[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 6.11.2007

SEC(2007) 1432

COMMISSION STAFF WORKING DOCUMENT

THE FORMER YUGOSLAV REPUBLIC OF MACEDONIA 2007 PROGRESS REPORT accompanying the COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Enlargement Strategy and Main Challenges 2007-2008

{COM(2007) 663 final}

TABLE OF CONTENTS

1. Introduction 4

1.1. Preface 4

1.2. Context 5

1.3. Relations between the EU and the former Yugoslav Republic of Macedonia 5

2. Political criteria 6

2.1. Democracy and the rule of law 6

2.2. Human rights and the protection of minorities 12

2.3. Regional issues and international obligations 16

3. Economic criteria 18

3.1. The existence of a functioning market economy 18

3.2. The capacity to cope with competitive pressure and market forces within the Union 22

4. Ability to assume the obligations of membership 24

4.1. Chapter 1: Free movement of goods 24

4.2. Chapter 2: Freedom of movement for workers 26

4.3. Chapter 3: Right of establishment and freedom to provide services 26

4.4. Chapter 4: Free movement of capital 27

4.5. Chapter 5: Public procurement 28

4.6. Chapter 6: Company law 29

4.7. Chapter 7: Intellectual property law 30

4.8. Chapter 8: Competition policy 32

4.9. Chapter 9: Financial services 33

4.10. Chapter 10: Information society and media 34

4.11. Chapter 11: Agriculture 36

4.12. Chapter 12: Food safety, veterinary and phytosanitary policy 37

4.13. Chapter 13: Fisheries 39

4.14. Chapter 14: Transport policy 39

4.15. Chapter 15: Energy 41

4.16. Chapter 16: Taxation 42

4.17. Chapter 17: Economic and monetary policy 43

4.18. Chapter 18: Statistics 44

4.19. Chapter 19: Employment and social policy 45

4.20. Chapter 20: Enterprise and industrial policy 46

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 53

4.25. Chapter 25: Science and research 56

4.26. Chapter 26: Education and culture 58

4.27. Chapter 27: Environment 58

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 63

4.32. Chapter 32: Financial control 64

4.33. Chapter 33: Financial and budgetary provisions 65

STATISTICAL ANNEX 66

COMMISSION STAFF WORKING DOCUMENT

The former Yugoslav Republic of Macedonia 2007 Progress Report

INTRODUCTION

Preface

The European Council of 17 December 2005 granted the status of candidate country to the former Yugoslav Republic of Macedonia. This is the second report on progress made by this country in preparing for EU membership.

The report:

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

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

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

- reviews the former Yugoslav Republic of Macedonia's capacity to assume the obligations of membership, that is, the acquis expressed in the Treaties, the secondary legislation, and the policies of the Union.

The period covered by this report is from 1 October 2006 to early October 2007. 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 permits an objective assessment.

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

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

Context

The European Council of December 2005 granted the status of candidate country to the former Yugoslav Republic of Macedonia. The Stabilisation and Association Agreement (SAA) between the former Yugoslav Republic of Macedonia and the EU was signed in April 2001 and entered into force in April 2004.

Relations between the EU and the former Yugoslav Republic of Macedonia

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

The former Yugoslav Republic of Macedonia has made progress in the implementation of the Stabilisation and Association Agreement (SAA) and complies with most of its obligations. Efforts have been made to improve implementation of SAA provisions in the field of competition, industrial property rights and the telecommunication market. However, further progress is needed in these areas.

Political and economic dialogue between the EU and the country has continued through the SAA structures. The SAA Committee met in June and the SA Council in July. Seven sectoral sub-committees have been held since November 2006.

The EU provides guidance to the authorities on reform priorities through the European Partnership. Progress on these reform priorities is encouraged and monitored through the bodies set up under the SAA. Based on the European Partnership, the 2006 Regular Report and comments made by the Commission, the former Yugoslav Republic of Macedonia adopted a national programme for the adoption of the acquis in April.

Visa facilitation and readmission agreements between the EU and the former Yugoslav Republic of Macedonia were signed in September. The new arrangements are important to facilitate people-to people contacts. They will simplify procedures for issuing visas for certain categories of citizens of the former Yugoslav Republic of Macedonia, including students, academics, businesspeople, journalists and tourists. They will also keep the cost of visas at its current level and, in some cases, lead to visas free of charge. This will allow more interaction between citizens of the EU Member States and the citizens of the former Yugoslav Republic of Macedonia.

As regards financial assistance , the new Instrument for Pre-Accession Assistance (IPA) started on 1 January 2007. The 2007-2009 Multi-Annual Indicative Planning Document (MIPD) for the former Yugoslav Republic of Macedonia was adopted in May. In 2007, the national programme amounted to € 58 million. In addition the country continues to benefit from regional and horizontal programmes. Cross border cooperation is used to promote dialogue between local and regional authorities of neighbouring countries.

The national CARDS allocations to the former Yugoslav Republic of Macedonia since 2002 amount to € 195.5 million. Assistance focused on support to the implementation of the Framework Agreement, strengthening of administrative capacity with particular emphasis on the rule of law sector, economic development, social cohesion and support in the field of the environment.

As regards financial support to civil society , two projects have been launched and co-financed by the EU with € 1.2 million to support the Civil Society Foundation and seven Civil Society organisations. The aim is to promote the protection of human rights and to strengthen democracy and good governance.

CARDS assistance is implemented by the European Agency for Reconstruction and preparations are ongoing for the transfer of that responsibility to the Commission Delegation in Skopje. IPA assistance is implemented by the Delegation in Skopje. The EU aims to transfer the management of IPA Funds to the national authorities under the Decentralised Implementation System (DIS) once the national authorities have developed the necessary capacity to assume this responsibility. Further attention is needed to developing accountable administrations and institutions with appropriate capacity.

As regards Community programmes, the former Yugoslav Republic of Macedonia signed a memorandum of understanding for participation in the 7th Framework Programme for research and technological development in June 2007.The former Yugoslav Republic of Macedonia received support from EU member states through the EU Monitoring and Information Centre for Civil Protection (MIC) to help deal with forest fires during the summer.

POLITICAL CRITERIA

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

Democracy and the rule of law

Parliament

The Public Prosecutor’s Office initiated procedures against 20 perpetrators of election irregularities relating to the parliamentary elections in July 2006. No verdicts have yet been handed down. The response of the judiciary has been weak, despite the increased severity of the electoral code. The State Anti-Corruption Commission and the State Audit Office assessed the financing of the political parties during the elections. They found that campaign costs had exceeded the limits set by law, and that many unreported donations had been received, in particular in the form of under-priced media advertising. The electoral code does not, however, penalise such donations.

The first-ever plenary session of parliament on the process of EU integration took place in December, and the Committee on EU Affairs remained among the most active committees. A committee on equal opportunities and an oversight committee on interception of communications were constituted. The oversight committee on security and intelligence issues finally started its work, and annual reports from the Intelligence Agency and the Administration for Security and Counter-intelligence were submitted.

However, the normal functioning of the parliament was disrupted by a dispute between the government and the main ethnic Albanian opposition party (Democratic Union for Integration) over the application of the double majority mechanism and the proper functioning of the committee on relations among communities. The double majority mechanism is a constitutional principle and a key guarantee for the non-majority communities. The dispute triggered a 4-month boycott of parliament by DUI. The work of the three committees chaired by DUI members, on finance and budget, culture and health was put on hold. Following intensive political dialogue with VMRO-DPMNE ( Internal Macedonian Revolutionary Organisation-Democratic Party for Macedonian National Unity ), DUI returned to parliament at the end of May. However, establishing an inclusive dialogue within the parliament remained difficult. Several major items of legislation were held up, notably in relation to judicial reform.

A dialogue between the government coalition and the opposition on issues of mutual concern was gradually established, although outside the parliament.

On 25 September there was a confrontation in parliament, which escalated into physical violence, between the ethnic Albanian parties. Clashes among MPs from DUI, PDP and DPA broke out during the debate on the amendments to the Electoral Code. Other people were also injured, including journalists.

In addition, a backlog of EU-related legislation built up in the second half of 2006. The government, in pursuit of its stated objective of having all the legislation for 2006 and 2007 adopted by the end of the summer, stepped up its efforts on legislative drafting. It managed to catch up partially, but without always giving sufficient attention to the quality and enforceability of legislation.

Parliament has so far failed to enact new rules of procedure that would streamline parliamentary procedure and clarify the use of the Albanian language by committee chairs. Little attention has been given to providing adequate budget and staffing for the parliament, in particular to support the work of the committees.

Overall, some efforts were made to speed up the legislative process. However, the functioning of the parliament was seriously disrupted by insufficient consultation between government and opposition, the boycott of parliament by DUI and political wrangling, which slowed down legislative activity. All political forces should commit themselves to working constructively within the democratic institutions.

