on the preparedness of Serbia and Montenegro to negotiate a Stabilisation and Association Agreement with the European Union {SEC(2005) 478}
Date: 2005-04-12
Institutions: European Commission
Subjects: Serbia and Montenegro, agreement (EU), association agreement, economic stabilisation

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 12.4.2005 
COM(2005) 476 final 

COMMUNICATION FROM THE COMMISSION 

on the preparedness of Serbia and Montenegro to negotiate a Stabilisation and 
Association Agreement with the European Union 

{SEC(2005) 478} 

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COMMUNICATION FROM THE COMMISSION 

on the preparedness of Serbia and Montenegro to negotiate a Stabilisation and 
Association Agreement with the European Union 

1. 

Introduction 

The  Stabilisation  and  Association  process  (SAP),  which  was  confirmed  at  the  Thessaloniki 
Summit  in  June  2003  as  the  European  Union’s  policy  framework  for  South  Eastern  Europe 
until accession to the EU, provides for the establishment of the Stabilisation and Association 
Agreements (SAA). 

This  Communication,  which  is  based  on  the  findings  presented  in  the  Commission  staff 
working  paper1,  assesses  whether  Serbia  and  Montenegro  has  progressed  sufficiently  in 
meeting the SAP political and economic criteria and in developing the capacity to negotiate 
meaningfully and subsequently implement successfully such an agreement. 

2. 

Relations between the European Union and Serbia and Montenegro 

Currently,  the  EU  has  no  contractual  relations  with  the  State  Union  of  Serbia  and 
Montenegro. Since the fall of the Milosevic regime in October 2000, Serbia and Montenegro 
(formerly the Federal Republic of Yugoslavia – FRY) has benefited from various instruments 
of the SAP, notably autonomous trade measures covering almost all products and substantial 
financial  support.  As  confirmed  at  the  Thessaloniki  Summit  Serbia  and  Montenegro  is  a 
potential candidate for EU membership. 

Over the past years, the EU has provided its policy advice through the EU-FRY Consultative 
Task Force, and then the Enhanced Permanent Dialogue (EPD). The EPD currently monitors 
and  drives  reforms  on  the  basis  of  the  European  Partnership  adopted  by  the  EU  Council  of 
Ministers in June 2004 and of the corresponding implementation Plan finalised by Serbia and 
Montenegro’s authorities in December 2004. 

In  2002-2003,  the  FRY  underwent  a  fundamental  constitutional  reform  leading  to  the 
adoption  of  the  Constitutional  Charter  of  the  State  Union  of  Serbia  and  Montenegro  on  4 
February  20032.  An  Action  Plan  for  the  creation  of  a  single  external  trade  policy  and  an 
unhindered  internal  market  was  adopted  in  summer  2003.  The  adoption  of  these  basic 
documents enabled the Commission to start work on a draft Feasibility Report. However, the 
attempts to achieve a minimum level of common trade policy and internal market integration 
did not achieve the desired results. Therefore, due to serious delays in the implementation of 
the  Constitutional  Charter  and  the  Action  Plan  on  trade  and  internal  market  and  major 
deficiencies  in  the  implementation  of  Serbia  and  Montenegro’s  international  obligations,  it 
was not possible to assess the feasibility of opening SAA negotiations. 

1 
2  

SEC(2005) 478. 
The State Union comprises two member states: the Republic of Serbia and the Republic of Montenegro. 
Throughout this Communication the terms Republic(s) and republican refer to the Republic of Serbia 
and the Republic of Montenegro as member states of the State Union of Serbia and Montenegro. 

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To  help  overcome  the  persistent  constitutional  stalemate  and  re-energise  Serbia  and 
Montenegro’s  progress  towards  the  EU,  a  “twin-track”  approach  was  proposed  by  the 
Commission in July 2004 and subsequently endorsed by the EU Council of Ministers and the 
political leaders of Serbia and Montenegro in October 2004.  

