Report from the Commission - The Stabilisation and Association process for South East Europe - Third Annual Report {COM(2004) 203, 204, 205, 206}
Date: 2004-03-30
Institutions: European Commission
Subjects: European integration, Western Balkans, cooperation policy, report

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 30.3.2004 
COM(2004) 202 final 

REPORT FROM THE COMMISSION 

The Stabilisation and Association process for South East Europe  

Third Annual Report 

{COM(2004) 203, 204, 205, 206} 

EN 

   EN 

 
 
 
  
 
 
 
 
 
 
PART I 

Preface...................................................................................................................................... 4 

1. 

1.1. 

1.2. 

1.3. 

1.4. 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

3. 

3.1. 

3.2. 

4. 

4.1. 

4.2. 

4.3. 

4.4. 

4.5. 

5. 

6. 

The overall context....................................................................................................... 4 

An enlarging Union...................................................................................................... 4 

The Western Balkans’ European vocation................................................................... 5 

The European Partnerships .......................................................................................... 5 

Regional priorities........................................................................................................ 6 

The stabilisation and association process and its instruments ..................................... 7 

Relations with the individual countries........................................................................ 7 

The European Union’s trade measures ........................................................................ 9 

Community assistance.................................................................................................. 9 

New forms of support................................................................................................. 11 

Progress by the countries in the stabilisation and association process....................... 12 

Political developments ............................................................................................... 12 

Economic development.............................................................................................. 16 

The regional dimension.............................................................................................. 19 

Political and institutional co-operation ...................................................................... 20 

Regional Trade ........................................................................................................... 20 

Co-operation in Justice and Home Affairs................................................................. 20 

Co-operation in other sectors ..................................................................................... 21 

Ensuring complementarity of regional initiatives ...................................................... 24 

Public Opinion and perception of the European Union ............................................. 24 

Conclusions ................................................................................................................ 25 

List of abbreviations................................................................................................................. 28 

ANNEX .................................................................................................................................. 29 

The effects of the European Union’s trade measures............................................................... 29 

ANNEX .................................................................................................................................. 34 

Executive summaries of the country reports ............................................................................ 34 

2 

 
 
  
 
PART II 

Commission Staff Working Papers on Albania, Bosnia and Herzegovina, the former Yugoslav 
Republic of Macedonia and Serbia and Montenegro  including  Kosovo (see SEC(2004) 374, 
375, 373, 376). 

PART III 

The  Commission’s  proposals  for  European  Partnerships  with  Albania,  Bosnia  and 
Herzegovina,  the  former  Yugoslav  Republic  of  Macedonia  and  Serbia  and  Montenegro 
including Kosovo (see COM(2004) 203, 205, 204, 206). 

3 

 
 
  
 
PREFACE 

The Annual Report on the Stabilisation and Association process for South East Europe (SAp) 
provides  an  assessment  of  the  progress  of  Albania,  Bosnia  and  Herzegovina,  the  former 
Yugoslav Republic of Macedonia and Serbia and Montenegro, including Kosovo as defined 
by UN Security Council Resolution 1244, within this process over the past year. It is therefore 
the key indicator of their readiness to move closer to the European Union.  

The  first  part  of  the  Annual  Report  summarises  progress  made  during  the  year  by  the 
individual  countries,  and  monitors  the  development  of  co-operation  within  the  region. 
Annexed to the report is an evaluation of the European Union’s trade measures vis-à-vis the 
region.  

The second part of the Annual Report comprises a set of Commission Staff Working Papers 
on each country. These assess the political and economic situation, implementation of reforms 
and  related  measures,  including  recommendations  made  in  previous  reports.  No  paper  was 
prepared  on  Croatia  this  year  since  the  Commission  will  publish  its  Opinion  on  Croatia’s 
application  for  EU  membership.  The  report  on  Bosnia  and  Herzegovina  concentrates  on  an 
update  of  progress  on  the  16  priorities  for  action  identified  in  the  Commission’s  Feasibility 
Study for opening SAA negotiations, published in November 2003.  

The  third  part  of  the  report  contains  the  Commission’s  proposal  for  the  first  European 
Partnerships.  These  identify  short  and  medium  term  priorities  which  each  country  needs  to 
address.  The  European  Partnership  for  Croatia  will  be  presented  with  the  Commission’s 
Opinion on the membership application.  

The  Annual  Report  and  the  European  Partnerships  combine  to  guide  the  countries  through 
their transition and help them move closer to the European Union. 

Information used in compiling these reports was provided by the authorities in the countries, 
the Commission delegations in each capital, international organisations and representatives in 
the  region.  The  report  reflects  developments  until  20  February  2004.  Therefore  the  report 
could not fully assess recent events in Kosovo. 

1. 

THE OVERALL CONTEXT 

1.1. 

An enlarging Union 

On  1  May  2004,  the  European  Union  extends  its  membership  from  15  to  25  states. 
Negotiations  are  well  advanced  with  Bulgaria  and  Romania,  which  aim  to  join  the  EU  in 
2007. The Commission will present before the end of 2004 a report on Turkey’s fulfilment of 
the  Copenhagen  political  criteria,  along  with  a  recommendation  on  the  possible  opening  of 
accession negotiations.  

For  the  acceding  countries,  the  accession  process  has  served  as  a  catalyst  for  change, 
accelerating the implementation of complex and difficult political, institutional and economic 
reforms.  The  conclusion  of  the  process  is  a  significant  achievement  that  was  based  on 
sustained commitment over many years to the goal of membership.  

4 

 
 
  
 
The European Union will ensure that the enlargement process does not raise new barriers, and 
that  the  Union  remains  inclusive  and  outward-looking.  The  Commission  has  put  forward  a 
new framework for relations with its new eastern and southern neighbours which currently do 
not have the perspective of membership of the EU, the European Neighbourhood Policy1. The 
European Neighbourhood  Policy does not  apply to the Western Balkan countries since they 
have a membership perspective. 

1.2. 

The Western Balkans’ European vocation  

As  potential  candidates,  the  countries  of  the  Western  Balkans  have  the  prospect  of  future 
membership of the European Union, an objective endorsed by the European Council in Feira 
in June 2000 and reconfirmed by the European Council in Thessaloniki in June 2003. This is 
a promise which the EU will honour when each country fulfils the necessary criteria.  

The same basic entry requirements apply to the countries of the Western Balkans as to other 
countries that aspire to join the Union, namely the political, economic and institutional criteria 
established by the Copenhagen European Council in 1993 and set out in Articles 6 and 49 of 
the  EU  Treaty.  The  countries  must  also  meet  the  criteria  specific  to  the  Stabilisation  and 
Association  process  (SAp)  as  set  out  in  the  Conclusions  of  the  General  Affairs  Council  in 
April  1997  and  in  accordance  with  the  Commission  Communication  of  May  1999  on  the 
establishment  of  the  SAp2.  These  criteria  include  full  co-operation  with  the  International 
Criminal Tribunal for the former Yugoslavia (ICTY)3, respect for human and minority rights, 
the creation of real opportunities for refugees and internally displaced persons to return and a 
visible  commitment  to  regional  co-operation.  Important  principles  established  during  the 
present enlargement process also apply to the countries of the Western Balkans: each country 
proceeds towards membership on its own merits and at its own speed.  

Fulfilment  of  the  SAp  and  accession  criteria  entails  far-reaching  reforms,  principally  the 
development  of  adequate  institutional  capacity.  Following  through  on  commitments  and 
having  the  basic  capacity  to  negotiate,  conclude  and  implement  a  Stabilisation  and 
Association Agreement is demanding, but is necessary if the countries wish to achieve a more 
advanced relationship with the Union. 

The  Commission  will  continue  to  support  the  countries  in  their  efforts  to  make  progress 
towards  these  goals.  The  Thessaloniki  European  Council  and  the  Summit  between  the  EU 
and  the  Western  Balkan  countries  in  June  2003  demonstrated  this.  The  “Thessaloniki 
Agenda”  proposed  that  a  number  of  instruments,  which  proved  successful  in  the  pre-
accession process, be introduced in the Stabilisation and Association process. The most far-
reaching  of  these  new  instruments  are  the  European  Partnerships.  The  Commission  now 
presents the first set of draft European Partnerships for the Council’s consideration.  

1.3. 

The European Partnerships  

Based  on  the  assessments  in  the  Annual  Reports,  the  European  Partnerships  identify  short 
and  medium-term  priorities  which  the  countries  need  to  address.  Implementation  of  these 

1 

2 
3 

Communication  from  the  Commission  to  the  Council  and  the  European  Parliament:  Wider  Europe  – 
Neighbourhood:  A  new  Framework  for  Relations  with  our  Eastern  and  Southern  Neighbours,  
COM(2003) 104 final.  
COM(1999) 235. 
Cooperation with the ICTY is a legal obligation under UN Security Resolution 827 of 25 May 1999. It 
is  also  an  obligation  under  the  General  Framework  Agreement  for  Peace  (the  “Dayton/Paris  Peace 
Agreement”). 

5 

 
 
  
 
                                                 
priorities will require commitment, political will and the allocation of adequate resources. As 
progress  is  achieved,  the  European  Partnerships  will  increasingly  be  geared  towards  the 
adoption of the acquis. The successful fulfilment of the Partnership priorities will equip the 
countries with the institutional and legislative framework and administrative capacity required 
to govern a modern democratic society with a functioning market economy. It will also speed 
up their progress towards EU membership.  

The  countries  of  the  western  Balkans  are  strongly  encouraged  to  adopt  plans  for 
implementing the priorities identified in the European Partnerships, including a timetable for 
doing  so.  The  Partnerships  and  subsequent  plans  can  also  guide  the  countries  in  their 
budgetary  decisions.  Progress  will  be  monitored  by  the  Commission  and  assessed  in  the 
Annual Reports.  

The  Partnership  priorities  will  also  be  the  basis  for  programming  assistance,  which  is 
provided under the CARDS programme. Preparations for future integration into the EU will 
require  considerable  resources.  Due  to  the  conflicts  of  the  last  decade,  the  development  of 
functioning market economies in this region is more demanding and will take longer than did 
the  transition  in  Central  Europe.  The  process  is  far  from  complete  in  the  Western  Balkans. 
The economic and social situation is still precarious in large parts of the region. The cost of 
economic, legal and administrative modernisation is considerable and will partly be borne by 
the countries themselves, but also requires external assistance. The EU and the international 
community will need to continue to provide a high level of support to the region. 

The  Stabilisation  and  Association  process  will  address  challenges  in  the  region  as  priorities 
generally  continue  to  shift  from  those  of  a  post-conflict  situation  –  essentially  crisis 
management,  reconstruction  and  rehabilitation  –  to  issues  closer  to  those  faced  by  the 
candidate  countries  as  they  prepared  for  EU  membership  –  institutional,  judicial,  economic 
and legislative reform. Consequently, the EU needs to ensure that its presence in the region 
reflects its evolving relationship with the individual countries. The Commission Delegations 
play an increasing role in supporting the reform process and managing assistance flows in the 
context of the new European Partnerships. Proper co-ordination among EU representatives in 
the region remains a high priority. 

1.4. 

Regional priorities 

There are a number of common issues that set the context for reform efforts in the region.  

Regional  co-operation  is  a  practical  means  for  promoting  reconciliation  and  under-pinning 
reform. Further efforts are needed to re-establish good neighbourly relations. Reconciliation 
among the peoples of the region also requires that those indicted for war crimes stand trial. 
Co-operation  by  the  countries  concerned  with  the  International  Criminal  Tribunal  for  the 
former Yugoslavia (ICTY) remains generally insufficient. Despite certain improvements, the 
work of the court is still systematically obstructed, as highlighted by the Chief Prosecutor of 
the ICTY4.  

The continuing prevalence of organised crime and corruption in the region delays political 
reform, holds back economic development and puts into question the rule of law. Progress on 
these  issues  and  improvements  on  border  management  could  undoubtedly  facilitate  the 

4 

Report  of  the  Chief  Prosecutor  of  the  ICTY  to  the  UN  on  9  October  and  presentation  to  the  General 
Affairs and External Relations Council on 13 October 2003.  

6 

 
 
  
 
                                                 
movement  of  persons  and  have  an  impact  on  the  willingness  of  the  Union  to  review  the 
situation. Initial discussions on these issues have begun, within the framework of the SAp.  

Several countries are still held back by disagreements concerning the distribution of power 
among  peoples,  parties,  national  and  sub-national  levels  of  government  and  by  complex  or 
ambiguous  constitutional  arrangements.  Proper  functioning  of  democracy,  promotion  of  a 
healthy  political  climate,  freedom  of  media,  respect  of  human  and  minority  rights  and  the 
efforts  to  establish  a  political  culture  more  close  to  EU  standards  should  be  given  a  higher 
priority. 

Firm  commitment  to  political  and  economic  reform  will  allow  the  countries  of  the  Western 
Balkans to move away from the past, to reconcile differences and to rebuild trust so that they 
can focus on improving their citizens’ living standards and bringing them closer towards EU 
membership.  A  redoubling  of  efforts  within  the  SAp,  coupled  with  the  introduction  of 
European  Partnerships,  enhanced  institution  building  and  participation  in  certain  EU 
structures can, with continuing support from the EU, help to meet our common objectives.  

2. 

THE STABILISATION AND ASSOCIATION PROCESS AND ITS INSTRUMENTS 

The  Stabilisation  and  Association  process  supports  the  countries’  development  and 
preparations  for  future  EU  membership  by  combining  three  main  instruments:  the 
Stabilisation  and  Association  Agreements,  autonomous  trade  measures  and  substantial 
financial assistance. 

2.1. 

Relations with the individual countries 

Since January 2003, there have been nine rounds of negotiations on concluding a Stabilisation 
and  Association  Agreement  (SAA)  with  Albania.  While  all  major  issues  of  substance  have 
been  discussed,  Albania  needs  to  accelerate  reforms  and  achieve  far  more  concrete  results, 
particularly  as  regards  implementation  of  legislation,  if  it  is  to  conclude  and  implement  an 
SAA within a reasonable time.  

A Feasibility Study on opening SAA negotiations with Bosnia and Herzegovina was adopted 
by the Commission on 18 November 2003.5 The Commission concluded that although much 
progress has been made, structural weaknesses persist and implementation of a SAA would be 
a major challenge. The Commission identified 16 priorities which should be addressed during 
2004  and  will  decide  on  a  recommendation  to  begin  negotiations  when  Bosnia  and 
Herzegovina can show that significant progress has been made in meeting these priorities.  