Government

The government coalition remained stable but tensions were occasionally apparent between the coalition partners, which pointed to a lack of effective internal coordination. The Party for Democratic Prosperity (PDP) joined the government coalition, taking over the local self-government portfolio. However, two of the three PDP deputies decided to stay in the opposition. The government underwent three minor reshuffles, involving mainly the ethnic Albanian coalition partners.

The government's work focused on the process of EU integration and NATO accession, as well as on the implementation of the Ohrid Framework Agreement. The government adopted a national plan for adoption of the acquis, which was subsequently endorsed by the parliamentary committee on EU affairs.

Cohabitation between the government and the President, who belongs to an opposition party, has been made all the more difficult, as VMRO-DPMNE disputes the validity of the President’s election in 2004. Members of this party did not attend the President’s annual address to parliament. The executive has nonetheless managed to coordinate on key foreign policy issues, such as its position on Kosovo.

Decentralisation has continued to make progress, notably thanks to a spirit of cooperation between the central authorities and municipalities. A law on regional development was enacted. The second phase of the fiscal decentralisation process was launched in July with 42 of the 85 municipalities considered ready. The grants currently planned to fund education, welfare, fire and rescue services and cultural institutions will be replaced with block grants . Municipalities will henceforth have to manage funds and decide on priorities themselves. The debts of the municipalities have been substantially reduced. The approach to financing education has been improved but remains inadequate. Municipal tax collection has also improved, though it is still far from satisfactory. Internal audit units have been established in some 20 municipalities.

However, funding of the tasks decentralised to the municipalities remains insecure. Some municipalities still have sizeable debts and have had their accounts blocked. No steps have been taken to develop the capacity of the municipalities to manage state-owned property. The qualitative and quantitative capacities of some municipalities are rather low. Coordination and information-sharing between municipalities remains limited.

Public administration

In the area of public administration reform, implementation of the law on civil servants passed in 2000 is continuing. Some ministries are using performance-based appraisal. The Civil Service Agency (CSA) has played its role in disciplinary procedures more actively, which have increased in number: from January to May, 59 disciplinary procedures were initiated against civil servants compared to 44 for the whole of 2006. In August, a government decree established new human resource management units within the administration with the objective of developing administrative capacities.

The code of ethics for civil servants was amended to include the obligation to report all illegal acts. A code of ethics for local officials has been adopted. Further steps have been taken to implement the law on freedom of information. In addition, a citizens' charter was introduced in January as part of the government's work programme, and information points have been set up in some ministries which provide public services. The resources provided to the Ombudsman have been increased. Cooperation of public bodies with the Ombudsman has also improved; in 2006, state bodies carried out the instructions of the Ombudsman in 75% of cases. The General Secretariat of the Government carried out a number of training events in the field of strategic planning and published a manual for policy-making. A regulatory reform to simplify administrative procedures was launched in November. An inter-ministerial committee to examine the audit reports of the state administrative bodies was established.

The structure of line ministries has been adapted to deal with preparations for EU accession by creating sectors for EU affairs. These sectors each consist of at least three units: adoption of the acquis ; programming and implementation of IPA funds; and internal monitoring and documenting of EU-related activities. The sector for the implementation of the Ohrid Framework Agreement was converted into a new Secretariat. Some progress has been made in the training of civil servants at local level.

The new police law, a key priority of the European Partnership, was adopted in October 2006. Steps were undertaken to implement the key elements of the reform and prepare for the full entry into force of the law in November 2007. These included: reorganisation and clearer assignment of competences in the Ministry of Interior; implementation of an integrated border management strategy; and the decentralisation of the police by, among other measures, reducing the present twelve regional offices to eight and creating a new system for appointing local police station commanders ( See also Chapter 24 – Justice, Freedom and Security) .

There was progress on defence reform as part of preparations for NATO membership. The general level of security remained satisfactory. The police further improved their country-wide capacity to patrol and investigate.

However, strengthening of the CSA is still necessary, in particular to ensure that it can play a full role in the performance assessment of civil servants and in disciplinary procedures. A number of assessment reports were not submitted to the CSA. The introduction of career salary supplements stipulated in the civil servants law was postponed until the end of 2007, which removed the possibility of linking appraisals to performance-based bonuses.

The large-scale dismissals of officials following the change of government in 2006 illustrated the politicisation of appointments at all levels in the public administration and disrupted its functioning well into 2007. Time and expertise were lost in reorganisation and extensive changes of personnel in the public administration. This contributed to the build-up of a legislative backlog and deprived the government of valuable expertise which could have ensured better drafting of legislation and timelier implementation. Recruitment and promotion should be regulated by objective and merit-based criteria and a clear distinction between the political and the administrative level should be observed.

Few ministries are preparing strategic plans and fewer still are implementing them. Administrative capacity for both strategic planning and policy development needs to be further strengthened. Capacity to prepare legislation, and hence the quality of draft laws, continues to be uneven. This problem has been exacerbated by the government's commitment to rapidly eliminating the legislative backlog from 2006. The transparency of the legislative drafting process remains limited and prior consultation of stakeholders unsystematic.

In April, the Secretariat for European Affairs demoted 40 employees (two thirds of the permanent staff) on the grounds that they had not been lawfully appointed, a ruling which was subsequently upheld by the CSA. The method applied as well as its timing affected to some degree the functioning of the Secretariat. Adequate human and financial resources to implement the SAA and the National Programme for the Adoption of the acquis (NPAA) are lacking. The structural reorganisation of the ministries has tended to be geared to accommodating staff changes rather than responding to strategic and functional planning needs. In the absence of a general strategy, there is no comprehensive training for all civil servants. Some ministries submitted annual training programmes, but these were not accepted. Training remains ad hoc and largely funded by international donors. Efforts made by the CSA to introduce the national system for coordinating civil servants’ training have met with a limited response.

The law on access to information is not fully implemented as many public bodies which hold information of public interest are not fully prepared or are unwilling to facilitate access to it. In addition, the administrative capacity of the commission for the protection of the right to free access to public information remains weak. Insufficient training and information have been provided both to the holders of the information and to the public.

The police law has not yet entered into force. Management of available resources, including training, is not yet done in a modern and effective manner, nor is there adequate budgetary planning. An effective mechanism for independent oversight and investigation of cases of death and serious injury by law enforcement officials is lacking. In 2007 there was a ruling of the European Court of Human Rights against the country for a violation of Article 3 of the Convention on account of the failure of the authorities to conduct an effective investigation into allegations of police ill-treatment.

More efforts are needed to ensure the accountability of the intelligence services to parliament and to clarify their competences, in particular as regards surveillance activities.

Overall, reforms are gradually being implemented in the area of public administration. However, there have been limited results, in particular due to lack of a strong commitment to meet the announced objective of a more transparent, professional and depoliticised public administration and better organised public services. Public administration remains weak and inefficient. Implementation of the police reform is underway but still at an early stage.

Judicial system

Some progress was achieved in implementing the strategy on judicial reform, one of the key priorities of the European partnership . The new court structure is gradually being established. Five specialised court departments have been established to deal with organised crime and corruption, one of which is fully operational. Steps have been taken to make the academy for the training of judges and prosecutors functional. New IT systems have entered into use. The implementation of the laws on litigation procedure and on enforcement of civil judgements is gradually having an impact on the enforcement of court decisions. Ministry of Justice statistics point to an increase in solved cases by 8% in the first six months of 2007.

The reformed Judicial Council began operating in January with 10 of its 15 members in place. In October 4 additional members were appointed. Eight procedures have been initiated against 10 judges. One judge has been dismissed and the remaining procedures are ongoing.

However, the judiciary continues to suffer from serious deficiencies, in particular as regards lack of independence and low efficiency. Completing the legislative framework through the enactment of laws on the public prosecutor's office and the council of public prosecutors is needed to improve the functioning of the judiciary. The Public Prosecutor was dismissed immediately after the new government took office, and the position remained vacant for four months due to difficulties in reaching a consensus on the nomination.

The deadlock on the appointment by parliament of the 5 remaining members of the Judicial Council disrupted its functioning, limiting its capacity to play a more active role in strengthening the independence and impartiality of the judiciary, hindering important judicial reforms. Broad political consensus is required to proceed with the reform and its implementation.

The courts' budget remains insufficient. Efforts on training will have to be sustained to allow for the effective implementation of the reform. The new law on misdemeanours has applied since the end of May, but it has not been fully implemented, as necessary amendments to many laws remain pending. The continuing delay in setting up the Administrative Court, which should have been operational in May, created a gap in jurisdiction over second-instance appeals in administrative cases.

Overall, steps were undertaken to gradually address the deficiencies of the judicial system. However, a number of delays were encountered, notably as regards the appointments to the Judicial Council and the reform of the prosecution service. A broader consensus is required to proceed with reforms. Judicial reform remains a major challenge, and a sustained track record of implementation has yet to be established. (See also Chapter 23 – Judiciary & fundamental rights)

Anti-corruption policy

Progress was made in anti-corruption policy and measures. The legal and institutional framework was strengthened, and strong political commitment yielded some results. The parliament ratified the United Nations Convention against Corruption. Most of the recommendations of the Council of Europe Group of States against Corruption (GRECO) have been implemented.

