Report from the Commission - The Stabilisation and Association process for South East Europe - Second Annual Report { SEC (2003) 339; SEC (2003) 340; SEC (2003) 341; SEC (2003) 342; SEC (2003) 343 }
Date: 2003-03-26
Institutions: European Commission
Subjects: Western Balkans, administrative reform, association agreement, cooperation policy, economic reform, economic situation, economic stabilisation, political reform

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 26.3.2003
COM (2003) 139 final

REPORT FROM THE COMMISSION

The Stabilisation and Association process for South East Europe

Second Annual Report

{ SEC (2003) 339; SEC (2003) 340; SEC (2003) 341; SEC (2003) 342; SEC (2003) 343 }

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Executive Summary

The  Commission’s  Second  Annual  Report  takes  stock  of  progress  since  the  first  report
issued in April 2002. It reconfirms the perspective of an even closer relationship with, and
ultimately membership of, the European Union and recognises substantial achievements in
terms of stabilisation of the region.

The  report  also  reveals  shortcomings  and  slow  progress  in  the  reform  process  in  many
sectors and in several countries. A theme running through both this report and those of the
individual countries is the generally poor  record on implementation. The main  challenges
ahead are identified and the Commission remains dedicated to supporting the countries in
their  efforts  to  tackle  them.  Genuine  political  will  and  commitment  on  the  part  of  the
countries  themselves  are  indispensable  in  overcoming  remaining  obstacles  to  transition,
development and European integration.

In  this  report,  the  Commission  outlines  some  measures  which  could  be  considered  to
strengthen the process further and draw the countries ever closer to the Union in what can
be considered a shared  agenda  for  European  integration.  This  demonstrates  the  European
Union’s continued commitment to the region. However, the time and the pace with which
the region can fully integrate into the European Union ultimately depends on the countries
of the Western Balkans themselves.

The  tragic  murder  of  the  Serbian  Prime  Minister,  Zoran  Djindjic,  who  courageously
worked to build democracy and played a key role in bringing Serbia out of its isolation, has
shocked  the  region  and  the  international  community.  This  crime  is  a  reminder  of  the
difficult  legacy  of  the  past  and  also  of  the  need  to  continue  the  Government’s  work  on
stabilisation,  democratisation  and  reform  at  an  unabated  pace.  Zoran  Djindjic  was
dedicated to keeping Serbia and Montenegro on its path towards the European Union.  This
report  and  the  separate report on Serbia  and  Montenegro  reflect  the  reforms  necessary  to
best carry forward his vision. The Commission will continue to provide all support possible
to the authorities of Serbia and Montenegro in their efforts to fight the forces that tried to
attack Serbian democracy.

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1. 

THE OVERALL CONTEXT

The  Copenhagen  Council  in  December  2002  confirmed  the  European  perspective  of  the
five countries of the Western Balkans and underlined, once again, the European Union’s
determination  to  support  their  efforts  -  as  potential  candidates  -  to  move  closer  to  the
European Union. The Stabilisation and Association process remains the policy framework
to help the countries along the way and is recognised and supported by the whole of the
international  community  and  by  the  countries  of  the  region.  It  is  an  entry  strategy  -
introducing European values, principles and standards in the region, which in due course
will gain them entry into the European Union. The process and the prospects it offers are
serving  as  the  anchor  for  reform  in  the  Western  Balkans  in  the  same  way  the  accession
process has in Central and Eastern Europe.

This  year’s  Annual  Report  shows  that  all  countries  are  making  steady  progress.  It  is  in
most  countries  being  achieved  at  a  slow  pace,  however,  and  sometimes  more  due  to
international  input  and  pressure  rather  than  a  willingness  or  ability  of  the  countries
themselves to take ownership of and drive forward the reform process.

The country reports point to a number of areas where improvements and further reforms
are  required  in  the  individual  countries  to  allow  their  progress  towards  a  closer
relationship with the European Union. The Commission is continuously assisting them in
their  efforts  to  overcome  obstacles  to  transition  and  development,  such  as  the  fragile
institutions and poor administrative capacity, the weak application of the rule of law and
the generally poor level of implementation.

The  reports  also  demonstrate  the  linkages  between  the  Stabilisation  and  Association
process and the European Union’s Common Foreign and Security Policy. One example is
the  recently  established  EU  Police  Mission  in  Bosnia  and  Herzegovina  (BiH)  which
supports the broader  rule  of  law  agenda  and  thus  complements  other  programmes  under
the Stabilisation and Association process. The envisaged EU-led follow-on to the NATO
Operation Allied Harmony in the former  Yugoslav Republic of Macedonia as well as to
the  NATO-led  Stabilisation  Force  (SFOR)  in  BiH,  are  other  examples  of  stabilisation
efforts which will contribute to the longer term reform and association process.

The Stabilisation and Association process is designed to help the  countries of the  region
with their transition, and is flexible enough to adjust to the needs and level of development
of the individual countries - but it cannot do the job single-handed. It should be seen as a
“contract”  between  the  European  Union  and  the  countries;  the  Commission  is
continuously  looking  at  ways  to  improve  and  intensify  the  process  and  its  instruments,
thus moving steadily towards a European integration process. An increased effort on  the
part of the Union has to be accompanied by an equally strong political commitment on the
part of the countries to implement the necessary reforms. It has to be a shared agenda for
European integration.

The European Union is ultimately a union of values. The governments of the region must,
and are also increasingly seen to, espouse these values - values related to democracy, the
rule of law, respect for human rights, protection of minorities and a market economy. It is
in  their  own  interest  and  the  peoples  of  the  region  deserve  it.  Values  do  not  change
overnight, however, and we have to give the countries the time they need – and appreciate
that  the  Stabilisation  and  Association  process  will  not  be  a  quick-fix  but  is  a  long-term
policy which will bring about sustainable results.

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The methodology and the structure of the Second Annual Report are basically the same as
those of the first report, published in April 20021. The country  reports  examine  progress
made  during  the  year,  make  assessments  of  the  level  of  implementation  of  the
recommendations in the First Annual Report and highlight priority areas needing attention
in the coming 12 months. This report, the “Composite paper”, summarises the main trends
and  remaining  challenges  in  the  region,  looks  at  the  regional  dimension  in  a  number  of
specific  sectors  and  discusses  coherence  and  implementation  of  two  of  the  main
instruments  under  the  Stabilisation  and  Association  process:  the  assistance  programme
(CARDS2) and the trade measures (Annex I). An evaluation of the implementation of the
Stabilisation and Association Agreements will be carried out when they have been in force
for  a  sufficient  period  of  time  to  allow  such  an  evaluation  to  be  made.  Executive
summaries of the reports on the individual countries are attached in Annex II.

1.1. 

Enlargement and the Western Balkans

The unification of Europe will not be complete until it includes its south-eastern part. The
2004  Enlargement  will  bring  the  European  Union  physically  closer,  indeed  to  the  very
doorstep of the Western Balkans. The successful completion of negotiations with some of
their  closest  neighbours  –  who  are  expected  to  join  the  European  Union  in  May  2004  -
will bring about new dynamics in the European integration process and consequently have
a profound impact on the countries of the Western Balkans. It should contribute to making
their own perspective real and visible and reinforce the message that hard work, and the
sometimes  painful  reforms  and  adjustments  required  to  get  there,  will  pay  off.  With
sufficient political will and ability to reform and endorse the core values and principles of
the European Union, the countries of the Western Balkans will be the next in line, at their
own individual pace.

Under the present circumstances, the European prospects of the countries of the Western
Balkans is of paramount importance and proves the European Union’s readiness to stand
by the peoples of the region in very difficult situations. The Thessaloniki Summit in June
2003 should highlight the Union’s commitment to a European future for the countries of
the region.

An enlarged Union has practical consequences. In order to meet the obligations under the
acquis and their commitments in the accession negotiations, the new Member States have
to  ensure  a  high  level  of  protection  at  the  Union’s  external  borders  to  provide  internal
security  while  ensuring  smooth  and  swift  border-crossings.  This  entails  closer  co-
operation  with  the  future  southern  neighbours  of  the  Union.  An  upgrading  of  future
external borders will reduce waiting time at the borders to the benefit of all travellers.

The  Enlargement  will  inevitably  lead  to  the  elimination  of  visa-free  travel  between  the
new Member States  and the countries of the Western  Balkans,  except  for  Croatia  which
enjoys a visa-free status in relation to Schengen countries. This is a natural consequence of
the candidates aligning with the visa acquis.

The  fact  that  the  Western  Balkans  is  one  of  the  gateways  to  the  European  Union  for
criminal activities, illegal immigration and other threats reinforces the need for wider law
enforcement co-operation in the region.  Working  with neighbouring  candidate  countries,
which are seeking to implement the EU acquis, will benefit the Balkan countries in their
daily efforts to develop new practices and skills.

1 COM (2002) 163 and SEC (2002) 339-343
2 Community Assistance for Reconstruction, Development and Stabilisation

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The  new  Member  States  will  fully  adopt  the  European  Union's  Common  Commercial
Policy  upon  accession.  While  the  trade  agreements  in  force  between  the  candidates  and
third countries will have to be terminated, the EU’s international agreements and unilateral
trade preferences will apply immediately in the new Member States. More than 70% of the
Western Balkans’ external trade will be conducted with the enlarged Union. Considering
that the EU’s trade preferences towards the region provides for better market access than
do the current trade regimes of the candidate countries, this will  be particularly beneficial
and provide for greater export opportunities. Furthermore, the enlargement is expected to
positively affect economic growth in the new Member States which is likely to spill over
into  the  countries  of  the  Western  Balkans  e.g.  through  an  increase  in  trade.  The
Commission will continue to monitor EU trade with the region.

All  in  all,  the  effects  of  the  enlargement  process  will  be  an  increased  exposure  of
neighbouring  countries  to  democratic  traditions  in,  for  example,  the  administrative,
judicial and police sectors, which in turn will help to consolidate the rule of law and the
capacity of institutions in the Western Balkans. In addition, the candidate countries have
their  own  experiences  of  transition  and  European  integration  and  by  sharing  these,  they
could provide valuable assistance to the countries of the Western Balkans. Such trends can
only improve the prospect of closer integration with the EU.

The  Republic  of  Croatia  submitted  an  application  for  EU  membership,  on  the  basis  of
Article  49  of  the  Treaty  on  the  European  Union,  on  21  February  2003.  The  application
will be dealt with according to the rules laid down in the Treaty. The first step would be
for the  Council  to  ask the Commission  to prepare a preliminary opinion on  the question
whether and when accession negotiations should be started.

The membership conditions were laid down in the 1993 European Council at Copenhagen
– the so called Copenhagen criteria. They require that the candidate countries ensure

“stability  of  institutions  guaranteeing  democracy,  the  rule  of  law,  human  rights  and  the
respect for and protection of minorities”,

“the  existence  of  a  functioning  market  economy  as  well  as  the  capacity  to  cope  with
competitive pressure and market forces within the Union” and

“ability  to  take  on  the  obligations  of  membership,  including  adherence  to  the  aims  of
political, economic and monetary union”.

The  importance  of  not  only  incorporating  the  acquis  communautaire  into  national
legislation,  but  also  ensuring  its  effective  application  through  appropriate  administrative
and judicial structures have been highlighted at subsequent European Councils.