Croatia signed an SAA with the EU on 29 October 2001, which will enter into force when it 
has  been  ratified  and  concluded  by  the  Member  States  and  the  European  Communities. 
Croatia presented its application for accession to the European Union on 20 February 2003. In 
April 2003, the Council requested the Commission to submit its Opinion  on the application 
and  a  series  of  questions  was  transmitted  to  the  Croatian  authorities  in  July,  to  which  the 
Croatian  government  responded  in  October.  This  has  been  followed  by  an  exchange  of 
questions and information between the Commission and the Croatian Government prior to the 
finalisation  of  the  Commission’s  Opinion.  The  Commission  will  submit  its  Opinion  on  the 
membership application in spring 2004. Consequently, no further assessment is made in this 
document on Croatia’s progress in the Stabilisation and Association process.  

5 

COM(2003) 692 final. 

7 

 
 
  
 
                                                 
The SAA with the former Yugoslav Republic of Macedonia was signed on 9 April 2001. It 
has been ratified by all member states and will enter into force shortly. The former Yugoslav 
Republic of Macedonia submitted an application for membership, on the basis of Article 49 of 
the  Treaty  on  the  European  Union,  on  22  March  2004.  The  application  will  be  considered 
according to the rules laid down in the Treaty.  

The  Commission  started  work  on  a  Feasibility  Study  on  opening  SAA  negotiations  with 
Serbia  and  Montenegro  during  the  autumn  of  2003,  after  the  country  had  adopted  a  new 
Constitutional Charter and presented an Action Plan for the creation of a single trade policy 
and a  single  market. Following Parliamentary elections in Serbia, the new Government will 
require  time  to  address  remaining  issues,  including  in  particular  political  conditionality, 
constitutional  issues  and  the  Action  Plan.  For  this  reason,  the  Feasibility  Study  was 
postponed. Building on the earlier Consultative Task Force, an Enhanced Permanent Dialogue 
serves  as  the  forum  for  advice  on  sectoral  reforms  and  will  increasingly  focus  on  technical 
and policy dialogue with the EU. Kosovo6 benefits from all the elements of the Stabilisation 
and Association process, with the exception of the possibility of contractual relations with the 
EU. To ensure compatibility of reforms in Kosovo with the acquis, and with the participation 
of  UNMIK  and  the  Provisional  Institutions  of  Self  Government  (PISG)  in  Kosovo,  the 
Commission  has  established  the  Stabilisation  and  Association  process  Tracking  Mechanism 
(STM),  which  plays  a  key  role  in  providing  policy  advice  and  measuring  progress.  The 
eruption of violence in March 2004 was a major setback for Kosovo. The events confirm the 
need  to  firmly  anchor  Kosovo  in  the  Stabilisation  and  Association  process.  The  European 
Partnership will provide guidance on the way forward but may need to be adapted following a 
thorough assessment of the causes and implications of the events. The PISG should publicly 
condemn  the  violence,  ensure  that  there  is  no  recurrence,  and  should  set  aside  funds  in 
Kosovo’s  consolidated  budget  to  cover  reconstruction  costs  resulting  from  these  events. 
Those responsible must be brought to justice.  

Political dialogue has increased between the European Union and the countries of the region. 
Within  the  framework  of  the  EU-Western  Balkan  Forum,  the  first  meetings  were  held  with 
the  Ministers  responsible  for  Justice  and  Home  Affairs’  issues  in  November  2003  and  with 
the Foreign Ministers in December 2003. Political Dialogue has been extended to all countries 
of the region.  

As close partners of the European Union, the countries of the Western Balkans are regularly 
invited  to  align  themselves  with  EU  demarches,  Declarations  and  Common  Positions  on 
Common  Foreign  and  Security  Policy  issues.  The  Commission  monitors  the  follow-up  to 
these shared political positions and reports its findings in the Annual Reports. In this context, 
the  Commission  regrets  that  Albania,  Bosnia  and  Herzegovina  and  the  former  Yugoslav 
Republic  of  Macedonia  have  signed  bilateral  immunity  agreements  with  the  United  States, 
which  run  contrary  to  the  “EU  guiding  principles  concerning  arrangements  between  a  state 
party  to  the  Rome  Statute  of  the  ICC  and  the  United  States  regarding  the  conditions  of 
surrender  of  persons  to  the  court”7.  The  EU  remains  firmly  committed  to  the  effective 
functioning of the International Criminal Court (ICC) and is determined to preserve the full 
integrity  of  the  Rome  Statute,  as  underlined  in  the  Council  Conclusions  and  Guiding 
Principles adopted in September 2002 and in a Common Position of 16 June 2003.  

6 
7 

Kosovo is administered under UN Security Council Resolution 1244. 
The guidelines were adopted by the Council on 30 September 2002. 

8 

 
 
  
 
                                                 
2.2. 

The European Union’s trade measures  

The  introduction  of  the  EU’s  exceptional  trade  measures  for  the  Western  Balkans  in 
September  2000  provided  the  region  with  uniform  and  wide-ranging  free  access  to  the 
Union’s market for almost all goods. 

Western Balkan exports to the EU have increased substantially since the late 1990s. This is 
due to a combination of factors such as post-conflict reconstruction, the transition to a market 
economy  and  the  introduction  of  the  trade  measures  by  the  EU,  the  region’s  biggest  trade 
partner. The impact of the trade measures on the countries varies, depending on the structure 
of  their  exports  and  on  previous  trade  arrangements.  At  this  stage,  Albania  and  Serbia  and 
Montenegro appear to have benefited the most from the trade measures which brought about 
lower tariffs  for about half  of their exports, the other half already benefiting from  duty-free 
access to the EU market. The tariff reduction was significant for most exported products. In 
the context of parallel EU trade liberalisation towards other third countries, the trade measures 
have  assisted  the  Western  Balkan  countries  in  maintaining  their  preferential  position  on  the 
EU market.  

To fully benefit from the EU’s trade measures, the countries need to increase competitiveness, 
diversify production, raise awareness among economic operators of the potential of the trade 
measures, facilitate a dialogue with business counterparts on the EU market and upgrade trade 
related  institutions.  They  need  to  further  harmonise  their  standards  with  those  of  the  EU, 
including in theveterinary and the sanitary and phytosanitary field. 

An examination of the region’s long-term prospects of exports to the EU shows a significant 
untapped potential. Exports from the countries of the region to the EU could be considerably 
higher than currently. To exploit the underlying potential, the countries must attract sufficient 
levels  of  foreign  direct  investment  to  broaden  their  export  base  and  to  increase  their 
production  capacity  and  productivity  and  to  ensure  compliance  with  EC  standards. 
Governments  need  to  pursue  structural  reforms,  modernise  administrations,  including  in 
particular the judiciary, and to ensure the rule of law to realise this objective. 

A more extensive evaluation of the impact of EU’s trade measures is annexed to this report. 

2.3. 

Community assistance 

European  Union  assistance  for  the  region  is  provided  mainly  through  the  CARDS8 
programme.  The  EU  has  allocated  around  €5  billion  to  this  programme  for  the  period 
2000-2006.  The  main  focus  of  Community  assistance  has  gradually  shifted  from 
infrastructure  rehabilitation  and  democratic  stabilisation  (including  aid  to  refugees)  to 
institution building and justice and home affairs. The programme includes capacity building 
in  the  public  administration,  judiciary,  police,  border  services,  support  to  and  reform  of  the 
media and assistance in drafting legislation. The priorities reflect the emphasis in the SAp on 
the need to strengthen the countries’ capacity to implement reforms. The impact of assistance 
is  not  limited  to  the  sector  directly  concerned.  Programmes  to  create  competent  institutions 
and judicial systems have a positive impact on economic development and reform.  

To  address  reconstruction  needs  and  to  stabilise  the  region,  disbursements  of  the  CARDS 
budget were proportionally greater in the first years of the period. An additional €71 million 

8 

Community  Assistance  for  Reconstruction,  Development  and  Stabilisation,  Council  Regulation  No 
2666/2000, OJ L 209/1. 

9 

 
 
  
 
                                                 
were  allocated  to  the  Western  Balkans  in  the  2004  budget,  an  increase  of  some  13%9.  The 
Commission has adopted a revised financial programme for 2005 and 2006, which foresees an 
annual  increase  of  some  €70  million  for  the  Western  Balkans.10  The  increase  will  allow 
CARDS to continue to address needs until the end of this budgetary period. 

In addition to the CARDS programme, the EC has committed since 1992 around €1 billion in 
macro-financial assistance11, of which €873 million had been disbursed by the end of 2003. 
At present, there are two operations; in Bosnia and Herzegovina (€60 million) and in Serbia 
and  Montenegro  (€200  million).12  A  proposal  for  further  macro-financial  assistance  for 
Albania  (€25  million)  has  been  adopted  by  the  Commission13.  The  EC  is  also  providing 
substantial  financial  support  to  international  bodies  and  interim  administrations  in  the 
region, such as the OHR and UNMIK and, from 2004, the Office of the Special Co-ordinator 
of the Stability Pact for South-Eastern Europe.  

To  be  eligible  for  Community  assistance,  the  countries  must  respect  the  principles  of 
democracy, the rule of law, respect for human and minority rights and fundamental freedoms. 
Community assistance is also subject to the conditions defined by the Council in 1997.14 The 
Commission  examines  compliance  with  these  conditions  and  will,  as  appropriate,  submit 
proposals concerning eligibility for assistance in general or for particular projects.  

The Commission will submit to the Council before 30 June 2004 two reports that will provide 
an independent and reliable assessment of the implementation of Community assistance in the 
region,  and  help  map  out  the  future  of  Community  assistance  programmes.  The  first  is  an 
evaluation of implementation of assistance under the CARDS regulation15. The evaluation 
will be based on five criteria: relevance, impact, efficiency, effectiveness and sustainability of 
the  assistance  programme. 
It  should  also  assess  and,  where  appropriate,  make 
recommendations  as  regards  complementarity  with  Member  States’  assistance,  local 
ownership  and  participation,  as  well  as  coherence  with  other  EU  policies  and  with  the 
priorities  of  partner  governments.  The  Commission  will  also  submit  an  evaluation  of 
implementation  of  assistance  under  the  regulation  on  the  European  Agency  for 
Reconstruction.16 This report will assess the agency’s implementation of EC assistance and 
make a proposal on the future status of the agency.  

The Commission’s communication "Wider Europe – Neighbourhood: A New Framework for 
Relations  with  our  Eastern  and  Southern  Neighbours"17  indicated  that  the  Commission  will 
consider the possibility of creating a new instrument to support cross-border co-operation at 
the  EU’s  external  borders.  A  subsequent  communication,  ’Paving  the  way  for  a  New 

9 

10 
11 

12 

13 
14 
15 
16 
17 

Excluding macro-financial assistance and the Western Balkans’ contribution to the European Training 
Foundation. 
Work on establishing Multi-Annual Indicative Programs for 2005 and 2006 is on-going. 
EC macro-financial assistance is untargeted financial support in the form of grants and/or loans to help 
address  identified  balance  of  payments  needs  and  to  support  reforms  in  the  context  of  adjustment 
programmes by the International Monetary Fund (IMF). 
A  detailed  account  of  the  implementation  of  EC  macro-financial  assistance  to  third  countries  is 
provided  by  the  Annual  Report  of  the  European  Commission  to  the  European  Council  and  European 
Parliament. 
at: 
http://europa.eu.int/comm/economy_finance/publications/external_relations/macrofinancial_en.htm. 
COM(2003) 834 final. 
Council Regulation (EC) No 2666/2000 of 5 December 2000, OJ L 306/1. 
Ibid. 
Council Regulation (EC) No 2667/2000 of 5 December 2000, OJ L 306/7. 
COM(2003) 104 final. 

available 

website 

Europa 

Report 

2002 

The 

the 

on 

is 

10 

 
 
  
 
                                                 
Neighbourhood Instrument’18 (NNI), issued in July 2003, assessed the possibilities in this 
area  and  identified  four  objectives  for  the  instrument:  (1)  promoting  sustainable  economic 
development;  (2)  working  together  to  address  common  challenges  in  fields  such  as 
environment,  public  health,  prevention  of  and  fight  against  organised  crime;  (3)  ensuring 
efficient and secure borders; (4) promoting local, "people to people" type actions. Pending the 
introduction  of  the  NNI,  Neighbourhood  Programmes  currently  under  preparation  for  the 
period  2004-2006  will  provide  a  framework  for  enhanced  co-ordination  among  the  existing 
funding  instruments,  in  particular  Interreg,  Tacis,  CARDS  and  the  Phare  Cross-Border  Co-
operation (CBC) programme. CARDS will provide a financial contribution of €45 million for 
these programmes as part of its Regional strategy over these three years. 

Future needs in the Western Balkans will remain substantial, not all of which can be met by 
the  present  level  of  assistance  under  the  CARDS  programme.  The  countries  share  many 
common  problems.  These  include  an  inadequate  infrastructure  in  areas  such  as  health  care, 
education  and  social  security.  Economic  development  is  held  back  by  energy  shortages  and 
inadequate transport infrastructure. Funds are limited and the Commission needs to focus on a 
limited  number  of  priority  areas  where  assistance  can  have  the  greatest  possible  impact. 
Additional funds will be needed in the medium term to help the countries address remaining 
challenges  and  prepare  for  future  EU  membership.  These  needs  have  been  included  in  the 
recent  Commission  Communication  “Building  our  common  Future:  Policy  challenges  and 
Budgetary means of the Enlarged Union 2007-2013”19.  

2.4. 

New forms of support 

In  line  with  the  Commission’s  Communication  “The  Western  Balkans  and  European 
Integration”20  and  “The  Thessaloniki  Agenda  for  the  Western  Balkans”21,  the  Commission 
has introduced, alongside the European Partnerships, a number of new instruments which will 
help strengthen the countries’ ability to implement their reform programmes.  

One  instrument  originally  developed  as  part  of  the  EU’s  efforts  to  help  candidate  countries 
strengthen their administrative capacity is twinning. This involves the secondment of officials 
from  the  Member  States  to  their  counterpart  authorities  in  the  region;  it  has  so  far  been 
introduced in Albania, Bosnia and Herzegovina and Croatia and preparations are under way 
for  its  introduction  in  the  former  Yugoslav  Republic  of  Macedonia  and  in  Serbia  and 
Montenegro.  

