DIRECTORATE-GENERAL FOR EXTERNAL POLICIES OF THE UNION DIRECTORATE B - POLICY DEPARTMENT -

NOTE

ON THE POLITICAL AND ECONOMIC SITUATION OF ALBANIA AND ITS RELATIONS WITH THE EU

Abstract: This note gives an overview and update on the domestic political and economic developments in Albania and its relations with the EU.

Any opinions expressed in this document are the sole responsibility of the author and do not necessarily represent the official position of the European Parliament.

DGExPo/B/PolDep/Note/2008_ 094 04/06/2008

[PE N°] EN This note was requested by the European Parliament's Delegation for relations with the countries of South East Europe.

This paper is published in the following languages: English

Author: Marga De Jaegere, under the supervision of Georgios Ghiatis.

Manuscript completed in June 2008.

Copies can be obtained through: E-mail: [email protected] [email protected]

Brussels, European Parliament, 4 June 2008

Sources: European Commission Reuters/Factiva Oxford Analytica Economist Intelligence Unit World Markets Research Center World Bank IMF

2 CONTENTS

Page

1. INTRODUCTION ...... 4

2. POLITICAL SITUATION ...... 4 2.1. Historical Background ...... 4 2.2. Institutional system ...... 5 2.3. Recent domestic developments ...... 6 2.4. International relations ...... 8

3. ECONOMIC SITUATION ...... 9 3.1. Economic basis and structure ...... 9 3.2. Macroeconomic Developments ...... 10 3.3. Trade ...... 11

4. RELATIONS WITH THE ...... 11 4.1. Stabilisation and Association Agreement ...... 11 4.2. Challenges and opportunities from the SAA ...... 13 4.3. EU assistance ...... 13 4.4. European Commission Progress Report November 2007 ...... 13 4.5. Steps taken towards reform ...... 14 4.4. European Parliament ...... 15

ANNEX 1 (Political parties / Albanian government) ...... 16 ANNEX 2 (Map of Albania) ...... 17

3 1. INTRODUCTION Albania is physically and culturally rooted in Europe. As part of the South-Eastern European countries, it shares a border with Serbia/Kosovo, Montenegro, FYROM (the Former Yugoslav Republic of Macedonia) and Greece. Albania (or Shqipëria in Albanian), like most of the Balkan countries, has several ethnic minorities. These account for 2% of the population and include Greeks in the south, Macedonians in the east, Montenegrins in the north and Vlachs and Roma in the rest of the country. With a 98% ethnically Albanian population, Albania is however the most homogenous of the Western Balkan countries. Religion, often a secondary factor in Albania, is split as follows: Sunni Muslims account for 50% of the population, Bektashi Muslims 20%, Orthodox Christians 20% and Roman Catholics 10%. While the total population of Albania is more than 3.6million, an equally large national minority is found in neighbouring countries. These minorities have often been a source of conflict in the region. They live mainly in Kosovo (2million), FYROM (more than 0.5million) and southern Serbia and in Montenegro. The Albanian governments over recent years have made it clear however that Albania does not have any territorial claims to its neighbours, thereby removing any fears about a 'Greater Albania'. Economic transition in Albania has encountered many obstacles. The main aims of the successive governments since the fall of Communism in 1991 have been to tackle corruption, high unemployment and organised crime and to succeed in establishing a basic infrastructure for the country. The parliamentary elections of 3 July 2005, held more or less in line with international standards, were crucial to the conclusion of the Stabilisation and Association Agreement (SAA) with the EU. The SAA negotiations, which began in January 2003, have finally been concluded in early 2006 and the agreement was signed on 12 June 2006. In a resolution adopted on 6 September 2006 the European Parliament gave its assent to the SAA Albania now has the status of a potential candidate country for EU membership. Guidance to the Albanian Government for necessary reform priorities is provided by the EU trough the European Partnership.