1.2. 

Sharing European values and norms

The Stabilisation and Association process and the prospects of a closer relationship with
the  European  Union  offer  an  agenda  for  the  countries  to  reform  and  to  adopt  European
values and  norms.  Further  rapprochement  towards  the  Union  means  meeting  demanding
requirements.

The General Affairs Council of May 2002 stated that: “The speed with which each country
moves through the different stages of the SAP, taking ownership of the process, depends
on the increasing ability to take on the obligations flowing from an ever closer association
with the EU as well as compliance with the conditionality policy defined by the Council on
29 April 1997.”  These conditions remain a fundamental element of the Stabilisation and
Association process and are integrated into the Stabilisation and Association Agreements.

5

There are different degrees of required compliance: the conclusion of contractual relations
requires the highest degree while financial assistance and economic co-operation could be
considered  on the basis  of a different  kind  of  compliance.  In  addition,  there  are  specific
conditions  attached  to  particular  assistance  programmes  -  for  example  requirements  for
reforms in a particular sector which would then benefit from financial assistance.

The level of compliance with the conditions set out by the 1997 Council Conclusions, as
well  as  the  countries’  level  of  implementation  of  EU  compatible  reforms  and  their
administrative capacity are assessed in the attached country reports.

This year’s Annual Report shows that progress has been less than optimal in many areas
(e.g.  full  co-operation  with  ICTY  and  economic  reform).  The  Commission  is  currently
reflecting  on  how  different  criteria  benchmarks  and  road  maps  can  be  made  more
effective,  how  their  implementation  can  be  supported  and  thus  encourage  reform.
Benchmark and road-map approaches may be useful but need to be accompanied by a set
of  clear  and  predictable  measures  if  the  conditions  are  not  met  or  benchmarks  are  not
reached. At the same time, countries meeting conditions should continue to be supported
in  a  tangible  way  in  progressing  towards  Europe.  Effective  conditionality  must  be
complemented  by  effective  support  and  advice  on  how  to  make  necessary  reforms  and
thus facilitate progress towards integration into EU structures.

Progress will  depend  on  the  ability  and  political  will  to  introduce  the  necessary  reforms
and to implement and respect generally accepted rules and standards. These are the same
democratic  standards  as  those  advocated  by  the  Council  of  Europe  and  OSCE,  and  the
economic reforms as sought by the World Bank and the IMF.

1.3. 

Public opinion and the European Union

Although information  on public  opinion  varies  from country to  country, levels of public
support for a closer relationship with the European Union remain high, and perceptions of
the  Union  generally  positive.  It  is  important  that  the  effectiveness  of  European  Union
policy to the Western Balkans is understood by and above all visible to the population of
the region. Support for the reform process and realistic expectations of what it will deliver
depend on an understanding of what the Stabilisation and Association process means. The
region’s  historical  ties  and  the  aspirations  of  local  populations  to  reintegrate  into
mainstream Europe may be instrumentalised to promote reform.

A  strategy  for  strengthening  co-ordination  and  communication  of  activities  and  for
improving the understanding of the Union and what it can offer the Western Balkans has
been  elaborated  by  the  Council.  But  this  should  be  a  shared  task.  The  countries  of  the
region must play their part in explaining to their populations the realities and mechanics of
a closer association with the European Union. This would also foster the necessary sense
of ownership of the process.

2. 

PROGRESS  BY  THE  COUNTRIES  OF  THE  WESTERN  BALKANS 
STABILISATION AND ASSOCIATION PROCESS

IN  THE

2.1. 

Overall political development

The countries of the Western Balkans have invested significant efforts in the Stabilisation
and Association process. Stability has essentially been restored; security has improved; all
of  the  countries  have  democratically  elected  governments;  massive  reconstruction  has
taken  place  across  the  region;  a  substantial  number  of  refugees  and  internally  displaced
persons  have  returned  home;  reforms  in  many  sectors  are  underway  –  the  cumulative

6

effect of this is to lay the foundations for economic, social and institutional development,
for a normalisation of every-day life and for the countries’ gradual rapprochement with the
European Union.

Important  and  positive  developments  during  the  reporting  period  include  clear  signs  of
increasing political stability in Albania, which have enabled the country to move one step
further  towards  a  closer  relationship  with  the  European  Union;  the  Council  adopted  the
directives for the negotiation of a Stabilisation  and Association Agreement with Albania
in  October  2002  and  negotiations  were  formally  opened  at  the  end  of  January  2003.
Bosnia and Herzegovina has pushed forward with reforms, including important measures
aimed at increasing the efficiency of and advancing integration within governments at all
levels.  The  EU  Road  Map  was  substantially  completed  during  the  autumn  and  the
Commission  will  in  due  course  prepare  a  study  on  the  feasibility  of  Bosnia  and
Herzegovina  negotiating  and  concluding  a  Stabilisation  and  Association  Agreement
(SAA). Croatia is continuing to make good progress in its transition process and adopted a
plan for implementation of the SAA at an accelerated pace reflecting its ambitions for EU
membership.  In  the  former  Yugoslav  Republic  of  Macedonia,  the  Ohrid  Agreement  is
being  implemented  and  the  census  was  conducted  smoothly  -  there  is  an  increasing
readiness  to  find  compromise  solutions,  confirming  that  the  process  of  stabilisation  and
normalisation is firmly on track. Economic reforms are being implemented in Serbia and
Montenegro and steps have been taken towards necessary constitutional restructuring and
in regional relations. The Serbian Government has shown stability and calm in its reaction
to  the  assassination  of  Prime  Minister  Zoran  Djindjic.  Progress  continues  in  Kosovo,
focussing on standards before status. Continued progress in Serbia and Montenegro should
allow  the  Commission  to  prepare  a  feasibility  study  for  a  Stabilisation  and  Association
Agreement.

Many  of  the  pressing  political,  economic  and  social  challenges  identified  in  the  first
Annual  Report  remain,  however,  and  the  Commission  will  continue  to  support  the
countries  in  their  efforts  to  address  these  and  other  reforms  required  for  a  closer
relationship with the European Union.

The countries are adhering to the principles of democracy. There are, nevertheless, still
shortcomings in terms of governmental culture and functioning of democratic institutions,
such as a lack of respect for constitutional frameworks and exertion of political influence
on  the  judiciary  and  media  –  although  there  are  great  variations  between  the  countries.
Parliamentary  structures  have  improved  but  the  functioning  of  parliaments  and
parliamentary  bodies  is  still  being  hampered  by  the  slow  pace  of  reform,  a  lack  of
democratic  tradition  and  efficient  procedures,  an  endemic  shortage  of  experience  and
technical  expertise,  as  well  as  by  a  tendency  to  politicise  parliamentary  administrations.
General and local elections, which were held in several of the countries over the past year,
were considered basically free and fair but voter turnout was generally low, in the case of
the  Serbian  and  the  Montenegrin  presidential  elections  even  rendering  the  elections
invalid. This low turn-out is worrying in several respects: it reveals a disappointment or a
lack  of  confidence  in  the  political  establishment  and  also  draws  attention  to  structural
problems, such as the need to review election legislation in Serbia and Montenegro. The
behaviour  of  many  political  leaders  also  leaves  much  to  be  desired  –  confrontational
approaches, personal agendas, corruption, obstruction and obfuscation rather than a focus
on  achieving  the  medium  to  long-term  needs  of  their  populations  negatively  affect
developments and undermine confidence in public institutions.

7

Unresolved, complicated or fragile constitutional arrangements continue to put a brake
on  reforms  in  several  countries  and  thus  on  implementation  of  the  Stabilisation  and
Association  process.  There  is  an  increasing  sense  of  urgency  in  the  need  to  overcome
obstacles to transition and development.

Work  is  continuing  to  reform  and  modernise  the  public  administrations  and  their
performance  is  improving.  While  recognising  progress  made  to  date  and  the  enormous
difficulties  it  has  entailed,  public  administrations  nevertheless  remain  weak  in  several
countries,  lacking  adequate  administrative  capacity,  trained  staff  and  budgets.  The
legislative process and implementation is slow for a variety of reasons, including a lack of
implementation  mechanisms,  blockages,  internal  political  party  disputes  and  unclear
division of power between different levels of government.  As in the case of the Candidate
Countries, the Commission attaches the greatest importance to ensuring that the countries
reinforce  their  administrative  and  judicial  capacity  and  it  therefore  provides  extensive
support to institution and capacity building.

During 2002, experts from the Member States and the Commission made assessments of
the  justice  and  home  affairs  sector.  Progress  has  been  made  across  the  region  in
reforming their judicial systems – a key factor in ensuring the rule of law. They still suffer
from  a  number  of  common  deficiencies,  however.  The  independence  of  the  judiciary  is
generally not secured. All countries have  a  large number  of pending cases in the courts,
not  so  much  due  to  an  insufficient  number  of  judges  but  to  outdated  procedural  codes,
inadequate  infrastructure,  inefficient  court  organisations  with  a  high  number  of  small
courts  and  an  uneven  division  of  tasks.  The  countries  need  to  foster  training  of  judges,
prosecutors and court clerks. Slow implementation and enforcement of decisions in  civil
cases  is  a  common  weakness.  Enforcement  procedures  need  to  be  simplified  and  the
efficiency of the bailiff services improved.

Organised  crime  and  corruption  are  endemic  in  the  region,  negatively  affecting
institutional and economic development. The commitments of the countries to tackle these
problems have not been sufficiently translated into concrete measures. The decision of the
Council  to  enable  Europol  to  start  negotiating  agreements  between  Europol  and  the
countries of the Western Balkans could in  due course provide  a useful instrument  in the
fight  against  organised  crime.  Until  these  agreements  become  operational,  police  and
judicial  co-operation  have  to  be  enhanced  through  existing  instruments,  notably  the
Interpol  network.    Organised  crime  and  corruption  are  not  constrained  by  borders  –  this
has a clear regional dimension and the problems can thus only be tackled efficiently if the
countries co-operate. At the Ministerial Conference on Organised Crime held in London in
November  2002, the  countries acknowledged  that these problems pose  serious threats  to
their stabilisation and democratisation and made a joint commitment to work together to
fight  crime  at  source,  in  transit  and  at  its  destination,  and  to  implement  a  number  of
priority  actions  related  to  e.g.  international  standards,  legislation,  capacity  building  and
co-ordination. The Summit in Thessaloniki in June 2003 will represent an opportunity to
take  stock  of  progress  and  for  the  countries  to  give  evidence  of  their  commitment  by
providing information about the first concrete achievements in the fight against organised
crime and corruption. It would be useful if each country presented a national plan setting
out the main elements of how to fight organised crime successfully.

The general situation in terms of respect for human rights and protection of minorities
has  progressed  but  there  is  a  need  for  further  improvement  in  a  number  of  countries  as
regards  for  example  implementation  of  legislation,  equality  before  the  law,  missing
persons and the right to property.

