SEC (2005) 1428

Serbia and Montenegro 2005 Progress Report {COM(2005) 561 final} {COM(2005) 558 final}

A. INTRODUCTION 3

1. PREFACE 3

2. RELATIONS BETWEEN THE EU AND SERBIA AND MONTENEGRO 4

B. IMPLEMENTATION OF THE STABILISATION AND ASSOCIATION PROCESS 8

1. POLITICAL SITUATION 8

1.1 Democracy and the rule of law 9

1.2 Human rights and the protection of minorities 17

1.3 Regional issues and international obligations 22

1.4 General evaluation 25

2. ECONOMIC SITUATION 27

2.1 Progress towards economic stability and competitiveness 27

2.2 General evaluation 35

3. EUROPEAN STANDARDS 36

3.1 Internal market 37

3.1.1. Free movement of goods 37

3.1.2. Movement of persons, services and right of establishment 38

3.1.3. Free movement of capital 39

3.1.4. Customs and taxation 39

3.1.5. Competition 40

3.1.6. Public procurement 41

3.1.7. Intellectual property law 41

3.1.8. Statistics 42

3.2 Sectoral policies 42

3.2.1. Industry and SME 42

3.2.2. Agriculture and fisheries 43

3.2.3 Environment 44

3.2.4. Transport policy 45

3.2.5. Energy 46

3.2.6. Information society and media 47

3.2.7. Financial control 48

3.2.8 Other policies 48

3.3 Justice, freedom and security 48

3.3.1. Visa, border control, asylum and migration 48

3.3.2. Money laundering 49

3.3.3. Drugs 50

3.3.4. Police 50

3.3.5. Fighting organised crime and terrorism 51

3.4 General evaluation 51

C. EUROPEAN PARTNERSHIP: OVERALL ASSESSMENT 54

STATISTICAL ANNEX 60

INTRODUCTION

Preface

The European Council in Feira in June 2000 confirmed that

“its objective remains the fullest possible integration of the countries of the Western Balkans region into the political and economic mainstream of Europe through the Stabilisation and Association process, political dialogue, liberalisation of trade and cooperation in Justice and Home Affairs. All the countries concerned are potential candidates for EU membership”.

In view of the EU-Western Balkan Thessaloniki Summit in June 2003, the General Affairs and External Relations Council adopted “The Thessaloniki agenda for the Western Balkans: moving towards European integration”[1]. The Thessaloniki agenda strengthened the Stabilisation and Association process by introducing new instruments to support the countries’ reform and European integration efforts, including European Partnerships. This agenda was endorsed by the European Council and by the countries of the Western Balkans in June 2003.

In June 2005, the European Council reiterated that:

“… each country’s progress towards European integration, taking account of the evolution of the acquis, depends on its efforts to comply with the Copenhagen criteria and the conditionality of the Stabilisation and Association process. Moreover, in this process, regional cooperation and good neighbourly relations will remain essential elements of EU policy.”

The structure of the report is largely the same as that used in previous years and assesses the implementation of the Stabilisation and Association process. The report:

- describes the relations between Serbia and Montenegro[2] and the Union;

- analyses the political situation in Serbia and Montenegro in terms of democracy, the rule of law, respect for human rights and the protection of minorities;

- assesses the economic situation in Serbia and Montenegro in terms of economic developments and progress towards economic stability and competitiveness;

- reviews Serbia and Montenegro’s capacity to implement European standards, that is, to gradually make legislation in key policy areas more compatible with European legislation and standards;

- examines the extent to which Serbia and Montenegro’s has addressed the European Partnership priorities.

This report takes into consideration progress since the Feasibility Report published in April 2005. It covers therefore the rather short period from April 2005 to 30 September 2005, which should be taken into account when reading this report. It looks at whether planned reforms referred to in the Feasibility Report have been carried out and examines new initiatives, as well as assessing the overall level of implementation.

Progress has been measured on the basis of decisions actually taken, legislation actually adopted and the degree of implementation. As a rule, legislation or measures which are in various stages of either preparation or Parliamentary approval have not been taken into account. This approach ensures equal treatment for all countries and permits an objective assessment of each country in terms of their concrete progress implementing the Stabilisation and Association Process.

The report draws on numerous sources of information. Serbia and Montenegro has been invited to provide information on progress made since the publication of the Feasibility Report. Council deliberations and European Parliament reports and resolutions have been taken into account in drafting the report.[3] The Commission has also drawn on assessments made by various international organisations, in particular the contributions of the Council of Europe, the OSCE, the international financial institutions, and non-governmental organisations.

This report does not cover Kosovo, as defined by the UN Security Council Resolution 1244, which is dealt with in a separate Progress Report.

Relations between the EU and Serbia and Montenegro

Recent developments in bilateral relations

Serbia and Montenegro is participating in the Stabilisation and Association Process (SAP). Currently, there is no contractual framework between the EU and Serbia and Montenegro. Political and technical dialogue is carried out through the Enhanced Permanent Dialogue (EPD), where meetings take place regularly several times a year. Formal contractual relations between the EU and Serbia and Montenegro should be established through the conclusion of a Stabilisation and Association Agreement (SAA). Parts of the SAA would be implemented through an Interim Agreement until ratification of the SAA is completed.

The Feasibility Report on Serbia and Montenegro’s preparedness to negotiate an SAA was adopted by the Commission in April 2005. Based on the findings of this report, the Commission concluded that Serbia and Montenegro was sufficiently prepared to negotiate an SAA. The Commission therefore recommended to the Council that negotiations should be opened. At the same time, it urged Serbia and Montenegro to continue to prepare for the negotiations in a sustained way. In this respect, the Commission pointed out that over the coming months, in line with the European Partnership, the authorities should make further significant progress concerning a number of areas, notably cooperation with the UN International Criminal Tribunal for the former Yugoslavia (ICTY), constitutional issues, the functioning of democratic institutions, public administration reform and the development of administrative capacity, judicial reform and the fight against organised crime and corruption. Moreover, the Feasibility Report stressed that should the Commission note at any time that the State Union and republican authorities have not lived up to their commitments and have not satisfactorily addressed the issues highlighted in this Feasibility Report, it will propose to the Council that the negotiations be suspended.

The Council endorsed the Feasibility Report and invited the Commission to present the draft negotiation directives, which the Commission did in July 2005. On 3 October 2005, the Council adopted the negotiation directives and authorised the start of negotiations. At the same time, it indicated that the pace and conclusions of the negotiations will depend in particular on the country’s progress in developing its legislative framework and administrative capacity, the effective implementation of the Constitutional Charter and full co-operation with the ICTY. The SAA negotiations were officially opened on 10 October 2005 in Belgrade.

Meanwhile, the Commission has continued to monitor closely the progress made by Serbia and Montenegro, notably in the context of the Enhanced Permanent Dialogue, where several sectoral groups have been set up. As a result of the Thessaloniki agenda, the first political dialogue meeting at ministerial level between the EU and Serbia and Montenegro was held in June 2004. A second ministerial meeting took place in February 2005.

An EU-Serbia and Montenegro inter-parliamentary meeting, attended by delegations from the Serbia and Montenegro Parliament and the European Parliament, was held in December 2004. Although no formal relations exist with the European Economic and Social Committee, an introductory visit establishing contacts with civil society has taken place. The EU Monitoring Mission continued to operate on the basis of its Joint Action.

The first European Partnership for Serbia and Montenegro was adopted by the Council in June 2004 ( see part C – European Partnership: Overall Assessment ). The short-term priorities of the European Partnership coincide to a large extent with the recommendations issued in the context of the Enhanced Permanent Dialogue. In autumn 2004, Serbia and Montenegro – at State Union level and at the level of the Republics - adopted the respective components of the action plan addressing the European Partnership priorities. Further to the discussions held in the framework of the EPD, the authorities have updated the action plan. As a result of the plan, Serbia and Montenegro has been able to make progress in addressing a number of the short-term priorities and also some medium-term priorities.

The EU is Serbia and Montenegro’s main trading partner. Trade integration with EU has been rising since 2000 and the EU share of total imports reached 49% between January and August 2005. For the same period, the EU share of total exports reached 55%. A significant proportion of both Serbia and Montenegro’s exports are raw materials or goods with a low level of processing and relatively low value-added. Iron and steel, fruit, vegetables and sugar constitute the largest components in the case of Serbia. Exports of agricultural goods have returned to earlier levels. Montenegro’s, exports are dominated by aluminium. By contrast, the goods imported are generally more highly processed. While there is a positive trend of increasing imports of capital goods (pointing to higher investment in the country and underpinning structural reforms), the growth of consumer goods imports remains significant. Since 2000 Serbia and Montenegro has benefited from Autonomous Trade Measures (ATMs) granted by the European Community. These measures allow almost all imports originating in Serbia and Montenegro to enter the EU without quantitative restrictions and exempt from custom duties. The only exceptions are some beef and fish products, sugar and wine, to which tariff quotas apply. During the year, following discussions on Serbia and Montenegro’s customs provisions, the Commission secured preferential access on certain agricultural products thereby ensuring respect for the provisions of the standstill clause. In addition, an agreement on trade in textile products between the European Community and the Republic of Serbia was signed in March 2005 and entered into force in July 2005[4]. Serbia and Montenegro is the country for which the ATMs have created the largest margin of preference over competitive suppliers, in particular for fruit, vegetables, leather, chemical and steel products. However, the overall opportunities offered by the preferences have yet to be fully exploited. Neither Republic has been able to fully realise the export potential created by the ATMs, which shows that restructuring efforts of some industries and further reform are still required.

