slowed down in the run-up to and during the electoral campaign. Following the set-up of parliamentary bodies end of July, work has resumed; urgent procedures with limited consultation and discussion time have been applied to several new pieces of legislation, including problematic changes to the central bank law.

The parliament developed its use of public hearings, including one on its role in the EU integration process in January 2012 and another on access to IPA funds in March 2012. Parliamentary oversight of the work of the executive remained weak. There were no regular sessions of questions to the government from December 2011 to July 2012. The work in committees remained reactive, with core debates taking place in the plenary.

Overall, the elections were competitive, professionally administered and peaceful throughout the country. The 2011 electoral framework legislation was implemented but results of the monitoring of the financing of political parties are still awaited. Legislative activity was cut short by the approach of the elections, but other parliamentary activities continued normally. The authorities need to follow up the recommendations of the OSCE/ODIHR election observation mission.

Government

Following the parliamentary elections, a new coalition government took office in July, on the basis of an agreement between SNS, SPS, URS and two smaller parties, with the leader of SPS assuming the position of Prime Minister. The new Prime Minister has pledged to accelerate the EU agenda of reforms with the aim of opening accession negotiations.

All over the reporting period, the government demonstrated its commitment to EU integration, notably by continuing to implement the relevant provisions of the Interim Agreement, in line with the agreed liberalisation schedule. It undertook, with the support of the Serbian European Integration Office (SEIO), the Coordination Body for accession to the EU and the European Integration Council, to follow up on the recommendations of the Commission’s Opinion and adopted a third revision of its National Programme for EU Integration (NPI) in January 2012. The government has been drafting a number of laws aimed at further alignment of national legislation with European standards and adopted new implementing legislation on regulatory impact assessment. There has been some improvement in its monitoring of the annual work programme. However, the drafting process continues to lack transparency, sufficient structure and time for effective consultation of all interested parties, which would also make the legal environment more predictable. The implementation and monitoring of adopted legislation needs to be improved. Ministries do not always follow up and even in some instances openly challenge the opinions and recommendations of independent regulatory bodies, including the State Audit Institution. The General Secretariat of the Government needs to be strengthened to be able to drive the policy system towards greater effectiveness and high-quality output.

As regards local self-government, the legislation on municipal finance needs to be clarified and properly implemented to ensure that municipal funding is predictable. There is no available overview of the functions delegated to municipalities. Responsibilities have continued to be transferred without ensuring sufficient capacity and resources at local level. The National Council for Decentralisation continues to be inactive. Consultation of local authorities when deciding on new legislation or amendments to existing laws that have implications at local level needs to be further improved.

Overall, the outgoing government completed a full term in office and the new government is up and running since July. Both were active in pursuing the country’s strategic goal of EU integration. However, the government continues to lack a consistent, structured approach to consulting stakeholders and needs to develop its monitoring of the preparation and implementation of new legislation. The legal framework for local self-government remains to be clarified and properly implemented.

Public administration

Little progress has been achieved regarding public administration reform. The Law on Administrative Inspection, which governs procedures for checking that administrative bodies comply with administrative law, was adopted in November 2011. The Public Administration Reform Council continued to address only administrative and technical issues and did not actively steer the implementation of the Public Administrative Reform Strategy which remains insufficient. Greater political commitment, better coordination, and increased financial and human resources are needed to bring about administrative reform.

The legislative framework is still incomplete. New legislation on general administrative procedures and on local government employees and salaries is yet to be adopted. The Law on Administrative Disputes still needs to be fully aligned with European standards for judicial review of administrative acts.

The policy planning and coordination system needs to be improved to steer policy development and produce consistent work plans for the public administration. Administration and management capacity at local level are weak and significant disparities between municipalities persist. The Law on Civil Servants does not apply to local government employees.

The recruitment and career system is not yet fully merit-based and recruitment is still prone to political influence. Local government does not have a merit-based and professional human resources service. A number of appointments to senior civil service positions are still pending. Selection procedures are not applied uniformly and managers still have too much discretion when choosing candidates from lists drawn up by selection panels following competitions. Temporary employees are still not recruited according to competitive criteria and contracts are allocated without internal or public competition. Changes in the administration envisaged by the new government should not be detrimental to its capacity to make further progress in the alignment with and implementation of the acquis.

A new training programme for civil servants was adopted in 2012 and several training courses were delivered. However, only a small percentage of civil servants, and in particular a very small percentage of managers, took part in training. Induction training is not provided.

Several independent regulatory bodies continue to face logistical constraints. Parliament needs to resume the review of their annual reports and improve follow up of legislative proposals tabled by such bodies. As regards restructuring of public agencies, due consideration has to be given to the need to maintain the capacities and entitlements to implement the acquis. In some cases, when prescribed by the acquis, the independence of such bodies needs to be preserved.

The Ombudsman’s Offices continued to be effective and have increased their accessibility. The term of office of the State Ombudsman was renewed by parliament in August 2012. The number of citizens’ complaints has increased. The largest number of reported violations relates to governance. Changes to the Law on the Ombudsman, which should enhance the Ombudsman’s independence, still have not been adopted. The Ombudsman’s recommendations were not sufficiently followed up.

The Commissioner for Information of Public Importance and Personal Data and Protection continued to be active and his term of office was renewed by parliament in December 2011. Some progress has been made in the implementation of legislation ensuring access to information of public importance. However the recommendations of the Commissioner are still not sufficiently followed up (See also, for data protection, Chapter 23 - Judiciary and fundamental rights).

The State Audit Institution (SAI) of Serbia continued to gradually build up its capacities by recruiting further auditors and the term of office of its president was renewed by parliament in September 2012. The SAI has now approximately 130 staff, including over 100 auditors. The SAI also continued to work on improving audit methodology and increased audit coverage (See also Chapter 32 — Financial control).

Amendments to the central bank law adopted in August 2012 have seriously undermined the independence of the National Bank of Serbia (See also Chapter 17 – Economic and monetary policy).

Overall, public administration reform is proceeding at a slow pace and is hampered by insufficient political commitment. The legislative framework needs to be completed and fully aligned with international standards. Implementation of the existing laws and strategy needs to be improved. Merit-based recruitment and promotion systems should be developed and implemented. The follow-up of the recommendations ofindependent regulatory bodies needs to be stepped up.

Civilian oversight of security forces

There was little progress on civilian oversight of security forces. A specific parliamentary committee for civilian oversight of security services was set up in July, in line with the 2010 rules of procedure. Parliamentary oversight remained limited in practice. The legal framework for the security and intelligence services’ monitoring of communications needs to be clarified. Provisions of the Law on Military Security and Military Intelligence Agencies which allowed sensitive data related to citizens’ communications to be monitored without a court order were ruled unconstitutional by the Constitutional Court in April 2012. There are allegations that the unclear legal situation has led to abuses. A law on access to state security files remains to be adopted.

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

Serbia has made little progress on judicial reform.

Amendments aimed at improving the efficiency of the Constitutional Court were adopted in December 2011. Deliberations in panels of eight or three judges are now allowed for certain decisions, whilst a full Court session remains the normal format for important cases. In line with the recommendations of the Venice Commission, constitutional changes and further measures need to be adopted to reduce the growing backlog. In particular, cases involving breaches of the right to trial within a reasonable time, which account for 40% of the Constitutional Court backlog, could be delegated to the Supreme Court of Cassation.

As for the independence of the judiciary, the High Judicial Council (HJC) and the State Prosecutorial Council (SPC) took over the administration of the budget of courts and prosecution services in March 2012; the Ministry of Justice remains in charge of IT and capital expenditures in the court system and funding of the courts’ administrative staff. The HJC and the SPC have yet to finalise the appointments of court presidents and public prosecutors. The HJC and the SPC have not yet adopted rules on regular evaluation of the work and performance of serving judges and prosecutors. The foreseen evaluation of the magistrates newly recruited in 2009 for a three year term is in particular pending. A proper merit-based career system for judges and prosecutors remains to be fully developed. It is still possible to enter the judicial profession, in particular at higher levels, on the basis of unclear criteria without having passed through the Judicial Academy. The legal framework still leaves room for undue political influence over the judiciary, in particular as regards parliament’s power to appoint judges and prosecutors — including the President of the Supreme Court of Cassation and the Republic Public Prosecutor — and its direct participation in the work of the HJC and the SPC.