Amendments to the anti-corruption law have been enacted to prohibit political parties from receiving and spending funds from anonymous sources. The amendments reinforced the obligation on all appointed and elected officials to declare their assets, and made it obligatory for these to be published on the State Anti-Corruption Commission website. A law on conflict of interest was adopted. A number of misdemeanour procedures were brought against officials who failed to submit asset declarations following the elections in 2006 and a few court decisions have been issued.

There were court decisions in a number of high profile cases, including those of a former Deputy Minister, a former Customs Director, judges, lawyers, notaries, and police officers.

Determined efforts were made to prevent and punish corruption. The renewed State Anti-Corruption Commission began its five-year mandate and the government adopted an Action Plan. Cooperation with the Public Prosecutor's Office and other state bodies improved. Law enforcement agencies, in particular the Ministry of Interior and the public prosecution service, and also the customs administration, demonstrated a stronger determination. The capacity to investigate corruption was reinforced and coordination among law enforcement agencies improved. Toll-free telephone hotlines have provided a channel for the public to report cases of corruption.

However, corruption is widespread and constitutes a very serious problem. The approach to tackling corruption is not yet comprehensive and the Action Plan lacks a clear budget allocation. The NGO sector remains weak, politicised and divided in this field.

The high number of legislative acts has created a fragmented legal system which makes implementation and monitoring more difficult. Attention must be paid to the loopholes in the legislation identified by the State Audit Office and the state commission, as well as to the quality of the legislation in order to increase its clarity and consistency. More effective implementation of the preventive measures provided by the anti-corruption legal framework, including the law on general administrative procedures and the law on free access to public information, would narrow the opportunities for corruption. Overall, the anti-corruption legal framework needs to be reviewed and strengthened, in particular with a view to ensuring effective implementation.

Lack of human and technical resources continues to impede the work of the state commission. Although a large number of officials have declared their assets, the commission's capacity to publish them is limited, checking remains weak and sanctions lenient.

A track record demonstrating the capacity of the judiciary to take decisions against corruption at all levels needs to be established. Improved coordination between the police and the prosecution office during investigations is needed. Delivery and enforcement of court decisions need to be strengthened.

There is still neither a unified methodology nor a system for collecting and sharing intelligence and for mutual access to databases. This hampers more effective coordination among law enforcement agencies and watchdog bodies. Furthermore, there has been limited follow-up to the review of discretionary powers of ministers and other officials in the administration.

Overall, implementation of the framework for fighting corruption has yielded some results, in particular a number of high level prosecutions and convictions. However, legal reforms are still in early stages of implementation and a more comprehensive and consistent approach across all sectors would improve their impact. Corruption is widespread and constitutes a very serious problem. Considering the challenges the country has to meet, sustained political commitment is required (See also Chapter 23 – Judiciary & fundamental rights).

Human rights and the protection of minorities

Observance of international human rights law

As regards ratification of human rights instruments, the inter-ministerial committee set up in 2006 to monitor the obligations stemming from the ratification of Protocol 1 to the European Social Charter has continued its work. Ratification of the revised protocol No 2 from 2005, reforming the control mechanism, is still pending.

In 2006 the European Court of Human Rights (ECtHR) delivered 7 judgements finding that the former Yugoslav Republic of Macedonia had violated at one article of the ECtHR. In 1 case the ECtHR ruled that there was no violation of the ECHR.

A total of 343 new applications regarding the country were made to the ECtHR from 1 January to 31 December 2006. The total number of pending cases before the Court regarding the former Yugoslav Republic of Macedonia is 1033.

As regards promotion and enforcement of human rights, the inter-ministerial body for protection of human rights met for the first time in 2007 to follow up the recommendations by the UN and the Council of Europe on elimination of all forms of discrimination.

Civil and political rights

As regards prevention of torture and ill-treatment and fight against impunity , the capacity to investigate ill treatment has been further developed, notably by means of training. In the past 10 months the Sector for Internal Control and Professional Standards in the Ministry of the Interior has dealt with only one case of ill-treatment and two cases of illegal arrest. This marks a significant decline in the number of cases compared with previous years. Criminal charges were brought against the officers involved. The 2006 annual report of the Ombudsman's office indicates an improvement in police behaviour towards people held in custody.

The Ministry of the Interior developed an action plan to implement the code of police ethics, which envisaged adequate training and funding. Cooperation between the Ombudsman and the Sector for Internal Control and Professional Standards in the Ministry of the Interior improved significantly, at the initiative of the Ministry of the Interior. In 2006, 83% of the recommendations made by the Ombudsman in this area were followed up.

Use of informative talks by the police was regulated by the 2006 police law thus improving the transparency of detention procedures.

There is still limited access to justice for appeals against acts and decisions by civil servants affecting individual citizens' rights and obligations. There are long delays in the review of administrative decisions carried out by second-instance administrative commissions. The quality of decisions is poor – the Supreme Court accepted 42% of the appeals in 2006. The majority of the recommendations made by the Ombudsman that have not been followed up relate to these commissions.

As regards the prison system , the Government adopted a programme to improve conditions in prisons. However, no significant progress has been made. During 2006 there were 6 deaths and 3 suicides in prisons, compared with 6 and 5 respectively in 2005. Limited progress has been made in the implementation of the recommendations of the Council of Europe's Committee for the Prevention of Torture and Inhuman and Degrading Treatment or Punishment on the conditions of detention.

The report by the European Parliament's temporary committee on the alleged use of European countries by the CIA for the transport and illegal detention of prisoners, which was approved by the European Parliament, noted a lack of thorough investigation of the Khaled El-Masri case by the authorities. It urged the authorities to carry out investigations and parliament to set up a committee of inquiry. At a special session of the oversight committee on security and intelligence issues, the Government maintained that it had not been involved in any illegal detention.

The Law on Interception of Communications was enacted, satisfactorily filling the previous legal vacuum. Implementing legislation was adopted in January on the special arrangements for protection of data collected by authorised interception of communications. An oversight committee was set up in parliament.

The legal framework on freedom of expression and the media now meets most international standards. However, despite new legal procedures to ensure the independence of the Broadcasting Council and the public service broadcaster, these bodies remain vulnerable to political interference. The economic and financial independence of the public service broadcaster and the regulatory body has not been sufficiently ensured. The quality of the service provided by the public service broadcaster is inadequate; that of the private broadcasters is satisfactory. The broadcast media are dominated by a large number of private TV stations, while the public broadcasters are weak. Ownership of the leading print media is highly concentrated, while the remainder are financially fragile. The media continue to be subject to significant political influence. ( See also Chapter 10 – Information society and media)

As regards freedom of assembly and association , the Law on civic associations and foundations has been amended to provide for such bodies to be registered in the Central Registry. In May 2007, 40 trade unions were registered in accordance with the Labour Relations Law.

The Government adopted a strategy for cooperation with civil society organisations and developed an action plan. One of its aims is to involve civil society more in the policy development process and in legislative drafting. The activities of civil society are still hampered by lack of finance and heavy dependence on foreign sources of financing. The 2006 Law on Sponsorship and Donations has not been implemented pending the necessary bylaws. The transparency of the criteria for allocating grants from the state budget to NGOs remains to be strengthened.

As regards freedom of religion , the Law on the Legal Status of Churches, Religious Communities and Religious Groups has been enacted. The revision provided for more liberal procedures for registration of religious institutions. Compulsory religious education was introduced for primary school pupils, who can choose between religious instruction and history of religion.

Overall, further steps were taken to strengthen civil and political rights. However, continued efforts are needed.

Economic and social rights

As regards women's rights , parliament adopted a declaration which condemned all forms of violence against women and within the family and committed parliament to give these issues priority and to strive towards greater gender balance. Implementation of the 2006 legislation on equal opportunities is slowly progressing. Some progress has been made in areas such as education, health care, political participation and the non governmental sector. Equal opportunities have been set up in a number of municipalities. 33 out of 120 members of parliament as well as 3 members of the government out of 23 are women. However, the situation of women in rural areas and of women from minorities or who are victims of domestic violence or trafficking remains a cause for concern. The definition of rape in criminal law remains very narrow thus making successful prosecutions highly unlikely. Stronger measures against sexual harassment are needed.

A sector dealing with human trafficking and illegal migration was set up within the organised crime department in the Bureau for Public Security. Also a memorandum of understanding was signed between the Ministry of the Interior and an NGO to give new impetus to the fight against trafficking. However, progress has been limited in this field.

Implementation of the action plan for the protection of children's rights , adopted by the government in 2006, is slow.

As regards socially vulnerable and /or persons with disabilities , the mental health strategy which defines and protects the rights of patients has been adopted. Conditions in psychiatric hospitals remain a matter of concern. There is too few qualified staff with appropriate training. The deaths of six patients at the Demir Kapija special institution for the mentally disabled in early 2007 underlined the urgent need to improve the institutional care provided for socially vulnerable and disabled people and to further develop community-based alternatives.