3 

Constitutional and legal issues 

3.1 

The twin-track approach in the Stabilisation and Association process 

The  State  Union  of  Serbia  and  Montenegro  as  such  is  a  subject  of  international  law  and 
possesses treaty-making powers. The two constituent Republics also possess treaty-making 
powers  in  their  fields  of  competence.  The  Constitutional  Charter  contains  rules  on  the 
division of competences between the State Union and the two constituent Republics. Based 
on  the  information  provided  by  the  authorities  on  the  current  situation,  the  Commission 
understands  that  these  competences  are  articulated  as  follows.  The  State  Union  itself  holds 
powers relevant for an SAA in the fields of international political cooperation, non-economic 
international obligations (such as cooperation with the International Criminal Tribunal for the 
former Yugoslavia - ICTY), human and minority rights and regional cooperation. In addition, 
the State Union is competent for defence – a matter which is linked to the respect of the SAP 
political criteria. Other policies, in particular trade, customs, economic and fiscal matters as 
well as sectoral policies such as agriculture, energy and transport, the environment, electronic 
communications and audio-visual, the police and judiciary, lie within the respective remits of 
the  two  Republics.  Nevertheless,  certain  legislative  powers  and  administrative  structures 
remain on the State Union level, in the field of intellectual property rights, standardisation and 
certification.  Moreover,  in  the  field  of  justice  and  home  affairs  the  State  Union  has  a 
legislative competence but implementation takes place at the level of the Republics. 

The twin-track approach responds to this complex institutional structure. In its conclusions 
of  11  October  2004,  the  Council  expressed  “its  support  for  the  twin-track  approach,  which 
would imply a single Stabilisation and Association Agreement with distinct negotiations with 
the  Republics  on  trade,  economic  and  possibly  on  other  relevant  sectoral  policies.  The 
Council reaffirmed its commitment to a strengthened State Union of Serbia and Montenegro 
based on the Constitutional Charter”. 

A  Stabilisation  and  Association  Agreement  with  Serbia  and  Montenegro  would  therefore 
cover matters of State Union competence and matters within the competence of the Republics. 
Negotiations would be held with the State Union or the Republics according to the repartition 
of  competences  as  sketched  above.  The  SAA  as  a  whole  would  be  a  single  instrument 
concluded  by  both  the  State  Union  and  the  Republics  in  accordance  with  their  respective 
powers.  This  approach  would  enable  the  Community  and  its  Member  States  to  engage  in 
contractual  relations  with  Serbia  and  Montenegro,  properly  by  clearly  identifying  the  rights 
and obligations of the competent authorities, in full respect of the State Union under the terms 
of the Constitutional Charter. 

The  twin-track  approach  does  not  alter  the  authorities’  responsibility  to  comply  with  the 
political  and  economic  criteria  of  the  Stabilisation  and  Association  process,  in  particular 
with regard to international obligations.  

The twin-track approach does not prejudge the future of the State Union. The Constitutional 
Charter  includes  a  clause  whereby  each  Republic  has  the  right  to  withdraw  from  the  State 
Union. This clause features a clear time indication: the relevant proceedings can be initiated 

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only after the expiry of a three–year period commencing from the adoption of the Charter in 
February  2003.  Such  a  withdrawal  would  be  subject  to  a  referendum  held  in  the  Republic 
invoking  the  clause.  The  existence  of  this  option  is  not  ‘per  se’  an  obstacle  to  progress 
towards  contractual  relations  with  Serbia  and  Montenegro  under  the  twin-track  approach.  It 
will, however, require a constructive attitude and strong political commitment on all sides to 
ensure  Serbia  and  Montenegro’s  capacity  to  engage  in  negotiations  to  establish  contractual 
relations with the EU.  

3.2 

The current status of Kosovo 

The current status of Kosovo raises specific legal questions in view of an SAA with Serbia 
and  Montenegro.  United  Nations  Security  Council  Resolution  1244  (1999)  establishes  “an 
international  civil  presence  in  Kosovo  in  order  to  provide  an  interim  administration  for 
Kosovo under which the people of Kosovo can enjoy substantial autonomy within the Federal 
Republic  of  Yugoslavia,  and  which  will  provide  a  transitional  administration  while 
establishing  and  overseeing  the  development  of  provisional  democratic,  self-governing 
institutions”. All legislative, executive and judicial powers of the authorities of FRY and now 
Serbia  and  Montenegro  are  thus  suspended  as  regards  Kosovo.  Therefore,  Serbia  and 
Montenegro cannot undertake international obligations covering Kosovo under UNSCR 1244. 
At  the  same  time,  UNSCR  1244  formally  reaffirms  the  commitment  to  the  sovereignty  and 
territorial integrity of the Federal Republic of Yugoslavia (now Serbia and Montenegro).  

An SAA with Serbia and Montenegro must comply with UNSCR 1244. This implies that an 
SAA with Serbia and Montenegro must not prejudge the future status of Kosovo. 