Another example of the successful transfer of experience from the enlargement process to the 
western  Balkans  is  the  extension  in  December  2003  to  the  Western  Balkans  of  the  services 
provided by TAIEX22.  

The Commission has begun a Feasibility Study on the establishment of a Regional School for 
Higher Education and Public Administration and is awaiting the conclusions of the study 
before making concrete proposals.  

18 
19 
20 
21 

22 

COM(2003) 393 final. 
COM(2004) 101 final. 
COM(2003) 285 final. 
“The Thessaloniki Agenda for the Western Balkans” was adopted by the General Affairs and External 
Relations Council on 16 June 2003 and endorsed by the Thessaloniki European Council on 19-20 June 
2003.  
Technical Assistance and Information Exchange Office 

11 

 
 
  
 
                                                 
Countries  in  the  region  will  be  able  to  take  part  in  the  work  of  selected  Community 
programmes and agencies, according to their particular needs, interests and capacities. The 
European Commission issued a Communication23 on 3 December 2003, setting out ways and 
means and a time schedule. This will enable the  Western  Balkan countries  to improve their 
understanding of the policies and working methods of the EU.  

The  Commission  has  proposed  that  the  Western  Balkan  countries  should  be  eligible  to 
participate in tenders under various pre-accession programmes (Phare, ISPA, SAPARD and 
programmes  for  Cyprus,  Malta  and  Turkey).  This  will  enable  companies  in  the  region  to 
compete for contracts, to familiarise themselves with tendering procedures, to gain business 
opportunities and to establish links with economic operators in the countries concerned.  

Implementation  of  the  Thessaloniki  Agenda  is  well  under  way.  The  Thessaloniki 
commitments  are  joint  undertakings,  however,  and  require  practical  steps  on  the  part  of  the 
Western Balkan countries themselves as well as of the EU. 

3. 

PROGRESS BY THE COUNTRIES IN THE STABILISATION AND ASSOCIATION PROCESS 

3.1. 

Political developments 

The countries of the Western Balkans have continued to make progress. The security situation 
has  been  stabilising  across  the  region.  The  eruption  of  ethnically  motivated  violence  in 
Kosovo  in  March  2004  was  a  serious  setback  in  this  context,  however.  Further  detailed 
assessments of the causes and implications of these events are still needed.  

Across the region, reforms are underway in the public administration and in various sectors, 
including  defence.  Regional  co-operation  is  increasing.  Progress  is  uneven,  however.  In 
several  countries,  many  of  the  recommendations  in  the  2003  Annual  Report  remain 
unfulfilled.  There  is  little  progress  in  the  fight  against  organised  crime  and  corruption. 
Administrative  and  judicial  reforms  are  slow  and  implementation  and  enforcement  of 
legislation weak.  

Albania  continues  to  play  a  constructive  role  in  the  region  and  its  economy  has  remained 
stable.  Organised  crime  and  corruption  remain  widespread,  however,  and  threaten  stability 
and  reform.  Albania  needs  to  step  up  its  efforts  in  this  area.  It  also  needs  to  strengthen  the 
judiciary  and  public  administration  and  to  ensure  free  and  fair  elections  at  all  levels. 
Implementation  capacity  is  an  issue  of  particular  concern.  Albania  should  also  devote  more 
attention to addressing the claims of its minorities. 

The  Feasibility  Study  for  Bosnia  and  Herzegovina  (BiH)  confirmed  that  considerable 
progress has been made in stabilisation but also that the country still suffers from significant 
structural  weaknesses.  The  constitutional  order,  as  defined  by  the  Dayton/Paris  Peace 
Agreements, is complicated, costly and does not facilitate reforms. However, reforms in the 
areas  of  defence  and  taxation  show  that  incremental  and  politically  acceptable  change  is 
possible.  One  of  the  main  challenges  for  BiH  today  is  to  address  remaining  structural 
weaknesses  and  become  a  self-sustaining  state  able  to  maintain  closer  relations  with  the 
European  Union.  This  may  require  a  strengthening  of  the  powers  and  capacity  of  central 
government  and  an  appropriate  division  of  responsibilities  between  State  and  Entities.  The 

23 

COM(2003)  748  of  3.12.2003  “Preparing  for  the  participation  of  the  Western  Balkan  countries  in 
Community programmes and agencies”. 

12 

 
 
  
 
                                                 
High  Representative  has  played  an  important  role  in  pushing  through  reforms.  The 
Government of BiH now needs to take more direct responsibility for the reform process.  

The  security  situation  in  former  Yugoslav  Republic  of  Macedonia  is  stabilising  and  the 
political  climate  has  improved.  National  unity  and  political  maturity  marked  the  period 
following the tragic death of President Trajkovski. President Trajkovski played an important 
role in establishing and implementing the Ohrid Framework Agreement and he was strongly 
committed  to  bringing  his  country  into  the  European  Union.  The  Commission  is  confident 
that  the  government  of  the  former  Yugoslav  Republic  of  Macedonia  will  carry  forward  his 
work.  During  the  reporting  period,  implementation  of  the  Ohrid  Framework  Agreement  has 
progressed  although  some  of  the  most  sensitive  pieces  of  legislation  remain  to  be  adopted 
and/or implemented. The entry into force of the Stabilisation and Association Agreement on 1 
April  2004  should  further  accelerate  the  much  needed  reforms  to  ensure  stable,  functioning 
institutions, the rule of law and economic development.  

The adoption of the Constitutional Charter and of an Internal Market and Trade Action Plan 
in  Serbia  and  Montenegro  were  important  achievements,  but  they  have  not  been  fully 
implemented  and  the  Action  Plan  remains  incomplete.  In  Serbia  the  state  of  emergency 
following  the  assassination  of  Prime  Minister  Zoran  Djindjic  led  for  a  time  to  greater 
engagement  in  the  fight  against  the  networks  of  organised  crime  and  political  extremists. 
However,  the  respect  for  human  rights  and  the  rule  of  law  was  affected  during  this  period. 
Parliamentary  elections  in  Serbia  in  December  2003  led  to  the  formation  of  a  coalition 
government  led  by  Prime  Minister  Kostunica.  In  Kosovo,  the  completion  of  the  transfer  of 
non-reserved powers from UNMIK to the Provisional Institutions of Self-Government paved 
the  way  for  the  opening  of  a  new  phase  in  relations  between  the  international  and  local 
authorities. This will be based on a closer partnership to jointly realise the targets set out in 
the  document  “Standards  for  Kosovo”  put  forward  by  the  Special  Representative  of  the 
Secretary General in December 2003 and subsequently endorsed by the UN Security Council. 
Progress in fulfilling these standards has become even more important after the March 2004 
events. The events have also demonstrated that progress will require a stronger commitment 
of  Kosovo’s  leadership  to  a  stable,  secure,  democratic  and  multi-ethnic  Kosovo  and  to  the 
European  integration  agenda.  Ethnically  motivated  threats,  violence  and  destruction  of 
property  are  not  compatible  with  European  values  and  standards.  The  EU  aims  to  maintain 
Kosovo  firmly  anchored  in  the  Stabilisation  and  Association  process  and  to  ensure  that 
progress  in  fulfilling  the  UN  standards  remain  compatible  with,  and  reflect  the  relevant  EU 
policies and the EU’s values. 

Ensuring  fully  functioning  democratic  systems  of  government  remains  one  of  the  main 
challenges  in  the  region.  During  the  course  of  the  year,  elections  were  held  in  several 
countries.  They  were  generally  considered  free  and  fair  and  were  conducted  in  accordance 
with international standards. The Albanian local elections were carried out on the basis of a 
new  electoral  code  but  were  nevertheless  problematic,  notably  with  regard  to  voter 
registration, voter lists and delays and interference in the tabulation of results. The repeat of 
the  Serbian  presidential  elections  in  November  2003,  following  a  series  of  unsuccessful 
attempts in 2002, failed as the turnout was below the required threshold.  

The  functioning  of  government  institutions  in  several  countries  is  still  hampered,  and 
sometimes  paralysed,  by  internal  political  conflicts. A lack  of  support  for,  or  disagreements 
over  constitutional  arrangements  combined  with  a  legacy  of  distrust  between  political 
opponents  is  often  at  the  core  of  the  problem,  slowing  down  the  legislative  process  and 
economic  recovery.  Throughout  the  region,  trust  has  to  be  rebuilt  among  leading  reformers 

13 

 
 
  
 
and  between  the  politicians  and  their  electorates.  Progress  has  been  made  in  reform  of  the 
military in Bosnia and Herzegovina and in Serbia and Montenegro. 

The performance of the parliaments has improved in several countries. Substantial issues are 
being discussed, working methods have improved, and more laws are adopted. The quality of 
output  of  some  parliaments  is  still  affected  by  the  lack  of  an  adequately  qualified 
administration  and  of  technical  resources.  In  Serbia  and  Montenegro,  the  functioning  of  the 
republican legislatures has been marked by instability and a lack of consensus on the need to 
adopt  key  laws.  The  state  parliament  has  been  engaged  in  very  limited  legislative  activity 
which led to delays in the implementation of the Constitutional Charter.  

A  civil  society  that  can  articulate  popular  needs,  preferences  and  concerns  is  an  important 
element of any democratic society. Civil society is still very underdeveloped in some of the 
Western  Balkan  countries,  although  the  situation  is  gradually  improving.  NGOs  and  other 
independent bodies need to improve their advocacy skills and their financial viability, relying 
as they do largely on external donor funding.  

Efforts  should  be  stepped  up  to  reform  the  education  systems,  and  to  support  the  non-
governmental  youth  organisations,  whose  active  participation  in  society  can  ensure  an  open 
and pluralistic democracy. The issue of education in minority languages deserves continued 
attention. 

There has been limited progress in public administration reform. Generally, administrative 
capacity  remains  poor  throughout  the  region  at  state  and  lower  levels  of  governments.  The 
ability  of  the  civil  service  to  coordinate  policy  and  to  carry  out  strategic  planning  are  held 
back in several countries by a lack of human and financial resources and of a clear division of 
responsibilities.  Political  interference  is  widespread.  The  countries  need  to  establish  a  legal 
framework  and  procedures  that  ensure  the  professionalism  and  independence  of  the  civil 
service. This is of paramount importance since the public administration needs to prepare and 
implement the reform process.  

Another common challenge for the countries is reform and strengthening of judicial systems. 
The  deficiencies  in  the  judicial  systems  identified  in  last  year’s  report  remain  largely 
unaddressed. There are considerable backlogs of pending cases in the courts. In the region as 
a  whole,  training  of  judicial  staff  depends  to  a  large  extent  on  contributions  from  external 
donors.  Training  institutes  have  not  yet  evolved  into  permanent  bodies  with  comprehensive 
training programmes. Further progress should be made in building the capacity to prosecute 
war crimes. 

The performance of the judicial system in Albania remains weak, which adversely affects the 
prosecution of serious crimes. Salaries for judges and prosecutors are low, the infrastructure is 
poor and corruption within the justice system is widespread.  

A  comprehensive  judicial  reform  strategy  was  adopted  in  Bosnia  and  Herzegovina  in 
February 2002; appointment procedures will be reviewed and the number of courts and judges 
reduced.  The  creation  of  a  BiH  State  Court  and  State  Prosecutor  was  an  important  step 
forward. However, judicial reform remains a major challenge for BiH at state, entity and local 
level.  Particular  efforts  are  needed  to  build  judicial  capacity  at  state  level  and  to  ensure 
appropriate representation of all peoples in the judiciary.  

There  have  not  been  any  major  changes  of  the  functioning  of  the  judiciary  in  the  former 
Yugoslav Republic of Macedonia. Hearings in civil cases are often postponed, the delivery of 

14 

 
 
  
 
notifications  of  summons  and  orders  to  appear  before  courts  is  inefficient  and  there  are 
significant delays in enforcement of cases.  

In Serbia and Montenegro the judiciary continues to struggle with serious backlogs, political 
interference  and  limited  resources.  The  state  of  emergency  in  Serbia  led  to  undue  political 
interference in the judiciary and to the adoption of legislation via emergency procedures with 
negative effects which persisted after the state of emergency was lifted in 2003.  

Work  has  continued  to  fight  corruption.  Most  countries  have  adopted  anti-corruption 
strategies  and  set  up  bodies  to  monitor  their  implementation.  However,  their  work  often 
suffers from unclear or unrealistic objectives and insufficient resources. The strategies are not 
implemented  vigorously  enough.  The  results  of  anti-corruption  measures  have  so  far  been 
limited and corruption is still widespread throughout the region. Efforts must intensify to get 
to grips with these problems. A positive development was that Serbia and Montenegro joined 
the GRECO co-operation structure (Groups of States against Corruption) in October 2003. All 
Western Balkan countries are now participating in this inter-governmental anti-corruption co-
operation.  

The  respect  for  human  and  minority  rights  is  guaranteed  in  constitutions  or  in  law  in  all 
countries.  Improvements  need  to  be  made  in  terms  of  practical  application.  Institutions 
guaranteeing  the  respect  for  human  rights  need  to  be  supported,  adequate  funding  must  be 
provided  and  their  decisions  must  be  respected  and  implemented.  In  some  countries,  co-
ordination between different levels of government on these issues needs to be further stepped 
up.  Violence  by  members  of  the  police  force  persists  and  the  conditions  in  prisons  remain 
problematic  in  several  countries.  Accusations  of  human  rights  abuses  must  be  properly 
investigated and dealt with. Gender equality is insufficiently ensured and domestic violence 
remains a problem in several countries.  

Significant numbers of refugees and internally displaced persons are still returning to their 
homes. Many have also chosen not to return but to resettle. Their rights, including property 
rights  in  their  country  of  origin,  must  be  respected.  The  return  of  refugees  to  Bosnia  and 
Herzegovina has been impressive with more than one million returns since the end of the war, 
although the pace is now slowing down24. At the end of 2003 over 90% of all property claims 
in BiH arising from the war in the 1990s had been resolved. The main challenge today is the 
creation  of  sustainable  economic  and  social  conditions  for  the  returnees.  In  Kosovo 
inadequate  security  continues  to  be  a  major  obstacle  to  returns.  The  difficult  economic 
situation  and  other  social  reasons  are  additional  factors  discouraging  displaced  people  from 
returning.  At  the  end  of  2003,  the  number  of  displaced  persons  in  Serbia  and  Montenegro 
with origin in Kosovo was 225,000, a slight decrease compared to 2002. New reflections will 
also be required on an appropriate strategy to ensure that those displaced by the recent acts of 
violence in Kosovo can return and to avoid any further displacement. 