Community assistance

Since 1998 Community assistance to Serbia and Montenegro has totalled more than EUR 2.6 billion. The EC has been providing significant support to Serbia and Montenegro under a variety of instruments, including CARDS assistance, macro-financial support and humanitarian aid. In recent years, the emphasis has shifted away from reconstruction and is now more concentrated on institution-building, economic development and reform, and support for civil society, in line with the European Partnership recommendations.

The main EC financial instrument in Serbia and Montenegro, the CARDS programme, is managed by the European Agency for Reconstruction (with the exception of Tempus programme and Customs and Taxation projects).

CARDS assistance, which supports Serbia and Montenegro’s participation in the SAP, targets a number of sectoral interventions in support of three broad priorities:

Democratic stabilisation

Good governance and institution-building (including public administration reform, justice and home affairs and support to customs and taxation)

Economic and social development (including infrastructure, environment and the Tempus programme[5])

The support provided through CARDS in 2005 is mainly focused on European Partnership priorities, which take into account the political and economic situation in Serbia and Montenegro and the requirements Serbia and Montenegro must fulfil in order to be able to implement an SAA. Total CARDS assistance allocated to Serbia and Montenegro in 2005 amounts to EUR 183.5 million (State Union: EUR 7 million, Serbia: EUR 154.5 million, Montenegro: EUR 22 million).

Serbia and Montenegro also benefits from the regional CARDS programme, which in 2005 has an overall budget of EUR 40.4 million to support actions of common interest for the Western Balkan region, for example in the fields of infrastructure, institution-building and cross-border cooperation.

In addition to CARDS assistance, Serbia and Montenegro is also a priority country for the European Initiative for Democracy and Human Rights and benefits from the LIFE environmental programme, as well as from the 6th Framework Programme for Research and Development.

The Commission has agreed with the authorities on a Supplemental Memorandum of Understanding to grant additional macro-financial assistance to Serbia and Montenegro (up to EUR 70 million: EUR 45 million grant + EUR 25 million loan). This assistance is expected to be disbursed in two tranches during 2005 and 2006 provided that external financing needs remain and Serbia and Montenegro meets the associated economic reform conditionalities and performance criteria as laid down in the Supplemental Memorandum of Understanding.

The EU agreed at the 2003 Thessaloniki summit to open participation in Community programmes to the Western Balkan countries, following the model of previous enlargements. Therefore, a Framework Agreement between the Community and Serbia and Montenegro on participation in Community Programmes was signed in November 2004. The Community ratified the Agreement in May 2005, and Serbia and Montenegro did so in July 2005.

Twinning

In its efforts to help Serbia and Montenegro to strengthen its administrative capacity, the EU has also decided to extend the “twinning” mechanism to the Western Balkans. “Twinning” makes the Member States’ public sector expertise available to the partner country through the long-term secondment of civil servants and accompanying short-term expert missions and training. The Western Balkans can also draw on Member States’ expertise through “twinning light” (projects of up to six months’ duration).

A twinning will assist the bodies of the State Union as well as the two Republics which co-ordinate and support the European Integration process.

The Republic of Serbia started to use the assistance of Member State institutions through the twinning programme under the CARDS 2004 Annual Programme. The Ministry of Agriculture, Forestry and Water Management is implementing a twinning project to strengthen its administrative and policy analysis capacities. The Ministry of Mines and Energy is implementing a twinning project to assist in the implementation of the unbundling and reform of the energy sector and to establish national and regional energy markets. The Ministry of Justice is implementing a twinning project to facilitate the alignment of legislation and administration with EU standards. A twinning project is also helping the General Secretariat of the Government of the Republic of Serbia to strengthen policy development and decision-making at the centre of the Government. A further eight twinning projects are being prepared under the CARDS 2005 annual programme for Serbia to support the development of the veterinary, phytosanitary, food-safety laboratory, wine, water, transport and health administrations as well as to strengthen the ability of the Ministry of Interior to combat organised crime.

For Montenegro two twinning are under preparation, support to special prosecutor on organised crime and support to police academy.

IMPLEMENTATION OF THE STABILISATION AND ASSOCIATION PROCESS

Political situation

The conditions of the Stabilisation and Association process were set out in the conclusions of the General Affairs Council in April 1997. To become EU members, the countries need to satisfy the criteria established in the Copenhagen European Council conclusions of June 1993. The Copenhagen political criteria stipulate that countries must have achieved “stability of institutions guaranteeing democracy, the rule of law, human rights and respect for and protection of minorities.”

Elements for examination include democratic principles, human rights and the rule of law, respect for and protection of minorities and regional cooperation. In addition to these, specific elements of relevance to individual countries are examined, including respect for international obligations such as peace agreements and cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY).

In the Feasibility Report, the Commission found that:

“The functioning of democratic institutions and the respect for rule of law in Serbia and Montenegro have improved – although this has been slow and sometimes partial especially owing to the legacy of the past regime.

Some progress has recently been made towards constitutional and legal certainty but it remains open to challenges. The recent agreement to revise the Constitutional Charter concerning the State Union Parliament direct elections is a particularly welcome development. The functioning of the parliaments and the executives has improved but it is still affected by structural weaknesses.

There are ongoing efforts in both Republics to tackle public administration reform through intensive legislative activities. However, implementation of this reform is still at a very early stage. The level of administrative capacity remains generally low. In Serbia, although unevenly distributed across the various levels and branches of the administration, there is a core capacity to deal with European integration and notably with the negotiation of an SAA. In Montenegro, while efforts have been made to reinforce the European integration structures, this capacity is affected by the lack of human resources throughout the administration. At the State Union level, administrative capacity is constrained in particular by the lack of stable budgetary allocations. Army reform has continued but much remains to be done to ensure effective democratic control.

The overall respect for human and minority rights has significantly improved over the recent years, but considerable further steps are needed at both the level of legislation and of enforcement. Accession to the Council of Europe in 2003 and ratification of its key human rights instruments were a major step forward, but difficulties as to their full implementation still persist, in particular concerning the Office of the Government Agent for the European Court of Human Rights and the jurisdiction of the State Union Court. Respect for minority rights saw progress, but occasional incidents occur. Police ill-treatment needs further comprehensive action. Little progress has taken place in relation to the investigation of crimes committed during the previous regime. Freedom of speech is generally respected, but restrictions to independent media persist. There is no anti-discrimination legislation and human rights institutions, such as the Ombudsman, need to be established at all necessary levels and strengthened.

As regards the respect of the United Nations Security Council Resolution 1244 on Kosovo , Belgrade’s constructive engagement on the Kosovo issue will help to advance Serbia and Montenegro’s European perspective, while obstruction could turn into an obstacle.

Serbia and Montenegro has recently made significant progress in meeting its international obligations concerning co-operation with the ICTY after a period where co-operation had been seriously deficient. There are no more backlogs with regard to waivers to witnesses. Access to documents has substantially improved, though this process is still sometimes obstructed by parts of the administration and the army. In recent months, a significant number of indictees has been transferred to The Hague.

Overall, the political criteria are sufficiently met at this stage for opening SAA negotiations.”

The section below provides an assessment of political developments in Serbia and Montenegro since the publication of the Feasibility Report, including the overall functioning of the country’s executive and its judicial system, the rule of law, respect for human rights and protection of minorities and regional issues. Such developments are closely linked to Serbia and Montenegro’s ability to implement the reforms and reach the standards that are required to make further progress in the Stabilisation and Association process and towards the EU.

Democracy and the rule of law

Constitutional and legal certainty has remained precarious . Although the functioning of the institutions of the State Union has improved in relative terms, their efficiency continues to be adversely affected mainly by the conflicting interpretations of the Constitutional Charter. The revision of the Constitutional Charter, which was adopted in June 2005, has restored the legitimacy of the State Union Parliament but its functioning remains weak. The State Union Court has started working, although its capacity continues to be limited and the agreement on the scope of its powers remains largely untested. The State Union Parliament has still not adopted the State Union legislation that would give a more solid basis to the financing of the State Union in line with the Constitutional Charter. The recent revision of the Constitutional Charter also made it clear that the law on the referendum , whereby a Republic can decide to withdraw from the State Union, “must be based on the internationally recognised democratic standards” and that the Republic organising the referendum “shall cooperate with the EU respecting international democratic standards as stipulated by the Constitutional Charter”. The Venice Commission is expected to deliver an opinion on the compatibility of the Montenegrin law on referendum with internationally recognised democratic standards as Montenegro indicated its intention to hold a referendum after the end of the period prescribed in the Constitutional Charter.

The authorities at the level of the State Union and the Republics are making efforts to respect a common understanding on the distribution of powers enshrined in the Constitutional Charter. In practice, problems persist with regard to the articulation of competences between the State Union and the Republics in a number of areas, often due to the lack of a constructive approach. In particular, there has been no progress on harmonising different visa regimes or developing an integrated border management system at State Union level. As regards those competences that were transferred to Republic level, inter-republic cooperation has continued to develop, though mostly not on a formal basis.