As regards labour rights and trade unions, tripartite social dialogue remained very formal and bipartite social dialogue is very weak. The criteria laid down by law for determining who should take part in the social dialogue are not implemented. The lack of representativeness is currently one of the factors hindering the development of an all inclusive social dialogue. It is also suffering from a lack of capacity of the social partners.

In the area of anti-discrimination policies, further efforts are required to fight against all forms of discrimination. A comprehensive law on anti-discrimination should allow for more effective mechanisms to identify, pursue and penalise all forms of discrimination by state and non-state bodies against individuals or groups.

As regards property rights , the process of return of property confiscated during the Yugoslav regime still has not been completed. No progress has been made on the issue of return of properties of the Orthodox church and the Muslim community.

Overall, there has been limited progress. Significant additional efforts are needed.

Minority rights, cultural rights and protection of minorities

As regards cultural rights, the parliament ratified the UN Convention on the Protection and Promotion of the Diversity of Cultural Expressions.

As regards minorities , inter-ethnic tensions have remained at a low level. Several constructive gestures were made by the government. These include the Prime Minister's address to students at the South-East Europe University in Tetovo, the authorisation to erect a statue of Skanderbeg in Skopje and the Law on Public Holidays, which recognised the different ethnic and religious holidays. Dialogue and confidence-building among communities is slowly progressing. The Ohrid Framework Agreement remains a crucial guarantee of the rights of the ethnic communities in the country. Further progress has been made on its implementation, for instance regarding equitable representation, local self government and use of languages.

In 2006 the Ombudsman's office received a very limited number of complaints concerning discrimination and equitable representation (11 compared with 4 in 2005).

Some steps have been taken to ensure equitable representation across the public sector. A comprehensive strategy on equitable representation, along with an action plan, was adopted by the government. Increased resources have been allocated for implementing the strategy. 3 of the 8 members of the Judicial Council elected by the judges are from the non-majority communities. The army has made some progress on implementing its strategy on equitable representation.

Some of the committees for interethnic relations set up at local level to promote the concerns of the various communities are contributing effectively to participation by all communities in public life. Introduction of bilingual road signs has been initiated.

However, integration of ethnic minorities is quite limited. Most of them remain at a disadvantage with respect to education and employment. The increase in representation of the non-majority communities remains uneven among individual ministries. The number of non-majority communities' members in the army remains low. Slow progress has been made within the police overall, and none in senior ranks, in particular within the criminal police and the department for security and counter-intelligence The strategy for equitable representation is not yet fully satisfactory, notably in terms of its targets and sanctions. Committees for inter-ethnic relations have not been set up in all the municipalities concerned and are often not effective. Sustained commitment to implementing the regulatory framework for use of minority languages is required. There are not enough qualified interpreters for fully effective implementation of the law on use of minority languages in criminal proceedings and in local and central government.

As of August 2007 there were 1,907 refugees/asylum seekers in the country, of whom the vast majority were Roma from Kosovo. The number who received recognised refugee status since the Law on Asylum entered into force has remained unchanged (28). Most applicants have been granted humanitarian protection for up to 12 months. Concerns persist regarding the independence of the government commission that deals with appeals against first-instance decisions on refugee status. The Supreme Court's handling of appeals is often perfunctory. The number of registered internally displaced persons (IDPs) remained fairly stable (755). The government decided to pay the rent for IDPs accommodated in private houses and to grant them monthly allowances.

As regards the Roma , the implementation of the four action plans prepared by the Ministry of Labour and Social Policy in the framework of the 2005-2015 Decade of Roma Inclusion has continued. Some projects were approved for financing under the Roma Education Fund set up as part of the Decade. However, efforts to meet the objectives of the National Strategy for Roma have yielded no visible results. Discrimination against Roma people continues. The enrolment rate in primary education is below 30 %, and high drop-out rates are still recorded, in particular among girls. There is evidence of police violence and targeting against the Roma. Unemployment among the Roma remains extremely high, and social and civic marginalisation is common. No specific measures have yet been taken to promote access to the general employment programmes. No solution has yet been found to address the issue of lack of legal status of Roma without citizenship or with denied refugee status.

Overall, inter-ethnic relations have improved. However, the spirit of the Ohrid Framework Agreement needs to be upheld consistently, through a consensual approach and readiness to compromise. There has been only limited progress on the situation of the Roma, which continue to face very difficult living conditions and discrimination, especially in the areas of education, social protection, health care, housing and employment.

(See also Chapter 23 – Judiciary and fundamental rights)

Regional issues and international obligations

The former Yugoslav Republic of Macedonia has maintained full cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY). The trial of the only case ("Ljuboten") for which ICTY indicted citizens of the former Yugoslav Republic of Macedonia, including the former Minister of Interior, started in April in The Hague. A law on cooperation with ICTY came into force in June 2007 which, inter alia, provides for monitoring by the OSCE and the EU, training of judges and prosecutors and the confiscation of assets. The four files for which the Tribunal decided not to pursue its investigations, in view of its "exit strategy" (UNSCR 1534/04), have not been referred back to the national authorities for possible further investigation, pending the upgrading of the judicial structures and the fulfilment of the other necessary pre-conditions to ensure due process. The judicial reforms required to ensure proper handling of the cases when they are returned have not yet been completed.

As regards the International Criminal Court (ICC), the former Yugoslav Republic of Macedonia still maintains a bilateral immunity agreement with the United States of June 2003 granting exemptions from ICC jurisdiction which does not comply with the EU Common Positions on the integrity of the Rome Statute as well as related EU guiding principles on bilateral immunity agreements. It needs to align with the EU position.

Regional cooperation and good neighbourly relations form an essential part of the process of moving towards the European Union. The country has continued to actively participate in other regional initiatives: Stability Pact and the process of its transition into a more regionally owned cooperation framework with a strengthened South East Europe Cooperation Process (SEECP) and a new Regional Cooperation Council (RCC). The country hosted the first meeting of the Council of Ministers of the Energy Community Treaty after the Treaty entered into force. 2007. The former Yugoslav Republic of Macedonia participated actively and constructively in the negotiations for the new Central European Free Trade Agreement which entered into force in July 2007. It has also ratified the Agreement on the European Common Aviation Area (ECAA).

Agreements have been signed with Bulgaria, Albania and Greece on preventing and resolving border incidents, as well as protocols with the Albanian and Bulgarian Ministries of Interior on cooperation on border control and prevention of illegal migration. The Public Prosecution Office signed bilateral memoranda on cooperation with its counterparts from Albania, Bosnia and Herzegovina, Montenegro and Serbia.

As regards bilateral relations with other enlargement countries and neighbouring member states, relations with Albania have remained good, with reciprocal high-level visits and the entry into force of an agreement on cultural cooperation.

Relations with Bosnia and Herzegovina have remained good, with increased cooperation on defence and high-level reciprocal visits.

Relations with Croatia have continued to develop intensively. The first meeting of the Joint Committee set up to implement the bilateral agreement in accordance with Article 10 of the SAA has taken place. Agreements on cooperation in the fields of tourism, health and medical sciences have been ratified.

The authorities were keen to engage in cooperation with Montenegro , and reciprocal high-level visits took place. A memorandum on cooperation in defence has been signed.

Relations with Serbia are good in general. The Agreement on protection of national minorities has entered into force. There have been no developments regarding the dispute between the Macedonian Orthodox Church and the Serbian Orthodox Church but the issue was played down in the public debate .

The position of the former Yugoslav Republic of Macedonia on Kosovo continued to be supportive of the efforts made by the international community throughout the status process, backed by a broad consensus across the political spectrum. The government is committed to aligning with the EU position on the Kosovo status process. Reciprocal high-level visits have contributed to fostering cooperation. Interim protocols on police cooperation were signed with UNMIK. The reference to the border demarcation issue in the Ahtisaari plan was welcomed by the country's authorities.

Relations with Bulgaria have been developing, marked by several meetings at senior political level. New agreements have been concluded, notably on the promotion and protection of investments, on cross-border police cooperation, on travel of citizens and on cooperation in the field of labour and social policy.

Relations with Greece are close and cover many areas, notably economic matters and foreign direct investment. The government decided to authorise Greek citizens to enter into the country with their domestic identity cards to facilitate cross border movements. However, relations between the two countries were affected by the name issue. No progress has been made in this context. The renaming of Skopje airport after Alexander the Great was received in Greece as a provocation, contrary to the 1995 interim agreement. Actions which could negatively affect good neighbourly relations should be avoided. Renewed efforts are needed, with a constructive approach, to find a negotiated and mutually acceptable solution on the name issue with Greece, under the auspices of the UN, within the framework of UNSCR 817/93 and 845/93, thereby contributing to regional cooperation and good neighbourly relations.

Relations with Turkey developed positively with reciprocal high level visits.