Free,  independent,  professional  media  are  a  key  element  in  functioning  democracies.  The 
Western  Balkan  countries  have  made  progress  in  adopting  and,  to  a  lesser  extent, 
implementing media legislation in line with European standards. Further progress is needed to 
transform state broadcasters into genuine public service broadcasters and to ensure free access 

24 

44,868  returns  were  registered  in  BiH  in  2003  compared  to  102,000  returns  during  2002  (UNHCR 
Sarajevo,  Recorded  minority  returns  2003  in  BiH).  100,000  refugees  from  BiH  remain  displaced  in 
Serbia and Montenegro and about 4,000 in Croatia. The number of internally displaced persons in BiH 
is  327,000  (UNHCR,  Estimate  of  refugees  and  displaced  persons  still  seeking  solutions  in  South-
Eastern Europe, updated to reflect the situation on 1st January). 

15 

 
 
  
 
                                                 
to  information,  freedom  and  independence  of  the  media,  full  independence  of  Regulatory 
Bodies and the transparent and fair allocation and regulation of emission frequencies. Political 
interference  in  the  media,  sometimes  through  financial  and  fiscal  pressure,  still  persists  in 
most  of  the  countries,  and  protection  against  undue  defamation  is  not  satisfactory.  More 
efforts are required to ensure the media’s financial viability over the long term, particularly as 
far  as  the  transparency  of  financial  sources  and  the  rules  of  media  ownership  and 
concentration  are  concerned.  A  level  playing  field  for  public  and  private  broadcasters  is 
needed to ensure the co-existence of viable public and private sectors. Efforts should also be 
directed at consolidating professional structures, raising professional and ethical standards – 
thereby  promoting  self-regulation  –  and  ensuring  the  appropriate  involvement  of  relevant 
professional and other bodies in the functioning of the media.  

In  the  broadcasting  sector,  the  countries  should  advance  towards  adoption  of  EU  standards 
concerning, inter alia, advertising and sponsorship rules, protection of minors, the promotion 
of  European  works  and  the  right  of  reply.  The  Commission  and  other  relevant  European 
organisations  are  reinforcing  their  co-operation  with  the  public  authorities  and  professional 
sectors in the countries, in order to increase awareness of best practices in the media and to 
identify ways to accelerate the pace of the necessary reforms. 

3.2. 

Economic development25 

Economic  growth  in  the  region  reached  above  4%  in  2003  for  the  fourth  consecutive  year 
continuing to show resilience to the sluggish growth of the world economy in general and to 
the downturn in the European Union in particular. Most of the countries show slightly higher 
growth rates as compared to previous year. The level of gross domestic product (GDP) per 
capita reaches a regional average of €2400, ranging from about €700 in Kosovo26 to €5400 in 
Croatia.  If  Croatia  is  excluded,  per  capita  GDP  of  the  remaining  countries  average  €1700. 
Income levels in the Western Balkans generally lag well behind those in acceding countries of 
Central-  and  Eastern  Europe  (CEECs),  where  the  average  per  capita  GDP  amounts  to  some 
€6000.  

Inflation has been brought down to a regional average of 3.5%, mainly due to policies based 
on external anchors and prudent macroeconomic frameworks and continued improvement in 
Serbia  and  Montenegro.  Public  finances  improved  during  2003.  The  general  government 
deficit  (before  grants)  across  the  Western  Balkans  decreased  to  4%  of  GDP,  ranging  from 
about  1.5%  of  GDP  in  the  former  Yugoslav  Republic  of  Macedonia  to  5.5%  of  GDP  in 
Albania.  

The  countries  have  all  made  some  progress  on  structural  reforms,  but  overall  the  pace  of 
reform remains modest and significant structural reforms remain to be introduced. In addition, 
some achievements are fragile and need to be consolidated. Privatisation of small and medium 
sized  enterprises  is  well  advanced  in  most  of  the  countries  and  substantial  further  progress 
took  place  in  Serbia  and  Montenegro.  On  the  other  hand,  privatisation  of  large  state  or 
socially owned enterprises advanced slowly with noticeable progress in only a few countries. 
Overall, in Serbia and Montenegro the momentum of reform appears to have slowed down in 
some areas compared to the last two years, and in Bosnia and Herzegovina reforms are to a 
large extent pushed by the Office of the High Representative.  

25 

26 

The  reliability  of  statistics  from  the  region  remains  generally  poor  and  data  should  be  interpreted 
cautiously. 
Per  capita  income  in  Kosovo  has  been  significantly  revised  downwards  by  the  IMF  compared  to  last 
year’s figure.  

16 

 
 
  
 
                                                 
Economic  restructuring  may  be  associated  with  job  losses,  but  if  this  process  is  undertaken 
with  sufficient  vigour,  new  economic  activity  is  expected  to  lead  to  net  job  creation  and  a 
reduction of unemployment. Recorded unemployment is high in all countries, particularly in 
the  former  Yugoslav  Republic  of  Macedonia,  Kosovo  and  in  Bosnia  and  Herzegovina. 
Sustained high rates of unemployment may cause social and political tensions undermining 
further  economic  and  political  reform,  not  least  since  it  mainly  affects  young  people  and 
minorities.  

Some  20-25%  of  the  citizens  of  several  of  the  countries  are  estimated  to  live  below  the 
poverty  line27  and  the  infant  mortality  rate  is  five  times  higher  than  the  EU  average  in 
Albania and three times higher in Bosnia and Herzegovina, the former Yugoslav Republic of 
Macedonia  and  in  Serbia  and  Montenegro.28  Living  standards  are  particularly  low  in  rural 
areas and for minorities, low skilled workers and the unemployed. 

The  economies  of  the  Western  Balkans  have  large  informal  sectors  as  occurs  in  most 
economies in transition. Estimates of the size of the informal economy are often high and may 
reach as much as 50% of GDP in some cases following significant growth in size and scope 
during the years of conflict. Substantial informal sector activity hampers the emergence of an 
effective public sector since it reduces the tax base and impedes effective targeting of social 
policies due to a lack of reliable information.  

International financial assistance in the form of grants and loans remains an important source 
of budgetary financing. In 2003, grants are expected to account for more than 2% of GDP in 
the former Yugoslav Republic of Macedonia and 4% of GDP in Bosnia and Herzegovina. In 
Kosovo, the figure could exceed as much as 40% of GDP. While providing a vital source of 
income for the countries, remittances from migrants abroad, which for 2002 are estimated 
to amount to more than 10% of GDP in most of the countries (i.e. far greater than the volume 
of  foreign  direct  investment),  are  spent  primarily  on  imports  and  are  often  associated  with 
significant trade deficits.  

The continuous loss of human resources in the form of migration has started to decline from 
the  high  levels  of  previous  years.  In  2003,  three  countries  appear  among  the  top-40 
nationalities seeking asylum in industrialised countries, against four in 2002, as there has been 
a reduction in the number of asylum applications from nationals of these countries.29 While 
the  reasons  for  this  change  remain  difficult  to  verify,  it  may  reflect  an  increasing  sense  of 
stability and economic opportunity in the region.  

Trade  liberalisation  is  an  integral  part  of  the EU  accession  process  and  of  the  Stabilisation 
and Association process. Trade in the Western Balkans increased in 2002 with import growth 
(9%) outpacing export growth, which almost came to a halt during the year. The EU remains 
the  region’s  main  trading  partner  accounting  for  close  to  60%  of  their  total  trade  (ranging 
from  about  45%  for  BiH  to  80%  for  Albania)  out  of  which  Italy  and  Germany  cover  more 
than half. The Western Balkans remains a modest trading partner for the EU, making up less 
than  1%  of  its  total  trade  in  2002.  The  EU’s  ten  new  member  states  will  apply  the  EU’s 

27 

28 

29 

Poverty lines vary in time and place, and each country uses lines which are appropriate to its level of 
development, societal norms and values as what is necessary to satisfy basic needs varies across time 
and societies.  
United Nation’s Statistical Division (2003). The infant mortality rate reaches approximately 25 deaths 
per 1.000 children born alive within one year of birth in Albania, while the figures for BiH, the former 
Yugoslav Republic of Macedonia and Serbia and Montenegro is around 15. In Croatia, the figure is 8.  
UNHCR: Asylum levels and trends in industrialized countries, January to October 2003.  

17 

 
 
  
 
                                                 
Common  Commercial  Policy,  including  the  EU’s  trade  measures  towards  the  Western 
Balkans, from 1 May 2004, thus offering enhanced opportunities for duty free exports to the 
EU.  

The overall trade deficit remains large at more than 25% of GDP across the region in 2003, 
spanning from about 17% of GDP in the former Yugoslav Republic of Macedonia to almost 
40% in Bosnia and Herzegovina and 95% in Kosovo. While the current account deficits are 
expected to decline to a regional average of some 8% of GDP in 2003, the region’s level of 
external  debt  is  estimated  to  reach  about  55%  of  GDP.  The  external  imbalances  deserve 
careful and continuous monitoring.  

Levels of foreign direct investment (FDI) increased significantly in 2003 (up 40% on 2002) 
and reached about 5.4% of GDP or about €130 per capita, mainly due to a near doubling of 
flows into Serbia and Montenegro resulting from the privatisation process. On a cumulative 
basis  over  the  past  years,  the  flow  of  FDI  to  the  Western  Balkan  countries  is  significantly 
lower  in  per  capita  terms  compared  to  the  FDI  flows  to  the  acceding  countries,  but  rather 
similar in terms of percent of GDP. The geographical distribution of the FDI flows is uneven 
with Croatia having received more than half of the total. FDI represents an essential source of 
foreign currency earnings and plays an important role in financing current account deficits, a 
role which is particularly important in transition countries where the ability to raise domestic 
savings  is  often  limited  and  where  large  current  account  deficits  finance  an  increase  in 
consumption and investment.  

Continued  work  is  needed  on  the  establishment  of  a  functioning  market  economy  and  a 
business  environment  that  will  attract  FDI.  A  stable,  predictable  and  supportive  legal  and 
regulatory framework is key to sustained high rates of growth in the long term. Additional 
efforts  are  needed  in  a  wide  range  of  areas  including  respect  for  the  rule  of  law,  the 
establishment and implementation of a transparent legal framework (including reform of the 
cadastre  and  the  settling  of  ownership  issues),  the  reform  of  public  administrations  and  the 
continuous  fight  against  corruption.  The  countries  also  need  to  continue  financial  sector 
reforms  and  improve  financial  intermediation,  including  in  particular  (in  most  of  the 
countries) measures to improve long-term financing for small and medium sized enterprises. 
Continued liberalisation and development of the telecommunications sector is important for 
the development of the economy. Governments should encourage the adoption of information 
and communication technologies and work towards promoting a knowledge based economy 
based on the new EU regulatory framework for electronic communications.  

The  Commission  has  established economic  dialogues  with  Albania,  Croatia  and  the  former 
Yugoslav  Republic  of  Macedonia.  The  first  dialogues  with  Bosnia  and  Herzegovina  and 
Serbia  and  Montenegro  are  expected  to  be  held  in  the  course  of  2004.  The  economic 
dialogues  allow  for  an  exchange  of  information  and  views  on  progress  with  economic  and 
structural  reforms  in  the  countries.  The  dialogues  also  familiarise  the  Western  Balkan 
countries with economic developments and policy coordination within the EU.  

Small and medium sized enterprises play an important part in economic development and job 
creation.  At  the  Thessaloniki  Summit,  the  countries  of  the  Western  Balkans  endorsed  the 
European Charter for Small Enterprises and thereby committed themselves to implement 
its ten principles. Kosovo is covered by the scheme through the work of the United Nations 
Mission in Kosovo (UNMIK). The Commission’s report on the implementation of the Charter 
in  the  Western  Balkans  of  January  2004  displays  a  mixed  picture  of  progress  across  the 
countries  and  the  ten  areas  covered.  Each  of  the  countries  has  voluntarily  set  a  number  of 

18 

 
 
  
 
targets to improve the business climate for the next twelve months. The Charter will become 
an annual mechanism for tracking progress in this field.  

A Ministerial round table, “The Balkans: From Reconstruction to Economic Integration”, was 
held  in  Venice  in  October  2003  to  promote  private  sector  development  and  the  creation  of 
modern networks and infrastructures in the fields of energy and transportation. 

In  June  2003,  the  Thessaloniki  European  Council  reaffirmed  the  central  role  of  trade  in  the 
Stabilisation  and  Association  process  and  endorsed  the  Council’s  invitation  to  the 
Commission to prepare the extension of the pan-European diagonal cumulation of origin to 
the  countries  of  the  region  in  a  manner  consistent  with  all  relevant  community  policies  and 
dependent on their administrative capacity. At this stage, the Commission focuses its efforts 
on Croatia and the former Yugoslav Republic of Macedonia, the only two countries so far to 
have signed or concluded a Stabilisation and Association Agreement with the EU.  

Following  findings  that  the  system  of  management  and  control  of  the  preferential  origin  of 
sugar  in  Serbia  and  Montenegro  did  not  allow  the  authorities  fully  to  verify  the  originating 
status  of  sugar  exports,  the  Commission  suspended  the  preferential  arrangements  for  sugar 
imported from Serbia and Montenegro for an initial period of three months in May 2003 to 
protect the financial interests of the European Community. This measure was extended for six 
months in August 2003 and for another six months in February 2004. Serbia and Montenegro 
has  recently  made  encouraging  progress  in  addressing  many  of  the  structural  shortcomings 
identified  by  the  Commission.  However,  decisive  anti-fraud  action  on  specific  cases  is  still 
needed.  Some  of  the  detected  structural  deficiencies  still  exist  and  might  affect  all  goods 
exported to the EU. Therefore, a Notice to Importers covering all products from Serbia and 
Montenegro (a formal Commission warning alerting traders that the certification of origin can 
not be fully trusted) was published in the Official Journal in January 2004. The Commission 
continues to monitor developments carefully. 

4. 