8

The  number  of  refugees  and  displaced  persons  returning  to  their  homes  is  steadily
increasing3. Approximately 1,1  million people remain displaced in the Western  Balkans,
however4. While  welcoming the  significant progress made over the  last  few  years,  there
are still obstacles which need to be tackled to enable all individuals to exercise their right
to  choose  whether  or  not  to  return.  Property  repossession  in  BiH,  which  has  the  largest
number of refugees and displaced persons, is advancing while the process is still slow in
Croatia  and  Kosovo.  Croatia  has  made  progress  on  reforms  of  property  repossession
legislation but difficulties to repossess property nevertheless remain a significant obstacle
to  return.  The  regulation  of  property  repossession  varies  between  the  countries  –  and
needs  to  be  harmonised.  Security  is  still  a  factor  hampering  returns  to  Kosovo.
Administrative procedures often remain cumbersome and do not facilitate access to basic
rights,  including  citizenship  and  social  benefits.  Economic  activities  and  employment
opportunities  in  many  return  areas  are  far  below  national  averages.  Areas  with  a  large
influx of refugees have not had commensurate increases in budgets for health and social
welfare. Regional exchange of information need to improve and new forms of financing of
return related expenditures found.

Education  is  an  important  issue  which  is  linked  to  the  democratisation  process  and  to
structural  reforms.  The  education  systems  need  to  be  further  developed  to  promote
democratisation,  pluralism and  employment.  Non-governmental  youth  organisations  also
have  an  important  role  to  play  in  the  development  of  open  and  democratic  societies  by
promoting inter-ethnic dialogue and active participation of young people.

An active civil society is slowly but surely emerging in the Western Balkans, although the
level  of  development  varies  considerably  from  country  to  country.  Civil  society
organisations  are  engaged  in  an  increasing  number  of  areas,  including  culture,
environmental  protection,  electoral  transparency,  in  fostering  democratic  ideas  and
institutions. But organisations in many other areas, such as professional associations and
trade unions, remain weak. The majority of civil society organisations are still at an early
stage of development and need to be strengthened to be able to respond more effectively
to the political, social and economic environment.

Most  of  the  countries  have  made  significant  efforts  in  developing  an  effective  legal
framework  for  media.  Reform  programmes  must  continue  by  adopting,  amending  and
effectively  implementing  the  legislation  necessary  to  cement  a  culture  of  independence
and  sustainability.  The  establishment  of  regulatory  bodies  in  most  of  the  countries  is  a
welcome  development,  but  they  operate  with  varying  degrees  of  independence  and  in

3 Over 120,000 returns were recorded in the region in 2001, including more than 100,000 so-called minority
returns.  During  2002  there  were,  according  to  UNHCR  statistics,  more  than  102,000  minority
returns  recorded  in  BiH  and,  according  to  UNMIK  statistics  2741  overall  returns  in  Kosovo.
According  to  ODPR(Croatia’s  Ministry  for  Public  Works,  Reconstruction  and  Construction,
Department for Expellees, Returnees and Refugees), there were 9,640 minority returns to Croatia in
2002.

4  A  total  of  615,000  persons  remain  displaced  in  Serbia  and  Montenegro,  including  more  than  121,000
refugees from BiH and 228,000 from Croatia, 234,000 internally displaced persons  from Kosovo.
There  are  31,000  displaced  persons  in  Kosovo.  In  BiH  there  are  in  total  405,000  refugees  and
displaced  persons  of  whom  28,000  are  refugees  from  Croatia  and  Serbia  and  Montenegro  and
377,000  are  internally  displaced  persons.  More  than  9,000  persons  are  internally  displaced  in  the
former Yugoslav Republic of Macedonia (UNHCR statistics updated to reflect the situation as of 18
December 2002). There are occasional inconsistencies in the figures between different sources and
this should be kept in mind when interpreting them.

9

                                                
some  cases  lack  a  clear  mandate.  Efforts  should  be  directed  at  securing  a  transparent,
predictable and legally secure implementation of new regulatory frameworks. More efforts
are also required to consolidate professional structures  and  raise professional  and  ethical
standards.

the 

importance  of  multiplying  efforts  for 

the
Recent  events  have  reconfirmed 
democratisation of state structures. In  this light, the  overall level of  co-operation of BiH
(Republika  Srpska  in  particular),  Croatia  and  Serbia  and  Montenegro  with  the
International  Criminal  Tribunal  for  the  Former  Yugoslavia  (ICTY)  in  the  Hague
remains  inadequate.  Co-operation  with  the  Hague  tribunal  is  a  legal  obligation  under
Security Council Resolution 827 of 25 May 1993, is an obligation on Dayton signatories
and is essential for further rapprochement with the European Union.

2.2. 

Economic development5

The  population  of  the  Western  Balkans  region  is  about  25  million  people,  and  its
economic size (GDP) equals some €50 billion. Croatia is the largest economy with a GDP
of  some  €23  billion,  thus  accounting  alone  for  nearly  half  of  the  region’s  GDP  and  for
almost  75%  together  with  Serbia  and  Montenegro.  Average  per  capita  income  in  the
region  equals  €2000.  Per  capita  income  in  Croatia  is  approximately  €5100,  while  the
average of the remaining countries is about €1350.

In 2002, the economies of the Western Balkans countries grew at a rate close to 4%, faster
than the rate of growth of the world economy of about 2.5%. This was partly fuelled by
an inflow of foreign grants and loans corresponding to roughly 7% of the region’s GDP.
Bearing in mind the slowdown in and the importance of the EU economy for the region,
this  may  be  considered  as  by  and  large  satisfactory.  Still,  living  standards  have  barely
improved compared to the pre-war period and the low levels of per capita income provide
future  potential  for  significantly  higher  rates  of  growth.  Growth  in  the  former  Yugoslav
Republic of Macedonia reached only about 0.3% and is apparently still suffering from the
repercussions  of  the  crisis  in  mid-2001.  Despite  respectable  growth  rates  in  general  the
last couple of  years, high registered unemployment levels persist, stretching from about
15% in Albania to 40% in BiH.  Inflation at regional level has steadily declined and was
down  to  6%  in  2002.  Serbia  and  Montenegro  is  the  only  country  of  the  region  with  an
inflation rate remaining in double figures (though rapidly declining).

The countries’ fiscal positions are weak. The general government deficit for the region as
a whole, excluding grants, reached about 6% of GDP in 2002. The situation has improved
somewhat  in  all  countries  except  for  Serbia  and  Montenegro  during  2002.  In  general,
revenue collection needs to be improved in order to reduce reliance on external financing
and  expenditure  control  have  to  be  strengthened.  Likewise,  public  spending  should  give
increased  priority  to  necessary  investments,  and  administrative  structures  must  be
rationalised.

Further progress in structural  reforms  is  needed  to  turn  the  Western  Balkans  countries
into  fully  functioning  market  economies.  The  pace  of  privatisation  and  restructuring  of
large  public  companies  has  generally  been  slow,  despite  some  progress  in  Serbia  and
Montenegro and  the  former  Yugoslav  Republic  of  Macedonia.  This  issue  remains  a  key
for the coming years. The results are better concerning privatisation of small and medium

5 It should be recalled that the reliability of statistics from the region is generally poor. Growth rates, levels

of unemployment and other economic data should thus be interpreted cautiously.

10

                                                
sized enterprises. There has also been positive developments with respect to reform of the
banking  sector.  Progress  can  be  noted  in  reform  of  the  legal  framework,  and  in  an
increased  confidence  in  the  banking  system.  The  level  of  bank  lending  is  still  relatively
low, however.

In all the countries of the region, small and medium-sized enterprises (SMEs) are essential
for economic development. In that respect it is important to improve their institutional and
financial  environment.  In  addition,  the  adoption  and  implementation  of  the  principles
enshrined  in  the  European  Charter  for  Small  Enterprises  is  recommended,  as  it  would
further enhance the improvement of the business environment in line with good practice in
EU Member States.

In  2001,  the  region’s  trade  continued  to  grow  despite  the  global  economic  downturn.
Imports  grew by  17%,  whereas exports increased by  13%.  Growth in trade  continued  in
the first six  months  of 2002,  albeit at  a slower  pace.  The  EU  remains  the  region’s  main
trading partner. In 2001, the EU accounted for about 55% of Western Balkans’ total trade
(ranging  from  some  45%  for  the  former  Yugoslav  Republic  of  Macedonia  and  BiH  to
about  80%  for  Albania).  Italy  and  Germany  are  the  Western  Balkans’  two  main  EU
trading partners, accounting for about 35% of EU trade with the region.

A  first  assessment  of  the  introduction  of  the  European  Union’s  trade  measures  shows
encouraging  results,  although  much  remains  to  be  done  to  increase  the  export  potential
further. During the last few years, the rate of growth in exports from the Western Balkans
to the EU  has  outpaced  the  increase  in  exports  from  the  region  to  the  rest  of  the  world.
However,  the  level  of  exports  remains  relatively  low,  corresponding  to  approximately
0.5% of total EU imports. The region’s imports amount to more than twice the volume of
its exports, giving rise to sizeable trade deficits. These range from 20% of GDP in Serbia
and Montenegro to close to 45% of GDP in BiH. However, the current account deficit of
the region is limited to approximately 7% of GDP due to an inflow of private remittances,
official  transfers  and  a  positive  balance  of  trade  in  services.  Trade  with  the  candidate
countries is important (especially with Slovenia) and represents almost 20% of total trade
for  the  region.  Intra-regional  trade  remains  low,  at  about  6%  of  total  trade.  Still,  it  is
essential to BiH, representing some 20% of its total.

The conclusion of a network of free trade agreements (FTAs) between the countries of the
region  under  the  auspices  of  the  Stability  Pact’s  working  group  on  trade  liberalisation
represents  a  major  achievement.  When  fully  implemented,  these  are  expected  to  boost
intra-regional trade, to enhance efficiency, increase competition and to enable economies
of scale. In view of the small size of the countries’ economies, regional trade integration is
also expected to attract further Foreign Direct Investment (FDI) to the region. Only when
the  necessary  conditions  are  fulfilled  and  the  administrative  arrangements  are  in  place
could  an  extension  of  the  pan-European  system  of  diagonal  cumulation  of  origin  to  the
Western  Balkans  be  envisaged,  which  would  then  further  facilitate  reaping  the  full
benefits of regional trade integration. If any such extension were to be envisaged, it should
be applied in a manner which is fully consistent with all relevant community policies.

At  multilateral  level,  the  former  Yugoslav  Republic  of  Macedonia  completed  its  WTO
accession negotiations in 2002, while BiH and Serbia and Montenegro started theirs. The
two countries already members of the WTO, Albania and Croatia, continued their reform
programs in order to comply with the WTO accession conditions.

11

In order for the countries to realise the full benefits of trade liberalisation in the framework
of WTO and/or Stabilisation and Association Agreements, significant improvements in the
areas of infrastructure, customs and institutional capacity, and progressive alignment with
EU standards are needed, in addition to a political will to implement the agreements.

In  2002,  foreign  direct  investment  inflows  to  the  region  reached  about  €2.2  billion,
corresponding  to  about  4.5%  of  the  Western  Balkan’s  GDP  or  some  €90  in  per  capita
terms,  a  slight  decline  compared  to  2001  when  FDI  flows  amounted  to  €2.5  billion.
Croatia  accounts  for  half  of  the  inflow  of  FDI  to  the  region,  corresponding  to  €230  per
capita in 2002. In comparison, the inflow of FDI to the ten  acceding candidate countries
was equal  to  about  5%  of  their  GDP  or  by  and  large  €250  per  capita  in  2001.  With  the
exception  of  Croatia,  FDI  flows  remain  insufficient  to  finance  the  countries’  current
account deficits. They need to attract greater levels of foreign direct investments, not least
greenfield investments.