As regards the revision of the constitutions of the two Republics, no actual progress has been made, due to the continued lack of consensus within each Republic on completing this key reform. In Serbia the most controversial issues are the way the new constitution is to be adopted and the modalities of future decentralisation, while in Montenegro the key issue remains an apparent lack of political will to engage in substantial reform until after the referendum. Moreover, since the provisions of the current constitutions largely date back to the Milosevic era they do not provide all the guarantees that are necessary for the consolidation of democracy, the rule of law and, in the case of Serbia, full respect for human and minority rights. This remains a serious concern.

In both Serbia and Montenegro the rule of law remains fragile because of constitutional and legal uncertainty, structural weakness and undue politicisation of the administration and the judiciary, the high level of corruption, the pressure exerted by organised crime, and obstruction from parts of the institutional, political, military and state security systems. While there is an increasing awareness of this among civil society, few efforts are made by the authorities to deal with the legacy of the past and reinforce the rule of law. The situation therefore remains a source of concern.

Parliament

State Union

Further to the revision of the Constitutional Charter, which was adopted in June 2005, direct elections to the Parliament of Serbia and Montenegro – originally planned for March 2005 - will now be held separately in the two Republics at the same time as elections to the respective parliaments. The mandate of the current members of Parliament has been extended until such elections take place, thus retroactively restoring their legitimacy.

The functioning of the State Union Parliament, which has limited competences, has remained weak. During the reporting period, it has adopted three laws and a number of ratification laws of international agreements. The State Union Parliament continues to lack specialised staff. Parliamentary control of the military has remained weak.

The State Union Parliament adopted a Resolution on European integration in June 2005. Even though it was not approved with a political consensus, this is a welcome development. This resolution should strengthen the link between internal reforms and EU integration requirements as well as parliamentary control over the Council of Ministers in that process.

Serbia

The legislative activity of the Serbian Parliament has intensified further. The adoption of the new Rules of Procedure in June 2005 represents a significant step forward. The new rules reinforce the role of the parliamentary committees in law-making, with a view to increasing the efficiency of Parliament’s work. They also strengthen parliamentary control over the Government and the role of the Committee for European Integration. Parliament continues to lack specialised staff. Although parliamentary sessions are open to the public, the law-making process still suffers from inadequate public consultation and does not fully take into consideration the expertise of relevant professional or international organisations . There has been no development as regards the electoral legislation.

Recent problems in relation to the transfer of MPs from the opposition to the ruling coalition have highlighted the need for a clearer regulation of the issue of the parliamentary mandates and a scrupulous respect of rules concerning incompatibility of functions. The decision of the Democratic Party (DS) to withdraw from the parliamentary works gives rise to concern.

In spite of limited resources, the Committee for European Integration has continued to carry out valuable work in implementing the priorities from the European Partnership and amending relevant legislation, although its opinions have not always been fully taken on board. The Committee, however, has limited expertise to check the compatibility of legislation with EU standards and relies upon external resources.

Montenegro

In Montenegro, the opposition, which boycotted the work of Parliament from September 2003 until autumn 2004, has still not resumed fully the work in the parliamentary committees. New rules of procedure are still awaited. The Parliament has continued its intensive legislative activity. There has been no development as regards electoral legislation.

In June 2005 a Resolution on European integration was adopted with the support of both the parliamentary majority and part of the opposition. This is a welcome development. This resolution should strengthen the link between internal reform processes and EU integration requirements as well as parliamentary control over the Government in that process.

The functioning of the Committee for European Integration remains weak and inadequate, due on the one hand to political difficulties, and on the other to lack of resources, including specialised staff. While the relevant bills forwarded by the Government contain a statement on compatibility with EU standards, the Committee itself has very limited expertise to perform similar checks.

Government

State Union

No progress has been made as regards the work of the State Union Council of Ministers, which continues to suffer from structural weaknesses (in particular concerning coordination and the performance of some individual ministries) and from the problems relating to compliance with the Constitutional Charter.

The high-level Serbia and Montenegro Council for European Integration, set up to give political direction and strategic guidance to the country’s EU aspirations, has not met since April 2005.

The position of the European Integration Office continues to be fragile, due to both a lack of resources and structural weaknesses as regards its formal status and competences. While the Office has made efforts to implement the relevant priorities of the European Partnership, it has not been put in a position to develop technical and administrative guidance for EU integration-related activities. Coordination with the respective republican institutions has improved, though some difficulties persist. Co-operation between the European Integration Office and the State Union Parliament, notably the parliamentary European Integration Committee, is good but there is no formal mechanism for checking the compatibility of legislation with EU standards.

With a view to the opening of the Stabilisation and Association Agreement negotiations, the State Union Council of Ministers set up the Serbia and Montenegro negotiating team in July 2005. The Minister of Foreign Affairs was appointed head of the team. Three working groups were established for those chapters of the agreement where the State Union will lead the negotiations (preamble, political dialogue, general principles, institutional provisions, transitional and final clauses, visa/asylum/migration, and harmonisation). The relevant negotiation platform has been adopted.

Serbia

In Serbia the lack of coordination within the Government persists. There has recently been a worsening of relations with the civil sector and the media both of whom have been raising the issue of war crimes, and in particular the Srebrenica massacre; this attitude from the side of the Government reflects a continued failure to appreciate the role that civil society and the media play in a democratic society and worrying tendencies towards political interference in their work. Of equal concern have been the apparent attempts by some members of the Government to interfere with the functioning of the justice system.

A comprehensive strategy for joining the EU was adopted by the Government in June 2005. This is a welcome document which needs to be further elaborated and followed by increased involvement of line ministries and agencies in the European integration process. In line with the October 2004 parliamentary Resolution on EU Integration, the Government regularly submits reports on the activities in that process, which are usually debated in the parliamentary Committee for European Integration. The mechanism institutionalised in the Government Rules of Procedure, whereby every proposed bill must be accompanied by a statement on compliance with EU standards, has been implemented, with substantial involvement of the European Integration Office. The Government has shown reluctance to forward the statement to Parliament, as part of the justification of a bill, in spite of requests by the Committee for European Integration, which still needs to develop its capacity to produce such expert reports.

The new Law on Government has upgraded the position of the European Integration Office by putting it under the responsibility of the Prime Minister, who has in turn delegated European integration affairs to the Deputy Prime Minister. This Office continues to develop the institutional capacity for coordination on EU-related issues in cooperation with the European integration contact points established in all line ministries. It has developed a key role in the preparation of annual action plans for harmonising Serbian laws with the EU acquis , and is in charge of submitting quarterly reports on the implementation of these action plans. The first such report has been prepared and published and contains valuable information about ongoing activities and future requirements. The Office lacks the institutional capacity to ensure that the actions by the Government and administration properly satisfy SAP political criteria.

With a view to the opening of the SAA negotiations, the Serbian Government has appointed the Deputy Prime Minister as head of the negotiating team and has set up six working groups. The negotiation platform has been adopted by the Government.

Montenegro

In Montenegro the functioning of the executive continues to be characterised by smooth decision-making. Implementation capacity remains weak, although the authorities have undertaken steps to tackle this issue. In spite of the recent adoption of a strategy on the fight against corruption and organised crime, the environment remains conducive to corruption. Efforts have been made to take on board the relevant international expertise concerning the content of some major draft laws in preparation. Cooperation with civil society has continued to progress on EU-related issues, but the overall situation needs further improvement. NGOs have protested against government interference in media freedom .

Having consolidated its infrastructure and resources, the Ministry for International Economic Relations and European Integration is playing an increasing role in the coordination of EU-related activities, including the preparations for Stabilisation and Association Agreement negotiations, and should continue to focus on the European integration agenda. There is a standing Government Coordination Group on EU-related issues, involving the line ministries and relevant agencies. The mandatory statement on the compatibility of draft laws with EU standards is implemented in the governmental law-making process. The relevant drafts forwarded to the Parliament contain the statement on compatibility. There are also increasing references to EU standards or SAP criteria in the text of justifications accompanying some important bills and forwarded to the Parliament.

With a view to the opening of the Stabilisation and Association Agreement negotiations, the Montenegrin Government has appointed the Minister for European Integration as head of the negotiating team and has set up six working groups. The negotiation platform was adopted by the Government.

Public administration

State Union

No progress has been made as regards the State Union administration, which still lacks any genuine civil service legislation, with detrimental consequences for the status and accountability of State Union officials. Furthermore, the precarious financial situation of civil servants persists.

Serbia

Pending the adoption and full implementation of new laws, the Serbian administration remains overstaffed but at the same time suffers from a shortage of qualified personnel and undue political interference, which affects both institutional and policy continuity.

In the context of the reform strategy, the Serbian Parliament adopted the Law on the Government (which is currently being reviewed by the Serbian Constitutional Court, following an initiative by the People’s Advocate Office of the President), and the Law on Public Administration and the Law on Civil Servants. Regulations on the salaries of civil servants are still pending. The authorities have indicated that most of the by-laws implementing the Law on the Government have been adopted, with the notable exception of the new rules of procedures of the Government. A law creating the function of an Ombudsman was passed in September 2005. This is welcome development. This law now needs to be implemented in particular by securing adequate budgetary means to the Ombudsman’s Office. As regards the Provincial Ombudsman in Vojvodina, in spite of limited resources and infrastructure, the Office has developed a wide range of activities, including ex officio actions to investigate human rights abuses. There is no specific information on the follow-up to the Ombudsman’s recommendations, apart from general statistics for 2004 claiming that out of 265 cases 188 were resolved at the level of the Ombudsman while 71 were not receivable.