Moreover,  Kosovo’s  current  legal  position  should  not  be  an  obstacle  to  Serbia  and 
Montenegro’s  progress  in  the  framework  of  the  Stabilisation  and  Association  process  if  the 
other pertinent conditions for such progress are fulfilled by Serbia and Montenegro. 

It  follows  from  the  above  that  –  in  present  circumstances  -  an  SAA  with  Serbia  and 
Montenegro  cannot  apply  to  Kosovo.  Therefore  this  Feasibility  Study  does  not  assess  the 
situation in Kosovo. 

Regardless of the conclusion of an SAA with Serbia and Montenegro, Kosovo will continue 
to  benefit  from  the  various  instruments  of  the  SAP.  Kosovo  is  currently  covered  by  the 
various basic elements of the SAP (trade preferences, EC assistance and reform dialogue).  

4. 

Assessment 

4.1 

Political criteria  

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

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

the  State  Union  Parliament  direct  elections 

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

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

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

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

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

4.2.  Economic criteria 

Good  progress  has  been  achieved  in  macroeconomic  stabilisation,  due  to  more  appropriate 
fiscal  policies  in  combination  with  relatively  tight  monetary  policies.  Despite  a  recent 
resurgence,  inflation  has  been  reduced  considerably,  supporting  public  confidence  in  the 
currency and domestic banking system and providing a better environment for investment and 
growth  since  end  2002.  Important  structural  reforms  have  been  carried  out.  In  the  area  of 
public  finance,  more  fiscal  transparency  and  modern  budgetary  rules  were  introduced, 
strengthening  expenditure  control  and  improving  the  overall  tax  policy  framework. 
A conducive  legal  and  institutional  framework  for  the  privatisation  of  socially  and  state-
owned companies has been established. Market entry and exit conditions for companies have 
been  improved  and  basic liberalisation with  regard to price, trade and  foreign exchange has 
been carried out. Crucial steps have been taken in financial sector development, including a 
reform of the banking sector and the strengthening of banking regulation and supervision. 

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However,  macroeconomic  stability  is  not  yet  sufficiently  achieved.  In  Serbia,  inflation  has 
recently accelerated and the current account deficit has risen substantially between 2000 and 
2004  raising  serious  concerns  about  its  sustainability.  External  debt  is  relatively  high,  and 
rising  debt  service  obligations  will  continue  to  put  a  strain  on  the  country’s  balance  of 
payments.  Hence,  fiscal  restraint  continues  to  be  crucial  accompanied  by  further  fiscal 
adjustment against the background of new expenditure priorities related to restructuring costs 
and  important  public  investments.  This  calls  for  a  further  prioritisation  of  spending,  in 
particular  a  better  targeting  of  social  transfers  as  well  as  a  further  rationalisation  of  public 
administration.  Further  progress  in  formalising  the  grey  economy  would  facilitate  fiscal 
consolidation  by  broadening  the  tax  base.  However,  fiscal  policy  should  be  supported  by  a 
strengthening  of  the  export  sector.  This  calls  for  further  significant  improvements  in  the 
business  environment,  the  restructuring  and  privatisation  of  large  companies,  improving  the 
competitiveness of Serbian and Montenegrin industry. Here a new impetus is needed, in both 
Serbia and Montenegro. The WTO accession process will require further reforms and lead to 
multilateral  trade  liberalisation.  In  addition,  the  privatisation  of  banks  and  non  banking 
financial sector should be completed to support financial sector development. 

In  conclusion,  Serbia  and  Montenegro  has  implemented  a  critical  mass  of  initial  reforms 
towards  establishing  a  functioning  market  economy  in  a  relatively  short  period  of  time. 
However,  further  vigorous  stabilisation  efforts,  embedded  in  an  IMF  programme,  and 
structural reforms are necessary in order to address considerable remaining challenges.  

4.3.  Ability to Assume the Obligations resulting from an SAA 

The  State  Union  of  Serbia  and  Montenegro  and  its  two  Republics  have  progressed  in  the 
implementation  of  the  European  Partnership’s  priorities  and  should  be  in  a  position  to 
liberalise  the  movement  of  goods,  workers,  services  and  capital  with  the  European  Union, 
possibly with different liberalisation schedules. Both Serbia and Montenegro have embarked 
on trade liberalisation with their neighbours.  