Several macroeconomic indicators related to the development of the region’s economy are
moving in the right direction. Growth is sustained, inflation is being brought under control
and  trade  is  increasing.  There  are  still  some  reasons  for  concern.  Inequality  in  income
distribution  has  increased  in  the  region  and  poverty  has  become  more  widespread.
Estimates on unemployment remain high, even taking into account that a substantial part
of economic activity remains unregistered. Countries remain heavily dependant on foreign
financing. Donor grant assistance to the region is expected to be gradually reduced, and it
is  necessary  for  the  countries  most  reliant  upon  it  to  start  shifting  to  other  sources  of
financing (and growth). In addition, there is a continuous flow of people from the region
seeking  a  future  elsewhere.  According  to  UNHCR,6  four  of  the  five  Western  Balkans
countries  are  included  among  the  top-40  nationalities  seeking  asylum  in  industrialised
countries,  and  there  has  been  a  steady  increase  in  the  number  of  asylum  seekers  from
some of the countries over the past year.7 This process signals lack of hope for the future
and leads to a loss of human resources, which in turn may lead to serious consequences for
the long-term development of the countries. It is necessary to restore citizens’ confidence,
and to make ordinary people feel tangible improvements in their situation.

There  is  an  essential  need  for  continuous  institutional  and  structural  reforms.  Continued
weak  application  of  the  rule  of  law,  combined  with  extensive  corruption  and  a  sizeable
informal  sector  undermine  confidence  in  the  political  leadership  which  in  turn  affects
economic development. A substantial informal sector creates an uneven playing field for
economic operators and reduces tax collection. This may in turn lead to difficulties for the
State  in  performing  basic  tasks  and  obligations,  including  fulfilment  of  obligations  and
implementation of Stabilisation and Association Agreements.

3. 

DEVELOPING REGIONAL CO-OPERATION

Regional  co-operation  remains  a  cornerstone  of  the  European  Union’s  policy  for  the
region.  The  European  Union  is  built  on  a  deeply  rooted  foundation  of  regional  co-

6 UNHCR: Trends in asylum applications, January-September 2002: Europe, North America, Australia, New

Zealand and Japan (excluding the UK).

7  Serbia  and  Montenegro  is  second  from  the  top,  BiH  ranks  15th,  and  the  former  Yugoslav  Republic  of
Macedonia and Albania rank 26th and 27th, respectively. Croatia is not represented among the top-
40 countries.

12

                                                
operation.  Based  on  the  EU’s  own  experience  of  the  benefits  of  regional  co-operation  –
that political understanding, economic and social prosperity all depend on it – it believes
that  the  countries  of  the  Western  Balkans  would  benefit  significantly  from  closer  co-
operation. Regional co-operation is also an integral part of the preparation for integration
into European structures. Each country’s contribution to achieving regional objectives will
help determine its readiness to take on the demands of full integration into the EU.

Developments  in  the  past  year  provide  reason  to  be  optimistic.  Much  progress  has  been
made,  in  particular  in  the  fields  of  energy,  trade  and  transport.  Progress  has  also  been
made  in  the  field  of  police  and  judicial  co-operation  –  with  support  from  the  CARDS
programme.    Levels  of  regular  bilateral  and  multilateral  contact  have  increased,  and  a
regional approach is increasingly seen as the obvious option rather than a last resort. The
challenge  of  the  coming  year  is  to  ensure  that  this  co-operation  continues  to  deliver
results.

3.1. 

Political and institutional co-operation

The last year saw an increase in the frequency and substance of multilateral and bilateral
contacts in the region and beyond. Border management, the fight against corruption, dual
citizenship, refugee returns, pension and social security rights, economic co-operation are
all  areas  that  have  been  the  subject  of  detailed  bilateral  discussion  in  the  region  and,  in
many  cases,  agreement.  A  number  of  unresolved  issues  still  have  the  potential  to  sour
relations  but  the  resolution  of  disputes,  such  as  the  border  crossing  between  Bosnia  and
Herzegovina and Croatia at Kostajnica and progress towards resolving key elements of the
Croatia/Serbia  and  Montenegro  border  dispute  (Danube  and  Prevlaka),  show  that
negotiated compromise is increasingly the accepted approach.

3.2. 

Progress in specific sectors

to  develop 

Infrastructure: One of the specific objectives of the SAp is the integration of the Western
Balkans  countries  into  pan-European  infrastructure  networks  –  helping  the  countries
international  dimension
infrastructure  strategies  with  an 
involved 
encompassing both opening of markets and development of interconnected infrastructures.
The concrete results are listed under a ‘regional infrastructure project list’ which currently
includes 46 projects totalling some €3.46 billion, of which 52% have started to materialise
(double the figure of December 2001).

The  Danube  Co-operation  Process  and  Sava  River  Basin  Co-operation:  Two
initiatives relevant to  regional  infrastructure  co-operation  emerged  last  year:  the  Danube
Co-operation Process and the Sava River  Basin Co-operation. The  Danube Co-operation
Process was established by 13 countries in Vienna in May 2002 – including BiH, Croatia,
Serbia and Montenegro and the former Yugoslav Republic of Macedonia (as an observer).
The Framework Agreement on the Sava River Basin – signed by BiH, Croatia, Serbia and
Montenegro  and  Slovenia  in  December  2002  –  is  a  good  example  of  countries  taking
regional ownership of an issue, and translating potential into reality.  It focuses primarily
on water management, navigation and environmental protection. An action plan is now to
be finalised and implementation begin.

Transport:  Considering  the  relatively  small  size  of  the  individual  countries  and  of  the
Western  Balkans  as  a  whole,  the  only  realistic  and  sustainable  approach  to  transport
investment  needs  is  a  trans-national  one.  Here,  the  European  Union  is  applying  a
methodology  similar  to  that  used  in  the  candidate  countries.  Following  the  Transport

13

Infrastructure  Regional  Study  (TIRS)  completed  in  June  2002,  the  Regional  Balkans
Infrastructure  Study  -  Transport  (REBIS)  will,  until  June  2003,  develop  policies  on  a
number of key issues inter alia: identification/prioritisation of projects on a core network;
reform  of  the  various  transport  sectors,  operational  tools  to  support  decision-making  by
planing  authorities  and  investors.  Memoranda  of  Understanding  were  signed  in  2002  on
the Pan-European Corridors VI (the Danube river) and VIII (linking Italy with Turkey via
routes  through  Albania,  Bulgaria,  the  former  Yugoslav  Republic  of  Macedonia  and
Greece) – both of critical importance for the region.

Energy: Only  regional co-operation can guarantee  sustainable  electricity  supplies  for  all
of South East Europe, levelling out seasonal fluctuations in production, providing reserve
capacity  for  net  importers,  and  properly  functioning  markets  for  net  exporters.  The
signing,  in  Athens  in  November  2002,  of  the  Memorandum  of  Understanding  on  the
Regional  Electricity  Market  in  South  East  Europe  and  its  integration  into  the  European
Union  Internal  Electricity  Market  represented  a  significant  achievement.  It  launched  the
‘Athens process’ that commits all the countries of the Western Balkans, Bulgaria, Greece,
Romania and Turkey  (with Austria, Italy, Hungary, Moldova and Slovenia  as observers)
to a medium-to-long-term plan to create the conditions for a functioning electricity market
in  South  East  Europe  and  alignment  with  the  EU  electricity  network.  Regular  reports
prepared by the Commission will monitor progress, using mechanisms like benchmarking
and  peer  reviews,  providing  also  an  important  benchmark  for  their  progress  in  the
Stabilisation  and  Association  process.  Legal  alignment  to  the  Community  acquis  and
improved  administrative  capacity  are  essential  steps  to  be  taken.  During  2003,  the
European Commission intends to set out the basic principles for a regional approach to the
gas market in South East Europe.

Environment:  The  Western  Balkan  countries  are  actively  participating  in  the  Regional
Environmental  Reconstruction  Programme  (REReP),  and  increasingly  co-operating  with
the European Environment Agency (EEA) in order to connect the Western Balkans to the
European Environment Information and Observation Network (EIONET). This represents
a significant increase in the level of environmental co-operation between the countries of
the  region  as  well  as  between  them  and  the  European  Union.  The  Community  action
programme  promoting  environmental  NGOs  was  extended  to  the  Western  Balkans  in
2002.

Science and Technology: The European Research Area project and the launch in 2002 of
the  6th  RTD  Framework  Programme  (2002-2006)8  link  Western  Balkan  policies  in  this
area with those of the Member States and the Candidate countries. The sixth Framework
Programme  is  open  to  participation  by  countries  which  have  concluded  the  necessary
agreements  and  is  also  open  at  project  level  to  participation  by  entities  from  third
countries  and  by  international  organisations.    The  participation  of  scientists  and
institutions  from  developing  countries,  Mediterranean  countries,  the  Western  Balkans  as
well as Russia and the newly independent states will be supported. Research priorities will
address the consequences of war in the region with a special emphasis on environment and
health.  Further  action  might  be  considered  on  agricultural  and  industrial  facilities.  The

8   Decision No 1513/2002/EC of the European Parliament and of the Council of 27 June 2002 concerning
the  sixth  framework  programme  of  the  European  Community  for  research,  technological
development  and  demonstration  activities,  contributing  to  the  creation  of  the  European  Research
Area and to innovation (2002 to 2006) OJ L 232/1  29.08.02

14

                                                
requirement that projects should include at least two SAp  partners  and three participants
from  the  Member  States/candidate  countries  will  directly  support  regional  co-operation
within the scientific community.  An EU/ Western Balkans Action Plan meeting will  take
place  in  Thessaloniki  in  June  2003  with  the  aim  of  adopting  a  regional  Science  and
Technology  co-operation  policy  (“Shared  vision”)  and  an  Action  Plan  and  Work
programme.  This  should  facilitate  the  further  integration  of  these  countries  into  the
European Research Area.

Information  and  Communication  Technology  is  by  its  very  nature  an  issue  that  can
benefit from an international approach. The countries of the region have committed to the
implementation  of  plans  for  the  development  of  the  Information  Society  through  the
the  eSEE  Agenda.  All  countries  have  passed
signing  at  ministerial 
in
further  progress 
telecommunications 
implementation,  is  needed  before  the  regulatory  environments  can  be  considered  to  be
attractive to investors. In all countries, institutional capacity needs strengthening.

transposition,  especially 

laws  but 

level  of 

in 

Statistics is an area that requires international co-operation. The countries of the Western
Balkans  are  participating  in  various  actions  of  the  European  Statistical  System,  such  as
Eurostat Working Group meetings with Member States and Candidate countries. Through
pilot  projects,  the  countries  will  gradually  align  their  legislation  in  this  field  with  the
acquis.