2. POLITICAL SITUATION

2.1. Historical Background There was a brief period of independence in the 18th century, but the territory occupied by modern Albania has been under foreign domination for much of the past 2.000 years. An independent republic of Albania was proclaimed in November 1912, and confirmed by the London Treaty of 1913, while Serbia acquired Kosovo and the Albanian-inhabited areas of Macedonia. A long history of resistance to foreign powers, together with the recent transition from an excessively strict communist regime, go some way towards explaining why institutions in Albania are fragile, and the rule of law is sometimes tenuous. Following more than four decades of isolation under the rule of communist leader Enver Hoxha since the end of World War II and a more moderate rule of his successor Ramiz Alia since 1985, it was not until 1990/1991 that Albania accepted a multiparty system. The first elections were won by the Albanian Workers' Party, which became the Socialist Party of Albania (SPA/PSSH). The political and economic instability of 1991 and 1992 caused new elections to be held, in which the largest opposition party, the Democratic Party of Albania (DPA/PDSH), led by the current Prime Minister, Sali Berisha, claimed victory. The challenges facing the new leader were fairly complex. On the domestic front, he had to move from a planned to a market economy, while taking into account that Albania was the 4 poorest country in Europe. At this time, Albania survived thanks to humanitarian aid and various international funds. The next parliamentary elections in 1996 were again won by the DPA. The elections were however heavily criticised by international observers and the United States and EU for several irregularities. In 1997, Albania underwent a serious crisis when the 'pyramid investment schemes'1 collapsed. Albanians who had invested most of their savings in these schemes were ruined. Blaming those in power, the savers rioted, creating an atmosphere of near civil war in the country. The uprising by savers in southern Albania, supported by the SPA, led to early elections. These were held in July 1997 under OSCE monitoring and the protection of an Italian-led military force2, which was responsible for transporting humanitarian aid, restoring order and gathering up the weapons that had been stolen during the riots. The elections were won by a left-wing coalition led by the Socialist Party (SPA/PSSH) of Fatos Nano, another of Albania's important political figures. In 1999, the war in Kosovo and the NATO bombing of Serbia - ruled at the time by Slobodan Milosevic - had a serious impact on Albania. Of a total of 800.000 Kosovars forced to leave their country, 480.000 headed to Albania to seek refuge. The Socialist Party (SPA) emerged again victorious from the multi-round Parliamentary elections in 2001, with 41% of the vote and its smaller allies winning a further 11%. The DPA- led opposition coalition, the Union for Victory (UV), won 37% of the vote and subsequently boycotted parliament.

The 2001 elections were followed by a chaotic 12 month period, with three different Prime Ministers. The former Prime Minister Ilir Meta (SPA) initially remained in place after the elections. However, conflicts within the ruling SPA, including accusations of corruption of the government by party Chairman Fatos Nano, led to the resignation of 4 Ministers in December 2001 and of Prime Minister Ilir Meta in January 2002. Following an interim period with Prime Minister Pandeli Majko (SPA) Mr. Nano took over the post himself in July 2002. The elections were observed by an International Election Observation Mission, which identified a number of isolated but serious irregularities. The results of 37 out of the 100 electoral zones were challenged by the right and the left in the Constitutional Court. The opposition coalition boycotted Parliament until 31 January 2002, because of the disputed election results.

2.2. Institutional system The Republic of Albania is a parliamentary democracy. Albania's current constitution was adopted by referendum in November 1998 and replaced an interim document that had been in place following the abandonment of a Marxist-inspired constitution in April 1991. The 1998 constitution apportions the largest share of political power to the prime minister and the government.

1 Pyramid schemes are investment trusts using a basic 'chain principle': sums of money are handed over to 'institutions', which promise savers astronomical interest rates. Savers are then paid with money from the most recent deposits.

2Following numerous discussions and negotiations among the Western countries of the EU and NATO, it was decided that a military operation, known as Operation Alba, would be organised under the aegis of the OSCE and under Italian command, involving countries such as , Greece and Turkey. 5 Since the 2001 parliamentary election the unicameral legislature has comprised 140 deputies, 100 of whom are elected from single-member constituencies and the rest by proportional representation from party lists. Minorities are guaranteed the right to express their ethnic, cultural and religious identity. Under the constitution parliament elects the president to a five-year term. The president must be elected by a three-fifths majority (at least 84 votes in the 140-seat Assembly). If no candidate attains that majority after five rounds of voting, a general election is called. The last election of a President was won in July 2007, in the fourth round, by Bamir Topi, a DPA supported candidate. The president formally appoints the prime minister and cabinet ministers, but has a largely ceremonial role. As head of state, the president is meant to be a force for national unity and should ideally secure cross-party support. Neither the previous president, Mr Moisiu, nor his predecessor, Mr Meidani have been directly involved in party politics, although Mr Moisiu was under pressure from both the SPA and DPA on the issue of nominations to various state bodies. The government also clashed with the previous president, Mr. Moisiu over the future of the general prosecutor, the constitutionality of various laws approved by parliament, and the composition of the Supreme Council of Justice. However, the incumbent president, Bamir Topi, did follow the advice from the Parliament and dismissed the prosecutor-general, Theodhori Sollaku. (See point 2.3).