The re-appointment procedure carried out for judges and prosecutors in 2009/2010 and the review process conducted to correct its shortcomings were overturned in July 2012 by the Constitutional Court as not meeting the required standards. The Court revoked all the decisions of the HJC and the SPC on the non-re-appointment of judges and prosecutors that had been appealed and instructed the Councils to reinstate all of them within 60 days. For the judges, the Court considered inter alia that the HJC did not apply the required quorum and breached the requirement of impartiality. In this respect, the Court objected to the participation of ex-officio members — the President of the Supreme Court, the head of the parliamentary committee and the Minister of Justice — and the member representative of the lawyers to both the first decision on re-appointment and the review process. The Court also considered that the presumption of suitability required that judges could only be dismissed by the positive votes of the majority of the HJC members, which was not the case as three of them were in part or fully unavailable to act (one resigned and was replaced 3 months later, another faced criminal proceedings and a third one faced a procedure for incompatibility of duties as dean of a law faculty). For the prosecutors, similar shortcomings were found which invalidated the SPC’s assessment that the petitioners did not fulfil the criteria of worthiness, professional qualification and competence. In particular, the Constitutional Court found that the review process unfairly placed the burden of proof on the petitioners and that the Council’s decisions were often based on facts and assertions that could not be challenged by the petitioners. As a results, the Serbian authorities need to evaluate how to the judicial reform can be further advanced after most non-reappointed judges and prosecutors are to be reintegrated further to the rulings of the Constitutional Court.

The impartiality of judges has continued to be broadly ensured thanks in particular to automated allocation of court cases, which has now been introduced in all commercial courts and general courts. New case management software has been introduced in the Administrative and Appellate Courts in Belgrade and the Supreme Court of Cassation in July 2012.

To ensure accountability, steps were taken to set up a disciplinary system. The HJC introduced a disciplinary prosecutor and commission, which handled a little number of cases and took a few final decisions. The SPC adopted Rules on disciplinary procedure and liability in July 2012 which remain to be fully aligned with European standards. The SPC has yet to set up disciplinary bodies and establish a track record of investigating and imposing penalties in disciplinary cases. The higher courts and the Ministry continued internal inspections on technical and administrative matters in the courts, identifying shortcomings in registering and handling of court cases.

A number of laws came into force aimed at improving the efficiency of the judiciary and applying international standards in national courts. The Judicial Academy selected a new generation of students and provided a variety of in-service training programmes for judges, prosecutors, judicial staff and attorneys, which still need to be systematised and structured. The judicial budget for 2012 remained stable at some € 213 million (around 0.65% of GDP). In 2011, the courts received 2.23 million new cases, resolved 2.65 million cases and were left with a backlog of 3.34 million cases. The new Civil Procedure Code has been in force since February 2012, aimed at increasing efficiency in civil procedure, which accounts for two-thirds of all cases before the Serbian courts. The first private bailiffs were sworn in and first notaries selected in May 2012. However, the entry into force of the law on public notaries was postponed to 2013. Major imbalances in the workload of judges persist between courts, particularly between those in Belgrade and other courts. A comprehensive analysis of the functioning of the new court network is needed in terms of cost, efficiency and access to justice. The quality of judicial statistics needs to be improved.

The new Criminal Procedure Code has been applied in organised crime and war crimes cases since January 2012 (and is to be applied in all criminal cases as of January 2013). It introduces a new model of criminal investigation, giving the prosecution the lead role in collecting the evidence and presenting it before the court. One aim is to shorten the investigative phase, but this will require that the prosecution services rise to the complexity of their new role. The fully adversarial system raises questions regarding procedural safeguards, in particular the ability of poorer defendants to finance an effective defence, a concern echoed by the Ombudsman and the Commissioner for Free Access to Information of Public Interest. At the same time, the prosecution service still has to demonstrate its ability to obtain convictions in high-level cases against well-funded defence teams. A careful analysis of the implementation of the legal framework on abuse of office or authority also needs to be conducted in order to ensure that it is consistent and proportionate. Generally, Serbia needs to ensure that procedural safeguards are applied consistently across the country.

The Administrative Court continued to increase its activity while the inflow of new cases was steady and so managed to reduce the backlog by some 2,500 cases to 17,711 by the end of 2011. However, administrative judges’ expertise needs to be developed, particularly in areas such as asylum, consumer protection, state subsidies and competition.

Overall, little progress was made, mostly in enforcing new legislation aimed at improving the efficiency of the judicial system. The review of reappointments of judges and prosecutors did not correct the existing shortcomings and was overturned by the Constitutional Court who ordered the reinstatement of all judges and prosecutors that had appealed their non-reappointment. Cases returned by the Constitutional Court will need to be processed diligently and in accordance with the Constitutional Court’s decisions. A system of professional evaluation, effective disciplinary rules and stronger integrity safeguards remains to be established. In order to restore the confidence of the citizens, the authorities will need to consider additional measures to strengthen the independence, impartiality, competence, accountability and efficiency of the judiciary, in particular: transparent criteria for appointments of judges and prosecutors; initial and in-service training under the Judicial Academy’s responsibility, together with appraisal of serving judges and prosecutors, including of the newly appointed ones in 2009; integrity safeguards; court rationalisation. To meet these challenges, a new strategy on judicial reform is needed, together with an action plan to implement the strategy, based on a functional review of the judiciary.

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

Serbia has made little progress in the fight against corruption. Progress was made mainly regarding enforcement of the legislation. Implementation of outstanding GRECO recommendations continued. The amendments to the Law on Health Care and the Law on Advocates include provisions on conflict of interest. The Government has not yet finalised its National Anti-Corruption Strategy for 2012–2016 and the corresponding Action Plan. There has been little evidence in practice of the coordinating role officially assigned to the Minister of Justice under the previous government. A specific responsibility in this area was entrusted to the First Deputy Prime Minister in the new Serbian government.

The Anti-Corruption Agency’s operations, which focus on prevention, increased. The Agency started to implement the 2011 Law on the Financing of Political Activities. It adopted implementing legislation on the monitoring of electoral campaigns and set up an extensive network for the monitoring of the 2012 elections. It also collected annual financial reports from a majority of political entities and issued warnings to 10 of them who had failed to submit such report by the deadline. The Agency continued to make targeted checks on asset declarations it has received. This activity led to misdemeanour judgements in two cases, and criminal charges in another. The Agency collected few data for its new registry of legal entities involved in public procurement in which public officials have shares over 20%. Regarding cases of dual public functions presenting a risk of conflict of interest, the Agency took close to 500 decisions in 2011 that are generally being enforced. However, the Agency has still to establish a track record of effective checks on party funding. It has not yet made full use of its powers and needs to improve cooperation with relevant stakeholders to investigate declarations of assets effectively.

The Anti-Corruption Council continued to be active in exposing and analysing cases of systemic corruption. There has been very limited follow-up to its detailed reports of high-profile corruption cases.

The special prosecutor for corruption and organised crime launched investigations into 115 corruption cases in 2011. These included several medium- to high-level cases. There was a marked increase in the number of lower-level corruption cases for which the prosecutor’s offices initiated investigations in 2011, but in the great majority of such cases sanctions remained lenient. Further efforts are needed to establish a track record of prosecution and conviction, particularly in high-level cases. The law enforcement bodies need to become more proactive and develop their ability to conduct financial investigations. There was little action to protect whistleblowers.

Internal checks by the customs administration and the police have continued to result in a sizeable number of cases being investigated and penalties imposed. Public procurement, management of public enterprises, privatisation procedures and public expenditure remain areas of serious concern, in which independent supervision and capacity for the early detection of wrongdoing and conflicts of interest are underdeveloped. Health and Education remain particularly vulnerable to corruption. Comprehensive risk analyses for areas vulnerable to corruption are needed. Coordination between all stakeholders needs to be strengthened to ensure effective prevention and prosecution of corruption cases.

