Snap elections, economic woes cloud Serbia's EU path

By bne IntelliNews February 3, 2014

Harriet Salem in Belgrade -

Eduard Kukan, head of the European Parliament delegation for relations with Serbia, said on January 29 that it will take the Balkan country, which has just opened its accession talks, "at least eight years to join the EU." Given the economic and political obstacles looming, that could be an underestimate.

The biggest short-term risk is the snap elections due to take place March 16. The Serbian Progressive Party is a fledgling party leading a tenuous coalition with the Socialist Party. But its leader, Deputy PM Aleksandar Vucic, is looking to rid himself of the Socialists and take the PM spot from Ivica Dacic. "Vucic is no longer content to be second to Dacic," one Belgrade business insider tells bne. "He wants to cash in on his high level of popularity now by calling a vote."

Polls consistently show Vucic as the most popular Serb politician by far; a September poll found supported by 42% of those surveyed, followed by President Tomislav Nikolić (26%), PM Dačić (15%), former president Boris Tadić (11%) and Democratic Party leader Dragan Đilas (9%).

Vucic's popularity derives from a number of notable achievements racked up since the current government won power in 2012, including attracting big investments from Russia, China and the United Arab Emirates (UAE), as well as a deal over Kosovo and a high-profile anti-corruption campaign that has already snared the country's richest oligarch, Miroslav Miskovic.

However, early elections may not prove to be the fix-all that Vucic anticipates. The Progressives winning an outright majority is by no means a certainty; a November poll found the Progressives had the support of 43.1% of voters, the opposition Democrats with 12.8% and the Socialists with 10%. If the Progressives don't win a majority, the setbacks to EU negotiations could be substantial; the wrangling and backroom deal involved in forming a new coalition will likely take months.

Even if the desired majority is secured, Serbia could still face a prolonged period of post-election political instability. Alleged infighting between Vucic and President Tomislav Nikolic, his mentor and co-founder of the Progressives, looks set to foment infighting within the new party. "It's hardly a secret that these two top figures are in conflict," James Ker-Lindsay, a senior research fellow focusing on SEE at LSE, tell bne. "If the Progressives win the elections, a power struggle seems likely to ensue."

Tabled reforms could also be stalled if the Progressives try to govern alone. Left without a fall guy for the tough times ahead, decision-makers may shy away from implementing the much-needed, but unpopular, economic measures to the fullest extent.

Problems with neighbours

Whatever the ultimate formulation of the next government, it will face another major challenge in 2014: moving the so-called "April Agreement" on Kosovo from paper into practice.

The EU-brokered deal was a huge step forward for both Serbia and the now independent state of Kosovo, and it played a significant role in propelling Serbia's EU bid into the negotiation stage. Yet the Nobel Peace Prize nominations it has earned Kosovan Prime Minister Hashim Thaci and his Serbian counterpart Dacic from a group of US senators may be premature. "There is a lot that still needs to be done," Ker-Lindsay notes.

November's local election in Mitrovica, a Serb enclave in North Kosovo, amply highlights the distance between the corridors of power in Brussels and on-the-ground realities. Repeatedly marred by violence and political obstructions by Serb nationalists chaffing at rule from Pristina, the vote now looks set to go for a fourth round.

Relations between Pristina and Belgrade, although improved, clearly remain strained. President Nikolic recently stated he would not support Dacic standing next to Thaci, "even to collect a Nobel Peace Prize." The Kosovan PM is due to be either indicted or vindicated of war crimes, including organ smuggling, by the EU's Special Investigative Task Force later this year.

However, it is easy to over-dramatise the tensions and political sparring. "This is usually the case with peace deals," Ker-Lindsay tells bne. "Signing an agreement marks the transition from a significant package negotiations to a series of micro-negotiations over implementation."

He warns that both Serbia and Kosovo need to keep momentum high and push forward practical arrangements, or risk a halt in the progression of new chapters of talks - as has been the case for Turkey over the divided island of Cyprus.

Undoubtedly the most contentious issue still to be tackled is Serbia's recognition of Kosovo. Alongside five other EU members - including Romania, Hungary and Spain - Serbia still does not acknowledge the sovereignty of its erstwhile province. Thus far, the EU has not formally demanded recognition, but the elephant in the room cannot be ignored much longer. Germany, in particular, has made clear that wholesale recognition should be a prerequisite for EU accession.

The EU, known for its carrot-and-stick approach, is likely to use the opening of negotiations to force the issue onto the agenda. "I fully expect that the overall speed of Serbia's EU accession will be directly linked to more agreements," Ker-Lindsay says.

Economic realities

Balancing the demands of its EU masters against the sensitivities of the domestic audience will be no small task for the Serbian government, especially against a challenging economic backdrop of fiscal belt tightening.

Serbia's economy is beleaguered. Public debt currently stands at more than 60% of GDP. And despite substantial recent improvements in attracting foreign investment - including a $10bn commitment by China to invest in a high-speed railway and a proposed €2.5bn investment by UAE tycoon Mohamed Alabbar - as well as a planned programme of fiscal tightening and generous loan deals from the UAE and Russia, not all are convinced enough has been done to fix the country's wobbly finances.

The International Monetary Fund (IMF) reportedly wants greater savings to be made in Serbia's proposed 2014 budget before it will consider renegotiating terms for a new, much-needed stand-by loan deal. Following the lead of Moody's Investors Service, which downgraded Serbia's rating in July last year, Fitch Ratings on January 16 kicked Serbia down to 'B+', or "highly speculative junk" status.

The tough medicine of the EU has proved an effective remedy in reviving beleaguered economies in the past: Poland and Czech Republic are just two such examples. But history shows the accession process is long and painful, and in the short to mid-term the situation in Serbia will likely get worse before it gets better as spending cutbacks result in large-scale layoffs in the bloated public sector.

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