2.3. Recent domestic developments Parliamentary elections in 2001 and local elections in 2003 were considered by international observers to be a step towards democratic development, but with serious deficiencies. Many of these deficiencies were addressed through bi-partisan changes to the electoral code in 2003 and 2005, and the conduct of parliamentary elections in July 2005 showed considerable improvement. Nevertheless, international observers, including the OSCE/ODIHR, condemned again numerous irregularities during the elections. These mainly concerned the precision and transparency of voting lists, the secrecy of the vote and the identification of voters. Further electoral reform thus remains necessary. Attempts to reach broad agreement were so far inconclusive, mainly due to distrust and tensions between the main political forces; the reform though is still high on the political agenda. The 2005 parliamentary elections typically saw the two major personalities on the Albanian political scene (since the 90's), Sali Berisha (Democratic Party of Albania - DPA) and Fatos Nano (Socialist Party of Albania - SPA) in a head-to-head. The election results showed a clear win by the DPA, led by Sali Berisha with more than 45% of the votes, whereas the SPA, led by the outgoing Prime Minister, Fatos Nano, obtained 30% of votes. A third participant in the elections was Ilir Meta's Socialist Movement for Integration (SMI), founded in September 2004 in a breakaway move from SPA. It won 8 % of the vote and 5 seats in Parliament. Following the elections, the leadership of the SPA was taken over by the charismatic mayor of the capital Tirana, Edi Rama. The ruling coalition, led by the Democratic Party of Albania (DPA), received a boost in mid- June 2006 when the EU signed a long-awaited stabilisation and association agreement (SAA) with Albania. The key to clinching the agreement was the government's commitment to fight corruption and organised crime, a campaign being spearheaded by the prime minister and DPA leader, Sali Berisha. However, the government remains under considerable international pressure to take further action on essential reforms, such as making the judiciary and public

6 administration more efficient, strengthening the rule of law, fighting corruption at all levels, and improving the business environment through tax cuts and other measures. Thus, the list of outstanding economic and structural reforms, including legislative alignment with the EU in the framework of the Stabilisation and Association Process, remains long. The next parliamentary elections will be held in mid-2009, so 2008 is the key year for making progress on the electoral reform (and other priority reforms). However, the Albanian government has faced so far serious difficulties in pushing reforms through because of a tense domestic political environment. Relations between the ruling and opposition parties in parliament have been highly tense already in July 2006, during a debate on the make-up of the Central Election Commission in the run- up to upcoming country-wide local elections. The opposition subsequently declared also a boycott of parliamentary work. Following intervention by the international community, including EU ambassadors, an agreement was reached (31 August 2006) between the Democratic Party and the main opposition Socialist Party in order to defuse some of the tension. Elections have been a dominant issue for the period summer 2006/summer 2007. Local government elections were eventually held in February 2007, after months of disputes and tense political negotiations (with international involvement) and were followed by a protracted post-electoral litigation period, with final results declared only in June 2007. The opposition (mainly Socialist Party led by Edi Rama) emerged as the winner of these elections, winning the majority of municipalities including the major cities (Tirana, Durres, Fier, Elbasan, Korçe, Gjirokaster etc. the only major city the Democratic Party won being Shkoder). Despite improvements, international observers (International Election Observation Mission) considered that these elections "only partly met OSCE commitments". Notwithstanding a temporary improvement after local elections, the political climate turned tense again because of another major clash - between the DPA-led coalition and the then Albania's President, Alfred Moisiu. President Moisiu has returned a number of government- backed bills to parliament in 2006. Further to that the president and parliament entered on collision course over the composition of the Supreme Council of Justice, which oversees Albania's judicial system, and over the future of the Prosecutor-general, Theodhori Sollaku. The rejection by the President of the recommendation by the Parliament to sack the Prosecutor-general, Theodhori Sollaku3 fuelled further tensions between the president and the ruling coalition, whereas the opposition hailed it as a victory for independent institutions against government interference. The other major election-event was that of the election of the new President by Parliament on 20 July 2007. This required a three-fifths majority, or 84 votes out of 140. Albania's constitution stipulates that parliament be dissolved if no president is elected after five voting rounds. Despite the fact that no "consensus candidate" was found, eventually the ruling majority's candidate Bamir Topi (Vice-chair of the Democratic Party) was elected on the 4th round. The president's election process did not entail any external mediation and the risk of parliament's dissolution was averted. The new President has a good reputation, even beyond the DPA ranks. The opposition parties, however, became more sceptical as to whether Mr. Topi can become a unifying, non-partisan figure, and they fear that the new president will be less inclined than his predecessor, Alfred Moisiu, to block some of the government's more controversial initiatives. These concerns seemed to be borne out on November 22nd, when Mr Topi dismissed the prosecutor-general,

