Relations between Serbia and its southern breakaway region of Kosovo will be a test case for Serbia's EU bid (EURACTIV 25/01/10). The EU, mindful not to repeat the problem posed by the accession of a divided Cyprus in 2004, is unlikely to decide on Serbia's membership before the territorial problem is solved.
Serbia was at war with Kosovo in 1998-1999. It endured NATO air strikes from March to June 1999 after the failure of the Rambouillet Conference in March that year. When Miloševi? capitulated, NATO's KFOR forces entered Kosovo. Since 10 June 1999 the region has been administered by the United Nations Interim Administration Mission in Kosovo (UNMIK), and since 2008 it has been assisted by EULEX, the European Union's rule-of-law mission in the breakaway region.
On 17 February 2008 the assembly of Kosovo declared independence from Serbia. Since then, Kosovo has attempted to gain legitimacy as a fully-fledged state by embarking on a process of recognition by other countries.
By the end of 2009, 34% of the countries in the UN had recognised Kosovo, mainly NATO and EU member states. Yet within the European bloc, Spain, Slovakia, Romania, Greece and the Republic of Cyprus refused to recognise the sovereignty of the former Serbian province. Spain, for instance, is concerned that such a move would encourage separatists in Catalonia and the Basque region.
EULEX, the initial objective of which was to take over from UNMIK, was put in place as a result of a compromise with Serbia, which demanded that the mission be deployed with the blessing of the UN Security Council. Western nations also agreed that the mission would be "status neutral," meaning it would not make Kosovo's split from Serbia official and would not implement the UN's Ahtisaari plan (EURACTIV 28/10/08).
In recent years Serbia and Kosovo appeared to move their dispute to a diplomatic level. In December 2009, Serbia challenged Kosovo's declaration of independence before the International Court of Justice (EURACTIV 1/12/09). Both parties hope that the ICJ ruling will determine the final status of the breakaway region.
Meanwhile, the bilateral dispute between Serbia and Kosovo also has repercussions in the wider Western Balkan region. Serbia recently decided to recall its ambassador from Montenegro after the latter decided to establish diplomatic ties with Kosovo. More recently, Serbian President Tadi? boycotted the inauguration ceremony of Croatia's new president, Ivo Josipovi?, due to the presence of Kosovar President Fatmir Sejdiu. In addition, Serbia refuses to sit at the negotiating table with Kosovar authorities and insists that its former province should be represented by UNMIK.
Serbia and Croatia fought bitterly during the fratricidal Balkan wars of the 1990s but their battles now take place in court.
On 2 July 1999, Croatia took Serbia to the International Court of Justice, accusing Belgrade of genocide. Serbia reciprocated on 4 January 2010, with a specific focus on the operations carried out by Croatian forces during Operation Storm (4-8 August 1995; EURACTIV 12/01/10).
Despite the bitterness, relations between the two countries appear to be thawing. In Croatia, the recent election of Ivo Josipovi?, a social democrat, has opened a window of opportunity to solve genocide accusations politically.
In the immediate aftermath of the election of Josipovi?, the Serbian government pledged to issue a declaration formally condemning the events of Srebrenica, when more than 8,000 Bosniaks were killed.
Moreover, with one eye on the finishing line in its EU accession process, Croatia said it would try its utmost to help other Balkan countries join the EU by providing them with examples of national laws that have been adapted to conform with European legislation (EURACTIV 08/12/09).
Bosnia and Herzegovina
Serbia has a special relationship with Bosnia and Herzegovina, since Serbs are the majority ethnic group in the Republika Srpska and are one of the country's three 'constituent peoples'.
However, tensions between ethnic Serbs and the international community have surfaced in recent years. The Republika Srpska appears to be pushing for secession and opposes Western plans for constitutional reform of the country. Indeed, since the 1995 Dayton Agreement, Bosnia and Herzegovina has to some extent been a Western protectorate.
The danger, political analysts warn, is that a possible fragmentation of Bosnia might have spillover effect across the region. In what sounded like a warning shot, Stjepan Mesic, the outgoing president of Croatia, claimed in January 2010 that if the Repubkia Srpska were to organise a referendum to join Serbia, Zagreb would be forced to intervene militarily.
However, Serbia seems to have no intention of encouraging separatists in Bosnia. Speaking at the UN Security Council on 24 January 2010, Serbian President Boris Tadi? claimed that "being a responsible member of the international community, Serbia will continue to fully support the sovereignty and territorial integrity of Bosnia and Herzegovina and will strongly oppose any attempts at partitioning this or any other member state of the United Nations".
ICTY and the Netherlands
Serbia's EU bid will also continuously be tested by its cooperation with the International Criminal Tribunal for the Former Yugoslavia (ICTY) in the Hague.
This issue is particularly dear to the Netherlands, which is hosting the ICTY (see 'Policy Summary').
The EU has already signed an interim Stabilisation and Association Agreement (SAA) with Serbia, offering the country technical assistance and a long-term membership perspective. But the agreement has not entered into force yet as a result of a Dutch government veto on its implementation.