3.3

Ensuring complementarity of regional initiatives

Efforts under the Stabilisation and Association process are complemented by a number of
other  regional  and  sub-regional  initiatives.  Key  amongst  these  is  the  Stability  Pact  for
South Eastern Europe. Another important initiative is the South East Europe Co-operation
Process  (SEECP),  which  provides  a  forum  for  political  co-ordination  amongst  all  of  the
countries  of  the  region.  Others,  such  as  the  Adriatic-Ionian  Initiative  and  the  Danube
Cooperation  Process,  involve  those  countries  which  share  particular  geographical
characteristics. All play an important role in normalising relations and thereby contribute
to achieving the objectives of the SAp.

The Stability Pact has pursued its efforts to streamline and downsize its activities in line
with  the  mandate  conferred  on  the  new  Special  Co-ordinator  by  the  Council  of  the
European Union. In March 2002, the Special Co-ordinator of the Stability Pact presented
priority objectives for 2002 and in December 2002 the Regional Table endorsed a further
streamlining of the Stability Pact as well as the priorities for 2003. A primary objective is
to enhance complementarity of the activities of the Pact with those of the Stabilisation and
Association process.

4. 

  STRENGTHENED PARTNERSHIP - TAKING THE PROCESS FORWARD

4.1. 

Continued challenge

The Commission’s assessment of the countries in this year’s Annual Reports carries five
important messages:

(cid:1)  The European Union confirms its commitment to the region and supports its continuing
rapprochement  with  the  Union.  A  credible  perspective  of  EU  membership  creates  a

15

powerful  incentive  for  fundamental  reform  of  these  societies.  The  EU  is  clear  and
unambiguous about the perspective. At the same time, it must be stressed that ultimate
responsibility lies with the countries of the Western Balkans themselves. Progress will
depend  on  their  will  to  introduce  necessary  reforms  and  to  adopt  European  standards
and values. There are no short cuts to European integration.

(cid:1)  The  Stabilisation  and  Association  process  has  proved  a  success  in  stabilising  the
Western Balkans. This process needs to be consolidated, however. Efforts should thus
be multiplied to proactively foster security, democracy and prosperity in the region.

(cid:1)  Developments  during  the  reporting  period  are  below  expectations  and  potential  in
several countries – recommendations made in the first annual report remain to a large
extent  unfulfilled.  All  too  frequently,  slow  progress  is  due  to  a  lack  of  political
commitment  and  we  want  to  stress  once  again  that  nothing  can  replace  this
commitment.

(cid:1)  The SAP is already a strategy for accession, adjusted to the level of development of the
countries  concerned.  This  objective  was  recently  reconfirmed  by  the  Copenhagen
European Council in  December  2002 and  it is now important for  the  countries  of  the
region to focus on the concrete steps to be taken to move towards this goal. The reform
agenda needs to be completed and reforms correctly implemented. Countries should be
encouraged to define modalities and possible deadlines for implementing reforms and
meeting requirements considered necessary to develop an ever closer relationship with
the Union with a final goal of full membership. The pace of this process will ultimately
depend  on  the  determination  of  these  countries  to  fulfil  all  obligations  and  criteria
required to each and every country wishing to join the European Union.

(cid:1)  The European Union, its policies and what is at stake for the region need to be better
explained to all sections of society. Much of the European Union’s efforts – as well as
the expected future gains - are invisible to the population, while short-term and painful
reforms are more visible. As mentioned above, the Union and the Governments of the
region both need to better explain what we are trying to achieve in the region.

As noted in this report and in the country reports, the challenges facing the region remain
tremendous  and  have  not  changed  significantly  since  the  assessment  in  the  first  Annual
Report.  The  successful  stabilisation  of  the  region,  through  the  Stabilisation  and
Association  process  and  its  instruments,  has  laid  the  foundation  for  further  reform  and
faster  transition  -  if  there  is  sufficient  political  will.  The  continued  challenges  can  be
grouped into five main areas:

(cid:1)  Building  functioning  democratic  states.  This  requires,  e.g.  further  democratisation,
strengthening of institutional capacities and of the application of the rule of law, respect
for human rights, resolution of constitutional matters, the development of a vibrant civil
society and independent media, respect for international obligations (e.g. ICTY) and a
strong commitment by the political leaders to an ambitious reform agenda.

(cid:1)  In order to enhance the effectiveness of the implementation of the Stabilisation and
Association  process  and  in  co-ordinating  EU  related  matters,  the  countries  need
European integration services with strong support at the highest political level.

16

(cid:1)  Social  and  economic  development.  A  major  challenge  for  the  countries  is  to  ensure
sustained  economic  growth,  particularly  in  view  of  an  inevitable  decline  in  foreign
grant assistance,  while the process of fiscal consolidation is further strengthened. The
business climate must improve to facilitate private sector development and job creation
thereby providing a basis for further economic development and social cohesion.

(cid:1)  Ensuring  respect  for  the  right  of  all  remaining  refugees  and  displaced  persons  to
return  to  their  place  of  origin  and  creating  the  conditions  for  sustainable  returns,  e.g.
repossession of properties and economic aspects.

(cid:1)  Commitments  to  tackling  organised  crime  and  corruption  must  be  translated  into
concrete  measures  and  visible  results.  Countries  that  aspire  to  adopt  European  values
and standards and eventually become members of the European Union simply must get
to grips with these problems.

These are of course all inter-related. Attracting foreign direct investment is an important
prerequisite for the countries’ economic development – but investors will only be attracted
to  countries  which  are  politically  stable,  where  property  rights  are  clear,  contracts  are
honoured and the judicial system is fully functioning. Refugees need a secure legal, social
and  economic  environment,  resolution  of  any  property  rights  problems,  trust  in  local
authorities  and  good prospects  for  the  future  to  return.  Progress  on  these  issues  requires
the countries of the region to take ownership of them.

4.2. 

Strengthening the Stabilisation and Association process

As the pace of reforms picks up and the countries move forward within the Stabilisation
and Association process, work will naturally intensify and the instruments will be adjusted
accordingly.  The  European  Union  will  increasingly  apply  elements  of  the  “enlargement
method”  –  and  area  the  Commission  has  developed  extensive  experience  and  expertise
over the years. This is to a certain extent already being done. All parts of the Commission
will be mobilised to support the countries of the Western Balkans.

The  financial  assistance  provided  under  the  CARDS  programme  runs  from  2001  until
2006, with a multi-annual indicative programme covering the period 2002-2004. There is
very  little  that  is  being  done  under  the  PHARE  programme  in  the  candidate  countries
which cannot be done under the CARDS programme. But the type of assistance provided
has  to  reflect  the  specific  needs  and  priorities  in  the  Western  Balkans  -  where  several
countries, due to the events in the region during the last decade, are still struggling  with
the consequences of the conflicts and therefore have had different starting points. As the
countries  develop  and  the  needs  change,  Community  assistance  will  be  adjusted
accordingly.

Following an initial phase of heavy focus on physical reconstruction and rehabilitation to
create  a  basis  for  further  development  –  which  entailed  a  front-loading  of  funds  –  the
focus has shifted to institution building primarily at state level, with the aim of  assisting
the  reform  processes  and  thus  preparing  the  countries  for  a  closer  relationship  with  the
European Union. There are many other  areas that are vitally important for the countries’
development,  such  as  local  governance  and  social  sectors,  which  are  not  the  highest
priorities  in  the  CARDS  programme.  More  efforts  in  additional  sectors  would  require
either  a  shift  of  priorities  away  from  state  building  efforts  or  additional  money  being
allocated  from  elsewhere,  through  different  forms  of  financing,  by  other  donors  or  the

17

governments  themselves  burden-sharing  in  these  sectors.  An  increase  of  the  CARDS
financial  allocation  is  currently  under  discussion  and  would  enable  the  Commission  to
intensify  efforts  in  the  areas  of  socio-economic  development  and  civil  society,  sectors
affected by the impact of the enlargement process, sectors requiring  additional attention,
e.g.  Justice  and  Home  Affairs,  and  additional  support  for  provisional  administrations  in
BiH and in Kosovo.

The Commission intends to extend Twinning projects – currently being implemented or
are underway in Albania and Croatia under the CARDS programme – to all the countries
of  the  region.  However,  their  successful  introduction  depends  on  both  the  countries’
absorption capacity and the availability of experts in the Member States.

The European Union’s decision to unilaterally liberalize trade with the Western Balkans
countries and to subsequently enshrine this commitment in long-term contractual relations
in  Stabilisation  and  Association  Agreements  is  starting  to  have  a  positive  impact  on
economic development of the region. In the coming  years, the trade liberalisation efforts
of the countries will be necessary to further reinforce prospects of economic growth and
thereby pave the way for an improvement of living standards. Trade remains a cornerstone
of the European Union’s policy in South Eastern Europe.

A  review  and  assessment  of  the  countries’  legislation  and  of  its  conformity  with  EU
standards  will  be  further  developed  in  specific  sectors,  possibly  supported  by  facilities
similar to  those provided  to the candidate  countries under TAIEX  (Technical Assistance
Information Exchange Office).

is  currently  considering  gradually  extending  participation 

The  Commission 
in
Community  programmes  to  the  countries  of  the  Western  Balkans.  This  would  require,
inter  alia,  modification  of  the  existing  regulations  and  the  conclusion  of  framework
agreements to provide a legal basis for participation in these programmes. Participation in
community  programmes  in  the  framework  of  the  pre-accession  strategy  has  proven  a
valuable  tool  for  familiarising  the  candidate  countries  and  their  populations  with  the
Union’s policies and working methods.

The countries have expressed a particular interest in a liberalisation of EU’s visa regime
and  its  migration  policy  in  general.  Developing  a  dialogue  on  these  issues  would  have
significant implications on the issues mentioned above regarding the perception of the EU
in the region. If carefully managed, it could be a positive factor for both the Union and the
countries  concerned.  It  could  also  be  an  element  of  the  Union’s  migration  management
bearing  in  mind  the  continued  irregular  migration  still  emanating  from  the  region.  Only
when  the  countries  have,  as  a  minimum,  substantially  improved  their  administrative
capacity and application of the rule of law, can ensure effective border control, adequate
systems for document security and when serious measures are taken to combat organised
crime and corruption, could the EU seriously consider reviewing its visa regime. Smooth
implementation of readmission agreements would also be taken into consideration in this
context.  The  Commission  would  be  prepared  to  lead  concrete  discussions  with  the
countries  regarding  the  requirements  for  how  to  take  these  issues  forward  in  concrete
terms.

Political dialogue is another corner stone of the process that could be further developed.
Bilateral  meetings  between  the  Union  and  the  countries  are  held  on  a  regular  basis  in
different  formats.  Once  the  Stabilisation  and  Association  Agreements  have  come  into
force, political dialogue will formally take place within the Stabilisation and Association

18

Councils. Considering that many of the problems are similar in several countries, or have
a  cross-border  dimension,  the  Commission  particularly  values  a  process  of  regular  joint
political  dialogue  between  the  European  Union  and  all  five  countries  of  the  region,  as
suggested in the Commission’s First Annual Report in 2002 and endorsed by the Council.