3 In July 2006 parliament had called for Mr Sollaku to be dismissed on the grounds that he had failed, among other things, to prosecute several high-profile corruption cases and that he was even protecting criminals. 7 Theodhori Sollaku, in line with the government's wishes, which Mr Topi's predecessor had refused to do. Opposition parties claim that Mr Sollaku's dismissal raises concerns about the independence of Albania's judicial system. In the beginning of 2008, however, political tensions have been suppressed by the widespread support for Kosovo's declaration of independence on February 17th, and a shared desire among Albania's leading parties to secure a NATO membership invitation in April 2008. The Parliament was able to approve a long-delayed draft law to overhaul the judiciary, and discussions on electoral reform restarted. (See point 4.5) 2.4. International relations Membership of NATO and the EU is the only point on which the whole of Albania's political class, the ruling majority and the opposition, agree. This vision is central to Albanian foreign policy. Regular meetings have been taking place with FYROM and Croatia in connection with the Adriatic Partnership Charter, a symbolic agreement designed to help the three countries harmonise their efforts to gain NATO membership. On 2 April NATO leaders agreed to invite Albania and Croatia to join the organisation, but FYROM's accession bid was vetoed by Greece. Albania and Croatia are expected to sign the accession protocol in July 2008. Albanian troops are currently taking part in several peacekeeping missions: in Afghanistan for ISAF and in Bosnia-Herzegovina for SFOR. Albania is supporting US troops in the Iraq conflict. Recently the Albanian government also decided to send peacekeeping troops to Chad to support an EU initiative there. Relations with FYROM have improved since the latter implemented the Ohrid Agreements, which allow the Albanian minority, which constitutes 25% of FYROM population, greater representation within the State apparatus. Albania has always favoured a peaceful and democratic solution with regard to relations between the FYROM authorities and the Albanian minority. However, early 2008, a short-lived visa dispute threatened to sour relations between Albania and FYROM. The issue arose after FYROM adopted a new law that changed its visa regime with about 140 countries, including Albania. Under the new law, which was due to take effect on February 1st, Albanian citizens wishing to enter FYROM could obtain visas only at embassies and consulates of this country, and not at the border, as before. Bilateral negotiations continued amid the controversy over the new regime, and on February 5th the two countries said that they had agreed to scrap visa requirements for each other's citizens. The new visa agreement was signed in Tirana on February 19th by Mr Berisha and his counterpart, FYROM Premier Nikola Gruevski.

Relations with Serbia/Montenegro have stabilised since Slobodan Milosevic was arrested in 2001. The resumption of diplomatic relations in September 2002 is evidence of this. However, the issue of Kosovo has always caused tensions between Albania and Serbia. Relations with Montenegro have developed further since the latter's independence in summer 2006, with Albania opening an embassy in Podgorica. The two countries established the first joint border crossing point in the Western Balkans at Muriqan/Sokobine. On the Kosovo issue, Albania welcomed Kosovo's declaration of independence on 17 February 2008, and recognised the new state on February 19th. The Prime Minister, Sali Berisha, has long been a strong supporter of Kosovo's independence and said that the declaration would lead to an era of peace, stability and EU integration in the region. The Albanian authorities were expected to recognise Kosovo soon after the US and leading EU states did so, and Mr Berisha said that 8 Albania would support Kosovo in the event of Serbia taking retaliatory economic measures. Such assistance could involve giving Kosovo access to Albania's ports and its main airport, and exporting some electricity to Kosovo. However, Albanian officials have sought to clearly minimize talk of a “Greater Albania”, emphasising that EU integration is the ultimate goal for Albania, Kosovo and the Western Balkan region as a whole.

3. ECONOMIC SITUATION

3.1. Economic basis and structure Albania had the most rigid system of central planning in the former communist bloc, with a policy of self-inflicted autarky that involved forced industrialisation and the prohibition of commercial links with the West. However, once transition began in 1991 Albania quickly turned to international financial institutions and Western governments for advice and funding. The reforms it initiated were soon regarded as an example for others in the Balkans to follow. A combination of rapid privatisation, the growth of small businesses and cutbacks at state enterprises meant that by 1996 the private sector was generating 75% of GDP—very high by regional standards. Rapid real GDP growth rates of 9-10% per year in 1993-96 seemed to confirm the success of the reforms. Although some of this progress was real (notably the growth of farm output following privatisation), much of it was, in retrospect, superficial. The financial sector remained underdeveloped, and the apparent rise in living standards largely depended on remittances from Albanians living and working abroad, large-scale smuggling and money-laundering, as well as illusory, short-term profits from "pyramid investment schemes". The Albanian economy remains heavily reliant on agriculture, which in 2007 accounted for about 21% of GDP (at current prices). The farming sector has been dominated by small private holdings since the collapse of the communist state in 1991, when peasant farmers disbanded the quasi-state collective farms. Industry accounted for about 20% of GDP in 2007, down from an average of about 45% in the late 1980s. This shift reflects the reduced importance of the mining and manufacturing segments since the communist period, when the authorities pursued a policy of aggressive industrialisation. Textiles and footwear are Albania's principal exports, and generate about 55% of total export revenue. Many Albanian clothing and shoe manufacturers act as subcontractors for firms in the EU, especially in Italy, importing semi-finished goods and making them into finished articles at a much lower cost than would be the case in Western Europe. However, the heavy reliance on one branch of re-exported products highlights the country's lack of competitiveness in other sectors. The services sector is a smaller part of the economy than in most other post-communist countries in Eastern Europe. Albania remains one of the poorest transition economies outside the Commonwealth of Independent States (CIS). In 2007 the country had an estimated GDP per head (at purchasing power parity exchange rates) of about US$6.140. This is below the per-capita GDP of Serbia (excluding Kosovo), Montenegro, Bosnia and Herzegovina (BiH) and FYROM, and only about 40% of that in Croatia. According to a study of living standards conducted in 2002 by the Institute of Statistics (Instat), 25% of the Albanian population lives below the national poverty line (less than US$2 per day), and 5% of the population lives in extreme poverty (less than US$1 per day). The World Bank estimates that 40% of households have no access to necessities such as basic education, water, sanitation and heating.