Overall, the implementation of the legal framework for fighting corruption has continued. The Anti-Corruption Agency’s operations increased, mostly in relation to the financing of political parties. However, corruption remains prevalent in many areas and continues to be a serious problem. A new Anti-Corruption Strategy and Action Plan are still awaited. The implementation of the legal framework and the efficiency of anti-corruption institutions need to be significantly improved. Further efforts are needed to adopt a more proactive approach to investigating and prosecuting corruption and the judiciary needs to gradually build up a solid track record of convictions, including in high-level cases, particularly in cases of misuse of public funds. Stronger political direction and more effective inter-agency coordination are needed to significantly improve performance in combating corruption.

2.2. Human rights and the protection of minorities (See also Chapter 23 – Judiciary and fundamental rights)

Observance of international human rights law

Serbia has already ratified all of the main international human rights instruments.

During the reporting period, the European Court of Human Rights (ECtHR) delivered judgments on 40 applications finding that Serbia had violated rights guaranteed by the European Convention on Human Rights (ECHR). The bulk of the judgments so far relate to the excessive length of court cases and to non-enforcement of domestic judgments. Due enforcement of ECtHR’s rulings in cases of compensation of workers from State owned enterprises, for which a decree was taken by the government in March 2012, is needed. A total of 4.833 new applications have been submitted to the ECtHR since September 2011, bringing the total of pending applications to 9.478. The number of filed applications against Serbia is steadily growing and now represents 6% of all filed applications with the Court.

There is some progress in the promotion and enforcement of human rights. Various activities aimed at promoting tolerance, anti-discrimination and respect for human rights were carried out. Different occasions such as those marking International Human Rights Day, International Women’s Day, International Roma Day and Pride Day were used to raise public awareness of human rights issues. Various training courses were held for judges, prosecutors, legal practitioners, prison officers and police officers. However, the implementation of relevant international instruments needs to be further improved.

Overall, the legislative and institutional framework for the observance of human rights is in place and some active measures were taken to ensure its implementation. However, further efforts to implement international instruments are required.

Civil and political rights

Some progress has been made on the prevention of torture and ill-treatment of persons deprived of their liberty. The Ombudsman, acting as of January 2012 as National Prevention Mechanism against torture, held its first inspections of prisons, psychiatric hospitals, police stations and social care centres. Poor living conditions, unsatisfactory healthcare and a lack of adequate and specific treatment programmes are still a matter of concern. There are no adequate legal safeguards for the placement and treatment of people with mental disabilities involuntarily placed in psychiatric or social care institutions. The internal control system for the police needs significant strengthening in terms of staff and training and needs to improve its response to allegations of ill-treatment.

Some progress has been made regarding the prison system. The Action plan implementing the Strategy for the reduction of prisons’ overcrowding was adopted in November 2011. Some improvements were made to prison infrastructure and a new prison facility with 450 places was opened near Belgrade in February 2012. However, the prison system continued to face serious problems due to overcrowding with a number of prisoners over 11,500 for some 5 to 6,000 places. Further efforts are needed to improve living conditions, healthcare and provide adequate treatment programmes for prisoners. Alternative sanctions need to be introduced on a larger scale. There are not enough frontline prison staff. An efficient probation system remains to be introduced.

Constitutional guarantees of access to justice are in place. However, the length of court proceedings and the backlog of cases continue to remain issues of concern. Legislation and funding for an effective system of free legal aid still need to be developed.

The legal framework to ensure freedom of expression is in place. As regards the media, several working groups have been set up to implement the Media Strategy adopted in October 2011 and its accompanying action plans. The Republican Broadcasting Agency (RBA) has improved the transparency of its work and has enhanced its technical capacity for monitoring broadcasters. However, violence and threats against journalists remain of concern, although their frequency has decreased slightly. The Serbian authorities have continued to provide police protection for journalists and media outlets which have received threats. Investigations into murders of journalists dating back to the late 1990s/early 2000s and into recurring threats against journalists have so far failed to identify the perpetrators. A more comprehensive and proactive approach by the police and the judiciary remains essential. Monitoring of discriminatory or hate speech by the RBA needs to be improved. The procedure by which RBA members are appointed continues to raise concerns about the independence of this body. Access to advertising in the media remains under the control of a few economic and political actors, entailing a significant risk of influence on the media and of self-censorship. Transparency of media ownership has yet to be ensured. The implementation of the media strategy needs to be speeded up.

Freedom of assembly and association is constitutionally guaranteed and in general respected. 91 political parties, including 53 representing minorities, were registered as of August 2012. In December 2011 the Constitutional Court ruled that a decision by the Ministry of the Interior not to allow the 2009 Pride Parade to take place in the location registered by the organisers was a violation of freedom of assembly. However, while a Pride festival could take place in Belgrade from 30 September to 7 October 2012, the Pride Parade itself, scheduled for 6 October 2012, was banned by the Serbian authorities on security grounds, for the second year in a row. The activities of extreme right-wing organisations and of violent groups of so-called sports fans continue to be a major cause of concern. The Constitutional Court banned a second such organisation in June 2012. Criminal proceedings were initiated in April 2012 against 12 persons suspected of having taken part in the attacks of foreign diplomatic missions in Belgrade, including EU embassies, in February 2008. So far, one of the suspects was acquitted in first instance.

Civil society organisations continue to play an important role in social, economic and political life, and in promoting democratic values. The Office for Cooperation with Civil Society has been very active in raising awareness both among the public and among state institutions of the importance of involving civil society and citizens in decision-making. It has also established cooperation with other countries in the region. The Office has been allocated sufficient means, including financial resources, and now functions at full capacity.

Freedom of thought, conscience and religion is guaranteed and generally respected. Religiously motivated incidents declined. In addition to 7 religious communities recognised as traditional communities under a law passed in 2006, 18 religious organisations have been registered. The lack of transparency and consistency in the registration process continues to be one of the main obstacles preventing some smaller religious groups from exercising their rights, which also led to limit the access to church services in some minority language. A Constitutional Court ruling on the 2006 law which differentiate between traditional and other religious organisations is still awaited. The Ombudsman’s 2011 annual report stressed continuing problems with regulating religious classes and the status of teachers of religion, particularly relating to the Islamic faith. Some media continued to propagate negative comments and hate speech against smaller churches.

Overall, there has been some progress on civil and political rights. The legal framework for freedom of expression is in place but violence and threats against journalists remain of concern. The implementation of the media strategy needs to be speeded up. Freedom of assembly and association are constitutionally guaranteed and in general respected. The Office for Cooperation with Civil Society has been very active. Freedom of thought, conscience and religion is in general respected but the registration process for religious communities continues to lack transparency and consistency. The National Mechanism for Prevention of Torture began work but needs further strengthening. Although one new facility was opened, overcrowding in the prison system remains a grave concern. On access to justice, an effective system of free legal aid still needs to be developed.

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

There has been some progress relating to women’s rights and gender equality. Serbia signed the Council of Europe Convention on Preventing and Combating Violence against Women and Domestic Violence in April 2012. A general protocol on procedures and cooperation between institutions, agencies and organisations in situations of domestic and partner-relationship violence was adopted in November 2011. The protocol aims to provide better protection for victims. A telephone helpline for victims of domestic violence was introduced in November 2011. A new shelter for up to 20 victims of domestic violence was opened in Pancevo in January 2012, bringing the number of such centres to 13. However, violence against women remains an area of concern. The action plan for the implementation of the National Strategy for Prevention and Suppression of Violence against Women has yet to be adopted. Very often, domestic violence goes unreported and greater coordination is needed, e.g. on collecting and sharing data between all actors in the system for protecting women from violence. Women continue to be discriminated against in the labour market.