ECONOMIC CRITERIA

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

The existence of a functioning market economy

Economic policy essentials

The country is fully participating in the EU's pre-accession fiscal surveillance. It presented its first Pre-accession Economic Programme (PEP) in December 2006 and submitted its second fiscal notification in April 2007. All the political parties concerned agree on the objective of establishing a market-based economy. The new government presented its economic programme in autumn 2006, emphasising the goals of fostering economic growth and addressing unemployment. Programme cooperation with the International Monetary Fund (IMF) and World Bank is on track, with positive assessments from both institutions concerning the programme commitments. A broad political consensus has been maintained on the fundamentals of economic policy, although political disputes have occasionally slowed down the reform process.

Macroeconomic stability

Real GDP growth accelerated from 3.5% in the second half of 2006 to 5.5% in the first half of 2007. The main factors were strong growth of commodity exports and increased private consumption. Industrial production also increased, by some 2.5% in the first eight months of 2007, compared with 2.8% for the same period the year before. Overall, stability has been maintained.

The current account deficit declined further to 0.4% of GDP in 2006, compared with 1.4% in 2005. During the first half of 2007, the current account even posted a small surplus, benefiting from strong export growth and private transfers. The share of exports in GDP increased from 36% of GDP in 2006 to 38% in 2007. Net private transfers remained high, on around 19% of GDP in 2006 and a similar level in the first half of 2007. Net inflows of foreign direct investment (FDI) returned to some 1¼% of GDP in the second half of 2006 and rose to 2¼% of GDP in the first half of 2007, after privatisation of an electricity distribution company had pushed them up to 5.6% in 2006. Overall, external imbalances have again narrowed substantially, although FDI inflows are still low.

The official reserve assets of the National Bank of the Republic of Macedonia (NBRM) stood at € 1.5 billion mid-September 2007, which is equivalent to about five months of imports of goods and services. The main reasons for the further increase in reserves were the private transfers and other foreign exchange inflows via the cash exchange offices. Gross external debt had fallen to about 33% of GDP by end-August 2007, reflecting early repayments to Paris Club creditors, the IMF, the World Bank and the EIB. This reduced the costs of servicing the public debt by about 10% (or 0.1% of GDP).

Unemployment is very high at some 36% of the labour force and declined only by about a ½ percentage point over the last year (to 35.8% in the first quarter of 2007). Employment, however, increased by some 3% during the last year, raising the employment rate from some 35% in mid-2006 to about 36% in mid-2007. The modernised labour code, which has been in force since 2005, has probably had a positive impact on job creation. However, a considerable part of the unemployment is structural, as confirmed by the weak link between economic growth and the level of employment. Unemployment among the young is still very high and the duration of unemployment in this age group is long. Because of the large informal sector, unemployment could be overestimated. Overall, employment is continuing to grow. However, progress with reducing unemployment has remained limited.

The NBRM has managed to keep the exchange rate of the denar stable at 61.2 denar/ euro and sustained a de facto peg. The NBRM has slightly reduced policy interest rates. Rates for Central Bank bills declined from 5.5% in mid-2006 to 5.1% by August 2007. Private-sector rates have continued to decline: weighted lending rates of commercial banks in domestic currency were cut from 11.1% at the end of August 2006 to 10.1% in August 2007. Credit growth to the private sector continued to be high, at some 34% (year on year) during the first eight months of 2007. The volume of broad money (M4[3]) rose by 33% year on year during the first eight months of 2007. Overall, exchange rate and monetary policy have remained sound. This has helped to maintain confidence in the stability of the financial system.

Consumer price inflation slowed down to 1.4% during the first nine months of 2007, compared with 3.3% for the same period in 2006. Consequently, inflation returned to the low levels of previous years after special factors, such as the increase in excise taxes and higher energy prices, had pushed inflation up to 3.2% in 2006. Overall, inflation remains under control.

Fiscal policy became more expansionary towards the end of 2006, when the new government adopted a supplementary budget with additional spending of some 2% of GDP. Substantial budget surpluses in the first half of 2006 kept the annual public-sector deficit within the target for 2006 of 0.6% of GDP[4]. After a fiscal surplus of 0.2% of GDP in 2005, this performance represented a fiscal impulse of 0.8% of GDP. The budget proposed for 2007 envisages a significant reduction in the fiscal burden while containing expenditure growth. In order to stimulate investment and economic growth, the authorities have introduced a "flat tax" on personal income and profits, reducing the rates for these two taxes to 12% from 1 January 2007. The same law provides for a further reduction to 10% on 1 January 2008. On the expenditure side, the government plans to reduce public spending by 2 percentage points of GDP by 2010. In all, an increase in the deficit to about 1% of GDP is planned for 2007. However, data for the first eight months point to a better than expected performance of revenue and expenditure. Overall, fiscal policy has become slightly more expansionary, but remains sound. However, the regular underperformance in implementing public investment plans points to serious administrative weakness in this sector.

Fiscal decentralisation entered its second phase in July 2007. Measures are being taken to settle the issue of municipal debt arrears, with the overall level reduced from about 1% of GDP in mid-2006 to about 0.5% by mid-2007. However, in some cases the new powers pose significant challenges to the municipalities and require close monitoring by the central authorities. At the moment, expenditure by the lower levels of government accounts for about 7% of total public-sector expenditure or about 2.4% of GDP. Mainly due to early debt repayments, public debt has fallen significantly (according to GFS from 39.4% of GDP end of 2006 to about 29% by end July 2007). The authorities have continued to improve the efficiency of tax administration and to simplify the tax system. Overall, the accounts of the public sector have remained largely balanced and public administration has been further strengthened. However, the quality of the public finances is impaired by weaknesses in medium-term budget planning and priority-setting, leading to a high share of discretionary and short-term oriented spending decisions.

The country's fiscal and monetary policy has supported an acceleration of economic activity, while maintaining overall economic stability. Public finances remain close to balance. Exposure to external shocks has been reduced by increasing foreign exchange reserves and reducing external debt. Inflation has been kept under control. However, unemployment remains high. Overall, the macroeconomic policy mix has succeeded in maintaining economy stability, although high unemployment and insufficient investment remain key challenges.

Interplay of market forces

Privatisation has largely been completed and the share of the private sector in total output has increased further to about 80% of the value added. The value of state-owned assets accounts for some 15% of GDP, with five state utilities accounting for 13.7% of GDP. The value of state-owned assets in the other 65 companies adds up to some 1.5% of GDP. Majority state-owned companies employ some 10,000 people or about 1.3% of the labour force. During the last year, the sale of a number of the last remaining minority state shares in the banking sector, combined with the sale of company shares owned by the Health Insurance Fund, generated revenue totalling about 0.5% of GDP. In the telecommunications sector, the state has liberalised access to the market, which has already resulted in a reduction in communication tariffs. Liberalisation of the air transport market has also started. Overall, the free interplay of market forces has further increased.

Market entry and exit

The government has continued to lower entry barriers and to speed up registration and exit procedures. Major developments in this respect were amendments to the laws on the one-stop shop, the trade registry and the registry of other legal entities, which resulted in a further simplification and facilitation of company registration procedures. For example, the time taken for company registration was further reduced from 5 days to 3 days, and registration costs are now less than € 100. During the first nine months of 2007, about 7,500 new companies were registered, compared with 6,700 in the same period of 2006. Companies which registered during the last year make up nearly 15% of the total stock of companies. In June, the authorities started to implement the "regulatory guillotine", involving a significant reduction in redundant legislation, introduction of the "silence is consent" principle, lowering of fees in a number of areas and simplification and shortening of a number of procedures. The legislation on bankruptcy procedures was amended with a view to improving the procedures and accelerating implementation. During the first nine months of 2007, 4,100 companies were taken off the register, while nearly 2,100 new bankruptcy procedures were registered. The backlog in bankruptcy cases has been reduced. Overall, barriers to market entry and exit have been further reduced and key implementing legislation has been adopted.

Legal system

The necessary legal system is largely in place. Significant progress has been made on accelerating registration of property rights. By August 2007, the coverage of the real estate cadastre had increased to 68% of the territory of the country, compared with 47% in autumn 2006.The registration procedure was amended in order to facilitate registration of foreign investors. Allowing commercial cases to be enforced by licensed enforcement agents has led to significantly faster enforcement of court decisions. However, legal procedures in general are still slow, which impedes proper law enforcement. Therefore, progress on settling ownership disputes has been limited. Overall, progress has been made on further accelerating market entry, clarifying property rights and speeding up enforcement of court rulings. However, weaknesses in the judiciary are still impeding the proper functioning of market mechanisms.

Financial sector development

The assets of the banking sector accounted for some 61% of GDP in mid 2007, compared with some 50% a year before. In view of the relatively high number of banks (19 banks and 12 savings banks), the sector's asset concentration still can be considered to be moderate, with the five largest banks holding some 75% of the sector's assets and deposits. In May 2007, a foreign bank became the majority owner of a medium-sized local bank, which should foster competition in the sector. The share of state ownership in this sector is low, at some 7% of the sector's assets, mainly consisting of a majority share in one development bank (5% of the sector's assets) and a limited number of remaining minority shares in other private banks. Credit to the private sector rose by about 30% in 2006, giving a credit-to-GDP ratio of 26%, compared with 24% at the end of 2005. This trend continued during 2007, bringing the credit-to-GDP ratio close to 30%. The range of financial instruments has been further diversified, for example by issuing three-year treasury bonds for the first time. A new banking law was adopted at the end of 2006, facilitating establishment of branches of foreign banks and bringing the sector's supervisory and prudential standards closer to international norms. Overall, the banking sector has developed further.