The Dutch veto is currently the only remaining obstacle to the entry into force of the SAA, which may offer other benefits including tariff-free access to some EU markets and greater financial assistance.
Some EU member states pushed for the SAA to enter into force when war criminal Radovan Karadži? was arrested in July 2008.
The Dutch authorities are also awaiting confirmation from the tribunal's chief prosecutor, Serge Brammertz, of Belgrade's "full cooperation" with the court. In a December 2009 report, Brammertz said that "requests for access to documents and archives were being dealt with more expeditiously and effectively".
Dutch Foreign Minister Maxime Verhagen described the report as "positive" and said "in June  we will re-evaluate if we can ratify the [SAA] agreement".
However, the Hague insists it will maintain a veto over Serbia's EU accession talks unless two wanted war criminals, Ratko Mladi? and Goran Hadži?, are arrested and handed over to the war crimes tribunal.
Support for the EU: Peoples and parties
Support for EU membership in Serbia runs high. According to a November 2009 report by the Centre for Free Elections and Democracy (CESID), 71% of Serbs support EU entry, up from 61% in October 2009.
One reason for this surge in enthusiasm could be the country's application for EU membership, which was officially filed in December 2009 (EURACTIV 04/01/10).
At political level, mainstream parties are consistently becoming more committed to the EU project and are realigning their policies towards this goal. The ruling Democratic Party is already a full member of the Party of European Socialists, while the Socialist Party of Serbia, formerly led by Slobodan Miloševi?, has made a U-turn on its EU position and its leader, Ivica Da?i?, is now well accepted in European socialist circles.
Centre-right parties, meanwhile, have not made significant electoral breakthroughs in Serbia in recent years.
Recent developments concerning the Serbian Radical Party are of particular interest. Radical Party President Vojislav Šešelj is on trial for war crimes at the ICTY . Former deputy president Tomislav Nikoli?, who now heads the Serbian Progressive Party, visited Brussels in 2009 and signalled a change of course, accepting EU integration as the country's goal. Speaking in the Hague, Šešelj called Nikoli? a traitor.
The European Commission's 2009 progress report on Serbia highlighted considerable progress made in stabilising the party system. "Parliament adopted a new Law on Political Parties in May 2009, a fundamental piece of legislation which has established clearer and stricter rules for registration and which will reduce the number of parties, some of which exist only on paper," the report says.
The Commission nevertheless criticised existing political practices. "Most parliamentary parties have concluded individual agreements with their MPs on blank resignations. Legislation required by the Constitution has not been adopted. The current procedure for signing blank resignations is, therefore, not legally regulated," says the report.
Serbia was praised by Brussels for maintaining governmental stability and for having substantially improved its human rights record.
A major concern remains the fight against corruption. An Anti-Corruption Agency was formally set up in April 2009, but it has not delivered significant results yet.
Other areas where Serbia is required to do more are public procurement, privatisation, taxation, customs, licensing and protection of whistleblowers.
Serbia was hit badly by the economic and financial crises. According to the country's statistical office, the economy contracted by 2.9% in 2009. This followed years of steady growth at 5-8%. Nevertheless, this figure is better than earlier IMF estimates, which predicted a contraction of 4%.
A country heavily reliant on foreign lending, Serbia was hit particularly hard by the credit crunch, the Commission report noted, saying more borrowing would be needed to inject fresh money into the economy. An initial IMF loan request of 420 million euros in December 2008 was revised upwards to 2.9 billion euros the following April.
Unemployment remains high in Serbia at 16.4% of the active population in April 2009. The employment rate was a mere 50.8% in 2008, compared to an EU average of 65.9%, according to Eurostat.
When assessing Serbia's capacity to cope with competitive pressure and market forces, the Commission offered a bleak view. According to the report, the economic crisis "contributed to creating a less stable and less predictable climate for decision-making by economic operators. The functioning of market mechanisms remained hampered by distortions, legal uncertainty, heavy state involvement in the production of private goods and insufficient competition," it said.
The European Union contributes to investments in the Serbian economy via the Instrument for Pre-Accession Assistance (IPA). 1.18 billion euros of IPA funds have been earmarked for the period 2007-2012, with 198.7 million euros set aside for 2010 alone.
Serbia is not yet a member of the World Trade Organisation but is expected to join by 2013. Serbia had expected to join in 2010 but its application was sidetracked with members citing that work still needed to be done on some specific issues. These included trading rights, import licensing, customs, sanitary issues, intellectual property and services. Members encouraged Serbia to intensify its talks on market access, which had become an increasingly important area of negotiation for Serbia's accession.
Members requested clarification on some of these areas in 2011. The Working Party urged Serbia to finalise as many bilateral agreements on market access for goods and services as possible with other WTO members. The EU and Serbia signed a bilateral agreement for Serbia's accession to the WTO on 11 January 2011. Accession would strengthen the country's role as a free-trade corridor between Europe, the Balkans and Russia, regions with which it already has free trade agreements.