Children’s rights are guaranteed by the Constitution and broadly respected. Little further progress has been achieved in this area. There has been a steady reduction in the number of children with disabilities placed in residential care institutions and an increase in the availability of community services for family members with disabilities. A media campaign to eradicate violence in schools has started and a telephone helpline for victims of juvenile violence was introduced in November 2011. However, both juvenile violence and violence against children continue to grow and are of great concern. Children’s rights, particularly the rights of those belonging to vulnerable groups such as Roma, poor children, children with disabilities, children without parental care and street children, are unevenly protected. There are an increasing number of children living in poverty. Inclusive education is still not fully developed. The school drop-out rate is high among Roma children, children with disabilities and children living in remote areas. Too many Roma children are still being enrolled in special schools.

Some progress has been made concerning the socially vulnerable and/or persons with disabilities. The overall legislative framework is in place for the protection, inclusion and education of socially vulnerable persons and persons with disabilities. Efforts have been made to promote their rights, education and inclusion in the labour market. Deinstitutionalisation efforts have further continued, in tandem with the development of community-based services. However, the number of vulnerable persons registered with the National Employment Service remains extremely low. Access to public buildings for persons with disabilities needs to be further improved, especially in rural areas. Overall, social integration of persons with disabilities remains limited and as that of other vulnerable persons it needs further improvement.

There has been some progress on anti-discrimination policies. Serbia’s anti-discrimination legislation is broadly in line with European standards on combating racism and racial discrimination. The Equality Protection Commissioner’s office was active in raising awareness on discrimination and existing mechanisms for protection against discrimination. It received 450 citizens’ complaints and dealt with 360 cases. The number of citizens’ complaints has been increasing, indicating greater awareness of this problem. The groups most discriminated against are the Roma, persons with disabilities and sexual minorities, who, together with human rights defenders, often face hate speech and threats. Certain aspects of the Serbian anti-discrimination law are not in line with the acquis, notably the scope of exceptions from the principle of equal treatment, the definition of indirect discrimination and the obligation of reasonable accommodation for disabled employees. The police response to attacks against the lesbian, gay, bisexual and transgender (LGBT) population has slightly improved. Several physical attacks and threats on members of the LGBT population and those promoting LGBT rights continued to occur and the 2011 and 2012 pride parades were banned because of security threats. For the first time, a Pride Day was marked in June 2012 by events co-sponsored by the government and civil society but so far, the new government has taken no further initiative towards the better inclusion of the LGBT population and a greater understanding across society.

Labour and trade unions rights are guaranteed by the Constitution and broadly respected but no further progress has been made. The 1996 law on strike is not in line with the EU and ILO standards, in particular as regards possible restrictions to the right to strike. Criteria for social partners’ representativeness in social dialogue are still an issue: several registered trade unions are still not recognised and concerns remain as to the criteria for participation of employers’ organisations. Social dialogue remains limited. The Economic and Social Council was not consulted regularly on draft laws and its meetings were often not attended by government officials. At local level, dialogue has generally been non-existent.

Progress was achieved concerning property rights. Implementation of the 2011 Law on Restitution has started. The Agency for Restitution was set up in January 2012 and invited former owners of properties nationalised after World War II, or their heirs, to submit claims for restitution between 1 March 2012 and 1 March 2014. The Agency has started processing the claims and has taken a number of decisions on restitution in kind. Given the ceiling of € 2 billion available for financial compensation, the corresponding individual decisions will only be taken after the deadline for submissions has expired, when the total number of claims is known. A Law on Rehabilitation adopted in December 2011 clarified the procedure and conditions under which members of the occupying forces recruited in Serbia during World War II can be rehabilitated, making them and their heirs eligible under the Law on Restitution.

Overall, the legal framework for the protection of social and economic rights is in place. However, discrimination based on race, ethnicity, gender, age and sexual orientation is widespread and further measures to fight all forms of discrimination are needed, together with efficient mechanisms to improve the protection of women and children against any form of violence. Social dialogue needs to be improved and the issue of social partners’ representativeness criteria resolved. Implementation of the 2011 Law on Restitution has started.

Respect for and protection of minorities, cultural rights

A comprehensive legal framework for the protection of minorities is in place, in line with the Framework Convention on National Minorities of which Serbia is party, and generally respected. A Governmental Office for Human and Minority Rights was established as of August 2012, taking over the functions ensured by the previous Directorate within the Ministry for Human and Minority Rights, Public Administration and Local Self-Government. Regular financial reports by the national minority councils to the Office for Human and Minority Rights have been introduced. The 2011 population census included provisions facilitating the participation of minorities such as translation of the questionnaire in nine languages and participation of minority languages speaking enumerators. However, implementation of the legislation needs to be further improved. The Republican Council for National Minorities has remained inactive. The Bosniak minority council has not yet been formally constituted. The recommendations made by the Serbian independent bodies with a view to improving the electoral framework for the national minority councils have not yet been followed up. The legislation is in place but implementation at field level remains uneven throughout the entire territory of Serbia. Generally, Vojvodina is more advanced while South and South-West Serbia lag behind, due in part to a lack of available funding. Coordination between the central and local level needs to be further improved as well as awareness on the minority issues legal framework, including from the minorities themselves. Further improvements are also needed regarding information and education in minority languages, including the provision of all the necessary textbooks.

The inter-ethnic situation in the Autonomous Province of Vojvodina remained good. Elections for the Provincial Assembly took place in May 2012. There have been only sporadic inter-ethnic incidents. Reactions to such incidents by provincial officials and the police were adequate but the legal process needs to be improved as the prosecution continued to treat them as misdemeanour cases rather than criminal offences. The Provincial Ombudsman’s 2011 annual report noted that out of 1,237 complaints 65 were related to minority issues (5.25%). The law on Vojvodina’s own resources, required by the Constitution, has yet to be adopted. The Constitutional Court invalidated in July 2012 some provisions of the law regulating the competences of Vojvodina.

As regards the municipalities of Presevo, Bujanovac and Medvedja, the situation continued to be stable overall, although there were sporadic incidents. An Albanian/Serbian Department of Economics was opened in Bujanovac in October 2011 as a branch of the Novi Sad Faculty of Economics and 69 students were enrolled. Students from Presevo and Bujanovac were granted scholarships to study at Novi Sad University. Several textbooks in Albanian were provided for the 2011 school year. In April 2012 the government and the municipal authorities reached an agreement on state investment in small and medium-sized enterprises in the three municipalities. Following calls by their political parties, Albanians however massively boycotted the October 2011 population census and partially boycotted the May 2012 parliamentary elections. Albanians continue to be underrepresented in the public administration and local public companies. The area remains among the poorest in Serbia and requires further commitment from the State authorities for its economic development.

Regarding the Sandzak area, the situation has been stable overall. The campaign for parliamentary and municipal elections was calm and no incidents were recorded. Parties from Sandzak which participated in the elections in April 2012 signed a code of conduct for the campaign and largely abided by it. The Bosniak community continued to be underrepresented in the local administration, judiciary and police. A 2011 recommendation to a municipal administration by the Equality Commissioner to ensure the use of the Bosniak language and Latin alphabet has not been followed. The Ombudsman also issued recommendations in April 2012 to ensure adequate use of the Bosniak language in four municipalities. No solution was found to the outstanding issue of the election of the Bosniak national minority council, nor has the issue of the two rivalling Islamic communities been resolved. The area remained significantly underdeveloped, with a high unemployment rate and a lack of adequate infrastructure and investment. It requires further commitment from the State authorities for its economic development.

There has been some improvement in the position of the Roma population. Serbia has continued to take an active part in the Decade of Roma Inclusion 2005–2015 and has undertaken to implement the operational conclusions of the June 2011 EU-Serbia social inclusion seminar on Roma issues. The government signed in April 2012 a Memorandum of Understanding with the Ombudsman and the UNHCR to provide assistance on the registration of legally ‘invisible persons’ and changes were brought to the law of non-contentious procedures in August 2012 aimed at facilitating later registration in the birth registry. The measure allowing undocumented Roma to register using a provisional address has yet to be implemented. Active measures to increase social inclusion of the Roma have continued. The enrolment rate of Roma children in the education system has increased. 170 Roma teaching assistants have been employed together with 75 health mediators. The school drop-out rate for Roma children remains however high. The 2012–2014 Action Plan for the implementation of the Roma Strategy has not yet been adopted. Most of the Roma population lives in informal settlements under difficult conditions. Some positive steps to comply with international standards were taken regarding the relocation of Roma evicted from such informal settlements. Further sustained efforts are required to fully comply with international standards on forced evictions. The Roma population, and especially Roma women, are the most discriminated against in the labour market. The Roma minority continues to face discrimination, social exclusion and high unemployment. Roma women and children are still frequently subject to family violence, which often goes unreported.