Interest rates on the benchmark central bank bills have fallen by about half a percentage point and rates on treasury bills by nearly one percentage point. Private-sector lending and borrowing rates have been declining by up to 1 percentage point during the last 12 months, while the spread between lending and borrowing rates has narrowed, to some 5 percentage points, compared with 6.5 the year before. The quality of the credit portfolio has improved, with the share of non-performing loans in the total credit portfolio falling from 10.9% at the end of 2005 to 6.4% by the end of June 2007. Capitalisation of the sector is still relatively high, with a capital adequacy ratio of 18% end June 2007, compared with some 21% a year before. Small banks have a high capital adequacy ratio of some 50% on average, while large banks have a ratio of around 12%. The profitability of the sector is continuing to improve. End June 2007, returns on assets and equity stood at 2.4% and 19.3% respectively. Market capitalisation of the 39 private and publicly owned companies currently listed on the Macedonian stock exchange rose from about 20% of GDP in mid-2006, to 29% end of 2006 and to some 84% by mid-2007. Overall, the size of the non-banking financial sector has increased, but the level is still low.

The size of the financial sector remains small, but significant progress has been made on deepening financial intermediation, increasing competition on the financial market and strengthening the legal framework for the sector. Overall, the situation in and stability of the financial sector have improved further.

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

Existence of a functioning market economy

The former Yugoslav Republic of Macedonia has maintained macroeconomic stability. It has made significant progress on reducing its external vulnerability and further lowering barriers to market entry and exit. It has adopted legislation to put into action major structural reforms. However, a fully functioning market economy is still impeded by weaknesses in the judiciary, a still insufficient legal certainty and a considerable number of unsettled property disputes. The high unemployment rate points to structural weaknesses and inadequate functioning of the labour market.

Human and physical capital

The authorities have stepped up their efforts to align the education system with international standards. Recent amendments to the laws on primary and secondary education include the extension of primary education to nine years and making compulsory as from 2008/2009 three additional years of general or vocational and educational training in secondary education, the introduction of two compulsory foreign languages and computerisation of the education system. The authorities have markedly increased the budget for modernisation of education, although from a low base. Despite these efforts, the overall level of education and training of the labour force still need to be upgraded in order to improve not only labour mobility but also the competitiveness of the country as a whole. Furthermore, equal access to education in all regions is not yet guaranteed in practice. Overall, substantial measures have been taken to improve education, which will have positive effects on human capital.

Job creation has improved. Labour contracts have become more flexible as a result of the new labour code adopted in 2005. Furthermore, active labour market measures have also been intensified. These have helped to increase employment. However, unemployment has remained very high. In particular, a large part of unemployment is structural, mainly affecting the young and poorly qualified. Furthermore, the current system of calculating social contributions does not yet take into account the newel introduced concept of part time work, which creates a significant disincentive of registering low wage or part time employment. Overall, the labour market has become more flexible, but the supply and demand mismatch is still sizeable.

Overall, private and public investment remained relatively low during the last year, reflecting a still difficult business environment and high financing costs. The quality of transport networks has suffered from two decades of underinvestment. Upgrading of the overall infrastructure system has started for projects related to European transport corridor X. Division of the railway company into two operating companies has been completed. The next step planned is the sale of the transport company. Overall, the share of investment in GDP has remained relatively low, in particular in view of the country's need to catch up with international standards.

FDI inflows returned to the previous levels of around 1% to 2% of GDP during the second half of 2006 and the first half of 2007. The main foreign investors are from the EU. The new government has launched a programme to attract FDI, for example by establishing free economic zones. So far the impact of these zones on FDI has remained limited. Greenfield FDI inflows also remain limited. In general, unclear property rights, slow legal procedures and fragmented responsibilities between the central and local governments are impeding FDI. Public research and development expenditure was raised to 1% of GDP in 2006. Overall, infrastructure continues to require repair and modernisation.

Sector and enterprise structure

The economic structure is gradually moving towards a larger contribution by manufacturing and trade, while the share of agriculture in the economy is declining. The number of new enterprises, and in particular of SMEs, has increased markedly. However, the informal economy has remained sizeable, affecting the competitiveness of the economy as a whole. Furthermore, provision of collateral for credit is impeded by the low degree of real-estate registration, and slow legal and administrative procedures are delaying structural change. Overall, the business environment for SMEs appears to have improved.

State influence on competitiveness

Direct state influence is relatively small and, following the establishment of the Commission for Protection of Competition in 2005, the institutional set-up is in place. However, establishment of a level playing field between market players appears to be impeded by the sometimes insufficient independence and resource endowment of the country's regulatory and supervisory agencies. The authorities have taken the first steps to reduce indirect state aid in the form of non-cost-recovering energy prices and of payment arrears. However, these distortions have not yet been fully addressed. Furthermore, the new government appears more active in directly intervening to promote domestic and foreign investment. In some cases, those interventions can lead to distortions in the competitive positions of market participants. Overall, the state's influence on competitiveness is rather limited, although the new government has been demonstrating a greater willingness to actively promote domestic and foreign direct investment. Indirect state aid is still leading to distortion of relative prices.

Economic integration

The country has a small and open economy, in which total trade in goods and services accounted for around 100% of GDP in 2006. The country's main trading partners are the EU and the neighbouring countries in the Western Balkan. During the first eight months of 2007 about 67% of all its exports went to EU-27, while about 50% of its imports came from EU-27. Trade integration with the Western Balkan region remains significant, accounting for 28% of the country's exports and 11% of its imports. In 2006, the country concluded a number of free trade agreements, including with Kosovo, and it joined the new CEFTA agreement, which became operational in mid 2007. The export structure is still highly concentrated on a limited range of products, with textiles and clothing accounting for about 24% of total exports and manufactured iron and zinc products for some 26%. Overall, trade integration is well advanced, but still concentrated on a few price-sensitive products.

International price competitiveness has improved slightly during the last half year, benefiting again from low inflation and a nominally stable exchange rate against the euro. The real effective exchange rate remained largely unchanged in 2006 and the first half of 2007, while overall labour productivity deteriorated due to the relatively strong increase in registered employment. Real wage increases remained in line with productivity growth and unit labour costs decreased slightly in 2006. Overall, price competitiveness has remained stable, while labour productivity has decelerated. The country's per capita income, measured in purchasing power standards, rose to 27% of the EU-27 average in 2006, compared with 26% the year before.

ABILITY TO ASSUME THE OBLIGATIONS OF MEMBERSHIP

This section examines the former Yugoslav Republic of Macedonia’s ability to assume the obligations of membership – that is, the acquis as expressed in the Treaties, the secondary legislation and the policies of the Union. It also analyses the former Yugoslav Republic of Macedonia’s administrative capacity to implement the acquis . The analysis is structured in accordance with the list of 33 acquis chapters.

Chapter 1: Free movement of goods

No developments have occurred as regards the general principles . The former Yugoslav Republic of Macedonia needs to ensure that its legislation is compatible with Articles 28-30 of the EC Treaty and the related case law, including both distinctly and indistinctly applicable measures.

For horizontal measures , the Law on Product Safety was amended to allow the State Market Inspectorate to impose fines, thereby bringing this law into line with the Law on Misdemeanours. Four horizontal by-laws have been adopted: an ordinance on the manner of notification of conformity assessment bodies; a decree on the procedure of notification as regards adoption of technical and non-harmonized regulations, technical specifications and standards; a decree on the content and the procedure of notification through the rapid information system (RAPEX) of products which pose a serious threat; a regulations on the notification of dangerous products placed on the market by producers and distributors.

In the area of standardisation , the pace of adoption of European standards has accelerated. As of August 2007, a total of 2,754 harmonised European standards had been adopted as national standards, mostly by endorsement and mainly related to the areas of low voltage equipment, safety of machinery, construction products and equipment for potentially explosive atmospheres. Of these, 2,367 standards give presumption of conformity to technical regulations transposing the “new approach” directives. A list of harmonised standards on construction products, which contained some 200 standards, was also recently published. The number of technical committees within the Institute for Standardisation of the Republic of Macedonia (ISRM) has increased to 22. The administrative capacity of the ISRM has been strengthened with new staff and training in several areas, and membership of the ISRM assembly increased to 55. A website has been developed with up-to-date information on all new developments regarding standards. A Memorandum of Understanding was concluded with the European Telecommunications Standards Institute (ETSI).

As regards conformity assessment , a decision was adopted which specifies the procedure for introducing the CE marking. A manual on the conditions that conformity assessment bodies will have to fulfil was adopted. Legislation concerning the designation and notification of conformity assessment bodies has not yet been adopted.