9 The labour market continues to face significant challenges, such as relatively slow job creation and high youth and long-term unemployment. Unemployment figures in Albania are unofficially estimated as high as 30%, official figures claim 13.2% in 2007. However, unemployment figures have to be taken cautiously, because an important number of the people unemployed do not register with social security services and are active in the informal economy.

3.2. Macroeconomic developments The government follows macroeconomic policies in accordance with IMF requirements and has adopted the National Strategy for Development and Integration (NSDI) 2007-2013 on 12 March 2008. The Strategy outlines the reform priorities and the vision of the government, focusing on the EU and NATO integration. Between 1998 and 2001 the economy grew at annual rates of 7 to 8 percent. Real GDP grew by an estimated 6% in 2007, up from 5.5% in 2006, driven by the services sector and construction. The contribution of manufacturing has declined in 2007 compared to 2006, while the contribution of agriculture has increased. Inflation accelerated in February 2008 to 3.6% (year-on-year), significantly up from 3.0% in January. The surge resulted mainly from the growth of food prices that increased by 6.5% year- on-year, 1.5 percentage points more than in January. Transportation prices and prices in hotels and restaurants also accelerated. Price increases of other product groups remained rather limited. However, according to the Central bank, consumer price inflation remained in the target range between three (3) and four (4) percentage point. According to preliminary data, the general government deficit turnout was 3.4% of GDP in 2007, 0.3 percentage points up compared to 2006. The deficit is substantially below the level projected in the Economic and Fiscal Programme 2007 (4.6% of GDP). The lower than projected level is due to under spending (6.5% short of the target for 2007). Revenues were also below target (4.2%). Nevertheless, the budget revenues and expenditure of beginning 2008 increased by 11% and 12%, respectively, compared to 2007. For 2008, the government projects the budget deficit to expand due to large infrastructure projects. The adopted budget for 2008 will also be amended by compensation measures in favour of victims from the damage caused by the explosion close to Tirana on March 154. This will trigger an increase in expenditures by some 0.2% of GDP. Starting from 2009, the government targets the budget deficit to remain within the limit of 4% of GDP, which is also recommended by the IMF. On 28 March 2008 the IMF completed the fourth review of Albania's economic performance and financing assurances under the three-year Poverty Reduction and Growth Facility (PRGF) arrangement and the Extended Fund Facility (EFF) arrangement, which began in January 2006. The completion of the reviews enables the release of an amount of about US$4 million, which will bring the total disbursements to Albania under both arrangements to about US$20 million. In its review the IMF congratulates "Albania's adherence to prudent macroeconomic and structural policies", which "contributed significantly to its strong macroeconomic performance, despite challenges from a difficult external environment". However, the Fund emphasises the importance of a sustainable reform of the electricity sector as it would help to mitigate risks to the macroeconomic framework. With this in mind the Albanian authorities made it clear that

4 On March 15, an explosion of munitions at an army depot close to Tirana killed close to 20 people and damaged thousands of houses in the area. The government decided to allocate 12.8 million EUR to compensate the material damages. 10 they are committed to address the financial difficulties of Korporata Elektroenergjitike Shqiptare (KESh), the Albanian Power Company, which forms a major risk to the 2008 budget outcome. Concerning the Albanian monetary policy, the IMF stated that it was "appropriate" and that it has served the economy well. However, it is important that supervisory and regulatory capacity continue to improve in line with the rapidly maturing financial system. Overall, Albania has achieved macroeconomic stability, contributing to its progress towards being a functioning market economy, but further reforms are needed. In general, progress with structural reform has been uneven in Albania and the business environment remains relatively uninviting. Despite advances, weak public institutions remain a source of vulnerability, particularly in the fiscal and financial areas. Together with infrastructure deficiencies - particularly in the electricity sector - these factors still hinder growth and promote corruption and informal activities.