According to the UNHCR, there are around 66.000 refugees and 210.000 internally displaced persons in Serbia. The number of collective centres fell further from 29 to 24. The programme for supporting municipalities which prepare local action plans for the improvement of the status of refuges and IDPs has continued and some improvement has been recorded concerning the displaced persons housing situation. However, the living conditions of many refugees and internally displaced persons are still difficult. Many are unemployed and live in poverty. Internally displaced persons who do not have personal documents are in a particularly difficult position as they are not able to exercise their basic rights.

Overall, the legal framework for the protection of minorities is in place and generally respected. Some positive steps were taken to improve the situation of minorities, including the Roma. Regular financial reporting by the national minority councils has been introduced. Additional efforts are needed to ensure effective implementation of minority legislation throughout the territory of Serbia and address known shortcomings. Serbia needs to do more to support the socio-economic development of Sandzak and Presevo, Bujanovac and Medvedja. The Roma, refugees and internally displaced persons continue to face a difficult situation.

2.3. Regional issues and international obligations

There are no outstanding issues in connection with Serbia’s compliance with the Dayton/Paris Peace Agreement. In the framework of the Special Parallel Relations Agreement between the Republika Srpska and Serbia, a joint session of the governments of Serbia and the Republika Srpska took place in Belgrade in December 2011, leading to the signing of four agreements on internal affairs, IT, the environment and agriculture.

Cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY) continued to be fully satisfactory. Serbia continued to provide smooth and swift access to documents and witnesses, in support of ongoing or planned ICTY trials. The June report of ICTY prosecutor Brammertz regretted the lack of action against the network of aid to ICTY fugitives. The War Crimes Prosecutor started criminal proceedings against an aid network in June 2012. A new trial against a previously identified group of 10 people suspected of aiding Ratko Mladic to evade justice was also restarted. However, Serbia must still further intensify its efforts in the conduct of more in-depth investigations into the fugitive networks in order to achieve visible results.

Domestic processing of war crimes continued with a number of new indictments, first-instance judgments and final convictions. Cooperation and exchanges of information with Croatia and EULEX developed in 2012. However, serious problems with witness protection hinder the handling of sensitive cases. A review of the 1990s indictments by military courts in the case of Croatia was completed and findings shared with Croatia. A similar exercise involving discussions with EULEX is ongoing in relation to events in Kosovo. An agreement with Bosnia and Herzegovina on sharing evidence remains to be concluded.

Serbia’s policy regarding the International Criminal Court is in line with the EU’s guiding principles and the EU Common Positions on the integrity of the Rome Statute. Serbia does not have any bilateral immunity agreements.

Serbia made some progress towards a visible and sustainable improvement in relations with Kosovo, the key priority set out in the Commission’s Opinion on Serbia’s membership application. Serbia continues to contest Kosovo’s declaration of independence and to actively oppose recognition by third parties but has participated in a dialogue with Pristina since March 2011. Additional agreements were reached in that dialogue in February 2012 on regional cooperation and representation of Kosovo and on integrated management of border/boundary crossing points (IBM), in the run-up to the March European Council which granted Serbia candidate status. Implementation of these agreements was long delayed. Serbia adopted at first an overly restrictive internal instruction regarding the participation of Serbian delegations in regional meetings and conditions to be observed for its acceptance of Kosovo’s participation. Soon after formation of a new government, a revised instruction was adopted in September 2012 which, subject to continued implementation, enables inclusiveness of regional cooperation. Serbia eventually signed the IBM technical protocol in September 2012 but it has yet to be implemented. Other agreements reached in this dialogue between March and September 2011 regarding freedom of movement, civil registries, customs stamps and mutual acceptance of diplomas are being implemented, except for cadastre, on which Kosovo still needs to adopt a law. Some areas are facing technical difficulties, e.g. vehicle insurance and car number plates for the freedom of movement agreement. Gates 1 and 31 remained mostly closed or only partially open, while there has been considerable traffic using unregulated crossing points into and from Serbia.

Serbia was constructive in accepting OSCE facilitation in Kosovo for the holding of its parliamentary and presidential elections there and in not calling local elections in Kosovo. Serbia continued to fund and to maintain its structures, particularly in northern Kosovo, including not only hospitals and schools, but municipal administrations, security services and judicial structures. Cooperation with EULEX has improved. Direct high-level contacts facilitated operational cooperation. Cooperation in combating organised crime has improved but needs to be further developed in regard to some specific cases.

Following the elections and a new leadership in Serbia taking up office, Serbia needs to continue to engage constructively in the next phase of the dialogue in order to achieve further progress towards a visible and sustainable improvement of relations with Kosovo.

Significant progress has been made as regards the Sarajevo Declaration Process, which brings together Bosnia and Herzegovina, Croatia, Montenegro and Serbia and aims at finding sustainable solutions for the refugees who were displaced as a result of the armed conflicts in ex-Yugoslavia during the 1990s. The four countries signed a ministerial declaration in November 2011 in Belgrade, renewing their political commitment to bringing this chapter to a close. They agreed on a Regional Housing Programme assisting some 27,000 households or 74,000 individuals. The programme was presented for international donor support at the Sarajevo April 2012 donors’ conference, which resulted in some € 265 million being pledged. Programme implementation is at an early stage. Good cooperation needs to continue between the four countries on all outstanding issues in the process, including data exchange and statistics, civil documentation and pension rights.

The unresolved fate of missing persons from the conflicts in the 1990s remains a humanitarian concern in the Western Balkans. As of August 2012, there were still approximately 13,250 people missing from the conflicts in the region. Of these, some 9,550 were related to the conflict in Bosnia and Herzegovina, approximately 1,900 to the conflict in Croatia and over 1,800 to the conflict in Kosovo. In the past year approximately 1,100 remains were identified at regional level. The lack of information on new gravesites and difficulties in identifying exhumed human remains continue to be the key obstacles to solving the remaining cases of missing persons. The Working Group chaired by the ICRC remained the framework within which the Belgrade and Pristina authorities maintained dialogue and exchanged information on persons unaccounted for in relation to the 1998–1999 events in Kosovo. It met twice since September 2011 and held two briefing sessions for the families of the missing, while only 45 cases were solved. Although modest, the progress was achieved mostly owing to the information provided by the Serbian authorities and obtained from international archives. Regarding cooperation between Serbia and Croatia, progress has been limited. No formal meetings of the bilateral Commission on Missing Persons were held. Sustained efforts and enhanced political commitment are needed towards identifying gravesites and clarifying the fate and whereabouts of people still unaccounted for.

Regional cooperation and good neighbourly relations form an essential part of the process of Serbia’s moving towards the European Union. In 2012 Serbia held the chair of the South East Europe Cooperation Process (SEECP), the Migration, Asylum, Refugees Regional Initiative (MARRI), the Adriatic-Ionian Initiative (AII) and the Black Sea Economic Cooperation (BSEC). It continues to play an active part in the Regional Cooperation Council (RCC), the Central European Free Trade Agreement (CEFTA), the Energy Community Treaty and the European Common Aviation Area Agreement. The new RCC Secretary General was appointed following a proposal from Serbia. Serbia supports the RECOM initiative on reconciliation and the Igman Initiative. However, the agreement reached on regional cooperation and the representation of Kosovo in the framework of the Belgrade/Pristina dialogue did not immediately result in either smoother or fully inclusive regional cooperation. Between March and August 2012 Serbia chose to walk out of or boycott meetings that did not strictly follow its own interpretation but eventually applied a more flexible approach from September 2012 onwards.

