Ulica kralja Milana 16, 11000 Belgrade, Serbia and Montenegro Phone: (+381 11) 3613–118, 3612–407, 2688–255 Fax: (+381 11) 3613–467 E–mail: [email protected] Internet site: http://www.ecinst.org.yu The Measures of Phase I of the Accession Of Serbia and Montenegro to the European Union within the Stabilization and Association Process Thematic Area: EU Accession Including Euro Adoption Authors Prof. Jurij Bajec, Prof. Nebojsa Savic, PhD Nikola Fabris, MSc Jelena Galic, Dragana Petrakovic, Milan Kovac This research was supported by a grant from the CERGE-EI Foundation under a program of the Global Development Network. Additional funds for grantees in the Balkan countries have been provided by the Austrian Government through WIIW, Vienna. All opinions expressed are those of the authors(s) and have not been endorsed by CERGE-EI, WIIW, or the GDN. BELGRADE, August 2004 (revised on January and May 2005) THE MEASURES OF PHASE I OF THE ACCESSION OF SERBIA AND MONTENEGRO TO THE EUROPEAN UNION WITHIN THE STABILIZATION AND ASSOCIATION PROCESS Thematic Area: EU Accession Including Euro Adoption C O N T E N T S INTRODUCTION........................................................................................................................................3 I STRATEGIC SIGNIFICANCE OF SM'S ACCESSION TO THE EUROPEAN UNION...........................6 1. SWOT Analysis of Accession to the EU .............................................................................................6 2. The Strategic Objectives of the Forthcoming Economic Development ............................................14 2.1. The Acceleration of Reforms and Transition Processes ............................................................14 2.2. Development through European Integration and Development Processes ...............................17 II THE FIRST PHASE OF ACCESSION TO THE EU .............................................................................23 1. The Process of Harmonization and Measures within the First Phase of Accession to the EU ........23 1.1. Description of EU Legislation Regulating the Selected Areas ...................................................23 1.1.1. EU Legislation Regulating the Free Movement of Goods ................................................25 1.1.2. EU Legislation Regulating the Free Movement of Capital................................................26 1.1.3. EU Legislation Regulating Competition Policy..................................................................26 1.1.4. EU Legislation Regulating Direct and Indirect Taxation ...................................................28 1.1.5. EU Legislation Regulating Financial Services ..................................................................30 1.1.6. EU Public Procurement Legislation ..................................................................................32 1.2. Identification of the Conditions for Conducting the Process of Harmonization ..........................32 1.3. An Analysis of Transition Countries' Experiences in the Process of Harmonization .................34 1.3.1. The experiences of selected EITs in the transition process .............................................34 1.3.2. Common Characteristics of the Process of EU Accession...............................................43 1.3.3. Recommendations for Serbia and Montenegro................................................................51 2. Harmonization – Instruments, Institutions and Time–Limits.............................................................53 2.1. Free Movement of Goods...........................................................................................................53 2.2. Free Movement of Capital ..........................................................................................................59 2.3. Competition Policy......................................................................................................................64 2.3.1. State Monopolies and Public Enterprises .........................................................................65 2.3.2. Government Assistance....................................................................................................67 2.3.3. Concentration Control .......................................................................................................70 2.3.4. Restrictive Agreements and the Structure of a Dominant Market Position.......................73 2.3.5. The Legal and Institutional Framework for the Implementation of Competition Policy.....76 2.4. Indirect and Direct Taxation........................................................................................................79 2.4.1. Indirect Taxation................................................................................................................79 2.4.2. Direct Taxation..................................................................................................................88 2.5. Financial Services ......................................................................................................................92 2.6. Public Procurement ..................................................................................................................106 CONCLUSIONS.....................................................................................................................................112 REFERENCES.......................................................................................................................................114 i THE MEASURES OF PHASE I OF THE ACCESSION OF SERBIA AND MONTENEGRO TO THE EUROPEAN UNION WITHIN THE STABILIZATION AND ASSOCIATION PROCESS Thematic Area: EU Accession Including Euro Adoption INTRODUCTION After the tragic events in South Eastern Europe (war, disintegration of the former Yugoslavia, sanctions, economic collapse and the instability of the region) and in an attempt to encourage the stabilization of the region, the EU initiated the Stabilization and Association Process (SAP), which was proposed for the West Balkan countries (Albania, Bosnia and Herzegovina, Croatia, Macedonia and the Federal Republic of Yugoslavia) by the European Commission in May 1999. Bearing in mind the long-standing instability of the region, a special arrangement for the accession of these countries to the EU was conceived. Namely, apart from satisfying the general (Copenhagen) criteria, it insists, above all, on the political stability of these coun- tries and on their interlinkages. The process also anticipates the conclusion of the Stabiliza- tion and Association Agreement (SAA) – a new type of contractual relationship with the EU, which is aimed at stabilizing the countries in this region through their convergence towards European integration processes. Serbia and Montenegro lost ten precious years and its excellent initial position for accession to the European Union. After the long period of isolation, the present state union is only at the beginning of establishing a contractual relationship with the EU. The political changes on 5 October 2000 opened a new phase in the relations between the Federal Republic of Yugosla- via and the European Union, characterized by the declarative and practical expression of the need for closer contacts with the EU, thus establishing a partner relationship. Accession to the EU represents Serbia's long-term strategy, whose implementation requires a clear definition of its aims and plans, as well as coordinated activities of all participants in the process. The confirmation of the Feasibility Study this April was a positive signal in the process of Ser- bia and Montenegro’s accession to the EU. Although the Feasibility Study was obtained by all other countries of South Eastern Europe several years ago, it is of great significance, because it actually marked the beginning of the process of EU accession. It also stipulates the meas- ures that should be implemented so as to begin the negotiations on the conclusion of the Sta- bilization and Association Agreement, which is the next step in the process of EU accession. The latest measures, which have been implemented so as to create an appropriate institu- tional infrastructure for the establishment of relations with the EU, include the adoption of the Action Plan for harmonization of the economic systems of Serbia and Montenegro and the commencement of work on the EU Accession Strategy. The creation of an appropriate institu- tional infrastructure for the establishment of relations with the EU represents only the first step in the process of integration into the EU. The overall process anticipates the implementation of internal reforms, achievement of a satisfactory economic stability and growth, stabilization of the democratic system and the strengthening of government institutions, including specifically the administration and judiciary. 3 THE MEASURES OF PHASE I OF THE ACCESSION OF SERBIA AND MONTENEGRO TO THE EUROPEAN UNION WITHIN THE STABILIZATION AND ASSOCIATION PROCESS I Strategic Significance Of Sm's Accession To The European Union During the past period, the Government's reform-related efforts were primarily oriented to the achievement of macroeconomic stability, whereby noteworthy results were produced. At the same time, the process of economic transition was initiated, anticipating the long path of tran- sition of the overall economy to a market-based system. The adoption of the EU rules and regulations represents the third step in the process of accession to the European