3.3. Trade

The EU is by far Albania's main trading partner. Albania's exports of goods to the EU accounted for around 88% of the total exports of goods in 2006. Italy was the main partner, accounting for more than 4/5 of total Albania's exports of goods to the EU, followed by Greece (11%) and Germany (4%). Imports from the EU accounted for approximately 63% of total imported goods. At the same time, Albania further expanded its trade with its non-EU neighbours, in particular Turkey. Exchanges were mainly concentrated in the footwear and textile industry, which accounted for around 55% of Albania's total exports of goods. Albania ran another large merchandise trade deficit in 2007, despite a strong increase in export revenue because of a reviving minerals sector. The full-year trade deficit totalled Lk280.1bn (US$3.1bn at average 2007 exchange rate), an increase of 26.5% compared with the Lk221.5bn deficit reported in 2006. Although exports rose by 24.5% in 2007, imports rose at the faster rate of 26%, and from a much higher base. The sharp rise in import costs was partly caused by domestic power shortages, which forced the Albanian authorities to import large amounts of relatively expensive electricity.

4. RELATIONS WITH THE EUROPEAN UNION.

4.1. The Stabilisation and Association Agreement (SAA) Along with the other countries of the Western Balkans, Albania participates in the Stabilisation and Association Process (SAP). It benefits from national and regional financial assistance under the Community Assistance for Reconstruction, Development and Stabilisation (CARDS) programme and, as of 2007, the new Instrument for Pre-Accession Assistance (IPA) and a far- reaching contractual relationship with the EU, including trade preferences, through the Stabilisation and Association Agreement (SAA). Regional dialogue and cooperation are also important elements of this process. Following the Commission’s November 2005 Enlargement Strategy Paper, the SAA was finally signed on 12 June 2006 in . On 27 July 2006, the Albanian parliament ratified the SAA and its Interim Agreement (IA). The European Parliament gave its assent on 6 September 2006. Until the SAA has been ratified by all Member States, an Interim Agreement, which entered into force in December 2006, allows Albania to benefit already from the SAA’s trade-

11 related conditions. A framework including a Joint Committee and Working Parties focusing on specific sectors will be used to monitor agreement obligations and associated reforms. Already in December 2005 the European Council has adopted a revised European Partnership for Albania. This identifies short and medium term priorities which Albania should address. It serves as a checklist against which to measure progress, and provides guidance for EC assistance. In response to the European Partnership the beneficiary country produces a national action plan with a timetable and details of how it intends to address the European Partnership’s priorities. Progress in implementing these priorities is monitored regularly by the Commission, notably through the annual Progress Reports and through political and economic dialogue. On 5 July 2006, the Albanian Government subsequently approved a National Plan for the Implementation of the SAA. It outlines legislative initiatives and implementing activities divided into short term, medium term and long-term (until 2012). The Ministry of European Integration is the responsible institution for overall monitoring of the National Plan. All the line ministries and other state institutions will report to the ministry on a monthly basis. The Ministry of Integration will report to the Council of Ministers on the implementation of the Action Plan.

A number of structures have also been set up under the SAP to provide for dialogue between Albania and the EU. The dialogue is conducted through Ministerial Troika, Consultative Task force (CTF) and Working party meetings, as well as through interparliamentary meetings. An EU-Albania agreement on visa facilitation was signed in September 2007 and entered into force on 1 January 2008. This new arrangement makes traveling to the EU easier for Albanian citizens. It complements the EC-Albania readmission agreement, which came into force in May 2006. These agreements will facilitate people-to-people contacts between citizens of the EU member states and citizens of Albania. On 24 October 2007 the European Parliament adopted a resolution, which approved the conclusion of the Agreement between the European Community and the Republic of Albania on the facilitation of issuance of short-stay visas.

4.2. Challenges and opportunities from the SAA The SAA offers many opportunities but also creates additional challenges for Albania. Prior to the SAA, the EU's "autonomous trade measures" have been "asymmetric": they eased access to the EU for exports from the Western Balkans countries, while retaining some protection for their weaker economies against EU competition. This protection will now have to phase out, and along with it the relevant considerable customs revenue. However, customs collection has improved considerably and tax revenues (value-added tax, excise duties, profits tax, personal income tax and small business tax) for 2006, registered a rise of 9% year-on-year. The more important effect of the SAA is to prepare the Albanian economy, legal system and businesses for integration with the more developed economies of the EU, although many Albanians are also interested in greater freedom to move to the EU for work. In the longer term, easing of controls on the movement of labour could be crucial because for the time being Albania's workforce is likely to remain its main export commodity. In the shorter term, the SAA represents something of a vote of confidence in Albania's reform process and stability which may encourage greater foreign investment. Overall, Albania's SAA with the EU represents a stage in the country's long emergence from its communist past, recovery from the chaos of 1997 and achievement of a greater political