THE REGIONAL DIMENSION 

Many of the challenges facing the Western Balkan countries are not only common to all but 
also have a cross-border dimension. Refugee return, infrastructure and economic development 
and  the  fight  against  organised  crime  are  examples  of  areas  where  the  countries  need  to 
cooperate  closely  to  achieve  results.  Regional  co-operation  goes  hand  in  hand  with  further 
development  of  the  individual  countries.  It  also  constitutes  an  essential  element  of  the 
Stabilisation  and  Association  process  and  is  a  requirement  under  the  SAAs.  Much  progress 
has been made in this area, as documented in the increasing number of bilateral co-operation 
agreements  between  the  Western  Balkan  countries.  Regional  co-operation  is  becoming  the 
natural way to tackle shared problems and to make further progress in important sectors.  

At  the  Thessaloniki  Summit,  the  countries  of  the  region  committed  themselves  to  enhanced 
regional co-operation and the promotion of a series of specific objectives and initiatives. The 
Commission  also  encourages  the  countries  to  increase  co-operation  both  with  EU  member 
states and with the candidate countries. The countries  of  the  Western  Balkans  could  benefit 
from drawing on the experience of the candidate countries and new member states from their 
transition and pre-accession preparations.  

19 

 
 
  
 
4.1. 

Political and institutional co-operation 

Political  dialogue  between  the  countries  is  intensifying.  Several  countries  have  made 
agreements  concerning  refugee  return,  border  crossings,  visa  regimes  and  the  fight  against 
terrorism, organised crime and trafficking.  

The  public  apologies  expressed  by  the  President  of  Serbia  and  Montenegro  for  crimes 
committed  in  Bosnia  and  Herzegovina  and  the  initiative  of  the  Presidents  of  Croatia  and 
Serbia  and  Montenegro  to  apologise  for  past  wrongs  is  an  encouraging  sign  of  improved 
relations between the countries, and a willingness to promote reconciliation.  

Border  delimitation  and  demarcation  between  several  of  the  countries  still  need  to  be 
resolved.  

4.2. 

Regional Trade 

Negotiations on a network of bilateral free trade agreements (FTAs) were concluded between 
the countries of the region (and with Bulgaria and Romania) in early 2003, based on the terms 
of a MoU signed by the countries in 2001 under the auspices of the Stability Pact. However, 
during the course of the year Serbia and Montenegro requested revisions of four of its FTAs. 
Following  a  meeting  of  Trade  Ministers  in  Rome  in  November  2003,  the  four  FTAs  were 
finalised  at  the  end  of  2003.  The  Commission  regrets  that  Bosnia  and  Herzegovina  has 
unilaterally delayed the implementation of certain aspects of its FTAs with Croatia and Serbia 
and  Montenegro.  This  casts  doubt  on  the  country’s  ability  to  abide  by  and  implement 
international agreements. 

In May 2003, the United Nations Mission in Kosovo (UNMIK) unilaterally committed itself 
to  the  terms  of  the  MoU  following  the  conclusion  that  its  mandate  under  UNSCR  1244 
extends to the signing of FTAs on behalf of Kosovo. So far, UNMIK has concluded an FTA 
with Albania and is engaged in further talks with other interested partners of the region. It is 
important that Kosovo is not left out of this regional trade liberalisation process.  

To  reap  the  full  benefits  of  trade  liberalisation  in  the  region  the  FTAs  need  to  be  ratified 
swiftly and fully and efficiently implemented. The process of trade liberalisation in the region 
ought  to  continue  to  further  facilitate  trade  and  to  attract  foreign  direct  investment.  The 
countries  are  encouraged  to  explore  possibilities  to  harmonize  their  FTAs  with  a  view  to 
establish a regional free trade area in the medium term.  

4.3. 

Co-operation in Justice and Home Affairs 

The debate on Justice and Home Affairs (JHA) in the Western Balkans has intensified over 
the past year. The “Thessaloniki Agenda” emphasised the growing importance of JHA issues 
in  the  relations  between  the  EU  and  the  Western  Balkans.  The  first  meeting  of  the  EU–
Western Balkans Forum took place at the level of JHA Ministers on 28 November 2003.  

The countries need to intensify their efforts to fight organised crime in the region. At the JHA 
Ministerial meeting on 28 November 2003, each country presented implementation strategies 
for specific action oriented measures to fight organised crime. Two regional priority measures 
were included in the country strategies. One of these concerns co-operation among Financial 
Intelligence Units in combating money laundering, and the other development of co-operation 
between  prosecutors  in  the  region.  The  measures  identify  priority  actions  and  set  out  a 
strategy  for  their  implementation  with  timetables,  benchmarks  and  the  identification  of 

20 

 
 
  
 
resource requirements. The responsibility for implementation lies with the countries, and the 
Commission will monitor progress within the SAp. 

Europol has a mandate to negotiate co-operation agreements with all countries in the Western 
Balkans. Exploratory talks have taken place and some of the countries have already provided 
information that will help launch negotiations. These agreements will be a useful contribution 
to the fight against organised crime. 

As regards the fight against drug trafficking, an Action Plan on Drugs covering the EU and 
the countries in the Western Balkans, and Romania, Bulgaria and Turkey was adopted by the 
Council in June 2003 and is being implemented.  

The Thessaloniki Summit welcomed the results of the Ohrid Regional Conference on Border 
Security and Management on 22 May 2003, where the Western Balkans countries presented a 
list  of  short-term  objectives  to  be  implemented  in  order  to  cope  effectively  with  illegal 
immigration,  border  security  and  border  management.  Each  country  has  presented  written 
reports indicating concrete steps they will take to implement these commitments. The review 
mechanism set up at Ohrid will allow the international community to monitor and to support 
the countries’ implementation efforts.  

A first meeting in November 2003 between Member States’ liaison officers posted in the area 
was a starting point for future co-operation in the region on subjects such as organised crime 
and  immigration.  This  initiative  needs  to  be  developed  further  to  strengthen  co-operation 
between Member States and the region so that they can tackle cross border challenges in the 
area  of  Justice  and  Home  Affairs.  The  countries  in  the  region  are  also  encouraged  to 
cooperate with the liaison officers stationed in their countries.  

Given the irregular refugee and migration flows ensuing from discrepancies in entry policies, 
the EU-Western Balkans Forum encouraged the countries to work closely together within the 
framework of relevant programmes on asylum and migration.  

A  readmission  agreement  between  the  European  Community  and  Albania  was  initialled  on 
18th December 2003.  

The perspective of the liberalisation of the visa regime is a long-term issue and should be put 
in a broader context: any progress in this area is linked to the countries’ ability to implement 
major  reforms  in  areas  such  as  strengthening  the  rule  of  law,  combating  organised  crime, 
corruption and illegal migration, improving their border management and document security, 
and  generally  improving  their  administrative  and  implementation  capacity.  Many  of  these 
issues can be discussed as part of an overall JHA dialogue in the context of the SAp.  

4.4. 

Co-operation in other sectors 

Progress  in  regional  co-operation  is  most  evident  in  the  web  of  agreements  and  sectoral 
strategies  that  are  beginning  to  bind  the  countries  in  a  framework  of  agreed  and  mutually 
supportive  commitments.  These  agreements  and  strategies  define  the  network  that  will  help 
ensure  sustainable  growth  in  the  region,  and  are  designed  to  ensure  the  smooth  integration 
with the networks of the EU. 

Infrastructure:  Continuing  progress  was  recorded  in  the  development  of  regional 
infrastructure strategies, under the supervision of the Infrastructure Steering group for South-
East  Europe  (ISG).  It  was  matched  by  concrete  progress  in  implementation  of  the  regional 

21 

 
 
  
 
infrastructure project list which is monitored by ISG (53 projects totalling €4 billion, of which 
3 were completed and 40 had started at the end of 2003). 

Transport:  Drawing  up  an  integrated  regional  transport  strategy  that  is  consistent  with  the 
Trans-European  Networks  and  takes  into  account  the  Pan-European  Corridors30  is  a  high 
priority.  Significant  progress  was  recorded  in  a  Report31  published  by  the  chair  of  the 
Infrastructure  Steering  Group  in  December  2003.  The  integrated  regional  transport  strategy 
was developed by the Commission, together with the IFIs, the Stability Pact and the Western 
Balkans  countries.  Technical  back-up  was  provided  by  the  EC-funded  and  ISG-steered 
Regional  Balkan  Infrastructure  Study  (REBIS-Transport).  It  was  agreed  that  efficient 
planning of public investment in the transport sector hinges on the development of four main 
building blocks: the establishment of a Core Regional Transport Network as a jointly agreed 
reference for planning investment of regional relevance; a process to prioritise investments of 
regional  importance  and  which  are  financially  affordable  and  suitable  for  international 
financing;  a  commitment  to  policy  reforms,  notably  to  improve  sector  management  and 
address cross border issues; and the establishment of an institutional framework to coordinate 
efficiently among the countries of the region.  

2003  was  thus  marked  by  the  completion  of  a  two-year  phase  of  reflection  and  consensus 
building amongst the countries of the region. The result is an agreement to work together to 
enhance  regional  transport  within  a  regional  framework,  to  hold  reciprocal  consultations  on 
transport  policy  and  to  introduce  the  institutional  reforms  needed  to  make  investments 
sustainable. In spring 2004, the countries of the Western Balkans will seal their commitment 
by signing, with the Commission, a “Memorandum of Understanding on the development of 
the South East Europe Core Regional Transport Network.” 

Energy:  Economic  and  social  development  is  impossible  without  a  steady  and  sufficient 
supply of energy. This is still an enormous problem in parts of the region and it can only be 
resolved  through  regional  co-operation.  The  “Regional  Energy  Market”  (REM)  process, 
which  was  initiated  in  November  2002  with  the  signing  of  the  “Memorandum  of 
Understanding  on  the  Regional  Electricity  Market  in  South-East  Europe  (SEE)  and  its 
integration into the EU Internal Electricity Market”, is an important initiative in this context. 
Day-to-day co-operation has developed between the countries of the region, with full support 
of  the  financial  institutions  and  bilateral  donors.  Coordination,  review  of  progress,  the 
promotion  of  a  common  strategy  among  donors  and  private  sector  involvement  were 
enhanced  during  the  two  “SEE  Energy  weeks”.  In  March  2003,  the  President  of  the  REM 
process, Turkey, published the results of a first peer review exercise. 

The process has been extended to the gas sector and to develop a basis for regulation of the 
market32.  A  revised  Memorandum  of  Understanding  on  the  Regional  Energy  Market  was 
discussed  and  concluded  by  the  Commission  and  the  countries  of  South  East  Europe  in 
Athens in December 2003. The MoU lays down the rules and objectives for the creation of an 
integrated  regional  energy  market  in  South  East  Europe  by  2005,  which  eventually  will  be 
integrated into the European Community’s Internal Energy Market. Furthermore, the intention 
to  negotiate  an  Energy  Treaty,  embodying  trading  and  market  regulation  rules,  was 
confirmed;  the  aim  is  initial  an  agreement  during  the  course  of  2004.  The  regional  energy 

30 
31 
32 

In particular Corridors V, VII, VIII and X. 
“Implementing regional transport priorities in the Western Balkans”. 
See  also  the  Communication  [COM(2003)  262]  of  13  may  2003  on  “The  Development  of  Energy 
Policy for the Enlarged European Union, its Neighbours and Partner Countries”. 

22 

 
 
  
 
                                                 
market in South East Europe will be achieved by progressively approximating state policies 
and by promoting harmonised rules throughout the region. The integrated regional approach 
pursued in the energy sector offers the right environment to attract international, public and 
private, investors.  

Environment: Environment is by its nature a regional issue and many challenges need to be 
addressed. The Regional Environmental Reconstruction Programme for South Eastern Europe 
(REReP) helps to improve the environmental policy framework in South Eastern Europe and 
received  support  from  the  5th  “Environment  for  Europe”  Kiev  Ministerial  Conference.  The 
programme  includes  institution  building,  measures  for  raising  environmental  awareness  in 
civil  society  and  cross  border  co-operation.  The  Commission  will  continue  to  assist  the 
countries  in  fulfilling  the  SAp  requirements  in  the  environmental  sector33.  In  2004,  the 
initiative  will  intensify  its  assistance  to  the  countries  in  developing  their  environmental 
policies to be in line with the acquis. A meeting of the Ministers for Environment in Skopje in 
October 2003 demonstrated increased regional ownership of the policies. Regional networks 
of  high  officials  and  experts  continued  to  develop  and  the  SAp  countries  are  now  also 
participating in the activities of the European Environment Agency. A priority environmental 
investment programme has drawn up priorities for the region, identified regional investment 
programmes,  compiled  a  list  of  priority  investment  infrastructure  projects  and  was 
accompanied by an assessment of the institutional and policy framework. The “Thessaloniki 
Agenda” and the conclusions of the May 2003 informal meeting of environment ministers of 
the EU and South-East Europe recommended the drawing up of Integrated Water Resources 
Management  Plans  for  trans-boundary  water  bodies  in  the  region.  The  DABLAS  (Danube-
Black  Sea)  Task  Force  completed  the  identification  of  priority  water  projects  and  presented 
the projects to the Project Preparation Committee in April 2003. 

Science  and  technology:  Reconnecting  the  Western  Balkan  countries  into  the  European 
research community is a strategic challenge. An EU-Western Balkans Ministerial meeting on 
co-operation  in  Science  and  Technology  was  convened  on  in  Thessaloniki  in  June  2003.  A 
Shared  Vision  for  the  regional  Science  and  Technology  co-operation  policy  and  a 
corresponding  three-year  Action  Plan  were  endorsed  that  will  help  the  Western  Balkans 
integrate into the European Research Area. The main goals are improved skills and research 
infrastructure,  institution  building,  and  the  promotion  of  joint  RTD  activities  which  are  of 
mutual benefit and have a regional impact. A Work Programme to implement the Action Plan 
was  defined  in  Florence  in  November  2003.  The  South  Eastern  European  Research  and 
Education  Networking  (SEEREN)  project  has  completed  the  extension of the pan-European 
high-speed research network GÉANT to the Western Balkan countries.  

Statistics:  Continuing  progress  can  be  noted  regarding  the  adoption  and  implementation  of 
EU  standards  and  methods  for  statistics.  Reinforced  regional  co-operation  was  observed 
regarding  implementation  of  two  important  data  collection  projects  on  External  Trade 
Statistics and Purchasing Power Parities. A new meeting forum for the Director Generals of 
the Statistical Offices was created for discussions on Strategic Management. Data collection 
began  for  the  first  leaflet  on  the  Western  Balkans  and  issued  specially  for  the  EU-Western 
Balkan Summit. Additionally, a list of indicators have been established and collected for the 
purposes of the statistical annex to the annual SAp report.  