The Summit which will be held in Thessaloniki in June 2003 with Heads of State and/or
Governments  of  the  Member  States,  of  the  candidates  and  of  the  potential  candidate
countries  in  the  Western  Balkans  aims  at  sending  a  strong  political  message  to  the
countries  and  peoples  of  the  region,  namely  that  the  EU  is  committed  to  the  European
future of all Balkan countries, and that Europe will be re-unified only after this region has
become an integral part of it. The meeting should also reconfirm the commitment of the
SAp  countries  to  the  rapprochement  and  gradual  integration  into  the  Union  and  their
determination to work to fulfil all related criteria and conditions, including democratic and
economic  reforms  and  further  development  of  regional  co-operation.  The  Summit  will
provide  an  important  opportunity  to  enhance  the  political  dialogue,  to  take  stock  of
progress  accomplished  under  the  Stabilisation  and  Association  process  and,  finally,  to
exchange views on important developments in the Union, the region and beyond.

19

ANNEX I

ASSESSMENT OF THE INSTRUMENTS OF THE STABILISATION AND ASSOCIATION PROCESS

1. Trade measures

The  extension  of  the  European  Union’s  autonomous  trade  measures  (ATMs)  in  the
autumn of 2000 established a uniform system of trade preferences for the countries of the
Western Balkans.9,10 In 2001, these provisions were, by  and large,  put  into a contractual
agreement with Croatia and the former Yugoslav Republic of Macedonia, by the signing
of the respective countries’ Stabilisation and Association Agreement (SAA).11 Pending the
ratification of the SAAs, the Union’s trade relations with these two countries are governed
by the Interim Agreements.

The  trade  provisions  offered  by  the  European  Union  under  the  trade  measures  (TMs)
provide the countries of the Western Balkans with duty-free access to the Union’s market
for practically all goods, including agricultural products, with no quantitative restrictions,
except  for  duty-free  or  preferential  quotas  for  some  fishery  products,  baby-beef  and
wine.12  The  greatest  change  compared  to  previous  system(s)  brought  about  in  2000  was
the almost complete liberalisation of imports of agricultural products and the abolition of
quotas for sensitive industrial products.

A short period of time has elapsed since the extension of the trade measures (TMs). As of
early 2003, less than two full calendar years of trade statistics are available for analysis.13
Consequently, it is too early to provide a definitive and detailed view on the functioning of
these  measures.  Nevertheless,  in  order  to  provide  a  first  basis  for  an  evaluation  of  the
effectiveness of the trade measures, an overview of trends in EU imports from the Western
Balkans  at  country  and  product  level  is  provided  below.  This  overview  will  need  to  be
complemented at a later stage when necessary trade statistics and economic data become
available.

9 Council Regulation (EC) No 2007/2000 (as of November 2000), amended by Regulations 2563/2000 and

2487/2001.

10  Previously,  Albania  had  benefited  from  the  EU  Generalised  System  of  Preferences,  while  Bosnia  and
Herzegovina and Croatia had been entitled to trade preferences under the first generation of ATMs
introduced in 1997 (Council Regulation  (EC)  No  70/1997,  amended  by  Regulations  2636/97 (for
1998)  and  2863/98  (for  1999),  and  Council  Regulation  (EC)  6/2000  (January-October  2000)),
which also briefly applied to Serbia and  Montenegro  before  the  preferences  were  revoked.  Trade
with the former Yugoslav Republic of Macedonia was governed by a co-operation agreement with
the European Union concluded in 1998.

11 Hereafter, EU trade preferences for the Western Balkans countries, as offered via the ATMs or as found in
the contractual relationships with Croatia and the former Yugoslav Republic of Macedonia will be
denoted as trade measures (TMs).

12 In addition, trade in textile products is covered by bilateral agreements, providing for duty and quota free
access into the EU. Serbia and Montenegro have not concluded such agreements with the EU and
benefit from quotas granted unilaterally by the Community.

13  In  January  2003,  statistics  on  the  Member  States’  imports  from  the  Western  Balkans  countries  were
available  to  September  2002.  This  overview  is  therefore  based  on  EU  imports  from  the  Western
Balkans  countries  in  12  month  periods  dating  backwards  from  the  latest  month  available
(September  2002).  Four  periods  were  chosen:  October  1998  –  September  1999,  October  1999  -
September 2000, October 2000 – September 2001, and October 2001 - September 2002.

20

                                                
There has been a substantial increase in EU imports from the Western Balkans during the
last few years, although from low absolute levels (see Figure 1). In percentage terms, EU
imports  have  increased  by  some  40%  since  September  1999,  and  by  21%  since  the
introduction of the TMs in September 2000. Despite a certain flattening out of the rate of
growth of EU imports recently, the region’s exports to the EU have grown at a faster rate
than the Western Balkans’ exports to the rest of the world (based on IMF data).

Figure 1: EU imports from the Western Balkans countries

o
r
u
E
n
o

i
l
l
i

M

6000

5000

4000

3000

2000

1000

0

SEE5

Albania

BiH

Croatia

fYROM

Serbia and Montenegro

10/98-09/99

10/99-09/00

10/00-09/01

10/01-09/02

Source: COMEXT

Croatia  is  the  largest  exporter  in  the  region,  providing  the  EU  with  nearly  half  of  its
imports  from  the  Western  Balkans.  Together  with  the  Serbia  and  Montenegro,  the  two
countries  account  for  approximately  70%  of  the  region’s  export  to  the  EU.  The  export
performance of these two countries are thus an important determinant for the development
of  exports  from  the  region  as  a  whole.  Since  the  extension  of  the  TMs,  some  countries
have displayed a better export performance than others. Croatian exports to the European
Union have grown by about 15%. The corresponding figure for Serbia and Montenegro is
over 70%. Albanian and BiH exports to the EU have increased by close to 30%, while EU
imports  from  the  former  Yugoslav  Republic  of  Macedonia  have  declined  continuously
since the Kosovo conflict in 1999.

Figure  2  shows  European  Union  imports  of  major  product  groups  from  the  Western
Balkans  countries.  EU  imports  of  almost  all  the  product  categories  have  increased  since
the  extension  of  the  TMs  in  the  autumn  of  2000.  The  largest  categories  of  imports,
miscellaneous  manufactured  goods  and  basic  manufactures,  making  up  close  to  60%  of
EU  imports  from  the  region,  have  slightly  decreased  lately,  which  is  in  line  with  the
pattern of total trade in Figure 1.

21

 
Figure 2: EU imports of major product groups from the 
Western Balkans countries

Food and live animals

Crude materials (no fuels)

Basic manufactures

Machines, transport equip.

Misc manufactured goods

Other

o
r
u
E
n
o

i
l
l
i

M

2500

2000

1500

1000

500

0

10/98-09/99

10/99-09/00

10/00-09/01

10/01-09/02

Western  Balkans’  exports  of  machines  and  transport  equipment,  and  of  food  and  live
animals, have increased considerably since the extension of the TMs.  EU imports of the
latter  category  have  more  than  doubled,  reflecting  the  improvement  in  market  access
brought about by the trade measures.

Sugar  accounts  for  approximately  half  of  the  growth  of  EU  imports  of  food  and  live
animals. The substantial increase of EU imports of sugar from the region and the parallel
growth of EU sugar exports to the region led the Commission to take several measures in
order to ensure the proper application of  the  preferential  trading  arrangements  for  sugar,
e.g. the publication of a Notice to Importers in June 2002, reinforced controls and closer
co-operation with the customs bodies of the region. It was also decided to abolish refunds
for EU sugar exports to the five countries of the region, as this is an incentive for the two-
way trade pattern.

Based on the above, there are several signs that TMs may have had a positive effect on EU
imports from the Western Balkans. Still, the countries will need more time to use the TMs
to the fullest extent possible. Economic operators in the countries need to be made aware
of the potential  of the TMs, contacts  need to be  established with  counterparts in the  EU
Member States,  channels  of  distribution  have  to  be  worked  up,  and  investments  may  be
required in order to take full advantage of the improved  export  possibilities.  In addition,
the system  of  veterinary,  and  sanitary  and  phyto-sanitary  inspections  must  be  improved,
and  work  on  further  harmonisation  of  standards  is  needed.  Export  promotion  activities
should be more developed, and adopted trade-related legislation must be implemented.

2.  Community  Assistance  for  Reconstruction,  Development  and  Stabilisation
(CARDS)

Since  programming  of  Community  assistance  was  formally  agreed  only  at  the  end  of
2001, CARDS14 still remains a relatively new instrument – implementation of the strategic
orientations effectively started in 2002.

14 Council Regulation (EC) No 2666/2000 of 5 December 2000 (OJ L 306p1)

22

 
                                                
Fig. 1   Trends in Community Assistance to Western Balkans 1998-2002
 Allocation by Sector (%)

40%

35%

30%

25%

20%

15%

10%

5%

0%

Justice & Home
affairs
Administrative
Capacity building
Economic & Social
Development
Environment and
natural resources
Democratic
Stabilisation
Infrastructure

1998

1999

2000

2001

2002

Between  1998  and  200215,  the  main  focus  of  Community  assistance  to  the  region  as  a
whole  was  infrastructure  and  democratic  stabilisation  (including  aid  to  refugees),
representing 27% and 20% respectively of total assistance allocated (fig.1).

The amounts allocated to Justice and Home Affairs, administrative capacity building, and
economic and social development were on average each equivalent to approximately 10%
of the total.

These  allocations  reflect  the  priority  given  during  the  initial  phase  of  assistance  to
reconstruction  and  tackling  the  problem  of  refugees.  From  2001  onwards,  the  amounts
allocated  to  Justice  and  Home  Affairs  and  Administrative  Capacity  Building  increased
steadily  (fig.2)  –  reflecting  the  Stabilisation  and  Association  process’  emphasis  on
strengthening administrations’ implementation capacity.

Fig.2   CARDS Assistance 2000-2004: by

28%

14%

13%

14%

5%

26%

Justice & Home affairs

Administrative Capacity
building

Economic & Social
Development

Environment and natural
resources

Democratic Stabilisation

Infrastructure

Community assistance has developed in three broad phases: an initial response to a crisis
situation,  with  the  focus  on  emergency  operations  and  reconstruction;  then  a  move  to
greater support for political, institutional and economic transition; and a third phase where
the emphasis has been on preparing for and implementing the association process.

Broadly  speaking,  the  first  of  these  phases  is  close  to  completion.  The  second  and  third
phases are at varying stages of implementation – depending on the country in question.

Whilst  the  focus  of  CARDS  is  on  maintaining  strategic  priorities,  the  response  to  last
year’s  crisis  in  the  former  Yugoslav  Republic  of  Macedonia  shows  how  CARDS
assistance  can  be  adapted  to  a  changing  situation  on  the  ground.  In  that  case,  CARDS
provided  support  for  EU  action  in  response  to  the  crisis  and  for  the  Ohrid  agreement,
through aid for refugees and displaced persons, and reconstruction assistance successfully
implemented by the European Agency for Reconstruction (EAR).

15 In order to be able to identify trends, the period of analysis runs from 1998 – 2002. Until CARDS became operational,
Community  assistance  to  Albania,  BiH  and  the  former  Yugoslav  Republic  of  Macedonia  was  delivered
through the PHARE and OBNOVA programmes, and to Croatia and Serbia and Montenegro through PHARE.