As regards decentralisation, which is a key issue in the context of the debate on the constitutional revision, there are concerns on the impact that the recently adopted law on Government may have on local self-government. There is still a need to grant to municipalities the right to own and manage properties.

Montenegro

In Montenegro further progress has been made in completing the legislative framework of public administration reform. In practice, implementation capacities continue to be weak, in terms of both funds and infrastructure and personnel and training. This is coupled with problems of poor accountability and continued political interference.

The establishment of the Authority for Human Resources Management, which still needs to become fully operational, is a positive step. The implementation of the legislation is ongoing. The new recruitment policy is operational but the new organisational structure and new salary system are still not fully in place.

The Ombudsman’s Office is still at an embryonic stage. The Ombudsman’s annual report, released in June 2005, notes that relations with the authorities are mostly good, except at local level, where the lack of understanding of this institution seems to be the key reason for insufficient cooperation. An awareness-raising campaign was conducted in summer 2005. The available statistics (for 2004) indicate that in numerical terms the follow-up to the Ombudsman’s recommendations has been satisfactory (out of 34 recommendations issued, 19 have been complied with and 15 have not).

Some developments have taken place in the field of decentralisation where the Government has set up a co-ordination body for local government reform. Several laws related to decentralisation are pending.

Defence reform

Defence is a State Union competence. The reform of the military continues to meet with significant resistance and obstruction from some political actors and elements within the army itself. The adoption of the military doctrine is pending. Despite efforts undertaken, the State Union parliamentary committee which is supposed to ensure democratic control over the military continues to be weak. This is a source of serious concern. Financial management is notionally entirely in the hands of civilian institutions (State Union Ministry of Defence and Council of Ministers, Supreme Defence Council, Governments of the two Republics), but the overall system of allocation and management of military funds has been the subject of controversies and confrontations between the State Union and republican (notably Serbian) authorities, culminating in the recent resignation of the Minister of Defence. The continued lack of the relevant legislation at State Union level and conflicts between different actors have added to concern over the transparency of military expenditures and allocation of military property.

At the same time, reform continues to be constrained by scarce financial resources. The issue of the ownership and rationalisation of military assets has been only partially resolved by the establishment of the Fund for military reform, whose legality continues to be disputed. Its functioning is also affected by the decision-making on the disposal of assets, which is subject to cumbersome procedures involving prior consent by the republican governments: this has led to sales of military assets in Serbia being blocked.

There have been further personnel changes and downsizing. Although the Ministry of Defence, with international assistance, has been making efforts to minimise the social impact, redundancies have led to protests and in some cases social unrest.

There is still resistance within the military system to the rule of law and cooperation with the ICTY.

Serbia and Montenegro is seeking membership of NATO’s Partnership for Peace, but this is contingent upon full cooperation with the ICTY.

Judicial system

As regards the structure of the judiciary, the two Republics have two autonomous judicial systems, formally linked only by the authority of the State Union Court. Montenegro’s authorities have not yet found a satisfactory solution for the premises of the State Union Court which, according to the Constitutional Charter, should be located in Podgorica. The State Union Court continues to sit temporarily in Belgrade, with the bulk of its budget coming from Serbia. The State Union Court, which has nine appointed judges and only basic equipment and support staff, has inherited more than 1000 unsolved cases from the former Federal Constitutional Court and Federal Court. In the course of 2005, the State Union Court has reportedly solved 350 cases, out which 50 concerned constitutionality and legality. According to the authorities, there is now agreement on the exact scope of the State Court’s powers (notably with regard to vetting of the constitutionality of acts of the Republics and the implementation of the European Convention of Human Rights) though the decision–making procedures of the Court need to be improved. Pending these modifications, the agreement on the scope of powers remains largely untested.

The transfer of powers of military justice to civilian courts, which took place in January 2005, has been implemented smoothly as regards criminal and civil matters. To this effect, in Serbia specialised departments have been formed within the regular courts. Concerning administrative matters, there is a considerable backlog of 3500 administrative cases inherited from the former Supreme Military Court. In Montenegro, these cases are dealt with by the administrative courts established earlier in 2005. In Serbia, the administrative courts which will take over the administrative cases will be established only in 2007.

Judicial cooperation between the Republics, which includes the mutual recognition of court decisions in both civil and criminal matters and honouring requests for legal aid between the courts, has continued to develop on the basis of a Memorandum of Understanding signed by the two Ministries of Justice in June 2004. Good cooperation exists in practice, although it depends on professional and personal relations rather than on a systematic and sustainable approach.

In Serbia the judiciary has continued to exhibit serious weaknesses. Its independence continues to be severely undermined by political pressure on the appointment of judges and prosecutors and their activities, and the system remains heavily burdened with the legacy of the previous regime. On the positive side, steps have been taken to ensure the effective functional independence of the War Crimes Prosecutor.

The lack of adequate resources to ensure financial sustainability and provide for better functioning is reflected in the continuing inefficiency of the justice system. At present, with the Justice Ministry solely responsible for the judicial budget , there is limited scope and capacity for the judiciary to influence budgetary decisions so that they address actual needs.

Serbia has so far failed to provide the legislative framework and to create and support an institution with the mandate to develop and implement a comprehensive training programme for judges. There is neither initial induction training for newly appointed judges nor continuing legal education for sitting judges. The Judicial Training Centre remains a very weak institution. Present training activities for the judiciary are donor-driven, with little coordination or direction provided by Serbian authorities, and are very limited in terms of participating practitioners, scope of training and results achieved.

In spite of efforts to improve legislative provisions (mainly in the area of civil law) aiming at shortening procedures and measures to deal with the sizable backlog of cases, the continuing inefficiency of the judicial system represents a serious obstacle to the reform process.

As regards the reform of criminal legislation, the Criminal Code and the law on witness protection were adopted in September 2005. The revision of the Code of Criminal Procedure and supplementing legislation as well as the law on police are still pending.

Finalisation of the Serbian Government’s judicial reform strategy has been delayed. Although the strategy defines as priorities the independence, accountability and efficiency of the judicial system, it also includes worrying provisions on the reappointment of judges after the initial limited mandate of five years, which in the absence of clear, professional criteria and transparency in the appointment procedure severely undermine the independence of the judicial system. Equally worrisome are the provisions placing the prosecutor system under the Ministry of Justice, in particular given the envisaged transfer to prosecutors of all the investigative tasks so far attributed to the investigative judges. Once it has been aligned with relevant international standards, the success of this important reform process will largely depend on the political will to implement it and on securing the full support and involvement of the legal professions and practitioners in its future implementation.

Despite considerable improvements in the legislation in both criminal and civil matters in Montenegro, proper implementation remains a source of serious concern. Although the legislative provisions on the organisation of the judicial system have been amended to secure the independence of the judiciary, in practice this is often obstructed by political influence over the appointment procedure for judicial positions, in the absence of clearly defined criteria for the appointment of judges and prosecutors and swift implementation of these criteria.

The Judicial Training Centre, which is still a largely donor-dependent institution, has continued to provide training of appointed judges, mostly on the implementation of the European Convention on Human Rights. The law envisaging comprehensive training of judges and prosecutors and the strengthening and financial viability of the Judicial Training Centre has not yet been adopted

Following the establishment of the administrative and appellate courts in January 2005, some additional judges have been appointed with a view to clearing the backlog of inherited cases and handling the increased volume of new cases. Delays in court proceedings are the main category of complaints brought to the attention of the Ombudsman.

The Special Prosecutor for Organised Crime has been appointed and the Office is now operational, but only modest results have been achieved so far in addressing the issue of organised crime, compared to the scale of the problem and the threat it represents to society. There has been little progress as regards the implementation of the witness protection law, due to insufficient cooperation between the judiciary and the police and inadequate financial support.

In both Republics, care should be taken to further develop the legal framework for witness protection, in such a way as to ensure that the safety of vulnerable witnesses is appropriately balanced with the accused's right of defence.

Anti-corruption policy

International surveys continue to indicate that Serbia and Montenegro suffers from a high level of corruption.

In May 2005 the Serbian Government submitted to the Parliament a strategy for the fight against corruption, developed with Council of Europe assistance. This strategy needs now to be adopted by the Parliament. In the meantime, problems have emerged with the preparation of the Action Plan for implementation and the establishment of the lead institution, the anti-corruption body, whose role and relationship with the existing structures remain to be fully defined. The Anti-Corruption Council, established as a focal point and an advisory body to the Serbian Government in 2001, has finalised several reports on alleged corruption cases, involving high-ranking officials, but the serious allegations raised and documented were not further investigated or properly addressed by the Government.

Conflicts of interest remain a concern, as there have been delays in implementing the new legislation and the results so far have been limited. The Government is still reluctant to fully implement the law on free access to information. This continues to undermine transparency in public policies. While the law on the financing of political parties has had some positive effects in terms of increased financial transparency, problems still exist with the content of the law and its implementation.