Serbia has good bilateral relations with other enlargement countries and with neighbouring EU Member States overall. Then President Tadic participated in February 2012 in a trilateral summit of Presidents of Serbia, Bosnia and Herzegovina and Croatia at Jahorina and in the summit of Presidents of Serbia, Croatia, Slovakia and the Czech Republic in Prague. A first trilateral meeting of the Ministers of the Interior of Serbia, Montenegro and Bosnia and Herzegovina took place in April 2012. However, some unhelpful statements for reconciliation in the region were made by the new Serbian President, Mr Nikolic, at the time of his election and taking office, such as that denying the qualification of genocide for the crimes in Srebrenica. Several regional leaders decided not to attend the inauguration of the new president. Serbia needs to continue to make a positive and constructive contribution to regional cooperation and reconciliation.

Relations with Albania remained good. Several high-profile bilateral meetings took place. An agreement on veterinary cooperation was signed in April 2012. A readmission agreement and an agreement on reciprocal movement of citizens were also signed.

Relations with Bosnia and Herzegovina remained good. The speaker of the Serbian Parliament paid a visit to Bosnia and Herzegovina in December 2011, the Minister of Foreign Affairs of Bosnia and Herzegovina visited Belgrade in March 2012 and the Serbian Prime Minister visited Sarajevo in September 2012. Then President Tadic visited Republika Srpska on several occasions. Border demarcation remains an open issue.

Relations with Croatia are stable, regardless of a number of outstanding issues (e.g. border demarcation and missing persons). The two countries are working on a bilateral agreement on war crimes prosecution. There have been no tangible results with regard to border demarcation concerning the Danube. The Serbian government submitted its written pleadings supporting its counter-suit against Croatia before the International Court of Justice on genocide allegations in November 2011. A protocol on the return to Croatia of cultural assets taken during the war in the 1990s was signed, thus resolving an outstanding bilateral issue.

Relations with the former Yugoslav Republic of Macedonia continued to be good. There were reciprocal presidential visits in December 2011 and January 2012, which were held in a positive atmosphere. Agreements on travelling conditions and on compensation for health protection were signed. There were no developments regarding the dispute between the Orthodox churches in the two countries.

Relations with Montenegro remained good, overall. The Serbian Prime Minister led a senior delegation on a visit to Podgorica in December 2011. The Montenegrin President attended the inauguration of the Serbian President. The two governments signed a number of agreements on sectoral policies, an agreement on cooperation on air traffic control and a protocol on cooperation in resolving the fate of missing persons. There were no developments regarding the dispute between the Orthodox churches in the two countries.

Relations with Turkey remained good. The prime ministers met in November 2011 and there were several other reciprocal visits at ministerial level.

Serbia’s relations with neighbouring EU Member States Bulgaria, Hungary and Romania remained generally good. Serbia and Romania expanded cooperation on the regulation of the status of their respective national and religious minorities and agreed in March 2012 to a Joint Statement on the Protocol on the second session of the Inter-Governmental Commission on National Minorities. The issue of protection of minorities in Serbia was raised in different contexts by Romania as being of particular concern. Both countries have started to address this bilateral issue through the mediation of the OSCE High Commissioner on National minorities as well as in the framework of their bilateral joint commission.

Overall, Serbia’s international obligations are generally complied with. Serbia continued to fully cooperate with the International Criminal Tribunal for the former Yugoslavia (ICTY). Domestic processing of war crimes cases continued. Serbia maintained a good level of relations with its neighbours and active involvement in regional cooperation, notably by chairing the South East Europe Cooperation Process (SEECP) and a number of other regional initiatives.

Serbia still needs to achieve further progress towards a visible and sustainable improvement in relations with Kosovo, the key priority set out in the Opinion. New results were achieved in the dialogue with Pristina, with agreements in the areas of regional cooperation and representation and integrated management of border/boundary crossing points. However, implementation of these agreements was long delayed. Serbia’s interpretation of the agreement on regional cooperation and the representation of Kosovo was eventually clarified soon after the formation of a new government and, based on initial implementation, is no longer hampering the inclusiveness of regional cooperation. Serbia eventually also signed the IBM technical protocol in September 2012 which has yet to be implemented. Implementation of other agreements on freedom of movement, the land registry, civil registries, customs stamps and mutual acceptance of diplomas has overall moved forward. Serbia’s new leadership has underlined its commitment to implement all agreements already reached in the dialogue with Pristina as well as to begin tackling the broader political issues. Fulfilment of this commitment is key to moving to the next phase of Serbia’s EU integration.

3. Economic criteria

In examining economic developments in Serbia, 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

In January 2012, the government submitted to the European Commission its Economic and Fiscal Programme (EFP) for the period 2012-14. The programme’s growth projections are optimistic, especially for 2012, and the plausibility of its targets is constrained by an outdated macroeconomic and fiscal scenario. The programme would have benefited from a more detailed description of policy measures to lead towards the declared objectives — sustainable growth based on exports and investment.

Serbia entered into a precautionary Stand-By Arrangement (SBA) with the International Monetary Fund (IMF) in September 2011. The completion of the first review has been postponed because the 2012 budget deviated from the agreed fiscal programme. After the elections at all levels in May, the new government is facing the challenge to urgently address the increasing fiscal imbalances and present and implement a comprehensive structural reform agenda. The independence of the central bank has been seriously challenged by the adoption of amendments to the Law on the National Bank of Serbia (NBS) in August.

Overall, economic reforms have mostly stalled in the election period. The consensus on the fundamentals of a market economy has been broadly preserved but needs to be reinvigorated in order to improve economic performance and enhance the resilience of the economy.

Macroeconomic stability

In 2011, Serbia’s GDP increased by 1.6% in real terms. The pace of recovery slowed down significantly in the second half of the year and economic indicators point to a further deterioration of the economy, which contracted by an estimated 1.3% in the first and 0.6% in the second quarter of 2012. Growth in 2011 was rather narrow‑based as key sectors stagnated and even declined. This was particularly visible in manufacturing, real estate and agriculture, which grew by less than one per cent, and in wholesale and retail trade, which fell strongly by a real 5.5% compared to the previous year. Average per capita income in purchasing power standards rose to 35% of the EU average in 2011 from 34% in 2010. Overall, the economic recovery proved fragile and the economy has entered another phase of contraction.

Serbia’s external position has been affected by the slowdown in the EU economy and in the region. After remaining stable at around 7% of GDP for about two years, the current account deficit increased to around 9% of GDP in 2011 and continued expanding to double-digit levels in the first half of 2012. A major drop in current transfers, mainly private remittances, was the main factor driving the deterioration in 2011, while trade and net factor income deficits remained broadly unchanged. After a peak in 2009-2010, remittances declined to about 7% of GDP, a level closer to their medium–term average. In 2011, both exports and imports of goods and services increased in euro terms by double‑digit rates. Still, the trade deficit remained relatively high at 17.2% of GDP and the surge in exports of the last two years has stalled. Export growth decelerated strongly in the last months of 2011 and even turned negative in early 2012, as foreign demand declined and particularly bad weather reduced general economic activity in the country, before rebounding slightly in the second quarter. Imports decelerated too but continued growing by close to 6% in euro terms in the first half of the year. As a result, the trade deficit expanded by 15% over that period.

The inflow of net foreign direct investments was significant in 2011 but turned negative in the first half of 2012. Portfolio and other investment inflows increased last year, on the back of significant government borrowing, while banks and other sectors reduced their liabilities. In September 2011, the government issued a USD 1 billion 10‑year Eurobond. Short‑term commercial bank debt was reduced by two thirds, pushing the share of total short-term debt to below 3% of the external debt stock. This helped reduce Serbia’s total external debt to below 80% of GDP in 2011. In the first half of 2012, banks continued to reduce their foreign liabilities. However, the external debt rose to 80% of GDP by end-July as its valuation increased following significant dinar depreciation in this period. In 2011, the central bank was able to increase significantly its reserves, but these gains were reversed in 2012 as FDI and portfolio investment inflows fell sharply and the bank intervened heavily to support the falling dinar. Nevertheless, by the end of August, foreign exchange reserves remained at a comfortable level, covering about seven months’ worth of imports. Overall, the external adjustment remains unfinished, with significant and growing trade and current account deficits. External financing has weakened recently but short‑term risks are dampened by the still ample foreign exchange reserves and the favourable external debt structure, with a strong prevalence of long‑term debt.