12 stability. Its importance lies more with institutional integration with the EU than any prospect of increased trade, with either the EU or the Western Balkan region. 4.3. EU assistance

From 2001 till the end of 2006, the CARDS programme was the main EC financial instrument for co-operation with Albania, as in other Western Balkans countries. Following an initial focus on physical reconstruction and rehabilitation, emphasis shifted to institution building, strengthening of administrative capacity and justice, freedom and security. For the period 2001- 2006, EUR 282.1 million had been earmarked for Albania. The main priorities for CARDS assistance were justice, freedom and security, administrative capacity building, economic and social development, environment and natural resources and democratic stabilisation. The support provided through CARDS focused on European Partnership priorities, while taking into account the political and economic situation in Albania. As of January 2007, in the context of the Community’s reform of external aid, the CARDS programme has been replaced by the new Instrument for Pre-Accession Assistance (IPA). Its major objective is to streamline all pre-accession assistance in a single framework, and to unite under the same regulation both candidate and potential candidate countries, thereby assisting them in progressive alignment with the standards and policies of the EU. The instrument consists of five components, the first two of which are open to both potential candidate and candidate countries: The Transition Assistance and Institution Building component and the Cross-Border Cooperation component. Through these two components, Albania, a potential candidate country, is assisted in the process of transition and approximation to the EU while regional cooperation is encouraged. The Multi-Annual Indicative Planning Document (MIPD) 2007-2009 for Albania under IPA was adopted in May 2007. A total amount of EUR 212.9 million was earmarked for Albania. The remaining components of IPA are expected to become accessible after the country has been assessed to manage funds in a decentralised manner. In addition to the above mentioned assistance, already in April 2004, the European Council had adopted a decision to provide macro-financial assistance to Albania for a maximum amount of EUR 25 million, including EUR 16 million of grants and EUR 9 million of loans, to help support its external financing requirements.

4.4. European Commission Progress Report November 2007

The European Commission issued on 6 November 2007 a strategy paper on EU enlargement and the main challenges for 2007-20085, as well as reports on the progress of the countries of the Western Balkans and Turkey towards EU integration. In its strategy paper the Commission states that enlargement is a very powerful policy tool of the EU, adding that the enlargement process should be carefully managed in line with the new consensus achieved during the European Council in December 2006. "This consensus is based on the principles of consolidation of commitments, fair rigorous conditionality and better communication with the public, combined with the EU's capacity to integrate new members." The Commission also emphasises that, as the enlargement countries are facing a lot of challenges, it is essential to improve the quality of the enlargement process and to keep the prospects of their accession visible and credible. As in the enlargement strategy paper of November 2006, the Commission reaffirms that the countries of the Western Balkans and Turkey are likely to join the EU "in the medium to long

5 COM(2007) 663 final 13 term". For the Western Balkans, it considers 2008 as a crucial year in consolidating the transition progress. The countries of the Western Balkans are at various stages in fulfilling EU criteria and each of the countries will be judged on its own merits. As for the developments in Albania, the Commission is rather critical. It stressed that a lack of co-operation among parties continued to delay the reforms that are needed for the country to fulfil the requirements of its EU stabilisation and association agreement (SAA). It commended the Albanian Parliament for having become the focus of political debate, and for electing a new President of Albania in July 2007 in line with the constitution. However, the Commission criticised the authorities for their lack of progress in reforming the electoral system and the judiciary, and reiterated that corruption remained a serious problem. On the positive side, the Commission noted that Albania has made some progress on democracy and the rule of law. Some progress has also been achieved regarding human rights and the protection of minorities, and in strengthening property rights. Albania has continued to play a positive role in maintaining regional stability and has contributed to the conclusion of the regional free trade agreement, CEFTA. However, the Commission underlined that no progress had been made in improving the electoral framework since the February 2007 local elections, which, according to foreign observers, failed to meet international standards. The report called for "proper reform" of electoral laws before the next parliamentary election, scheduled for mid-2009. The Commission also highlighted problems in the judicial system, which remains slow, non- transparent and prone to corruption. The report noted some reduction in the backlog of court rulings that involve state institutions. However, legislation to overhaul the judiciary, and to strengthen the independence and accountability of judges, is being delayed, and the government has continued to clash with the prosecutor-general. The report noted progress in the fight against corruption—in particular, by the adoption of new public procurement legislation, strengthening of the independence and transparency of the Public Procurement Agency, reinforcement of the criminal code and adoption of legislation on bribery. In addition, the creation of a new task force to fight corruption and economic crime has led to the arrest of several high-level officials on corruption charges. Nevertheless, the Commission said that corruption remains widespread, especially in the judiciary and in relation to the funding of political parties. According to the Commission, Albania had made some progress in strengthening its public administration, partly by raising civil servants' salaries and by trying to attract Western- educated Albanians to the public sector. However, the Commission said that the practice of making political appointments to senior and mid-level positions continues, often without due attention to the civil service law. In other areas such as energy, transport and intellectual property rights, progress has also remained limited. Overall, the report suggests that Albania remains a long way from achieving EU candidate status. 4.5. Steps taken towards reform