In Montenegro anti-corruption activities are still far from sufficient. At present, the central institution is the Anti-corruption Initiative Agency, which has no investigative or operational authority. This is one of the reasons for the lack of tangible results over the years, despite the numerous cases of corruption reported by the NGO sector. A joint strategy against corruption and organised crime was adopted by the Government in August 2005. It was developed under the lead of the Ministry of Interior, including input from the relevant ministries, agencies, civil society and international organisations. Under this strategy, the central body responsible for implementation will have investigative and operational powers.

The Law on Conflict of Interests has been implemented with difficulty and contains problematic provisions allowing members of parliament to be members of boards of public companies. This legislation needs to be reviewed in line with international standards. The laws on political parties and their financing are being implemented with difficulty. Political parties failed to fully observe the legal deadlines and procedures for reporting financial assets and the financial management of electoral campaigns. Moreover, this law was further amended in May 2005 in a way that undermines the principle of equity in the election process and abolishes the upper limit for budgetary allocations. Other laws are still only in preparation, such as the draft law on free access to public information, which was backed by the NGO sector but is currently in the parliamentary procedure .

Serbia and Montenegro continued to participate in the Council of Europe’s GRECO initiative (Group of States against Corruption). Evaluation visits in the two Republics took place in September 2005.

Human rights and the protection of minorities

Observance of international human rights law

In April 2005 the period for the implementation by Serbia and Montenegro of the commitments it undertook when joining the Council of Europe came to an end. The Council of Europe’s assessment stated that “after more than two years of Council of Europe membership, Serbia and Montenegro has now honoured a large number of accession commitments, in particular when it comes to signature and/or ratification of Conventions and even more so adoption of relevant legislation.” The Council of Europe pointed out a number of areas requiring further efforts, in particular constitutional reform, reconciliation and facing the past, local democracy, the functioning and independence of the judiciary and prosecution service, and protection of minorities. Serbia and Montenegro continues to be subject to post-accession monitoring on a quarterly basis.

As regards the uniform implementation of international obligations throughout Serbia and Montenegro, the authorities claim that the role of the State Union Court’s of the convention on Human Rights and Fundamental Freedoms has been clarified but practical implementation remains to be realised. While the State Union Council of Ministers adopted the decree on the appointment of a state agent in February 2005, the agent was appointed in September, and the appointment of his deputy is still pending. Moreover, there are concerns about the budget allocations for the agent’s office for 2005. In the meantime, around 750 cases against Serbia and Montenegro are pending before the European Court of Human Rights. Other Council of Europe conventions, such as the European Charter on Regional and Minority Languages and the revised European Social Charter, should be ratified shortly.

As regards the right to the protection of personal data, Serbia and Montenegro have ratified Convention for the Protection of Individuals with regard to Automatic Processing of Personal Data (ETS No. 108) in September 2005. However, it is a matter of concern that this has been done without the previous adoption of an appropriate national Law.

Civil and political rights

No progress has been made on enforcing the Serbian Law on the Accountability for Human Rights Violations (the “ Lustration” Law).

As regards mass graves identified in Serbia , to date, no indictment has yet been brought.

In the area of the prevention of torture and ill-treatment , limited progress has been made in Serbia as regards the investigation of all allegations of human rights violations during the state of emergency in March / April 2003. The parliamentary Committee for Security and Defence concluded in May 2005 that “unselective detentions” and “human rights abuses and torture” took place in that period, but the issue is a source of continuing political confrontation. The Office of the Inspector-General in the Serbian Ministry of Interior reported that out of 37 cases brought to its attention in that context, 20 were rejected as unfounded, 6 torture cases were confirmed and 11 are still being investigated.

Efforts to implement the European Convention for the Prevention of Torture have continued, for example by educating relevant parts of the State Union and republican administrations. No progress has been made by the authorities in reacting to the cases brought by the UN Committee against Torture. The lack of transparency and adequate information concerning the number of possible cases of police torture and the measures taken remains a major problem in both Republics. In Serbia, the Office of the Inspector-General in the Serbian Ministry of Interior has continued its work. To date there has been little concrete information as to the outcome of various cases and any sanctions against the police officers alleged to have committed abuses. The independence of the internal control system needs to be maintained and reinforced. In Montenegro, human rights NGOs continue to claim that police torture during detention is a problem, but that action is often obstructed by the police itself. The new Montenegrin Law on Police provides for internal control mechanisms, which now need to be fully implemented. Notably, police ill-treatment in the prison in Spuz (September 2005) needs to be fully and transparently investigated.

In Serbia, the reform of pre-trial detention is contingent on the comprehensive revision of the Code of Criminal Procedure, which is still pending. In Montenegro, the Code of Criminal Procedure in force since 2003 limits the possibility of pre-trial detention to serious circumstances and to specified cases only, where the prescribed penalty must be ten years of imprisonment or more. The principle that proceedings should be conducted without undue delay is introduced in such cases, as well as provisions on mandatory defence.

Prison conditions remain precarious in both Serbia and Montenegro because of legislative, administrative and infrastructural problems. The recently adopted Serbian reform of the legislation on the execution of penal sentences and on juvenile offenders needs to be fully implemented. In the meantime, efforts have been made to improve prison conditions in several correctional facilities in order to meet the requisite standards, in particular as regards conditions in prison hospitals. This is becoming particularly relevant in the most serious cases which entail longer prison sentences, such as organised crime and war crime cases.

As regards access to justice , the basic legal framework on legal aid is laid down in the current State Union constitutional provisions referring to equality before the law, the right to legal protection, representation and defence. In Serbia mandatory defence is provided for in the case of serious criminal charges and in the case of police detention. In civil cases, the right to free defence is mainly defined in terms of the cost of the lawsuit and limited thereto. At present there is a lack of coherent planning and management of legal aid, with the result that laws are not being applied and there is no clear mechanism for ensuring the quality of legal aid. In Montenegro the system of free legal aid has not yet been introduced. In criminal cases, some provisions exist for serious cases and in instances of financial hardship. In civil cases, some aid is available to meet costs. In practice, the existing provisions are not being fully implemented.

As regards religious freedom , there are constitutional guarantees of freedom of thought, conscience and religion at all levels. In Serbia there has been no progress in the adoption of new legislation, which needs to be in accordance with international standards concerning the equality of religious organisations and the principle of separation of church and state. There have been considerable delays in legal proceedings concerning religiously motivated incidents, notably the burning of mosques in the aftermath of the March 2004 violence in Kosovo . In Montenegro the legislation regulating the status of religious communities is obsolete and needs further improvements to be fully in accordance with international standards . As regards conscientious objection , the Decree on civilian service has been implemented with difficulty, as the number of alternative institutions assigned for this purpose has proved to be insufficient. Furthermore, the Decree was amended in January 2005 in a non-transparent manner, with the introduction of what seem to be undue restrictions, although the Ministry of Defence insisted that their aim was to counter perceived abuses of the right to conscientious objection.

Freedom of expression and media in Serbia saw improvements through the abolition of prison sentences for slander/libel and replacement by fines. There are also occasional cases of state officials in Serbia publicly denigrating and even threatening journalists, which undermine media freedom. This problem has escalated recently, with acts being targeted particularly at media which are critical of the Government and, more specifically, those that advocate the need to address the legacy of the past, including war crimes and organised crime. The new amendments to the Broadcasting Law, adopted in August 2005, which are widely contested by professional organisations, contain provisions that undermine the independence of electronic media, in particular at municipal level, by introducing further delays in the timeframe for privatisation. The amendments centralise the work of the Broadcasting Council and no longer recognise the specificity of Vojvodina as a multicultural region. In Montenegro media freedom suffers from political interference. In April 2005, NGOs protested against the distribution by the Montenegrin Ministry for Foreign Affairs of a media analysis critical of the media that were not seen as supporting independence, and suggesting government interference, notably with the editorial policy of the state broadcasting company. The legislation regulating media concentration has not been adopted.

The Serbian law on free access to public information is still not being fully implemented. The Office of the Commissioner for public information became operational only in June 2005; the Agent also reports problems concerning the administration’s understanding of the law and its continuing ignorance and frequent reluctance to comply. In Montenegro similar legislation is still pending in Parliament.

New legislation on freedom of association is still pending in Serbia. Meanwhile, there continue to be difficulties with the status of both political associations and representatives of civil society, due to the lack of a proper legal framework. Montenegro has a satisfactory law on NGOs, but further action is still needed on the issue of tax exemptions. In May 2005 Montenegro also adopted the new law on public associations, which appears to be in line with international standards.

As regards non-discrimination , while Serbia and Montenegro is a signatory to all relevant international instruments, including Protocol 12 to ECHR (this protocol entered into force in May), there has been no progress in the adoption of a comprehensive anti-discrimination law, although specific laws have been adopted or are in preparation in both Republics, addressing gender equality and protection of vulnerable groups. Legislation in Serbia and Montenegro only very sporadically mentions prohibition of sexual discrimination as a separate obligation (media and labour legislation). According to human rights organisations, discrimination based on sexual orientation is a problem. In general terms, it appears that the level of protection against discrimination in Serbia and Montenegro is still far from the EU standards requiring the implementation of the principle of equal treatment between persons irrespective of racial or ethnic origin and the establishment of a general framework for equal treatment in employment and occupation, irrespective of religion or belief, disability, age or sexual orientation.