23

                                                
Fig.3   Levels of contracting and disbursement 2001: by Country

Allocated

Contracted

Paid

120%

100%

80%

60%

40%

20%

0%

CARDS
2001

Albania

BIH

Croatia

FYROM

FRY

Regional

As  of  the  end  of  2002,  66%  of  total  funds  allocated  in  2001  have  been  contracted
(contracts signed) and 45% disbursed (fig.3). However, performance varies from country
to  country,  according  to  the  focus  of  activity,  the  implementation  mechanisms,  and  –  in
those countries where management had been decentralised, notably Albania – the capacity
of national administrations to absorb assistance.

Fig. 4   Levels of contracting and disbursement 2001: by Sector

120%

100%

80%

60%

40%

20%

0%

Allocated

Contracted

Paid

Justice &
Home affairs

Administrative
Capacity
building

Economic &
Social
Development

Environment
and natural
resources

Democratic
Stabilisation

Infrastructure

Levels  of  contracting  and  disbursement  are  higher  for  infrastructure  and  democratic
stabilisation  projects,  and  lower  for  those  in  support  of  Justice  and  Home  Affairs  and
Administrative  Capacity  Building  (fig.  4).  This  reflects  differences  in  the  types  of
operation involved in theses sectors -  in particular the additional  preparatory  work  often
required for JHA and Administrative Capacity Building assistance.

Both  the  EAR  and  the  deconcentrated  approach  in  general  –  as  evidenced  by  the
performance  of  the  Commission  Delegation  in  BiH  –  have  proved  their  effectiveness  in
delivering assistance on the ground.

Deconcentration was extended to both Albania and Croatia with effect from 1/12/02 and
1/1/02 respectively. The aim has been to both increase the pace of implementation and to
benefit from local “on-the-ground” know-how and experience.

The current focus of Community assistance on institution building and Justice and Home
Affairs  –  although  there  is  still  significant  support  for  infrastructure  projects,  notably  in
Serbia  and  Montenegro  –  reflects  the  priorities  identified  in  2001.  There  is  a  particular
emphasis  on  strengthening  national  administrations’  capacity  to  implement  the  reforms
necessary for association.

Community  assistance  in  Justice  and  Home  Affairs  provides  a  long-term  framework  for
establishing  or  strengthening  the  rule  of  law  –  a  prerequisite  for  delivering  the  broader
objective of democratic, institutional, economic and social development. The fact-finding
missions  that  took  place  during  2002  have  provided  a  detailed  picture  of  the  current
situation and an assessment of needs. On the basis of this assessment, the Commission is
further developing its overall approach to Justice and Home Affairs in the region, helping

24

the  law  enforcement  agencies  of  the  countries  move  closer  towards  European  or
international standards and best practices.

The  development  of  reform  in  the  different  countries  is  the  result  of  a  number  of
interacting factors: national government initiatives, the efforts of national institutions, and
the support of the international community – in particular that of the European Union. The
aim of this report is to evaluate the overall state of progress in the reform process. CARDS
as an instrument will be subject to a separate and specific review as set out in the CARDS
Regulation [Article 13.2 – no later than 30 June 2004].

3. Community exceptional (macro-)financial assistance

The  Community  has  also  supported  a  number  of  IMF  backed  stabilisation  and  reform
programmes  in  the  Western  Balkans  with  macro-financial  and  exceptional  financial
assistance. In 2002, the Council approved two new macro-financial assistance operations
in favour of Serbia and Montenegro (up to €130 million) and BiH (up to €60 million) both
in the form of grants and loans. Disbursements in 2002 (including on previously decided
operations  for  Serbia  and  Montenegro,  Kosovo  and  the  Former  Yugoslav  Republic  of
Macedonia) amounted to €152 million. The release of this type of assistance is subject to
the  satisfactory  implementation  of  IMF  backed  programmes  and  the  fulfilment  of
economic policy conditions agreed with the authorities. (A more detailed account to these
operations is provided in each country SAp annual report as well as in the Annual report
on the implementation of macro-financial assistance in 2002 which is yet to be published).

25

ANNEX II

ALBANIA

Stabilisation and Association Report

EXECUTIVE SUMMARY

Limited progress has been made by Albania  in  addressing  the many  challenges it  has to
face. Recommendations included in the 2002 Stabilisation and Association process (SAp)
report  have  been  only  partially  addressed.  The  relative,  although  still  fragile,  political
stability  and  renewed  inter-party  dialogue  achieved  in  spring  2002  allowed  the  smooth
election  of  a  new  President  but  has  not  yet  translated  into  significant  achievements  in
terms of reforms.

This  new  political  climate  has  led  to  some  progress  in  the  implementation  of  the
international  community’s  recommendations  to  improve  Albania’s  electoral  procedures.
However, it has not been sufficient to respond to the constitutional requirements regarding
the restitution of or compensation for land expropriated during the communist era. While
there has been progress in developing good regional co-operation, the implementation of
the  rule  of  law  remains  deficient,  notably  due  to  weak  law-enforcement  institutions,
limited administrative capacity, corruption and organised crime. Individual freedoms and
human rights are guaranteed by Albanian law, but there is clear room for improvement as
regards 
towards  minorities  remain  generally
constructive, but there has been limited ambition to strive for higher standards.

implementation.  Albanian  attitudes 

GDP growth in Albania remained sustained and  reached  4.5  to  5%,  down  from  6.5%  in
2001. The overall economic performance has however fallen below expectations over the
reporting period. The main reasons for this slowdown have been the continuing problem
in  the  electricity  sector,  the  generally  depressed  state  of  the  world  economy,  limited
growth in the agricultural sector and the insufficient performance of the customs and tax
administrations.  The  authorities  partly  managed  to  cope  with  these  adverse  conditions:
both  the  fiscal  deficit  and  the  inflation  figures  were  within  target.  Progress  in  the
privatisation  process  and  the  restructuring  of  the  financial  sector  has  been  limited.  The
overall business climate has not improved significantly  despite some initiatives aimed at
supporting  business  promotion  and  encouraging  local  and  foreign  investment.  Legal
security  remains  insufficient  and  commercial  laws  inadequate  to  foster  business
development. Certain steps have been taken to improve the generally poor situation in the
various  Albanian  economic  sectors,  such  as  transport,  energy  or  agriculture,  but  these
efforts will need to be sustained over the medium term in order to achieve any significant
results.

After  delays  due  to  Albania’s  difficulties  in  guaranteeing  political  stability  and
implementing  reforms,  negotiations  for  a  Stabilisation  and  Association  Agreement
(SAA) were officially launched at the end of January 2003. However, at the current pace
of reform implementation, negotiations risk being long and drawn out. Before negotiations
can be concluded, Albania will need to demonstrate its ability to implement the provisions
of  the  future  Agreement,  and  to  address  the  priority  issues  identified  by  the  European
Union  through  its  various  reports  and  monitoring  instruments.  Albania  should  pay
particular  attention  to  the  Justice  and  Home  Affairs  sector  if  it  is  to  make  meaningful
progress  in  the  Stabilisation  and  Association  process  (SAp).  Some  improvements  have

26

been  noticed  in  controlling  illegal  migration  towards  the  EU,  but  trafficking  in  human
beings, drugs and other forms of organised crime, as well as corruption in key areas such
as the judicial system, customs and police, remain matters of deep concern. Improvements
in the judiciary have been limited and the prosecution of crimes poor, despite an increased
number of detentions. Albania will only be able to address these difficult issues if there is
real  commitment  by  the  Government,  the  Albanian  political  forces  and  the  law
enforcement  bodies  (including  the  prosecution  office  and  the  judiciary),  and  full
determination to translate that commitment into action.

27

BOSNIA AND HERZEGOVINA

Stabilisation and Association Report

EXECUTIVE SUMMARY

Irrespective  of  any  ambition  to  accede  to  the  European  Union,  Bosnia  and  Herzegovina
(BiH) needs to become a self-sustaining state. Without self-sustainability BiH can neither
meet  the  basic  needs  of  its  citizens  in  terms  of  security,  institutionalised  freedom  and
economic  well-being,  nor  can  it  integrate  into  European  structures.  Self-sustainability  is
therefore  a  pre-condition  for  BiH's  advance  from  dealing  with  the  aftermath  of  war
(reconstruction  and  peace  implementation)  to  a  transition  agenda  in  which,  like  its
central  and  eastern  European  neighbours,  it  can  concentrate  on  the  reform  and  technical
adjustments  necessary  for  integration  into  the  EU.  The  past  year  has  seen  important
advances,  but  self-sustainability  is  not  yet  guaranteed.  The  recently  inaugurated
governments with their four-year mandates will be decisive in deciding whether this can
be achieved within a reasonable time-frame.

General  elections  in  October  2002  confirmed  that  BiH,  whatever  its  political  and
institutional  challenges,  adheres  to  basic  democratic  principles.  The  landmark  decision
on  the  implementation  of  the  2000  BiH  Constitutional  Court  decision  on  “constituent
peoples”  has  altered  the  dynamics  of  national  politics  and  advanced  integration.  Other
achievements such as progressive dismantling of parallel structures within the Federation
of Bosnia and Herzegovina (FBiH), deployment of the State  Border Service (SBS) at all
border  crossing  points  and  successful  military  reductions  indicate  progress  on  a  wide
front.  Nevertheless,  evidence  of  real  "reform  ownership"  and  of  a  sustainable  domestic
political  dynamic  remains  limited:  pressure  from  the  High  Representative  and  the
international community remained vital for many of the reforms which were initiated. An
example of the failure to move from the post-war to a transition agenda is the continued
impunity of indicted war criminals such as Radovan Karadzic in Republika Srpska (RS).
The  fight  against  corruption  and  organised  crime  needs  to  be  strengthened.  Failure  to
address these issues is incompatible with integration into EU structures.

In  terms  of  the  economic    situation  long-term  sustainability  is  still  far  from  guaranteed.
After  high rates in the  second  half  of  the  1990s  fuelled  by  reconstruction  aid,  growth  is
slowing down. Estimated GDP is still below half its pre-war level (which BiH is expected
to  reach  only  in  2010  or  later),  even  though  the  presence  of  the  informal  economy  may
distort this figure. The economic and social costs of poor internal harmonisation and co-
ordination hamper the efficiency of the State and eliminate the benefits of decentralisation.
Public spending remains excessively high, while on its balance of payments BiH continues
to  run  a  deficit  both  in  the  trade  and  current  accounts.  However,  over  2002  BiH
maintained  macro-economic  stability,  low  inflation  and  continued  its  efforts  towards
lower  fiscal  deficits.  Foreign  direct  investment  (FDI)  improved  in  2002,  but  BiH  still
needs  to  do  more  to  attract  foreign  investors.  There  is  little  evidence  that  BiH  has
addressed its chronic dependence on assistance - although this issue will present itself with
increasing urgency as international aid declines.