In the area of accreditation , the Institute for Accreditation of the Republic of Macedonia (IARM) has sufficient equipment, its staff was increased from 4 to 9 and the number of lead assessors and trainers has increased. As of August 2007, the IARM has accredited 17 conformity assessment bodies, mainly inspection bodies and testing laboratories. It has also established a website.

Regarding metrology , the capacity of the Bureau of Metrology was strengthened by hiring additional employees, but it still does not have sufficient staff and equipment to perform its functions. It joined the Metre Convention, and obtained candidate status in the European Association of National Metrology Institutes (EURAMET). A bilateral cooperation agreement was concluded with the Metrology institute of Turkey.

The administrative capacity of the coordination body for cooperation in market surveillance established in 2006, whose role is to coordinate the activities of all inspectorates is not satisfactory. A new Law on the State Market Inspectorate has entered into force, which designates the State Market Inspectorate as the body responsible for performing inspections of products placed on the market. Overall, even if some of the necessary structures have already been established, further efforts will be required in order to create an adequate market surveillance system for the proper implementation of the acquis on free movement of goods.

As regards "old approach" product legislation , laws on the safety of cosmetic products, on chemicals and on pharmaceuticals and medical devices were enacted. Regulations on crystal glass products were adopted, which transposed the acquis in this area; alignment remains to be confirmed.

In relation to the "new and global approach" product legislation, ten by-laws aiming to transpose sector-specific acquis have been adopted. These include transpositions concerning machinery, equipment and protective systems in potentially explosive atmospheres (ATEX), low voltage equipment (LVD), electromagnetic compatibility (EMC), personal protective systems (PPE), energy efficiency of household refrigerators, energy efficiency of hot-water boilers, pressure equipment, transportable pressure equipment and lifts. Regulations on cableway installations, non-automatic weighing instruments (NAWI) and gas appliances as well as manuals on the implementation of the Law on Product Safety and the Law on Construction Products were adopted.

In the area of procedural measures , a decision was adopted which specifies the notification procedures. The Ministry of Economy and the ISRM have been designated as the institutions responsible for notification. The law on weapons entered into force and implementing legislation was adopted. There were no developments in relation to external border checks and cultural goods.

Conclusion

Some progress can be reported on alignment of legislation with the acquis on the free movement of goods and in strengthening the administrative capacity of the various institutions. However, most of the sectoral acquis on free movement of goods still remains to be transposed and implemented. The capacities of the implementing bodies are still insufficient to perform their tasks. Alignment with the acquis in this area is still at an early stage.

Chapter 2: Freedom of movement for workers

With regard to access to the labour market, the law on employment of foreigners has been adopted. It provides that foreign workers enjoy equal treatment with citizens of the country. No development can be reported regarding the legislation on employment in the public sector and exercise of public authority. Preparations in this area are advancing.

The employment agency and its network of employment offices still lack the required technical and human capacity and have not yet made the necessary preparations for participation in the European Employment Services Network ( EURES) .

In the field of coordination of social security systems there has been some progress. Bilateral social security agreements with Slovenia, Poland, Luxembourg and Belgium have been ratified. The country has now concluded a total of seven bilateral social security agreements. However, substantive steps still have to be taken to develop sufficient administrative capacity to apply Community rules fully.

Preparatory measures for the introduction of the European Health Insurance Card have not been considered.

Conclusion

Some progress has been made with adoption of the law on employment of foreigners. Alignment with Community rules has started. However, the institutional capacity and human resources required for coordination of social security systems and EURES have to be strengthened.

Chapter 3: Right of establishment and freedom to provide services

In the area of right of establishment , no progress has been made towards removing the remaining barriers to the right of establishment for EU natural and legal persons, apart from the identification of all regulations that need to be simplified or abolished in the framework of the deregulation reform. The provision of certain services by foreigners is still not allowed or is allowed only on condition of reciprocity. Furthermore, there are rules that require foreign companies to register with the Ministry of Economy, which delays the authorisation process and increases the costs of registration. Some problems persist, linked to the transparency and objectivity of the granting of authorisations. The amendment of the Law on the One-Stop-Shop System and the Maintenance of the Trade Register and the Register of Other Legal Persons is a step in the right direction. Preparations in this area are at an early stage.

In the area of freedom to provide cross-border services , the legislation still does not distinguish between foreign operators performing services on a temporary basis and those providing services through a permanent establishment. Some changes have been introduced by the Law on Employment and Work of Foreigners, although the licensing and the authorisation systems have not been reviewed so as to allow service providers to receive free access and enjoy free exercise of a service activity. The overall level of preparedness in this area is low.

A strategy for the development of postal services was adopted in June. The law on postal services , based on the second postal directive, has not yet been enacted and an independent regulatory authority has not been established but preparations in this respect are ongoing. The transformation of the Public Enterprise for Postal Traffic, Makedonska Posta, into a state-owned joint stock company has been completed. The company is undergoing financial and organisational restructuring. The preparations in this area are on track.

As regards mutual recognition of professional qualifications the law on higher education has been amended in April. It provides, however, only for an acceleration of the procedures for recognition of higher education diplomas obtained abroad. There is no distinction between academic and professional qualifications in the national legislation. An Information Centre for the recognition of foreign academic diplomas was established within the Ministry of Education and Science but its administrative capacity is poor. Overall, the preparations in this area are lagging behind.

Conclusion

There has been limited progress, primarily in the area of postal services. There is moderate legislative alignment, mainly regarding the right of establishment. The administrative capacity, particularly with regard to mutual recognition of professional qualifications and freedom to provide services, is not sufficient. Alignment in this chapter remains at an early stage.

Chapter 4: Free movement of capital

No progress can be reported in the field of capital movements and payments. However, the country fulfils all the commitments made under Stage I of the SAA and has undertaken to gradually liberalise its capital account. Apart from that, legislation within the acquis remains limited and will require considerable effort given the continued existence of significant restrictions. There are restrictions on the acquisition of real estate by non-residents, which can be transacted only under the conditions set in the special laws or ratified agreements on the basis of the principle of reciprocity.

Portfolio investment remains partially liberalised. In particular, non–residents have to open custody accounts with authorised banks for the purchase of securities and have to pay a premium for the right to cover the security position of the custody account, except for investments made for at least one year. This limitation is to be lifted after the end of the Stage I of the SAA which provides for the full liberalisation of portfolio investments. In addition, the Parliament ratified the protocol to the bilateral investment treaty with Bulgaria to take account of Bulgaria's accession to the EU. A protocol was initialled to amend the bilateral investment treaty with the Czech Republic, in order to align it with EU requirements.

Pension funds must comply with stringent restrictions and requirements regarding the type and volume of domestic securities that they can purchase on the stock exchange. In particular, they may not invest more than 20% of their capital in non-domestic securities. Significant restrictions on short-term capital movements remain. Non-residents can open foreign exchange and denar accounts in local banks. However, residents are not allowed to open accounts in foreign banks. In the area of capital movements and payments, preparations are still very limited.

Some progress has been made as regards payment systems legislation. A new law on payment systems was enacted with the aim of approximating the national legislation with the EC acquis and a strategy on development of payment operations was adopted. implementing legislation and the administrative structure have yet to be developed. The charges for cross-border electronic payment transactions are disproportionate to those for domestic electronic payment transactions. Preparedness in this area is on track.

Progress can be reported in the area of money laundering . The national strategy against money laundering and funding terrorism is now being implemented. The Directorate for the prevention of money laundering has established good cooperation with the reporting institutions, primarily the banks, and with other bodies involved in prevention of money laundering. A new law on the financial police has been enacted, which makes a clearer distinction between the investigative authorities of the Ministry of Finance and the Ministry of the Interior with respect to financial crime. The Directorate for prevention of money laundering has a purely analytical role. Although the number of staff has risen to 10, the Directorate is still under-staffed. The reports it sends to the investigating and prosecuting authorities for further investigation are still not adequate in terms of their length and quality. As of August, only two of the 36 reports sent by the Directorate to the investigating and prosecuting authorities had led to enforcement action. Preparations in this area are moderately advanced.

Conclusion

Progress in this area has been very limited. The legislative alignment is poor. There is adequate administrative capacity to implement the capital movements and payment systems legislation, but not the anti-money laundering legislation. Overall, preparations in the area of free movement of capital are still lagging behind.

Chapter 5: Public procurement

As regards general principles , no further developments can be reported. Alignment is on track.

In the area of the award of public contracts, further progress has been made in raising public sector awareness of public procurement procedures and in increasing compliance with the public procurement rules. The Public Procurement Bureau (PPB) has sufficient capacity to manage the public procurement policy. In performing its role in detecting corrupt activities, the Bureau regularly submits reports to the state anti-corruption commission and the state audit office. The PPB has organised several seminars on public procurement legislation for stakeholders. However, the administrative capacity of the contracting authorities is not adequate. Some public companies still do not comply with public procurement procedures.