33 

Communication [COM(2003) 62] of 6 February 2003 on “Pan-European Environmental Co-operation 
after the 2003 Kiev Conference”. 

23 

 
 
  
 
                                                 
4.5. 

Ensuring complementarity of regional initiatives 

The  Stability  Pact  for  South  Eastern  Europe  is  playing  an  important  role  in  promoting 
regional  co-operation  and  in  supporting  the  region  on  its  path  towards  further  European 
integration. The EU has invited the Stability Pact to continue complementing the regional co-
operation  element  of  the  Stabilisation  and  Association  process.  The  Stability  Pact  has 
reorganised  its  activities  and  structures  to  increase  focus  on  its  core  mandate  of  fostering 
regional co-operation. Based on the review of Stability Pact activities in 2003, the Regional 
Table  in  Tirana  agreed  to  continue  to  concentrate  its  work  on  six  core  objectives  -  Local 
Democracy and Cross Border Co-operation, Media, Trade and Investment, Energy and other 
Regional Infrastructure, Fighting Organised Crime and Managing and Stabilising Population 
Movements  -  and  endorsed  the  proposed  set  of  targets  for  2004.  The  Commission  attaches 
great importance to a continued focus on the core objectives.  

The South-East European Co-operation Process (SEECP) has further consolidated its role as a 
voice of the region. Both the Serbia and Montenegro and subsequent Bosnia and Herzegovina 
Chairs in Office secured a high level of political coordination among SEECP members on key 
issues,  in  particular  as  regards  Justice  and  Home  affairs  the  “Sarajevo  Declaration”  was 
adopted.  The  SEECP  made  significant  contributions  to  various  EU/Western  Balkan  events, 
such  as  the  Thessaloniki  summit  in  June,  the  Trade  ministerial  and  the  Justice  and  Home 
Affairs  Ministerial  meeting  in  November.  The  SEECP  plays  a  crucial  role  in  securing 
effective  regional  ownership  of  the  reform  process  and  in  bringing  about  regional  co-
operation. The Stability Pact has been invited to pursue and intensify its co-operation with the 
SEECP. This momentum should be preserved after the Sarajevo Summit in April 2004, when 
Romania will take over as Chair-in-Office.  

The  Special  Coordinator  of  the  Stability  Pact  has  assumed  a  central  role  in  enhancing 
coordination with other regional co-operation initiatives, such as the Adriatic-Ionian Initiative 
or the Central European Initiative. Regular exchanges of information have already taken place 
while operational coordination will receive further attention in the future.  

The  continued  close  co-operation  between  the  Stability  Pact  and  the  SEECP  and  the  recent 
establishment  of  regional  offices  of  several  Stability  Pact  initiatives  indicates  an  increased 
desire by the countries of the region to take control of the reform process.  

The Commission appreciates the constructive and systematic co-operation taking place with 
international partners such as the Council of Europe, the OSCE and the World Bank. In the 
case of Bosnia and Herzegovina and Kosovo, close co-operation with the High Representative 
and  UNMIK  is  indispensable  to  promote  the  reform  process.  This  kind  of  co-operation  at 
policy  level  and  coordination  in  deploying  assistance  will  help  the  countries  of  the  region 
accomplish the aim shard by the whole international community of seeing them develop into 
stable, self-sustainable states that eventually will be able to meet the Copenhagen criteria and 
join the European Union.  

5. 

PUBLIC OPINION AND PERCEPTION OF THE EUROPEAN UNION 

The  perception  of  the  Union  is  overwhelmingly  positive  and  public  support  for  a  closer 
relationship with the European Union remains high in all of the countries. The public sees EU 
membership  as  a  medium  or  long-term  prospect.  The  main  perceived  benefits  of  EU 
rapprochement  and  future  membership  are  economic  development,  improvement  of  living 
standards and freedom of movement of persons. The media, and in particular television plays 

24 

 
 
  
 
an instrumental role in shaping public perception of the EU, and show an increased interest in 
EU related issues. The EU is increasingly perceived as a political player in the region. Media 
interest  in  the  countries  focuses  mainly  on  the  political  aspects  of  the  relationship  with  the 
EU, including EU military/police missions in the region and issues related to the Stabilisation 
and Association process, such as trade relations, financial assistance and the implementation 
of  the  Thessaloniki  Agenda.  Regional  aspects  of  the  SAp  receive  little  media  coverage. 
Internal EU developments, such as the Convention and the IGC, the EU position on Iraq and 
the  enlargement  process  attracted  significant  public  attention,  indicating  an  interest  for  EU 
developments  not  related  to  the  Western  Balkans.  The  quality  of  coverage  of  EU-related 
issues has improved, but a persistent lack of professionalism and politicisation of the media 
still result in a number of misinterpretations and misperceptions of the role of the EU in the 
region. 

Knowledge  about  the  Stabilisation and Association process has  increased but there is still a 
considerable  lack  of  public  awareness  of  the  European  integration  process.  Citizens  in  the 
Western Balkans do not have a clear picture of what is required to bring their countries closer 
to  the  EU  and  public  opinion  often  oscillates  between  high  expectations  and  pessimistic 
perceptions  of  their  European  future.  A  more  effective  communication  of  the  long-term 
benefits of the SAp and European integration to the public by the governments of the region 
could  be  a  decisive  factor  in  mobilising  support  for  the  necessary  political  and  economic 
reforms. Greater efforts are needed to explain the opportunities and challenges of the SAp to 
all sections of society, so that the concrete benefits from the process and the necessary efforts 
are  better  understood.  Moreover,  efforts  should  be  enhanced  to  provide  the  societies  of  the 
countries  with  precise  information  on  the  values,  principles,  objectives,  activities  and  the 
overall functioning of the European Union.  

The major role in communicating the European integration process to citizens in the Western 
Balkan countries should be played by the national governments, regional and local authorities, 
media and civil society organisations in the region. In some of the countries, authorities have 
launched  or  are  planning  public  communication  strategies  about  their  European  integration 
process.  The  Commission  supports  these  efforts  and  deploys  significant  resources  in  the 
region  to  improve  public  knowledge  and  understanding  of  the  SAp  and  of  the  European 
Union.  Communication  activities  are  implemented  at  regional  and  local  levels,  in  close  co-
ordination with actions undertaken by the Council to promote visibility of the EU’s political 
support and other assistance to the Western Balkans.  

6. 

CONCLUSIONS 

In the light of the above, the Commission’s conclusions are the following: 

1) 

At the EU-Western Balkan Summit in Thessaloniki in June 2003, the EU renewed its 
commitment  to  the  European  perspective  of  these  countries.  The  Commission  is 
following through on the commitments it made at the Summit and has introduced an 
array  of  new  instruments  to  support  the  reform  process  and  to  bring  the  countries 
closer  to  the  European  Union.  These  instruments  will  only  deliver  their  potential 
benefits if implementation is stepped up also on the part of the countries of the region. 

2)  With  this  report,  the  Commission  is  presenting  its  first  proposals  for  European 
Partnerships.  By  identifying  priority  measures  for  the  short  and  medium  term,  the 
Partnerships  will  help  the  countries  with  their  reforms  and  preparations  for  future 
membership.  Addressing  the  priorities  in  the  Partnerships  should  be  a  catalyst  to 

25 

 
 
  
 
3) 

4) 

5) 

6) 

7) 

8) 

9) 

support  the  European  integration  process.  The  countries  are  strongly  encouraged  to 
develop  plans  for  the  implementation  of  the  European  Partnership  priorities,  with  a 
time  table,  and  to,  if  possible,  indicate  their  allocation  of  human  and  financial 
resources. This will speed up their European integration process. 

The countries’ efforts to ensure stability, to reform and to bring their citizens closer to 
the  European  Union  will  require  substantial  resources.  The  Commission  therefore 
considers  that  the  European  Union  needs  to  sustain  a  significant  level  of  financial 
assistance over the longer term. 

The Commission welcomes progress made by the countries of the Western Balkans in 
the  Stabilisation  and  Association  process  (SAp).  Reforms  are  underway  in  several 
sectors.  The  Commission  has  begun  negotiations  for  a  Stabilisation  and  Association 
Agreement (SAA) with Albania. Bosnia and Herzegovina is working on implementing 
the  priority  areas  identified  in  the  Commission’s  Feasibility  Report  of  November 
2003.  The  SAA  with  the  former  Yugoslav  Republic  of  Macedonia  is  about  to  come 
into  force.  Serbia  and  Montenegro  has  made  progress  towards  a  closer  relationship 
with the EU through the adoption of a Constitutional Charter and an internal market 
and trade action plan.  

The Commission is particularly encouraged by the increase in regional co-operation, 
notably in the areas of infrastructure, trade, transport and energy.  

The  Annual  Report  also  shows  that  many  challenges  remain  for  the  countries  to 
complete their transition to fully functioning democracies and market economies and 
to be able to sustain a closer relationship with the EU. The countries need to ensure the 
proper  functioning  of  democratic  institutions  and  to  uphold  the  rule  of  law.  Their 
administrative  capacity  and  ability  to  implement  and  enforce  legislation  and  reforms 
need to be strengthened.  

Further  efforts  are  needed  to  achieve  reconciliation  in  the  region.  This  will  ensure 
stability and re-establish trust and co-operation between peoples and countries in the 
Western Balkans.  

Several  countries  are  still  not  fully  co-operating  with  the  ICTY,  a  legal  obligation 
which must be respected and a condition for a closer relationship with the EU. 

All  countries  need  to  fight  more  vigorously  organised  crime  and  corruption  which 
continue to hamper reform and economic development. The strategies presented at the 
Justice  and  Home  Affairs  Ministerial  meeting  in  November  2003  should  be 
implemented.  EU  measures  to  facilitate  the  movement  of  persons  are  linked  to 
progress  in  the  area  of  justice  and  home  affairs.  Discussions  on  these  issues  will  be 
held in the fora of the Stabilisation and Association process.  

10) 

The  economies  of  the  countries  continued  to  grow  at  a  higher  rate  than  the  world 
economy  in  2003  and  inflation  has  remained  low.  However,  unemployment  is  high, 
the  informal  sector  large  and  a  large  part  of  the  population  lives  below  the  poverty 
line.  The  countries  need  to  improve  the  business  climate  and  the  competitiveness  of 
their  industries,  attract  foreign  direct  investments  and  increase  the  pace  of  reforms. 
This  will  require  in  particular  modernisation  of  administrations  and  upgrading  trade 
related institutions. It is important that they widen their export base and increase their 
production  capacity  so  that  they  can  realise  their  export  potential  and  take  full 

26 

 
 
  
 
advantage of the substantial trade preferences provided by the EU and to realise their 
export potential. The network of bilateral free trade agreements in the region should be 
ratified and fully and efficiently implemented.  

11) 

Recent events in Kosovo were a serious setback and confirm that the Kosovo question 
remains critical for the stability of the region. A thorough assessment of these events 
will  be  required  and  should  provide  a  basis  for  further  measures  to  prevent  a 
recurrence of violence and instability. The EU needs to ensure that Kosovo is firmly 
anchored in the Sap. The instruments developed in the context of the SAp will be used 
to  help  the  Kosovo  institutions  make  substantive  progress  in  implementing  the  UN-
endorsed Standards for Kosovo. In this context, the SAp Tracking Mechanism will be 
strengthened  to  enhance  Kosovo’s  European  reform  agenda  and  the  effectiveness  of 
EU’s assistance, while at the same time reinforcing the UN-led standards exercise.  

12) 

The  European  Union  will  also  need  to  continue  to  ensure  co-operation  and  co-
ordination  among  the  different  international  actors  in  the  region  if  it  is  to  make  the 
best  use  of  the  resources  available  and  to  have  the  largest  impact  possible  in  an 
increasingly  wide  range  of  sectors.  The  EU  needs  to  ensure  that  its  presence  in  the 
region reflects its evolving relationship with the individual countries.  

27 

 
 
  
 
LIST OF ABBREVIATIONS 

BiH 

CARDS 

EU 

FTA 

IFI 

ICC 

ICTY 

ISG 

JHA 

MoU 

NGO 

OHR 

OSCE 

REBIS 

REReP 

RTD 

SAA 

SAp 

SEE 

SEECP 

STM 

TAIEX 

Bosnia and Herzegovina 

Community  Assistance 
Stabilisation 

European Union 

Free Trade Agreement 

for  Reconstruction,  Development 

and 

International Financial Institution 

International Criminal Court 

International Criminal Tribunal for the Former Yugoslavia 

Infrastructure Steering Group 

Justice and Home Affairs 

Memorandum of Understanding 

Non-governmental organisation 

Office of the High Representative 

Organisation for Security and Co-operation in Europe 

Regional Balkan Infrastructure Study 

Regional  Environmental  Reconstruction  Programme  for  South  Eastern 
Europe 

Research, Technology and Development 

Stabilisation and Association Agreement 

Stabilisation and Association process 

South East Europe 

South East Europe Co-operation Process 

Stabilisation and Association process Tracking Mechanism (Kosovo) 

Technical Assistance and Information Exchange Office 

UNMIK 

United Nations Interim Administration Mission in Kosovo 

28 

 
 
  
 
ANNEX 

THE EFFECTS OF THE EUROPEAN UNION’S TRADE MEASURES 

Introduction 

In September 2000, the EU granted exceptional trade measures to the countries and territories 
which participate in the EU’s Stabilisation and Association process (SAp).34 These measures 
provide the Western Balkan countries with duty- and quota-free access to the Union’s market 
for practically all goods, except for some fishery products, beef and wine for which there are 
duty-free  or  preferential  quotas.  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). Pending 
the ratification of the SAAs, the Union’s trade relations with these two countries are governed 
by Interim Agreements. 

The trade measures established a uniform system of trade preferences for the countries of the 
Western Balkans and were the culmination of several years of gradual trade liberalisation. All 
countries  except  Serbia  and  Montenegro  qualified  for  some  form  of  preferential  treatment 
previously.35 The greatest change compared to earlier system(s) is the complete liberalisation 
of  imports  of  industrial  products  and  the  almost  complete  liberalisation  of  agricultural-  and 
fishery products.  