As for property rights , both individual and communal, there has been limited progress in Serbia concerning preparation of new legislation in cooperation with the Council of Europe. The restitution fund reportedly has at its disposal 42 million euros. Meanwhile, the law on registration of nationalised property was adopted in May 2005, stipulating July 2006 as the deadline for registration. Former owners regarded this law as a further undue delay in the restitution process. There has been no progress concerning the restitution of church property either. In Montenegro, the implementation of the law adopted in March 2004 has been difficult. The restitution fund increased in 2005 as privatisation revenues grew; the municipal commissions established to deal with restitution requests have rendered several first instance decisions. None of these is enforceable at the moment, and they have therefore not yet been fully implemented.

There is a well developed and very active civil society in Serbia and Montenegro. Its situation remains precarious, notably in Serbia due to the continued lack of adequate legislation and the knock-on effect on financial sustainability. In Montenegro there is a law dating from 1999, but this needs further improvements, in particular concerning the financial position of NGOs, but also their participation in public policy. The Montenegrin Government has still not adopted the platform for cooperation with the NGO sector. In both Republics NGOs remain heavily dependent on donor support. The authorities have made efforts to take the opinions of the civil sector on board, notably in the area of poverty reduction; parliaments have become more open, allowing NGOs to attend sessions; both the Serbian Office for European Integration and the Montenegrin Ministry for European Integration have signed special memoranda of cooperation with NGOs. On the other hand, the administration continues to show insufficient understanding of the genuine role of NGOs in a democratic society: in both Republics NGO activities that imply criticism of the government, and in particular those that draw attention to sensitive, often unpopular issues, are publicly denigrated.

Economic and social rights

Serbia and Montenegro signed the revised European Social Charter in March 2005, but its ratification is pending.

As regards gender equality , in spite of the fact that there are no legal restrictions, the representation of women in public life (in parliaments and governments at all levels) remains poor, as is their practical access to job opportunities. The situation is difficult, largely because there is neither a general anti-discrimination law nor specific legislation or coordinating activities on gender equality (although the latter is in preparation). The existence of Councils for Gender Equality has so far produced limited results. There is thus an urgent need to prepare Actions Plans for gender equality. One of the most important gender problems in Montenegro is the high level of domestic violence. In Montenegro, the trafficking of women remains a source of concern.

No development has taken place as regards respect for the rights of the child , in particular to eliminate discrimination against minority and disabled children. The issue of childcare centres remains to be tackled.

As regards socially vulnerable and disabled persons, there is still no specific legislation regulating the rights of persons with special needs in Serbia. In Montenegro the law on the protection and implementation of the rights of persons with mental disorders was adopted in May 2005. In practice, disabled people in both Republics often remain subject to discrimination. Access to social services is still difficult. The de-institutionalisation of the mentally ill has not even started.

As regards labour rights, both Montenegro and Serbia have new, comprehensive legislation. In Serbia, a new labour law was adopted in May 2005. Enforcement remains rather weak.

As regards social dialogue , competences are held at the level of the Republics. Social dialogue takes place mainly at the tripartite level, whereas bipartite social dialogue is at an embryonic state yet. Employers associations are not sufficiently developed and both employers' associations and trade unions need to further develop their technical and administrative capacities. In Serbia , the Economic and Social Council has started meeting but the representativeness criteria set to participate in the council have led to disputes between social partners concerning legitimacy and representations rights. In Montenegro , the Government is now planning to set up a revamped version of the Economic and Social Council. Neither in Serbia nor in Montenegro is the Economic and Social Council perceived by stakeholders as an independent, neutral and a powerful advocate.

Minority rights, cultural rights and the protection of minorities

Serbia and Montenegro is a signatory to all relevant international instruments in this area. It has ratified the Framework Convention for Protection of National Minorities, and the ratification of the European Charter of Local and Regional Languages is pending. International agreements have been signed by Serbia and Montenegro with countries in the region (Hungary, Romania, Croatia and Former Yugoslav Republic of Macedonia).

The establishment of National Councils for minority groups under the 2002 Minorities Law has continued, although in Serbia only. The initial difficulties concerning the funding of their activities have been resolved, and the financing of the Councils has now been institutionalised in the Serbian budget. The legislation needed to regulate their status and work, which is in preparation, has still not been adopted. Despite improvements, ethnically motivated incidents still occur, reflecting the legacy of the past decade and systemic issues in the implementation of existing standards.

Sporadic incidents have been reported across Serbia, including in Vojvodina, directed against minority populations, particularly ethnic Hungarians. These incidents are not the result of a deliberate policy of the authorities but the authorities’ response need to be more resolute and timely. The high-profile Council for National Minorities, chaired by the Serbian Prime Minister, which was established in October 2004 after the incidents in Vojvodina, has taken a proactive role and has initiated follow-up measures to the recommendations formulated by the European Parliament on the basis of the fact-finding mission that took place in January 2005, concerning notably education and, albeit so far with limited results, the judiciary and law enforcement. It is necessary, however, to introduce more transparency and regular information sharing to all interested parties and public in general about the activities of the Council.

As for Southern Serbia, the coordinating body, which was restructured and re-activated in March 2005, was fully constituted in June 2005, with the high-level participation of the Serbian President and Prime Minister. Since its reconstitution, some progress has taken place in field of education but local politicians have expressed concern about the working of the body, and in particular the level of engagement of line ministries. In September, for unrelated political reasons, the head of the Coordination Centre was replaced.

Montenegro has continued to prepare its own legislation, although this has been seriously delayed by the lack of political consensus, particularly about the arrangements for the political representation of minorities. In practice, respect for human and minority rights is mostly satisfactory, though there is still insufficient representation of minorities in public administration, despite constitutional guarantees.

Work has continued on the integration of the Roma, but the situation of this community remains precarious. There is continuing discrimination against Roma people, whose economic and social conditions are difficult (the percentage of poverty among Roma is four to five times higher than the national average). On the basis of the comprehensive Strategy for Integration and Economic Empowerment of Roma, drafted by the State Union Ministry for Human and Minority Rights (as part of the activities concerning the Decade of Roma Inclusion, 2005-2015), a number action plans in the areas of media, social protection, displaced persons, women and returnees have been prepared by the relevant Serbian ministries and are awaiting approval. In practice there is little cooperation between this State Union Ministry and the Montenegrin authorities, which have prepared a separate action plan for Montenegro. Implementation of Roma rights remains difficult: in both Republics there is a lack of accurate statistics on their real number, and a significant proportion of the Roma population do not possess basic personal documents. In addition, prejudices against this minority group among the majority population are strong and have in some cases been hampering plans for their resettlement; similar problems have been impeding activities relating to the education of Roma children. Resources for implementation are scarce, and the governments rely heavily on donor support, notably in the process of readmission. The situation of Roma people who are internally displaced is particularly difficult in both Republics.

Regional issues and international obligations

Cooperation with the International Criminal Tribunal for former Yugoslavia (ICTY) is an international obligation for Serbia and Montenegro as a UN Member State and as a signatory of the Dayton / Paris Agreements. It is also an obligation under the Council of Europe post-accession commitments and an integral part of the EU’s political conditionality under the Stabilisation and Association process. ICTY cooperation is an international obligation for Serbia and Montenegro as a whole and therefore also concerns the Republic of Montenegro.

In the report submitted to the UN Security Council in June 2005, the ICTY Prosecutor noted that significant progress had been made, but that the authorities’ policy of “voluntary surrenders” had reached its limits. One handover took place on the eve of the endorsement of the Feasibility Report by the EU Council of Ministers in April. Another handover took place in mid-September as a result of the co-operation between Belgrade’s authorities and Republika Srpska. The Belgrade’s authorities have also contributed to the arrest of two indictees in Argentina and Russia, who have not yet been transferred to The Hague. There are still a number of indictees at large, in particular Ratko Mladic and Radovan Karadzic, who need to be brought to justice. The authorities are expected to take action in this respect.

The National Council for Cooperation with ICTY, chaired by the State Union Minister for Human and Minority Rights, has continued to take important decisions concerning waivers for witnesses and access to documents; there is no backlog of ICTY requests. The implementation of the Council’s decisions is still sometimes obstructed by those in the administration and the army in possession of documents but unwilling to cooperate with the ICTY. The Montenegrin members have not resumed their participation in the Council.

Serbia and Montenegro has not yet fully aligned itself with the EU common position on freezing the assets of ICTY fugitives. The State Union draft law on freezing the assets of ICTY fugitives is pending before the State Union Parliament. In the meantime, the Serbian judiciary has issued an order freezing these assets. In Montenegro, no such an order has been issued, as the authorities claim that no ICTY fugitive has registered property there. If they had, an order to freeze their assets could be issued on the basis of the existing criminal legislation.

As regards domestic war crimes trials , domestic courts have continued to be cooperative and are doing good work in trying some low-profile cases (notably the Ovcara case). Some further steps have also been taken to improve their organisational and infrastructure capacities. The recent amendments to the Criminal Code introduce new offences of crimes against humanity and genocide, but the important issue of command responsibility has been only partially addressed by making failure to prevent and notify criminal activity against humanity a crime. Cooperation with the police continues to be insufficient, and both the judiciary and the police are still subject to heavy political pressure. The overall political climate is such that there is no guarantee that any high-profile war crimes trails could be conducted in a fair and transparent manner. As regards Montenegro, the trial concerning the deportation of a number of Bosnian refugees in 1992 has started.