Progress  within  the  Stabilisation  and  Association  process  (SAp)  has  been  noted.  The
Road Map was “substantially completed” by  September  2002. Of course,  the Road Map

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was  never  a  recipe  for  perfect  government  or  immediate  EU  accession,  but  it  was  an
indication  of  some  pressing  issues  and  a  measurement  of  political  will  to  address  them.
Regrettably, its substantial completion took too long and its full implementation requires
continued  attention.  The  next  SAp  stage  will  be  a  Feasibility  Report  which  will  assess
whether BiH is ready to open negotiations on a Stabilisation and Association Agreement
(SAA).  If  it  is  to  catch  up  with  its  neighbours,  some  of  whom  may  have  entered  the
transition phase, BiH must  accelerate  reform, including those  mentioned  in the  last  SAp
report, and develop truly self-sustaining structures.

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CROATIA

Stabilisation and Association Report

EXECUTIVE SUMMARY

The  political  situation  in  Croatia  remained  generally  stable  and  the  overall  situation
remained  satisfactory  as  democratic  developments  are  being  consolidated.  The
Government  continued  to  show  determination  in  its  efforts  to  establish  a  fully  fledged
democracy  regarding  the  rule  of  law.  Regional  co-operation  was  strengthened,  the
Constitutional  Law  on  the  Rights  of  National  Minorities  was  adopted,  and  important
legislative modifications were  adopted  to  facilitate refugee  return. Despite these  positive
developments, not enough has been done to overcome other short-term priorities identified
in last year report. A new law on Radio and Television (HRT)  was  adopted  in  February
but  it  does  not  fully  protect  HRT  from  possible  direct  or  indirect  interference  from
political  and  state  bodies.  The  Government's  attitude  in  the  co-operation  with  ICTY
remains  lukewarm.  In  practice,  only  limited  progress  has  been  achieved  in  the  return
process, and de facto integration of the Serb minority. Despite the adoption of a strategy, a
serious problem remains the continuing weakness of the judiciary and efforts need to be
concentrated  in  this  area.  The  fight  against  corruption  and  organised  crime  need  to  be
strengthened.

The economic situation continued to improve. Croatian estimated growth in 2002 is up to
5% and the outlook remains positive. Despite fiscal adjustment at central level, the general
government's fiscal stance remains weak and is a source of vulnerability for the economy.
High unemployment remains a main concern. Overall progress with structural reforms has
recently  been  slow,  reflecting  a  fragile  government  coalition  and  public  opposition  to  a
number  of  unpopular  measures.  Progress  has  been  achieved  in  rationalising  social
transfers  and  implementing  the  second  pillar  of  the  pension  system,  starting  fiscal
decentralisation and introducing a single treasury. On the other hand, reforms lag behind
in other areas, such as privatisation, education, and health. Labour market reform aiming
at increased flexibility has not yet been adopted.

The Government showed a strong commitment to the implementation of the Stabilisation
and  Association  Agreement  and  the  Interim  Agreement.  It  has  adopted  an  ambitious
programme for the integration of Croatia into the European Union, which includes a plan
for the harmonisation of legislation with the acquis. Croatia has started to work intensively
in  order  to  align  its  legislation  with  the  acquis  and  to  address  most  of  the  priorities
identified  in  the  2002  SAP  Report.  Important  new  legislative  texts  in  areas  such  as
competition  and  state  aid,  intellectual  property  and  consumer  protection  have  been
prepared over the last 12 months and must be adopted as a matter of priority. In parallel,
the necessary administrative capacity  must  be  created,  including  the  establishment  of  an
independent State Aid Authority, in order to ensure proper enforcement of new legislation.
Also,  the  enforcement  of  existing  legislation  often  remains  a  challenge,  due  either  to
delays  in  the  adoption  of  the  necessary  implementing  regulations  or  to  weak
administrative  capacity.  More  generally,  Croatia  needs  to  pay  special  attention  to
strengthening  its public  administration with  a  view  to  ensure  that  the  relevant  ministries
and  other  public  authorities  are  in  a  position  to  properly  implement  the  numerous
legislative reforms to which Croatia has committed itself.

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FORMER YUGOSLAV REPUBLIC OF MACEDONIA

Stabilisation and Association Report

EXECUTIVE SUMMARY

Following  a  largely  unstable  period  after  the  2001  crisis,  the  political  situation  in  the
former Yugoslav Republic of Macedonia has been moving steadily towards normalisation
based  on  the  Ohrid  Framework  Agreement.  The  European  Union  (together  with  its
partners in the OSCE as well as with NATO and the United States) has been consistently
supporting  this  process.  The  planned  EU  take  over  of  the  NATO  military  mission  in
March  will  be  a  further  demonstration  of  EU  commitment  to  peace  and  stability  in  the
country. The 15 September elections have illustrated the gradual return to normal political
life. The creation of a multi-ethnic coalition Government is a very positive indication of a
willingness to cooperate and to compromise on later. It will be crucial that all signatories
of the Framework Agreement, including the opposition parties, continue on this path until
its  full  implementation,  the  only  basis  for  further  development  and  strengthening  of  the
country’s  institutions  and  capacity  to  move  closer  to  the  EU.  After  initial  progress,  the
path  of  reform  needs  to  be  accelerated.  The  political  support  expressed  by  all  major
political  parties  for  European  integration  should  also  help  in  launching  the  necessary
political  and  economic  reforms.  Much  remains  to  be  done  and  it  is  now  up  to  the
Government to take and implement the initiatives needed.

In 2002, the economic performance of the former Yugoslav Republic of Macedonia fell
below  expectations  even  though  monetary  and  exchange  rate  stability  was  maintained.
The negative effects of the 2001 crisis stretched over into 2002 and were compounded by
the  weak  external  environment.  The  political  uncertainty  before  the  general  elections  in
September  and  the  failure  to  conclude  an  IMF  agreement  until  February  had  a  negative
impact  on  the  economic  and  business  climate.  The  implementation  of  the  agreement
finally reached with the IMF (yet to be approved) will further build confidence in sound
market-oriented economic policies to be promoted by the new Government, improving the
business climate and stimulating growth. Only in this way the Government will be able to
meet  the  costs  of  the  reforms  processes.  Other  key  issues  to  be  handled  by  the
Government are the implementation of a modern Treasury system and the development of
decentralised government and public finances.

With regard to the structure and functioning of the administration, the legal framework
for the decentralisation of public administration still needs to be adopted and implemented
to contribute fully to wider stabilisation of the country. As already emphasised in the SAp
2002 Report, the structure and management of the public administration has some way to
go before it can adequately fulfill all the tasks required of it in a  functioning democracy
based  on  the  rule  of  law.  It  is  crucial  that  the  government  further  develop  efficient
measures  against  corruption.  Other  priority  reforms  include  the  security  sector  and
effective measures to tackle the weaknesses of the judicial system.

Rapid  implementation  of  the  Framework  Agreement  will  also  enhance  progress  in  the
Stabilisation and Association process, including the ongoing ratification process of  the
Stabilisation  and  Association  Agreement  (SAA).  In  the  meantime,  the  former  Yugoslav
Republic  of  Macedonia  should  ensure  that  all  obligations  arising  out  of  the  Interim
Agreement  are  fully  complied  with  and  that  the  preparatory  works    needed  for  the

31

implementation of the full SAA are completed so that work can start as soon as it enters
into force.

32

SERBIA AND MONTENEGRO

Stabilisation and Association Report
EXECUTIVE SUMMARY16

Some progress has been made, with much still to be done, and not yet the qualitative leap
forward  required  if  the  state  of  Serbia  and  Montenegro  is  to  reap  the  full  benefits  of
Stabilisation and Association.

The  tragic  murder  of  the  Serbian  Prime  Minister,  Zoran  Djindjic,  who  courageously
worked to build democracy and played a key role in bringing Serbia out  of  its isolation,
has shocked the region and the international community. This crime is a reminder of the
difficult  legacy  of  the  past  and  also  of  the  need  to  continue  the  Government’s  work  on
stabilisation,  democratisation  and  reform  at  an  unabated  pace.  Zoran  Djindjic  was
dedicated to keeping Serbia and Montenegro on its path towards the European Union and
this  report  reflects  the  reforms  necessary  to  best  carry  forward  his  vision.    The
Commission will continue to provide all support possible to the authorities of Serbia and
Montenegro in their efforts to fight the forces that tried to attack Serbian democracy.

The  level  of  progress  in  political  reform  has  varied:  significant  success  in  the  areas  of
human/minority  rights  and  regional  co-operation;  mixed  results  in  the  reform  of  the
judiciary  and  police;  but  slower-than-hoped-for  progress  in  the  difficult  task  of  state-
restructuring  and  building  stable,  efficient  and  credible  institutions.  The  commitment  to
reform persists, but a number of serious obstacles continue to hamper delivery. The legacy
of  the  past  and  the  continued  existence  of  older  structures,  the  failure  to  fulfil  key
international  obligations  such  as  co-operation  with  the  ICTY,  political  disagreements
about  the  interpretation  and  implementation  of  the  constitutional  agreement,  and
protracted party  political  disputes  –  all  have  contributed to the  slow pace  of  reform  in  a
number  of  key  areas.  The  assassination  of  Serbian  PM  Djindjic  is  an  all  too  potent
reminder of  the need, throughout  the  region, to  tackle the forces of  organised  crime  and
extremism.

The economic situation has improved in the context of stability-oriented macroeconomic
policies although fiscal and external sustainability remain a challenge. Structural reforms
continued, notably in the banking and enterprise sector but need to be further accelerated.
The  key  to  the  state  fulfilling  its  full  economic  potential  –  and  also  a  prerequisite  for
contractual relations with the EU – remains the implementation of an internal market and
a single trade policy.

The European agenda and the Stabilisation and Association process remain catalysts for
reform.  But  much  time  has  been  lost  in  2002,  and  the  state  must  accelerate  the  pace  of
reform  and  improve  the  implementation  of  legislation  if  it  is  to  fulfil  its  potential.  The
continued  focus  on  constitutional  issues  has  distracted  attention  from  other  fundamental
areas  –  until  these  are  resolved,  the  state  will  struggle  to  achieve  the  necessary  pace  of

16 The state of Serbia and Montenegro is composed of the Republic of Serbia, Kosovo (under international
administration under UNSCR 1244 of 10 June 1999) and the Republic of Montenegro. This state is
the same international legal entity as the Federal Republic of Yugoslavia.

33

                                                
reform. Many of the recommendations made in the 2002 SAp Report, earlier reports, and
at the EU-FRY Consultative Task Force have yet to be implemented and thus remain valid
– and many are prerequisites for the implementation of any future SAA. The success and
speed  of  any  SAA  negotiations  will  depend  on  the  state’s  ability  to  demonstrate  its
capacity  to  implement  such  an  Agreement,  with  much  attention  focussed  on  its  track
record on delivering reform. The Commission will continue to provide support and advice
to the state. But EU efforts, even on the scale of recent years, cannot substitute for a lack
of political will within the state. Only with full commitment and co-operation within the
state, and decisive action to pick up the pace of reform, will the state be able to make the
necessary progress.

The situation in Kosovo has its own characteristics, due to the presence of an international
civil and military administration, yet many of the issues are the same. Work continues on
building democracy and rule of law, as well as other EU-compatible reforms including in
the economic sphere. The future challenge is for the provisional institutions to take greater
responsibility  for  reforms  and  their  implementation  –  working  within  the  powers  which
have  been  transferred  –  and  to  devote  less  time  and  fewer  resources  to  challenging
UNMiK and seeking a premature debate on status issues.

34