The  Annual  Report  of  last  year  provided  an  overview  of  trends  in  EU  imports  from  the 
Western Balkans as a first basis for an evaluation of the effectiveness of the trade measures. 
This year’s report further examines the number of products making up the exports from the 
region  and  the  extent  to  which  the  trade  measures  have  provided  these  products  with 
improved  market  access  compared  to  previously.  It  also  considers  the  Western  Balkans’ 
relative margin of preference on the EU market with respect to third countries following the 
introduction of the trade measures. An analysis of the countries’ export potential indicate the 
extent  to  which  the  countries  make  use  of  the  trade  measures  and  the  scope  for  boosting 
exports from the region (and thereby economic growth) which was the main intention behind 
the introduction of the trade measures in 2000. 

There are some limitations to the analysis that need to be borne in mind. The countries have 
been  provided  with  gradually  increased  trade  preferences  in  a  complex  way  since  the  mid 
1990s. This makes it difficult to identify when and where the trade measures have come into 
effect.  The  effects  on  exports  from  the  region  caused  by  the  trade  measures  compared  to 
changes  caused  by  post-conflict  reconstruction  and  the  gradual  transition  from  central 
planning  to  a  market  economy  are  further  likely  to  be  small.  Moreover,  following  the 

34 

35 

Council Regulation (EC) No. 2007/2000 of 18 September 2000, amended by Council Regulation (EC) 
No. 2563/2000 and 2487/2001.  
Albania  benefited  from  the  EU  Generalised  System  of  Preferences  (GSP),  while  Bosnia  and 
Herzegovina, Croatia and the former Yugoslav Republic of Macedonia had limited access to the GSP 
(only for agricultural and fisheries products) and had been entitled to trade preferences under the first 
generation  of  trade  measures  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  the  then  Federal  Republic  of  Yugoslavia  (today  Serbia 
and  Montenegro)  before  the  preferences  were  revoked.  As  of  1998,  trade  with  the  former  Yugoslav 
Republic of Macedonia was governed by the co-operation agreement with the European Union. 

29 

 
 
  
 
                                                 
introduction  of  the  trade  measures  in  2000  full  annual  trade  statistics  are  available  only  for 
2001 and 2002 which leaves only a short period of time available for studying the effects of 
the trade measures.  

Effects of the EU’s trade measures36 

Between 1999 and 2002, Western Balkan exports to the EU have increased by some 40% but 
remain low at about €5 billion (see Table 1). The EU is by far the most important export 
market for the five countries, receiving about 60% of their exports. The largest importers are 
Italy,  Germany,  Austria,  France  and  Greece,  which  absorb  close  to  90%  of  the  region’s 
exports  to  the  EU.  Croatia  is  the  largest  exporter  accounting  for  close  to  half  of  all  exports 
from the five countries. Although, the region’s share of the EU market remains low at about 
0.5%, it has nevertheless increased between 1999 and 2002.  

The low level of exports from the region indicates a rather narrow export base. The number 
of products making up the countries’ exports to the EU is low and has been further reduced 
between  1999  and  2002  (see  Table  2).37  This  indicates  a  greater  growth  in  fewer  already 
exported products, which may be explained by factors such as better market access under the 
trade  measures,  expanding  supply  capacity  and  a  more  competitive  production.  Most  of  the 
countries  export  goods  in  the  categories  of  clothing  and  footwear,  wood  products  and 
furniture and certain mechanical and electrical items. At product level a vast majority of the 
items is exported by only one or two countries.  

Table 1: Volume and market share of Western Balkan exports to the EU in 1999 and 2002 

Exports (€ million) 

Change (%) 

Share of EU imports (%) 

1999 

2002 

2002/1999 

1999 

228 

358 

1892 

591 

563 

3663 

330 

624 

2357 

552 

1.287 

5150 

44 

75 

25 

-7 

129 

42 

0.030 

0.047 

0.251 

0.078 

0.075 

0.481 

2002 

0.035 

0.066 

0.250 

0.058 

0.136 

0.545 

Country 

Albania 

Bosnia-Herzegovina 

Croatia 

former Yugoslav 
Republic of Macedonia 

Serbia and Montenegro 

Western Balkans 

Source: Eurostat. 

36 

37 

The analysis was carried out on two-thirds of each Western Balkan country’s exports to the EU in 1999 
(one year before the introduction of the trade measures) and in 2002 (the latest full year for which trade 
statistics are available) which was considered to form a sufficiently large sample. 
The number of products is analysed at the 8-digit level of the CN.  

30 

 
 
  
 
 
                                                 
Given the short period of time since the introduction of the EU’s trade measures, they could 
be  expected  to  promote  an  increase  in  exports  of  products  that  are  already  supplied  by  the 
region and which have experienced a change in tariff payable. Table 2 shows that tariffs on 
relatively few exported products were lower in 2002 compared to 1999, affecting about 17% 
of  the  region’s  exports.38  About  half  of  the  exports  of  Albania  and  Serbia  and  Montenegro 
were subject to abolished tariffs following the introduction of the trade measures. The tariff 
cut  was  significant  (>5%)  for  22%  and  30%  of  their  respective  exports  (not  shown  in  the 
table).39  

Table 2: Number of, and tariffs facing, Western Balkan exports to the EU in 1999 and 2002  

Country 

Albania 

Bosnia-Herzegovina 

No. of products 
exported 

Number of products for which 2002 tariff is:  
(% of exports in parentheses). 

1999 

2002 

Zero MFN 

Same as in 1999  Lower than in 1999 

34 

44 

23 

40 

7 (8%) 

2 (6%) 

14 (54%) 

12 (18%) 

26 (48%) 

Croatia 

128 

126 

32 (22%) 

83 (37%) 

former Yugoslav 
Republic of Macedonia 

Serbia and Montenegro 

42 

80 

37 

70 

5 (10%) 

27 (48%) 

15 (11%) 

0 

45 (48%) 

1 (1%) 

3 (2%) 

2 (4%) 

Western Balkans 

n.a. 

n.a. 

(16.6%) 

(28.3%) 

(16.9%) 

Note: The rows may not add up to the number of products (at the 8-digit level of the CN) exported in 2002 as 
products with changed CN codes have been excluded. 

A  tariff  reduction  could  be  expected  to  generate  a  larger  increase  in  exports  if  it 
simultaneously  improves  the  margin  of  preference  relative  to  other  major  suppliers  of  the 
same goods. Table 3 summarises the number of products and their share in exports for which 
the 2002 and 1999 tariff payable under the trade measures was lower than the tariff paid by 
the main source of EU imports. Overall, in 2002 the Western Balkan suppliers had a margin 
of preference on very few products, covering less than 10% of their exports, and the number 
of  products  enjoying  margins  of  preferences  vis-à-vis  other  suppliers  have  decreased  since 
1999.  Rather  than  offering  a  competitive  advantage  for  exported  products  from  all  the 
Western  Balkan  countries,  it  appears  as  if  the  trade  measures  have  acted  to  mitigate  EU 
parallel trade liberalisation towards other main suppliers.  

38 

39 

It should be noted that this is an underestimate as the analysis is based on a sample of the countries’ 
exports. 
Under  the  assumption  that  in  those  cases  where  a  range  of  tariffs  apply  it  is  the  highest  that  was 
applicable in 1999.  

31 

 
 
  
 
 
                                                 
Table 3: Western Balkan margin of preference in 2002 and 1999 over main EU supplier  

Number of products for which margin of preference is: 

> 10% 

5% - 10% 

< 5% 

Country 

Albania 

1999 

2002 

1999 

2002 

1999 

2002 

0 

4 (5%) 

0 

1 (6%) 

16 (22%) 

3 (12%) 

Bosnia-Herzegovina 

8 (4%) 

Croatia 

18 (8%) 

0 

0 

7 (20%) 

0 

4 (3%) 

14 (5%) 

2 (0.5%) 

17 (7%) 

former Yugoslav 
Republic of Macedonia 

9 (15%) 

2 (4%) 

2 (1%) 

0 

4 (6%) 

0 

0 

0 

Serbia and Montenegro 

0 

3 (2%) 

0 

4 (10%) 

0 

10 (8%) 

Western Balkans 

(7%) 

(1%) 

(5%) 

(3%) 

(6%) 

(3%) 

Note: Share of exports in parentheses. 

In  light  of  the  above,  the  rate  of  increase  in  overall  exports  from  Albania  and  Serbia  and 
Montenegro  (the  two  countries  mainly  affected)  amounted  to  44%  and  129%,  respectively, 
between  1999  and  2002  (see  Table  1).  The  corresponding  rate  of  increase  in  exports  for 
products which experienced lower tariffs in 2002 compared to 1999 is 58% for Albania and 
213%  for  Serbia  and  Montenegro  (not  shown  in  the  table).40  Too  few  products  of  the  other 
three countries obtained improved market access to allow a meaningful comparison.41 

Long-term export potential 

A  central  issue  to  the  Western  Balkans  is  post-war  reconstruction  (except  for  Albania)  and 
transition towards market economy. These processes have proceeded with different speed in 
the  different  countries.  Only  in  Albania  has  gross  domestic  product  (GDP)  reached  a  level 
higher  than  before  the  start  of  transition  and  the  period  of  conflicts.  The  region’s  ratio  of 
exports  to  GDP  is  about  15%.  This  indicates  that  exports  from  the  Western  Balkans  have 
difficulties in competing on the world market. For comparison, Romania, whose level of GDP 
is similar to that of the Western Balkans, displays a corresponding figure of 30%.  

Partly  as  a  consequence,  the  effects  of  the  trade  measures  have  thus  far  mainly  applied  to 
conventional products that experienced a reduction in tariffs following the introduction of the 
trade measures in 2000 and which have survived the problems and disruptions of recent years. 
As the trade measures cover a much wider range of products it is plausible that as ‘normality’ 
increasingly  returns  to  the  region  and  as  investment  in  productive  capacity  becomes 
operational,  new  exports  will  emerge  for  which  the  trade  measures  will  provide  substantial 
advantages.  

40 

41 

If  the  item  “17019910  -  white  sugar,  containing  in  dry  state>=  99.5  %  sucrose  (excl.  flavoured  or 
coloured)”  in  the  case  of  Serbia  and  Montenegro  is  excluded,  the  rate  of  increase  amounts  to  about 
160%. 
Increasing  the  sample  to  about  three-quarters  of  the  countries’  exports  to  the  EU  did  not  change  the 
result. Albania and Serbia and Montenegro remain the two countries mainly affected.  

32 

 
 
  
 
 
 
                                                 
The likely long-term potential of Western Balkan exports to the EU can be projected using a 
so  called  ‘gravity  model’  which  predicts  that  trade  between  two  countries  is  determined  by 
their  economic  size,  per  capita  income  and  the  geographical  distance  between  them.  Using 
previous  estimations  assessing  the  trade  potential  between  the  EU  and  the  candidate 
countries42 and applying them to the Western Balkans, the model indicates that the Western 
Balkan countries ought to be able to export to the EU at a level two to three times higher than 
at  present.  This  does  not  take  into  account  the  estimated  sizeable  grey  economy  which 
suggests an even greater export potential. This substantial untapped export potential is to be 
compared with the candidate countries whose trade with the EU had more or less reached its 
potential level in the late 1990s.43  

A questionnaire distributed to economic stakeholders, government officials and academics in 
the region reveal that the awareness of the trade measures appears to be low throughout the 
region. Respondents who were aware of the trade measures, or whose attention was drawn to 
them,  tend  to  believe  that  its  benefits  will  be  felt  in  the  medium  to  long-term.  Respondents 
further  sought  more  information  about  the  development  of  markets  in  the  EU,  mainly  from 
government  sources  who  provide  no  or  little  such information,  but also from  individual EU 
governments  and  from  the  European  Commission.  Supply-side  issues  (poor  and  outdated 
product  technology,  weak  quality  control,  lack  of  export  finance,  and  inadequate  packaging 
and marketing) were overwhelmingly quoted as the main impediments to the development of 
exports. Improvements in these areas were seen as the most important factors to facilitate an 
increase in Western Balkan exports. 

Conclusion 

The trade measures have served to create an enabling environment for an increase in exports. 
They do not in themselves support the development of the broad and competitive export base 
needed  to  take  full  advantage  of  the  substantial  preferences  at  hand.  The  countries’  export 
potential  can  only  be  achieved  through  continued  reforms  in  a  wide  range  of  policy  areas 
thereby  providing  the  basis  for  an  increase  in  investments  in  general  and  of  foreign  direct 
investment  (FDI)  in  particular.  FDI  implies  transfers  of  technology  and  know-how  with 
associated beneficial effects on productivity which in the long term should lead to an increase 
in production and export capacity and to the creation of employment opportunities. Investors 
and significant levels of FDI will in the long-term be attracted to politically stable and reform 
oriented  locations  where  the  rule  of  law  is  applied,  courts  are  perceived  as  fair,  where 
corruption is successfully fought and the grey economy is being reduced. To facilitate further 
exports  in  the  short-term,  the  countries  need  to  make  economic  operators  aware  of  the 
potential  of  the  trade  measures,  assist  them  in  establishing  business  contacts  in  the  EU, 
develop  export  promotion  activities  and  continue  to  work  to  meet  EU  standards  and 
regulations. 

42 

43 

European  Journal  of  Political  Economy  Vol.  16  (2000),  pp  807-827:  Trade  integration  and  the  EU 
economic membership criteria.  
Ibid. 

33 

 
 
  
 
                                                 
ANNEX 

EXECUTIVE SUMMARIES OF THE COUNTRY REPORTS 

ALBANIA 

Reform  in  Albania  over  the  past  twelve  months  has  been  limited.  Despite  some  progress  in 
specific  areas,  many  of  the  recommendations  included  in  the  2003  Stabilisation  and 
Association process (SAp) report have not been properly implemented. 

The political climate has not allowed for sound reform implementation. The fragile political 
stability  achieved  in  2002  has  been  replaced  by  tensions  between  the  main  political  parties 
and  within  the  ruling  Socialist  Party  (SP)  itself.  The  fight  for  SP  leadership  has  adversely 
affected  Government  stability.  With  Government  attention  increasingly  focused  on  these 
internal  difficulties,  and  with  an  increasingly  obstructive  opposition,  the  reform  programme 
has continued to suffer delays. As a consequence, many shortcomings identified in the 2001 
High  Level  Steering  Group  Report,  the  2002  and  the  2003  SAp  reports,  and  in  subsequent 
political dialogue with Albanian authorities have not been addressed. The local elections of 12 
October were carried out on the basis of a new electoral code. However, serious deficiencies 
were  observed  during  the  elections,  and  required  international  standards  were  not  met.  The 
ability  of  the  public  administration  to  implement  Albanian  commitments  in  respect  of  the 
Stabilisation and Association Agreement (SAA) remains an issue of concern. 