Negotiation  and  implementation  of  the  demanding  SAA  obligations  will  constitute  a 
challenge.  Given  the  substantial  amount  of  bilateral  trade,  the  SAA  will  require  significant 
commitments on the side of both Serbia and Montenegro – since neither is a WTO member - 
in  political,  administrative  and  financial  terms.  The  process  of  bilateral  trade  liberalisation 
with the EC would require further efforts in structural reforms, to reinforce both Republics’ 
capacity to resist the competitive pressure arising from an SAA, improve export performance 
and reduce current account deficits. One of the key elements to consider in this respect is for 
both Republics to possess the necessary standards and certification capacities to trade with the 
EU.  The  Republics  will  also  need  to  ensure  that  the  objective  of  trade  liberalisation  is 
understood and shared by the domestic economic stakeholders. 

Both  Serbia  and  Montenegro  must  prove  that  they  are  able  to  continue  to  sustain  their 
commitments to reform and to regional trade liberalisation in order to be able to function as 
reliable  long-term  partners  in  the  implementation  of  an  SAA.  In  particular,  they  should 
respect the obligations and procedures agreed under the FTAs, and an ability to comply with 
the “standstill” condition under the Community’s autonomous trade measures. 

Serbia  and,  in  particular,  Montenegro  will  have  to  improve  the  capacity  to  conduct  three 
separate negotiation processes at the same time, i.e. the SAA, the WTO accession process and 
the regional  process for further development of the FTAs. Both Republics will also need to 
establish solid consultation mechanisms to involve domestic stakeholders in the process.  

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Sustained efforts will be necessary to improve legislative and administrative capacities in 
all areas in the future Agreement.  

Both Republics should continue to develop - and avoid creating new barriers to - movement 
of  goods,  services,  persons  and  capital  on  the  Serbian  and  Montenegrin  market.  In  this 
context,  the  two  republican  Central  Banks  will  have  to  complete  the  agreement  on  a  fully 
operational  system  of  corresponding  accounts  to  ensure  free  flow  of  payments  within  the 
State Union.  

Following  the  adoption  of  the  new  legislation  on  Intellectual  Property  Rights,  Serbia  and 
Montenegro  must  adopt  and  implement  comprehensive  strategies  to  adequately  enforce  the 
legislation and protect IPR. Serbia, and in particular Montenegro, should pursue their efforts 
to  create  transparent  and  open  public  procurement  procedures  ensuring  fair  and  non 
discriminatory  conditions of competition for EU suppliers. In the area  of competition, both 
Republics  should  adopt  legislative  and  administrative  frameworks  including  anti-trust, 
mergers, state aid, and liberalisation and state monopolies. The two Republics should continue 
to  strengthen  the  administrative  capacity  to  fully  implement  the  agreement  in  the  area  of 
customs  (including  rules  of  origin)  and  taxation  in  order  to  raise  revenue  collection  and 
compensate  for  the  impact  of  the  agreement  on  the  level  of  their  customs  duties.  The  State 
Union  of  Serbia  and  Montenegro  as  well  as  both  Republics  should  strengthen  considerably 
their institutional capacities in the area of statistics. The electronic communications sector 
policy needs to be further developed towards liberalisation. Furthermore, as regards transport 
and energy, Serbia and Montenegro should ensure the interconnection and interoperability of 
appropriate  infrastructure,  and  implement  their  commitments  under  the  South  East  Europe 
Energy community treaty. 

In the area of justice and home affairs, the establishment of the State Union Court and the 
restriction  of  military  jurisdiction  are  positive  developments  that  need  to  be  followed  by 
effective  implementation.  As  regards  visa  asylum,  migration  and  integrated  border 
management,  the  concrete  articulation  of  competences  between  the  State  Union  and  the 
Republics  remains  problematic  despite  some  recent  progress.  While  the  reform  of  the 
judiciary  has  started  in  both  Republics,  the  independence  as  well  as  the  efficiency  of  the 
judiciary remains weak. The police and security services are also areas were legislative and 
administrative reforms are long awaited. The fight against organised crime, money laundering 
and corruption, which are serious challenges to the rule of law, is at a rather early stage. 

5. 

Overall conclusion  

Since the fall of the Milosevic regime, Serbia and Montenegro has progressed significantly in 
the  SAP  political  and  economic  criteria  and  in  developing  the  capacity  to  negotiate  and 
implement  a  Stabilisation  and  Association  Agreement.  The  reform  process  remains  fragile, 
however, particularly because of the legacy of the past regime. 

The European Commission considers that Serbia and Montenegro is sufficiently prepared 
to negotiate an SAA. Therefore, the Commission recommends to the Council the opening of 
negotiations and will accordingly present a draft mandate. 