In 2011 labour market indicators deteriorated for a third year in a row and worsened further in 2012. The unemployment rate climbed to 25.5% in April, from 23% in 2011 and 19.2% in 2010. Both activity and employment rates declined to their lowest levels in a decade. Most of the unemployment is structural as around three quarters of all unemployed have been without a job for more than a year. The economic growth of last year has not been conducive to employment creation and, according to the labour force survey, the number of employed people decreased by 6%. Employment declined even in sectors which had positive growth rates, implying gains in labour productivity and probably increasing informalities. Public administration, education and health care were a notable exception to this pattern and continued to expand. Employment continued to decline in the first half of 2012, with the number of registered employed falling by 1.5% compared to the same period in the previous year. Gross and net wages increased on average by a nominal 11% in 2011 and stagnated in real terms. Following the unfreezing of public sector salaries in early 2011, real wages have been growing by 2-3% since mid-2011. Their increase accelerated by the end of 2011 and in the first half of 2012, mostly due to base effects and rapid deceleration in inflation. Following a 13% increase in April, the minimum wage has reached almost half of the average wage. Overall, labour market conditions deteriorated sharply and unemployment and sustainable employment creation represent a major challenge.

The monetary policy framework remained unchanged and the National Bank of Serbia maintained its commitment to price stability. The amendments to the Law on the National Bank adopted in August 2012 seriously challenged its independence, undermining the confidence in the monetary policy. The central bank lowered its end-of-the-year inflation target from 4.5% in 2011 to 4% in 2012, still within an unchanged tolerance band of ±1.5 percentage points. The target was missed by a wide margin throughout 2011, notwithstanding a gradual reduction of annual inflation to 7.0% by end-2011, compared to 10.2% a year before. Inflation was mainly driven by food prices, while energy and transport became the main sources of inflationary pressure in early 2012. As food prices moderated strongly and even declined for a few months in the spring of 2012, inflation continued to fall, reaching 2.7% in April, thus moving below the NBS target band. The central bank reduced its key interest rate, in several steps in line with falling inflation, from a peak of 12.5% in April 2011 to 9.5% in April 2012. Since then, on the back of renewed pressure from food prices, affected by a drought in the summer, inflation accelerated again, reaching 7.9% in August. The exchange rate of the dinar vis-à-vis the euro remained broadly stable in the second half of 2011. However, it has come under pressure since the beginning of 2012. Political uncertainties linked to the general elections and the formation of a new government, weaker net foreign currency inflows and deteriorating budget performance have led to a depreciation of the dinar, and by end September 2012 it had lost about 10% against the euro since the beginning of the year. In view of the high euroisation of the economy and significant pass‑through effects to inflation, the central bank intervened heavily on the market. It sold more than € 1.3 billion and increased the dinar share in the foreign exchange required reserves in an attempt to stem the fall of the dinar. Moreover, since June the bank increased, in three steps, its main policy interest rate to 10.5%. Overall, inflation has been volatile and general uncertainty, weaker net foreign currency inflows, and increasing budget deficits have weakened the dinar.

Fiscal performance has deteriorated. The overall budget deficit increased to 5.0% of GDP in 2011, up from 4.7% a year earlier, and compared to a deficit target of 4.6% of GDP in the revised budget adopted in October 2011. The higher than projected budget deficit resulted from lower economic growth and underperforming revenues, especially in the second half of the year. Almost all revenue categories, with the exception of excise duties (due to rises in effective rates) and corporate income tax, have decreased in real terms. Total revenue fell by 1.5 percentage points to 41.0% of GDP in 2011, while total expenditure decreased by 1.2 percentage points but remained high at 46.0% of GDP. Most of the expenditure categories have declined, with the biggest drops recorded in subsidies, social assistance and capital expenditure. However, spending on wages and pensions remained significant, pointing to a major imbalance in the structure of public expenditure. Following the rapid increase in government debt over the previous few years, interest payments to service the debt went up to 1.4% of GDP.

The original 2012 budget law targeted a reduction in the deficit to 4.25% of GDP. However, due to a strong acceleration in expenditure in the first half of the year, the deficit target had quickly become unattainable. In the first six months, total expenditure grew by a real 8.5%, driving the budget deficit to around 3.3% of GDP, more than 50% higher in comparison with the same period last year. There were strong real increases in capital expenditure, subsidies, purchases of goods and services and interest payments. In September, the newly-elected government announced a rebalancing of the 2012 budget, targeting an annual deficit of 6.7% of GDP. Most of the adjustment is expected to come from the revenue side, to be coupled with expected savings mainly due to lower indexations of wages and pensions. However, expenditure pressures related to additional spending on pensions, agricultural subsidies and support for some of the state-owned banks put at risk the achievement of the revised, and not very ambitious, 2012 deficit target.

Government debt continued to rise rapidly in 2012, driven both by the widening deficit and the depreciation of the dinar. It approached 55% of GDP by the end of July, far above the legally binding threshold of 45% of GDP, requiring the government to present a special programme to bring the debt back below 45% of GDP over the medium term. The deteriorating fiscal performance, among other factors, triggered a downgrade of Serbia’s long‑term sovereign credit rating in August. Overall, the budget deficit in 2011 remained high for a third year in a row and continued to increase at a rapid pace in 2012. Government debt went above the legally binding threshold already at the end of 2011 and continued to increase in 2012. The adoption and implementation of urgent and decisive consolidation measures, backed by systemic reforms of the public sector in order to restore public finance sustainability, remain a key challenge.

After several years of loose fiscal policy, fiscal space to cushion further shocks in the economy has been limited and fiscal sustainability is increasingly challenged. Delays in structural reforms are also weighing on the budget and the efficiency of policy responses. High budget deficits have constrained the effectiveness of the macroeconomic policy mix and the main burden of adjustment fell on monetary policy. Moreover, monetary policy continues to be restricted by the high degree of euroisation of the economy, which complicates the attainment of official objectives of inflation targeting and preserving financial stability. Overall, the policy mix is relatively imbalanced. Loose fiscal policy and a number of structural weaknesses overburden monetary policy.

Interplay of market forces

Price liberalisation has stalled and has even been partially reversed. The prices of about 22% of the goods and services in the consumer price index basket are administered and, for some of the goods, are kept below cost-recovery levels. The state has introduced indirect price control for certain groups of goods (basic foodstuffs). A government decree, in place until the end of 2012, caps retail trade margins for these products at 10%. The government has continued to control prices of public utilities directly, but also indirectly by setting a limit on increases in the prices of communal and public city transport services which are under the control of the local authorities. Overall, the state control over prices continues to be substantial and price liberalisation has stalled.

State influence in the economy remains high, due also to the predominant share of state ownership in major sectors of the Serbian economy such as energy (electricity and gas), railway and air transport and telecommunications. State‑owned companies, which are overstaffed in general, employ more than 10% of all employees in legal entities. They make a loss of around € 1 billion a year or about 40% of all losses in the economy. Privatisation of socially-owned companies has practically come to a halt. In 2011 only two enterprises were sold through a public tender (with sales receipts amounting to € 1.0 million and investment commitments of € 4.3 million) and two enterprises were sold through auctions. As a result of delayed privatisation, cancellation of contracts or re-nationalisation, the state still has control over a number of large companies in the manufacturing sector. Currently, the portfolio of the Privatisation Agency consists of 408 companies. There are 171 companies under a restructuring procedure and most of the remaining firms are to be sold through bankruptcy or liquidation.