In the economic field, real GDP growth in 2003 has been estimated at 6.0%, up from 4.7% in 
2002.  At  the  end  of  2003,  inflation  reached  3.3%,  in  line  with  the  Government’s  target. 
Privatisation  of  the  largest  bank  of  the  country,  the  Savings  Bank,  has  been  a  notable 
achievement. Preliminary steps have been taken towards addressing the land ownership issue. 
However, the medium-term sustainability of economic growth as well as the country’s ability 
to  alleviate  poverty  are  being  jeopardised  by  political  uncertainty  and  limited  reform  focus. 
The Albanian economy remains informal to a considerable extent. The business environment 
is inadequate and offers little to encourage investment. Corruption, organised crime, deficient 
law implementation and administrative inefficiency continue to place barriers to business and 
to  hinder  legal  security.  Despite  its  achievement  in  establishing  Free  Trade  Agreements 
(FTAs) with countries of the region, Albania has been unable to fully implement all its WTO 
accession obligations. 

The Government has continued to state that Albania’s progress in the SAp is a top priority. 
However, its actions have not always supported this statement. Despite progress made during 
SAA  negotiations  in  discussing  the  text  of  the  future  agreement,  many  of  the  reforms 
necessary  to  guarantee  its  proper  implementation  have  not  been  carried  out.  Of  particular 
concern are those issues central to the rule of law. These include the fight against organised 
crime and corruption, and the functioning of the judicial system. Albania deserves credit for a 
number of initiatives, including its generally constructive role in the region, the reduction of 
smuggling  and  trafficking  in  human  beings  over  the  Adriatic  and  Ionian  Seas  and  the 
initialling  of  a  Community  Readmission  Agreement.  But  results  have  fallen  short  of 
expectations  in  the  key  areas  of  organised  crime,  corruption,  judicial  system  and  public 
administration  reform.  Since  Albania  wishes  to  progress  on  its  path  towards  the  EU,  it  is 
crucial  that  it  demonstrates  political  will,  determination  and  the  capacity  to  address  the  key 
issues identified in this report without delay.  

34 

 
 
  
 
BOSNIA AND HERZEGOVINA 

The  16  priority  reforms  identified  in  the  Feasibility  Study  relate  to  BiH’s  current  political 
situation,  to  its  economic  perspectives  and  to  its  progress  on  meeting  the  technical 
requirements of the Stabilisation and Association process (SAp).  

On  those  of  the  16  points  relating  to  the  political  situation,  progress  has  been  moderate. 
Government  at  State  level  remains  under-developed,  while  tensions  between  State  and 
Entities  still  affect  government  business  and  reform.  Public  administration  reform  has  just 
begun.  On  respecting  human  rights  provisions  and  the  conditionality  associated  with  the 
International  Criminal  Tribunal  on  former  Yugoslavia  (ICTY),  limited  progress  has  been 
recorded since end 2003. The Feasibility Study suggested that “a new [reform] dynamic may 
be  emerging  within  the  BiH  body  politic”.  Further  sustained  reform  efforts  are  needed  to 
make this a reality and to ensure that progress made in state-building is not reversed.  

The Feasibility Study further pointed out that “economic growth coupled with the reduction 
of wasteful expenditure would provide the resources for the institutional reform BiH needs”. 
BiH faces major economic challenges. As international assistance declines, private investment 
must  be  the  motor  for  growth.  However,  government  needs  to  do  its  part  by  establishing  a 
framework favouring investment and enterprise and by effective management of the funds at 
its  disposal.  For 
the  adoption  and 
implementation  of  a  State-level  budget  law,  the  recording  of  all  income  accruing  to  public 
authorities and the implementation of the statistics law as measures which could be achieved 
in 2004. On budgetary issues some progress has been made, but reliable statistics, the basis of 
all  effective  policy-making,  remain  worryingly  elusive.  The  short-term  steps  highlighted  in 
the Feasibility Study must be complemented by further decisive structural reform if BiH is to 
avoid further economic distress. 

the  Feasibility  Study  highlighted 

this  reason, 

In  terms  of  meeting  the  technical  SAp  requirements, the  judgement of the Feasibility Study 
remains  valid:  “  …  a  pattern  of  intermittent  progress,  interspersed  with  areas  where  crucial 
reform has not been completed, or in some cases even begun”. Thus, recent successes in areas 
such  as  Council  of  Ministers’  approval  of  an  Action  Plan  for  Feasibility  Study  issues,  first 
BiH  convictions  for  human  trafficking  and  initial  steps  in  setting  up  the  Indirect  Tax 
Authority are diminished by failures in other areas. No point relevant to this section has yet 
been fully completed. Moreover, it remains a concern that in too many areas where progress 
has been achieved, that progress has come only thanks to international pressure.  

For its part, the EU will deploy all means at its disposal to support BiH reform, ranging from 
technical  and  financial  support  to  meet  acquis  standards,  guidance  from  the  EU  Special 
Representative and actions under the European Security and Defence Policy (ESDP) to ensure 
a  stable  environment  in  which  reform  can  proceed.  As  soon  as  it  ascertains  that  significant 
progress has been made in meeting the 16 requirements established in the Feasibility Study, 
the European Commission  will  decide on  a recommendation for a Council decision to open 
SAA  negotiations.  Conversely,  if  progress  is  insufficient,  the  Commission  will  not  be  in  a 
position to recommend proceeding with such negotiations. Only BiH can ensure success. By 
successfully addressing the 16 priority points during 2004, BiH would reinforce a dynamic in 
part established by the  Feasibility Study and would create the  confidence both at home and 
abroad that it can address an ever wider and more demanding reform agenda. 

35 

 
 
  
 
FORMER YUGOSLAV REPUBLIC OF MACEDONIA 

While  constrained  by  a  difficult  budgetary  and  economic  situation,  the  former  Yugoslav 
Republic  of  Macedonia  has  made  efforts  in  2003  to  progress  in  the  Stabilisation  and 
Association  process.  In  many  areas,  the  reform  process  is  still  in  its  infancy  and  will  need 
further efforts to be converted into concrete changes and bring the expected benefits.  

The political situation has remained generally stable, building on process initiated in 2001 at 
Ohrid which remains crucial to ensure the development of the former Yugoslav Republic of 
Macedonia as a unitary and multiethnic state. The support of the International Community, in 
particular  through  the  EU-led  military  operation  “Concordia”  and  the  new  Police  Mission 
“Proxima”, has been critical in supporting gradual stabilisation. Consolidating stability calls 
for continued effort from the Government to implement fully the Framework Agreement and 
to strengthen the rule of law, as well as for commitment and sense of responsibility from all 
components of the population. Preparatory efforts need to be accelerated and enhanced for the 
implementation of the decentralisation process.  

Many challenges still lie ahead, whether on decentralisation, good governance, reform of the 
security  sector  or  the  rule  of  law.  Implementing  the  reforms  will  also  imply  strengthening 
administrative  capacity,  by  transforming  the  public  administration  into  a  modern  and 
accountable public service. Remaining on track in facing these challenges should enable the 
country to shift progressively its focus from stabilisation to association.  

The  former  Yugoslav  Republic  of  Macedonia  has  been  successful  in  maintaining  a  stable 
macro-economic  framework  and  joined  the  World  Trade  Organisation.  However,  the 
economic situation, and notably serious weaknesses in functioning of the economy, business 
climate,  competitiveness  and  enforcement  of  property  rights,  is  increasingly  a  challenge  for 
the country’s successful transition. Foreign direct investment has been particularly low, and is 
likely to increase significantly only if institutional and political stability continue to improve 
and reforms are pushed forward. Serious progress in establishing the rule of law will also be 
crucial.  

The  Stabilisation  and  Association  process  has  benefited  from  the  support  of  all  political 
parties  and  efforts  have  been  made  to  make  it  the  framework  for  Government  actions.  A 
National Action Plan to follow up the recommendations set in last year’s report has confirmed 
the will to go ahead. Further efforts and resources are needed to sustain reform. The entry into 
force  of  the  Stabilisation  and  Association  Agreement  will  lead  to  a  greater  co-operation 
between  the  EU  and  the  country.  The  presentation  by  the  EU  of  a  European  Partnership 
should provide the basis for focussing efforts to move forward on the reform agenda.  

SERBIA AND MONTENEGRO 

Progress in Serbia and Montenegro since the last annual Report has been mixed. The adoption 
of the Constitutional Charter was an achievement in its own right, but its implementation is 
still incomplete. Continued disagreements about the interpretation and implementation of the 
new constitutional arrangements reflect the lack of overall consensus on the future of the State 
Union.  This  lack  of  consensus  weakens  the  joint  institutions  and  policies  which  are 
indispensable for progress with political and economic reforms and for developing Serbia and 
Montenegro’s  relations  with  the  EU.  The  constitutional  problems  and  protracted  party 
political disputes in both republics have contributed to the slow pace of reform in many key 
areas.  

36 

 
 
  
 
Republican institutions showed resilience and stability following the assassination of Serbian 
Prime  Minister  Djindjic.  The  ensuing  state  of  emergency,  while  of  great  assistance  to  the 
Serbian  government  in  combating  the  immediate  threat  posed  by  organised  crime,  affected, 
however, the respect for human rights and for the rule of law.  

The level of progress in political reforms has varied: steady progress in army reform; further 
progress  in  the  areas  of  minority  rights  and  regional  co-operation;  slower  than  hoped-for 
reform of the police and judiciary. Efforts have been made to deal with the legacy of the past 
but  this  remains  an  outstanding  challenge.  Serbia  and  Montenegro  is  still  failing  to  comply 
with  its  international  obligations  concerning  co-operation  with  the  International  Criminal 
Tribunal for the former Yugoslavia (ICTY). 

Economic  stability  has  been  preserved.  However,  the  pace  of  structural  reforms  has  slowed 
considerably, mainly due to the political disputes that have hampered the functioning of the 
institutions.  

There  was  some  progress  on  the  European  reform  agenda  in  the  framework  of  the 
Stabilisation  and  Association  process  (SAp).  To  speed  up  the  reform  process  and  to  further 
deepen  EU  reform  advice,  an  Enhanced  Permanent  Dialogue  was  established  in  July  2003, 
upon  the  Commission’s  suggestion,  to  build  on  the  work  of  the  previous  Consultative  Task 
Force meetings. The recommendations of both serve as reform guidelines and benchmarks.  

Following  the  adoption  of  the  Constitutional  Charter  and  of  the  Internal  Market  and  Trade 
Action Plan in August 2003, the Commission decided in September 2003 to begin work on its 
Stabilisation and Association Agreement Feasibility Report. The Feasibility Report looks into 
the possibility to open negotiations on a Stabilisation and Association Agreement on the basis 
of a number of criteria: the degree of compliance with SAp political and economic conditions, 
the overall functioning of the State Union, the existence of a single trade policy and a single 
market, progress on sectoral reforms and on those institutions at the state level necessary to 
implement an SAA. 

The Feasibility Report was postponed in order to give the authorities more time to address the 
remaining key issues, including in particular political conditionality, constitutional issues and 
the Action Plan.  

KOSOVO 44 

The UN key decision to operationalise the Standards for Kosovo, and the launch – although 
amidst  difficulties  –  of  the  Dialogue  between  Pristina  and  Belgrade  on  issues  of  common 
concern were the main developments over the reporting period.  

Just at the time when the direct dialogue between Pristina and Belgrade seemed to be finally 
on  track  and  the  Kosovo  standards  implementation  plan  was  about  to  be  finalised,  the 
ethnically motivated violent incidents that occurred in March 2004 marked a serious ssetback 
to the establishment of a secure, democratic and multi-ethnic Kosovo.  

Over the reporting period, the performance of the Provisional Institutions of Self-Government 
(PISG)  and  public  administration  has  started  to  improve,  but  deficiencies  still  need  to  be 
addressed  with  determination.  The  transfer  of  non-reserved  competences  from  the  United 
Nations Interim Administration Mission in Kosovo (UNMIK) to the PISG was completed by 

44 

As defined by UN Security Council Resolution 1244. 

37 

 
 
  
 
                                                 
the end of 2003. Now the PISG need to make full use of the transferred competencies to take 
greater  responsibility  for  the  reforms  and  their  implementation  under  the  ultimate 
responsibility  of  UNMIK,  which  in  addition  holds  the  reserved  powers.  The  late  and 
inadequate reaction of the PISG to the events of March 2004 raises serious concerns. The rule 
of  law  needs  to  be  strengthened,  in  particular  as  regards  effective  implementation  and 
enforcement of the legislation.  

While some efforts were made, notably in the second half of 2003, substantial and sustainable 
return  of  displaced  persons  to  Kosovo  was  hampered  by  the  unfavourable  socio-economic 
conditions and precarious security situation. The March 2004 violent incidents have led to the 
forced displacement of members of minority communities and have exacerbated the climate 
of insecurity with a very adverse impact on the overall process of returns.  

Despite some improvements, the economic situation remains a cause for concern: Kosovo’s 
economy  is  still  heavily  dependent  on  foreign  aid  and  remittances  and  is  far  from  being 
viable. Unemployment is high and likely to increase, thus creating fertile soil for social and 
political unrest. Privatisation of socially owned enterprises and restructuring of public utilities 
have  not  advanced  satisfactorily.  The  management  of  public  finances  need  to  be  more 
efficient and transparent. 

Over the reporting period, progress has taken place in setting Kosovo’s European perspective 
through the implementation of the Stabilisation and Association process Tracking Mechanism 
(STM). The Commission has provided to the Kosovo authorities policy advice on a number of 
sectors with a view to supporting EU compatible reforms. At the same time, the STM process 
reinforces and strengthens the work being done on the Standards for Kosovo.  

The European perspective means that Kosovo people will be able to benefit from the peace 
and prosperity that the process of European integration has secured in a free and democratic 
manner  throughout  most  of  the  continent.  To  achieve  this  aim,  Kosovo  needs  to  be  firmly 
anchored  in  the  Stabilisation  and  Association  process.  However,  the  March  2004  incidents 
shows that the people of Kosovo and the PISG need to engage seriously in the process. 

38