Serbia and Montenegro continues to have a positive attitude towards the International Criminal Court (ICC). Serbia and Montenegro has consistently refused to sign bilateral agreements giving exemptions from ICC jurisdiction. It should continue to do so.

There are no major problems in Serbia and Montenegro’s compliance with the Dayton Agreement, apart from the outstanding cases relating to cooperation with ICTY. There have been mixed developments as regards the need to address the issue of war crimes, with the most notable positive being the actions by the Serbian President concerning the commemoration of Srebrenica.

Full respect of United Nations Security Council Resolution 1244 , governing the current status of Kosovo, is an obligation for Serbia and Montenegro as a UN member and a key requirement for regional stability.

The Belgrade-Pristina sectoral dialogue has been making progress. Four working groups on technical areas of mutual interest are in place: Energy, Returns, Transport and Telecommunications and Missing Persons. Both delegations have been able to travel to both Pristina and Belgrade without hindrance. In general, there is a need to intensify the frequency of the dialogue.

With few exceptions, Kosovo Serbs, who massively boycotted the elections, are still not participating in the Provisional Institutions of Self-Government (PISG). The participation of Kosovo Serbs in these institutions, in order to voice their legitimate concerns about the implementation of the UN-led Kosovo standards, is now crucial and should be encouraged by Belgrade.

Belgrade and Kosovo Serbs (the latter apparently disunited) have also dismissed the Kosovo Decentralisation Plan. A positive step was, however, taken in mid-September, when delegations from Pristina and Belgrade met to discuss decentralisation, in a meeting organised by UN Secretary-General’s Special Envoy and hosted by the Austrian Foreign Ministry. This encounter facilitated an exchange of views and greater understanding of respective positions. There needs to be now a greater compromise that allows more concrete progress to be achieved in this important issue. Moreover, the fact that representatives of the Provisional Institutions of Self-Government taking part in regional initiatives and conferences have experienced difficulties in entering Serbia continues to be an issue that needs to be followed up.

In line with UNSCR 1244, Belgrade should encourage participation with a view to promoting the development of a democratic, multi-ethnic society in Kosovo in the interests of all Kosovo communities. Furthermore, Belgrade’s constructive engagement in the Kosovo issue will help to advance Serbia and Montenegro’s European prospects, while obstruction could become an obstacle.

The high number of refugees and internally displaced persons continued to aggravate already difficult socioeconomic conditions in both Republics. Furthermore, the precarious situation of this vulnerable population group has a significant impact upon the overall political situation and the current trend towards radicalisation in the country.

According to data released by UNCHR in January 2005 after the comprehensive refugee re-registration exercise, there are currently around 140 000 refugees and 245 000 registered internally displaced persons. The fall in the number of refugees is partly due to the implementation of new legal provisions allowing dual citizenship, as some people lost refugee status by acquiring Serbia and Montenegro citizenship. Serbia and Montenegro is also participating in the regional initiative on the return of refugees with Bosnia and Herzegovina and Croatia. Although dialogue between Belgrade and Pristina on the important issue of returns of internally displaced persons has not progressed, some co-operation was achieved between Kosovo and Montenegro with the establishment of a protocol on the returns of internally displaced persons.

In Serbia the authorities continue their efforts on both repatriation and local integration, in cooperation with partners in the region. The implementation of the agreement on the return of refugees with Bosnia and Herzegovina has continued to facilitate safe returns. There has been no progress in the adoption of new refugee legislation.

Montenegro has prepared its own national strategy to allow either repatriation (or removal to a third country) or local integration, but financial resources for its implementation are scarce, thus affecting prospects for putting the strategy into practice. According to the relevant international organisations, practical problems concerning labour and related rights for refugees still occur, but the authorities are taking action to address the issue through legislative changes.

The unresolved situation concerning the practical exercise of voting rights for internally displaced persons from Kosovo who are currently in Montenegro but wish to vote in the Serbian elections persists. The two Republics need to work together to ensure that internally displaced persons do not remain disenfranchised.

Serbia and Montenegro has continued to pursue a policy aimed at improving relations with all its neighbours with a view to contributing to regional stability. It continues to take part in intensive multilateral cooperation . Under the auspices of the Stability Pact, Serbia and Montenegro has concluded the full network of bilateral FTAs with all the Western Balkan countries and with Bulgaria, Romania and Moldova. The FTA with the former Yugoslav Republic of Macedonia has been also revised. It is now critical that these international commitments are also fully implemented.

Bilateral relations with all countries, in both the political and the commercial sphere, have continued to improve, though sporadic problems recur. Some important issues are still outstanding, notably border demarcation with Croatia and BiH and the suits pending against Serbia and Montenegro before the International Court of Justice, filed by these two countries. The celebration of the tenth anniversary of Operation Storm by Croatia and the reaction to this in Serbia also placed a strain on bilateral relations. On the other hand, the high-level presence of Serbia and Montenegro at the Srebrenica commemoration was an important gesture contributing to regional reconciliation. Recently, new tensions have occurred in relations between the Serbian Orthodox Church and the non-recognised Macedonian Orthodox Church, affecting generally good relations with the former Yugoslav Republic of Macedonia.

General evaluation

As regards the political situation and the state of democracy and rule of law in Serbia and Montenegro, constitutional and legal certainty has remained precarious. While the legitimacy of the State Union Parliament has been restored and functioning of the Serbian parliament has improved with the adoption of new rules of procedures, the overall functioning of democratic institutions remains affected by structural weaknesses. No actual progress has taken place as regards the revision of the Constitutions of the two Republics.

Constitutional issues in Serbia and Montenegro, notably with respect to the relationship between its two constituent Republics and the functioning of the institutions of the State Union, should be addressed in a constructive spirit and in full respect of the Constitutional Charter of Serbia and Montenegro. This applies also to a possible referendum on independence of either Republic. Such a referendum will have to comply to and internationally recognised democratic standards, in the light of the forthcoming recommendations of the Venice Commission.

There has been progress in both Republics concerning the legal framework of public administration reform, but the implementation of this reform is still at a very early stage. No progress has taken place as regards the reform of State Union public administration. The level of administrative capacity remains generally low. The administrative structures with a view to the SAA negotiations have been set up at the level of State Union and the two Republics.

Defence reform continues to meet serious obstruction, due to insufficient democratic control and lack of transparent financial management.

The State Union Court has started working although its capacity remains weak and the agreement on the scope of its powers is still largely untested. The transfer of powers of military justice to civilian courts has been implemented smoothly, with the exception of the considerable backlog of the administrative cases. The judiciary has continued to be affected, especially in Serbia, by serious weaknesses and its independence is undermined by undue political interference.

Corruption remains a serious concern. Some progress has taken place with the development of anti-corruption strategies which now need to be finalised – in Serbia - and effectively implemented.

As regards the respect for human rights , Serbia and Montenegro has made progress in implementing the commitments undertaken by when joining the Council of Europe notably with the appointment of Government Agent for the European Court of Human Rights. There have been problems with regard to freedom of expression and civil society. Cases of police ill-treatment have occurred. Little progress has taken place in relation to the investigation of crimes committed during the previous regime. There is no comprehensive anti-discrimination legislation yet. Respect for minority rights has continued to see some progress, but incidents still occur.

Serbia and Montenegro achieved significant progress in co-operation with the ICTY in the run-up to the Commission Report on the preparedness to start SAA negotiations, in particular delivering a significant number of indictees to The Hague Tribunal. Since then there continues to be good co-operation with regard to waivers to witnesses and access to documents, though this process is still sometimes obstructed by parts of the administration and the army. Serbia and Montenegro has made some further, though limited, progress to bring remaining fugitives to justice. This progress must be continued until full co-operation with ICTY is achieved.

As regards the respect of the United Nations Security Council Resolution 1244 on Kosovo , Belgrade has intensified dialogue with Pristina on technical matters of common interest. However, it has not actively encouraged Kosovo Serbs to participate in the Provisional Institutions of Self-Government. Belgrade’s constructive engagement on the Kosovo issue will help to advance Serbia and Montenegro’s European perspective, while obstruction could turn into an obstacle.

Regional co-operation at the multilateral and bilateral level continues to improve, although sporadic problems occur.

Economic situation

While this Report updates the Feasibility Study of spring 2005, the economic chapter occasionally refers to older data, due to data limitations. The economic developments since April 2005 are included in the paragraph on progress towards economic stability and competitiveness.

Progress towards economic stability and competitiveness

Serbia

Reform momentum was regained . The government’s commitment to macroeconomic stabilisation and structural reform has been volatile. While there seems to be some consensus on the need for market-oriented reforms, the population’s perception of their standard of living having fallen vis-à-vis the late eighties and early nineties serves sometimes as a limitation to otherwise fast economic reforms.

Economic activity accelerated in 2004. Real GDP growth in Serbia reached an estimated 7.5%, mainly supported by services, in particular retail trade (17.9%), as well as agricultural production (19.8%) and industrial output (7.1%). In the first half of 2005, GDP grew by 6.1% year-on-year, driven by a large expansion of services, more than compensating a decline in manufacturing output.