However,  Serbia  and  Montenegro  needs  to  continue,  in  a  sustained  way,  its  preparation  as 
outlined in this Communication with a view to the negotiations. In particular, the Republics of 
Serbia  and  Montenegro  need  to  provide  the  Commission  with  a  clear  description  of  their 
respective  trade  regimes  in  full  respect  of  the  standstill  clause  in  the  Autonomous  Trade 

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Measures. The described levels of trade protection will form the basis for the negotiation of 
the liberalisation schedule.  

In  order  to  progress  through  the  various  stages  of  the  process,  both  before  and  during  the 
negotiations,  Serbia  and  Montenegro  must  continue  to  co-operate  with  the  ICTY,  and 
achieve full cooperation without delay.  

Furthermore,  the  Commission  also  considers  that  the  State  Union  and  the  two  Republics 
should continue to implement the European Partnership priorities through its Action Plan. 

The  Commission  will  continue  to  monitor  closely  the  progress  made  by  Serbia  and 
Montenegro. In particular, it will report on developments in the SAP Annual Report that will 
be issued in the autumn of 2005.  

The  pace  at  which  a  country  draws  closer  to  the  EU  depends  essentially  on  its  speed  in 
adopting  and  implementing  the  necessary  reforms.  Continued  focus  by  the  authorities  on 
European integration is, therefore, key to the sustainability of the process.  

Over  the  coming  months,  in  line  with  the  European  Partnership,  the  authorities  should  pay 
special  attention  to,  and  make  further  significant  progress  concerning,  the  following  issues 
that are particularly relevant for an SAA: 

•  With  regard  to  constitutional  issues,  the  common  understanding  of  Serbia  and 
Montenegro’s  authorities  at  the  level  of  the  State  Union  and  of  the  Republics  on  the 
Constitutional  Charter  and  in  particular  on  the  distribution  of  powers  enshrined  in  the 
Constitutional Charter should be followed by consistent and constructive implementation. 
The  State  Union  level  and  the  two  Republics  need  to  further  coordinate  their  efforts  to 
benefit  fully  from  the  twin-track  approach  in  negotiating  an  SAA.  The  revision  of  the 
Constitutions of the two Republics needs to proceed smoothly and in line with European 
standards. 

•  The democratic functioning of the parliaments and executives needs to be strengthened. 
The  revision  of  the  Constitutional  Charter  provisions  concerning  the  State  Union 
Parliament  direct  elections  should  be  adopted  without  delay.  The  role  of  European 
Integration  structures  at  the  administrative, governmental and parliamentary levels 
needs  to  be  reinforced  so  that  the  compatibility  of  legislation  with  EU  norms  is  more 
systematically ensured. 

•  As regards human rights and the protection of the minorities, continued concerted efforts 
need  to  be  made,  notably  as  concerns  the  situation  of  internally  displaced  persons  and 
refugees, in line with the obligations undertaken when joining the Council of Europe. 

•  Sustained efforts must be made to reform the public administration, to ensure budgetary 
sustainability and develop a stable, professional and independent civil service, in particular 
in  Montenegro.  Both  Republics  must  fully  commit  themselves  to  sustaining  legal  and 
economic  reforms  and  strengthening  administrative  capacity  particularly  competition, 
intellectual  property  rights,  public  procurement,  customs  and  taxation.  Both  Republics 
need to pursue with determination the reform of the judiciary as well as of the police and 
security services. The fight against organised crime and corruption must be stepped up and 
it should deliver concrete results. 

•  There  is  a  need  for  further  clarification  of  the  articulation  of  competences  in  practice 
between  the  State  Union  and  the  Republics  in  a  number  of  areas  including  intellectual 

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property 
management.  

rights,  standardisation,  visa,  asylum,  migration  and 

integrated  border 

Should the Commission note at any time that the State Union and republican authorities have 
not lived up to their commitments and have not satisfactorily addressed the issues highlighted 
in this Communication, it will propose to the Council that the negotiations be suspended.  

To  support  the  efforts  made  by  Serbia  and  Montenegro  before  the  formal  opening  of 
negotiations  and  throughout  the  negotiation  process,  the  Commission  will  further  intensify 
discussions  with  the  authorities  in  the  context  of  the  Enhanced  Permanent  Dialogue,  in 
particular by setting up sectoral groups. The Commission is also committed to supporting this 
process through its financial assistance programme.  

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