As mentioned before, further reforms in Albania have been delayed because of political tensions and a poor co-operation between the parties. In the beginning of 2008, however, some progress on reforms has been achieved. 14 With Albania hoping to receive a NATO membership invitation at the alliance's summit in Bucharest in April, the country's main ruling and opposition parties finally co-operated on the reforms that were seen as preconditions for entry. Judicial reform On February 18th parliament approved a long-delayed draft law to overhaul the judiciary, and to strengthen the independence and accountability of judges. The recently adopted law regulates the promotion, appointment, disciplining, salary and transfer of judges. It sets stricter rules for promotion; judges now require seniority and a clean record to be promoted from a first degree court to an appeals court, for example. And under the new law, heads of courts will be chosen through open competition and will no longer be appointed by the minister of justice. Electoral reform Albania's main parties also started work on electoral reform, (no progress in this area was made since the February 2007 local elections): the key issues under discussion between the parties are, firstly, the change to operate to Albania's hybrid parliamentary electoral system (which currently is a mix of majority vote in single-member districts and proportional representation) and, secondly, to reach agreement on whether the current 2.5% threshold for entering parliament should be raised or not. The Albanian authorities are also under international pressure to develop an accurate, computerised list of registered voters and to introduce a national system of identity (ID) cards.

4.6. The European Parliament The European Parliament with its resolution of 6 September 2006 (Rapporteur T.Ilves) gave its assent to the Stabilisation and Association Agreement, confirming the formalisation of Albania's European perspective at the Thessaloniki European Council in June 2003. The SAA is "the best way to help maintain the momentum of political and economic reform, and to encourage Albania to continue using its constructive and restraining influence in the region", the Parliament resolution said. At the same time, the resolution pointed to those areas needing further attention with a view to achieving reform. The 14th EP-Albania Interparliamentary meeting was held on 8-9 October 2007 in Tirana. During the meeting, members welcomed progress made in the ratification process of the SAA as well as the signature, on 18 September 2007, of the visa facilitation agreement between the EU and Albania. MEPs stressed the need for political dialogue between ruling majority and opposition forces, as this would help to focus effectively on the reforms required. Outstanding reforms were discussed in an open manner. In particular concerns over delays in carrying through the electoral reform were expressed. The delegates also called for stepping up the reform efforts in the judiciary and reform on property restitution and legalisation. The fight against corruption should also be better organised. Furthermore, Albania was congratulated for positive reform steps it had taken concerning respect for human rights and the fight against organised crime, although further efforts are still needed. The strong macro-economic performance of Albania was welcomed and the country's moderating role in the region of South East Europe was also praised. The European Parliament approved, on 24 October 2007, the Agreement EC - Albania on the facilitation of issuance of short-stay visas. The agreement entered into force on 1 January 2008. Parliament also approved similar agreements with the other states of the Western Balkans.

15 ANNEX 1 Main political parties

Governing coalition: Democratic Party of Albania (DPA), Republican Party (RP), New Democratic Party (NDP), Agrarian and Environmentalist Party (AEP), Union for Human Rights (UHR), Christian Democrat Party (CDP), Liberal Democratic Union (LDU).

Main opposition parties: Socialist Party of Albania (SPA), Social Democratic Party (SDP), Democratic Alliance Party (DAP), Party of Social Democracy (PSD), Socialist Movement for Integration (SMI)

Albanian Government

Prime minister: Sali Berisha (DPA) Deputy prime minister: Gazmend Oketa (DPA) Key ministers Foreign affairs: Lulzim Basha (DPA) Economy, trade & energy: Genc Ruli (DPA) European integration: Majlinda Bregu (DPA) Justice: Enkelejd Alibeaj (DPA) Finance: Ridvan Bode (DPA) Internal affairs: Bujar Nishani (DPA) Agriculture & food: Jemin Gjana (DPA) Culture, tourism & Sport: Ylli Pango (DPA) Defence: Fatmir Mediu (RP) Education & science: Genc Pollo (NDP) Environment & water: Lufter Xhuveli (AEP) Health: Nard Ndoka (DPA) Labour & equal opportunities: Koco Barka (UHR) Public works, transport & telecommunications: Sokol Olldashi (DPA)

Speaker of the Parliament Jozefina Topalli (DPA)

16 ANNEX 2

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