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The negative savings-investment balance led to widening of external deficits . Domestic investment grew strongly while national savings declined, particularly in the non-government sector, resulting in a widening of the savings-investment balance to 13.1% of GDP in 2004. The current account deficit before grants reached 15.5% of GDP. Exports grew by 25.8% in euro terms and imports by 33.6%. Exports covered a mere 36% of imports. Private remittances continued to be high at 14% of GDP while FDI reached a mere 4% of GDP in 2004. Between January and July 2005, the deficit of the balance of goods and services has declined by 21% compared to the same period a year earlier as exports and imports grew by 37% and 4.5%, respectively. Foreign exchange reserves continued to increase in 2005 and reached EUR 4.1 billion end-August. External debt declined to 62% of GDP or 2.5 times projected exports of goods and services for the year 2004. However, despite the July 2004 debt reduction by London Club creditors, the debt-to-GDP ratio has remained relatively high as an increasing share of the external deficit is financed by debt.

Inflationary pressure has mounted . Twelve-month inflation (retail price index) accelerated to 13.8% in December 2004 and to 16.5% in September 2005, driven by buoyant domestic demand, increases in administered prices, rising cost of fuel imports, strong wage growth and the one-off effect of the VAT introduced in January.

Employment remains low and unemployment high. Official figures of registered unemployed show an unemployment rate of 32.4% at end-2004, as compared to 27.2% three years earlier. Adjusted for those who are registered as unemployed but pursue activities in the informal sector of the economy the unemployment stands at below 20%. Long-term unemployment concerns around 70% of the unemployed. Employment is on a declining trend and the employment rate stood at 57.9% in 2003. Employment flexibility and legislation have, in general been improving, but some deterioration of flexibility has also been reported. The impact of newly created companies on job creation has remained insignificant so far. However, the informal sector is estimated to account for an estimated 30% of total employment. The Serbian government adopted an ambitious employment strategy for the period 2005-2010 in April 2005, which describes general conditions and steps to be taken in order to achieve the strategy’s projected goal of reducing the unemployment rate to 10.5%. Progress with regard to employment and social policy is part of the work towards European standards. Further efforts to establish economic and social rights as well as to promote employment and encourage social dialogue will contribute to improving governance and economic performance.

Monetary policy remained unchanged. The National Bank of Serbia attempted to follow a policy to balance the objective of maintaining price stability with external competitiveness and continued to implement its flexible “managed float” exchange rate regime. The Serbian dinar depreciated against the euro by 13.4% in 2004 and 5.7% during the first seven months of 2005. In 2005, authorities re-focused their priorities on keeping inflation in check and aimed for a slower depreciation.

Fiscal retrenchment continued. The consolidated general budget deficit of Serbia for 2004 was reduced to 0.3% of GDP from 2.3% in 2003. Reflecting strong domestic demand and improved tax enforcement efforts, fiscal revenues grew to 45.2% of GDP from 42.7% in 2003. In particular customs and excise revenues grew strongly. Expenditures were generally under tight control, although new social security arrears vis-à-vis the private sector were recorded. Reportedly, the introduction of the VAT in January 2005 helped to boost revenues, but expenditure remained high. For 2005 a fiscal surplus is projected.

The overall macroeconomic policy mix was tightened . The overall macroeconomic policy mix has been tightened in the second half of 2004. In particular an expansionary wage policy (the average real wage grew by 10.4%) has led to wage increases above productivity growth and has been undermining broadly stability-oriented fiscal and monetary policies. However, in the second half of 2004 there was a tangible deceleration of real wage growth, which broadly continued in 2005. To help curb the high domestic absorption, the fiscal policy stance has been significantly tightened in 2004 and 2005. To curb strong credit growth consumer credit regulation has been tightened in December 2004. While this had some mitigating impact on consumer lending rapid growth in credit to enterprises continued unabated.

Prices are broadly liberalised. Price controls on most goods and services are abolished, except for oil and oil derivatives, medicines, one type of bread and flour, coal and gas for heating, electricity, postal services, telecommunication services and railway traffic. Electricity prices were increased to 3.6 euro cent per kWh in 2004, to catch-up with cost recovery. Further adjustments were implemented in July 2005 and in line with dinar depreciation and rising world oil price new adjustments have been announced. Administered prices (including fuel) account for 40% in the retail price index.

The share of the private sector in GDP remains small and the level of competition low. Despite progress in privatisation in recent years a competitive and dynamic private sector has not yet been established. The share of the private sector in Serbia remains low, whereas state and social ownership still governs a large part of Serbia’s output. The absence of a larger share of private sector activity is a substantial obstacle for the provision of a dynamic supply of competitive domestic products and services, and adversely effects inflation and external accounts.

Privatisation has been progressing, but is far from completed. The total number of privatised companies reached 1,524 by end-May 2005, of which 43 were sold through tenders, 1,175 small and medium sized enterprises were sold through auctions, and shares of 324 enterprises were floated at the Belgrade Stock Exchange. The process of restructuring some 76 large and insolvent companies , which were selected by the Privatisation Agency for restructuring, progressed slowly. However, the adoption of amendments to several key laws (such as the laws on privatisation, share fund and financial markets) in May 2005 might help accelerate this process. Of particular importance is the provision which will allow for debts towards the state and state bodies to be automatically written off prior to privatisation. Substantial progress has been made in restructuring and privatisation of the banking system. Most importantly, the sale of Jubanka was successfully completed in February 2005 for EUR 152 million. Two other state-owned banks have recently been sold and three are currently in the process of being privatised. However, two large and systemically important banks still remain state-controlled and efforts would need to be accelerated to privatise a majority in these two banks to a strategic investor. By the end of April 2005 the share of foreign ownership in total bank assets had risen to 52%. The restructuring of network industries , such as the energy, telecommunications and transport sector is still in its initial phase. There is a certain progress in the creation of a necessary regulatory framework and establishment of well-equipped regulatory agencies for these sectors.

Loss-making state-owned enterprises continue to hinder the development of a dynamic private sector . In the Serbian economy, highly indebted socially-owned companies, that need to be closed or restructured and privatised, and state-owned companies with a high number of surplus work-force still play a predominant role.

Administrative barriers to market entry have been reduced, but the business environment is still hampered by bureaucratic obstacles and lack of access to finance. The average time needed to register a company has been substantially reduced to 10 days from over 51. In addition, the initial capital requirement has been significantly lowered from USD 5,000 to EUR 500. The latter was one of the major reasons for the high number of new companies established in the first few months of 2005. While the registration itself is not regarded as a key impediment for starting a business, there are still many bureaucratic obstacles which are hampering enterprise creation. In particular, there remains scope for improvement in a number of areas which impact the business environment, including corporate governance and financial reporting standards. In this context it is also important to mention that the World Bank registers remarkable progress during the 12 last months in Serbia.

Exit barriers remain high while the new bankruptcy law still needs to be implemented. The average time to resolve bankruptcies is 2.6 years at a cost of 23% of the estate value and a recovery rate of 16.6%. A centre for enforcement of bankruptcy procedure at the Privatization Agency was established in February 2005. It acts as a bankruptcy administrator for companies with the majority of state or socially-owned capital. At end-May, 39 enterprises were under its control. However, no bankruptcy procedure has yet been completed.

The slow and inefficient functioning of the judiciary system is seriously hampering the economy. With regards to the execution through courts, the average number of days necessary to execute the court procedures is over 1,000. Sale of housing premises is subject to high taxes, while it takes almost 200 days to register a property with a transaction tax of 5%. The real estate cadastre is in poor condition and almost 80% of all houses and apartments are not registered.

Competition in the banking sector has been increasing. At end 2004, 46 banks operated in the Serbian market. This number has further declined to 40 at end-September 2005 and included 14 majority foreign banks which are among the largest in terms of financial strength. However, in spite of the relatively high number of banks, their capacity (measured by overall credit activity relative to GDP) and efficiency remains low. The interest rate spread remained high and at end-August 2005 the average deposit and lending rates stood at 3.3% and 13.4%, respectively. Reflecting an increasing confidence in the banking sector in line with progress in bank restructuring, remonetisation continued. Broad money increased from about 20% of GDP at end-July 2005 to 26% at end-July 2005. Euroization, measured as the share of foreign-currency deposits in total deposits, rose by 3.3 percentage points in one year, reaching 69% at the end of June 2005. Buoyant economic activity, pent-up demand for durable consumer goods and a surge in foreign borrowing by commercial banks and the corporate sector resulted in a lending boom. As a result, the share of credit as a percentage of GDP exceeded 19% at end-June 2005.

A capital market has begun to develop, but is still in an early stage. Securities’ trading volumes have been on the rise recently and the overall market capitalisation at the BSE (including bonds) has sharply increased from EUR 3.7 billion in October 2004 to over EUR 5 billion in February 2005.

The National Bank of Serbia (NBS) implemented prudential measures to reduce macroeconomic and prudential risks. Since January 2005 the stock of commercial banks’ foreign borrowing of maturities of up to 4 years and all new foreign borrowings by commercial banks independent of maturities are subject to a minimum reserve requirement of 21%, thereby reducing the bias in favour of foreign-sourced funding. Effective April 2005, all short-term deposits of foreign banks with banks operating in Serbia are equally subject to the 21% reserve requirement. In July 2005, the