In early 2012, the majority state‑owned Telecom Srbija bought back 20% of its shares from a foreign investor. With this buy‑back, the 1997 privatisation of 49% of Telecom Srbija has been completely reversed (29% had been bought back already in 2003). In April, the Serbian government decided to distribute 6.94% of the shares in Telecom Srbija to the company’s current and former employees, while another 15% was offered to all citizens. In another privatisation reversal, in February 2012, the Serbian government bought back from US Steel the ailing steel mill in Smederevo for a symbolic USD 1. Later, production at the mill, one of Serbia’s main exporters and employers, has been temporarily suspended. The steel mill has been running up large losses in the last few years and, until the government is able to re‑privatise the company, it will have to secure at least the maintenance costs, adding to government liabilities. Overall, in a difficult economic environment, the privatisation process has been very slow and even partially reversed. Sustaining competitive markets remains a key challenge.

Market entry and exit

Some steps have been taken to facilitate market entry. The ‘one-stop shop’ has further shortened the registration procedure, which now takes only two days on average (five days is still the legal maximum, with the principle of ‘silent consent’ in place). The registration fee stands at € 45 and the required capital for setting up a limited liability company has been reduced from € 500 to less than € 1. The setting‑up of new businesses is still seriously hampered by difficulties in obtaining construction permits and the process of dealing with construction permits and land remains costly and lengthy. Regulatory reform (the ‘regulatory guillotine’) is ongoing, although it has slowed lately. In an attempt to revive it, a new Strategy for regulatory reform 2011-2014 was adopted in late 2011.

The Law on Bankruptcy has introduced automatic bankruptcy for companies if their accounts are blocked for a certain period and, since the beginning of 2012, this period has been reduced from two to one year. Under the Law, the National Bank of Serbia is required to provide the commercial courts with information about these companies, so that bankruptcy proceedings can be launched. In the first half of 2012, it notified the courts about 11,231 companies with blocked accounts — about 50% more than in the same period the previous year. Overall, some steps have been made to simplify and speed up market entry, but red tape and difficulties in obtaining construction permits remain important obstacles. The bankruptcy procedure for companies that have been over-indebted has speeded up.

Legal system

The establishment of a real estate registry and a digital registration system has been completed. The new system will be able to provide quick and accurate information about real estate ownership, and this should facilitate contracts and investment decisions. Restitution legislation has been adopted but its enforcement remains to be tested. The Law on Planning and Construction and its amendments have led to differences in interpretation and thus in implementation at municipal level, which increases uncertainties for investors.

The uneven execution of laws, slow or non-existent enforcement, and proliferation of different administrative fees and charges increase the uncertainty and the cost of doing business. Moreover, the informal economy remains strong and is a major hindrance to fair competition and business development. Overall, legal predictability and enforcement of court decisions remain weak. Corruption and unclear property rights continue to hamper economic activities.

Financial sector development

The Serbian financial system is dominated by the banking sector, which had a 92% share of total assets in 2011. A total of 33 banks are operating in the country, unchanged from a year earlier. By the end of March 2012, foreign ownership had risen to about 74% of the banking sector and 21 banks operating in Serbia are owned by foreign entities. The five largest banks accounted for 47% of the total assets of the sector. There are nine state-owned banks, holding about a 19% market share, while the market share of domestic private banks is small at around 7%. Since the end of 2011, banking sector assets increased by 8.5%, accounting for approximately 94% of GDP by the end of July.

Capitalisation of the banking sector declined but still remains high. The average capital adequacy ratio stood at 17.3% in March 2012, well above the prescribed minimum of 12%. Deposits, of which over 75% are denominated in foreign currency, represent around 57% of the total liabilities of the banking sector. Similarly, loans account for some 60% of banking sector assets. About 70% of the loans are denominated in or linked to a foreign currency, predominantly the euro. More than half of all loans are granted to the corporate sector, while close to a third are extended to households. The quality of bank assets worsened, with the gross non-performing loans ratio reaching 20.4%, from 17.1% a year before. Banks profitability deteriorated in the course of 2011 and the return on equity decreased to just 0.2%. However, this negative development was mainly caused by the significant loss accumulated by Agrobanka. The bank has been put in receivership in the end of 2011, after the central bank established that the level of the bank’s capital is not consistent with the degree of risk taken by the bank. The financial situation of Agrobanka did not improve and, in May, the Central Bank revoked its licence and granted an operating licence to the newly-established Nova Agrobanka, which took over all the liabilities and part of the receivables of the old bank. The new bank has been partially recapitalised by the Deposit insurance agency and the government. Following the failure of Agrobanka, in August the central bank took additional measures to increase its supervision of the banking system, focusing in particular on banks with significant share of custody accounts and state ownership. Overall, the banking sector remained well‑capitalised and liquid, but a weakening economy and depreciating dinar point to a growing risk of further deterioration in the quality of the loan portfolio. Bank supervision has been tightened, following the discovery of significant losses in one of the small banks.

The main index BelexLine of the Belgrade stock exchange fell by around 20% in 2011. This negative trend continued in the first nine months of 2012 and the index lost a further 10.6%. At the end of 2011, there were 28 insurance companies operating in Serbia, up from 26 a year earlier. Altogether 21 of them are in majority foreign ownership, while seven rely on predominantly domestic capital. The insurance sector’s share in the total financial sector increased slightly, to 4.4% in 2011. The annual growth of premiums stood at a modest 1.4%, down from a 5.6% rise in 2010. The market was dominated by the non-life insurance segment, which accounted for 83% of the total. Overall, the role of the non-banking financial sector remained marginal.

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

Existence of a functioning market economy

Economic recovery has stalled and macroeconomic stability has weakened as domestic and external imbalances increased. Delayed reforms and the economic slowdown have exposed and aggravated structural weaknesses, such as low employment and volatility in prices and exchange rates. State presence and influence in the economy remains significant and has even increased. The private sector continued facing major obstacles. Key laws are in place, but the rule of law remains weak. Overall, the functioning of market mechanisms is hampered by distortions, excessive state involvement and legal uncertainty.

Human and physical capital

At present, there is still a large gap between demand for and supply of skilled workforce — with some professions oversupplied and others lacking. Enrolment in education in both primary and secondary schools is high and is increasing over time. The number of people with higher education is low (currently 6.5 % of the population) but is envisaged to increase sharply in the course of this decade according to the draft education strategy for the period until 2020. Important elements of the strategy are the introduction of mandatory secondary education and the plans to reform vocational training, bringing it closer to the needs of the labour market. To back the achievement of its goals, the strategy envisages an increase in public spending on education to 6% of GDP in 2020, up from 4.2% in 2011. Overall, further steps remain to be taken to implement a strategy of reforming the education and training system in order to improve its performance and respond better to labour market needs.

Serbia continues to need significant investments to improve and upgrade its physical infrastructure. Government investments have been constrained by a difficult budgetary situation and declined to 3.5% of GDP. Nevertheless, works on major transport corridors (such as pan-European Corridor X) progressed, albeit slowly, but investments outside the main corridors are lagging behind. Energy efficiency continues to be low and energy infrastructure, in particular electricity generation and distribution, needs further investments. Net FDI more than doubled in 2011, reaching 5.8% of GDP. A large share of the inflows related to a single non‑greenfield investment in the retail sector and part of the remaining inflow has benefited from budget subsidies. Besides trade, the other two sectors which attracted most of the FDI were manufacturing and financial and insurance activities. Overall, the physical infrastructure needs large investments. Government investments have been constrained by an increasing budget deficit and FDI has been channelled mostly to non-tradable sectors.

Sectoral and enterprise structure

The shares of agriculture and industry edged up slightly in 2011, reaching 10.4% and 27.7% of total value added respectively, while the share of services fell from 63.0% to 61.9%. Employment declined across the three sectors but the fall was more marked in agriculture — its share in total employment dropped from 21.5% in April 2011 to 20.4% in April 2012. The share of industry remained broadly unchanged and employment in services increased to 53.4% of the total. Weak tax and expenditure policies and poor law enforcement, including in the fight against corruption, continue fuelling a sizeable informal sector. Overall, th