The remedies remain the weakest part of the system. The Complaints Committee is overloaded with complaints and suffers from a persistent shortage of committee members. Because it lacks an appropriate mandate, it has no means to enforce compliance with its decisions.

Conclusion

There has been progress in the area of public procurement. Alignment of legislation with the acquis is moving forward. Development of e-procurement remains a medium-term goal. However, administrative capacity at the level of contracting authorities is not sufficiently developed. Preparations in this area are fairly advanced.

Chapter 6: Company law

Some progress has been achieved in the field of company law . The Company Law was further amended in order to improve corporate governance. The law on the "one-stop shop" system, trade registry and registry of other legal entities was amended so as to further simplify and shorten the process of company registration. This process has been shortened from five days to three days, the costs of company registration have been substantially reduced and additional staff has been employed at the Central Register. The entire company registration process has been facilitated by reducing the number of documents required ( see also Economic criteria ). Businesses are still not able to register on-line.

The Central Registry has become the focal point for registering all companies and for data management of other registers. The register is accessible to the public for a fee of about €60. The law on takeovers was amended so as to increase the protection of small shareholders by making the takeover procedures more transparent. The amended securities law removes the right of existing shareholders to take precedence in the purchase of new shares. The first phase of the regulatory reform process has been completed, with all regulations that need to be simplified or abolished having been identified. The second phase is now under way.

With regard to corporate accounting, the Ministry of Finance updated two manuals on annual accounts, in order to align them with the 4th and 7th company law directives. The manuals contain separate instructions for small companies. The manuals are updated once a year, although there is some delay in translating and transposing revisions of the International Accounting Standards and of the International Financial Reporting Standards (IFRS); currently the IFRS version of 2003 is used. The department for financial systems in the Ministry of Finance has four employees, which is not sufficient to prepare instructions and properly enforce accounting and financial reporting.

As regards auditing , the charter of the Institute for Chartered Auditors (ICA) has been approved and its executive bodies have been established. The ICA's accounting standards committee has become operational, performing activities related to transposition and implementation of the International Financial Reporting Standards. The ICA adopted a manual on recognition of chartered auditors' qualifications acquired abroad. A programme of quality assurance for audit reporting has been prepared. The register of chartered auditors and the register of audit companies have been opened to the public. The quality of the audit profession has improved, especially with regard to the auditing of companies listed on the stock exchange. However, the ICA lacks institutional capacity, operating without any premises and employing only one person permanently; the rest of the staff works on a voluntary basis. Preparations in this area are well advanced.

Conclusion

Progress has been substantial in this chapter, in particular with regard to company law and the further improvement of the one-stop-shop system. The Central Registry has adequate administrative capacity, whereas the Institute for Chartered Auditors and its accounting standards committee do not have sufficient staff. Alignment is now moderately advanced.

Chapter 7: Intellectual property law

With regard to copyright and related rights , the criminal code was amended to create a precise definition of intellectual property rights offences. The amended law on the State Market Inspectorate (SMI) empowered the SMI, which already has a right to initiate misdemeanour proceedings, also to impose fines in cases of breach of intellectual and industrial property rights. The former Yugoslav Republic of Macedonia signed a memorandum of cooperation with the World Intellectual Property Organisation. Three collective rights management societies are operating in the country; however, cooperation between the government, collective rights management societies and other stakeholders is insufficient, which prevents addressing piracy and counterfeiting more effectively. The administrative capacity of the Ministry of Culture to manage copyright policy and conduct inspections is insufficient. The preparations in this area are lagging behind.

The legislation on industrial property rights was amended with the aim of bringing it into line with the acquis. Penalties for violation of those rights were increased. The law on the protection of new agricultural plant varieties was adopted. This is the first step in the ratification procedure of the International Convention for the Protection of New Varieties of Plants (UPOV). The State Office for Industrial Property (SOIP) and the Customs Administration were empowered to impose sanctions, including fines, for misdemeanours. The SOIP keeps registers of patent applications and other registered industrial property rights. The SOIP has equipment for maintaining all the registers and for monitoring the implementation of the legislation on intellectual and industrial property rights. Five new employees were recruited, but the total number and the level of competence of the staff are still not sufficient. Inspectors and prosecutors lack equipment and expertise. Preparations are moderately advanced.

The Customs Administration is establishing a credible enforcement record in combating cross-border breaches of industrial property rights.

Within the country, the activities and the capacity of the SMI and the Ministry of the Interior are not sufficient, especially with regard to the seizure and destruction of equipment used to produce counterfeit goods. The data provided by different institutions on seized and destroyed counterfeit goods are not yet consistent. The 13 basic courts are not yet exercising their new powers for cases related to intellectual property law. In 2006 there was an increase in the number of court proceedings following misdemeanour complaints: a total of 406 court procedures for misdemeanours were initiated, and 30 were finalised. Similarly, in 2006, the number of criminal charges rose to 24, compared to 8 in 2005.

A joint coordinating body for both intellectual and industrial property rights was created, consisting of 11 members from various institutions. Its aim is to coordinate the activities of all relevant institutions and to enhance the enforcement of the legislation on intellectual and industrial property rights.

However, the political will to tackle properly the enforcement of intellectual property law is weak. Fines and other sanctions are not effectively applied and do not have a dissuasive effect, and further awareness-raising actions are necessary. Very few right owners bring actions for infringements of their rights before the courts or request action from customs. There is no coherent National Strategy for intellectual property rights, since the present strategy only covers copyrights. Although some training has been provided, greater efforts are needed (e.g. training for judges and law enforcement authorities). Insufficient resources are being allocated to ensure a level of protection of intellectual and industrial property rights similar to that which exists in the Community, including effective means of enforcing such rights.

Conclusion

There has been some progress in this area, especially with regard to alignment of legislation in the area of industrial property rights and interception of counterfeit goods at the border. The legislative preparedness is satisfactory. However, the administrative capacity, in particular of the State Market Inspectorate, is insufficient to achieve proper enforcement. Strong political will is needed to crack down on piracy. In the area of intellectual property law, the former Yugoslav Republic of Macedonia partially meets its targets.

Chapter 8: Competition policy

Progress can be reported in the area of antitrust, including mergers . The Law on protection of competition was amended so that the Commission for Protection of Competition (CPC) now has the right to conduct misdemeanour procedures and impose fines. However, in the case of an appeal, a suspension clause becomes effective which might lead to long delays in paying the fines imposed by the CPC. This weakens their deterrent effect. Several guidelines on implementing the competition law were published. The merger notification conditions and the definitions of professional secrecy were aligned with the acquis . There remain overlapping competencies between the CPC and the public prosecutor's office in cartel cases.

The administrative capacity of the CPC was strengthened, but needs to be further reinforced. In accordance with the competition law, the Parliament appointed a new Commission consisting of three full-time and two part-time Commissioners. The new Commissioners carry out their tasks independently. The number of staff dealing with antitrust issues and their level of training remain insufficient. The CPC has moved to new, suitably equipped premises.

Enforcement in the antitrust field has improved, but still needs to be strengthened and should concentrate on the most serious infringements of competition (cartels and abuse of a dominant position). The CPC began to exercise its new powers and imposed fines in a number of cases. Since February 2007, the CPC took 22 administrative decisions: 12 regarding merger cases, 2 against cartels and 8 regarding abuse of dominant position. Adequate training of judges in competition law needs to be ensured.

Progress was made in the area of state aid . The state aid law was amended and it now incorporates horizontal aid rules and is aligned with the acquis . The implementing regulations on rescue and restructuring were adopted. The law on technological-industrial development zones – on which the CPC had issued a negative opinion – is not compatible with EU state aid rules. The law has not yet been amended as announced. On the contrary, new technological-industrial development zones have been created.

The CPC prepared a partial inventory of state aid measures for the period 2001-06. Unauthorised state aid granted by several government institutions was approved retroactively. On the basis of this inventory, aid schemes need to be aligned.

As regards administrative capacity, additional employees were recruited, but their number and level of training remain insufficient in order to perform the complex task of monitoring state aid. Measures have been taken to increase awareness among state institutions and cooperation between the various aid grantors and the CPC. Each state aid provider has designated one person responsible for notifying state aid to the CPC, and the CPC has organised training for this newly established network. However, some state aid grantors are still reluctant to report on the state aid provided. According to the amended rules of procedure, the Memorandum for submitting documents to the Government by state aid grantors must include a reference to state aid compatibility, which must have been assessed by the CPC. The CPC has published a manual on state aid notification procedures.

Concerning enforcement , the CPC must make further efforts to put in place an effective system of ex-ante state aid control. The CPC issued 23 decisions on state aid approved in the period 2001-06, three on state aid approved in 2007, and nine opinions at the request of the state aid providers. It is important that the decisions of the CPC are respected by the other government institutions.

Overall, the CPC has increased transparency and accountability by publishing all anti-trust and state aid decisions in the official gazette and on its new website.

The CPC has monitored all sectors where there is insufficient market liberalisation or co