I - Introduction

This report is the first in a series of assessments of Serbia’s economic governance, including its preparedness for EU single market competition, that CEVES is undertaking to produce annually. It serves both to inform Serbia’s policy-makers, development partners and the public, especially the groups and organizations that are today endeavoring to formulate an alternative economic policy offering for Serbia, and to lend support to the implementation of the EU’s Growth Plan for the Western Balkans (Growth Plan) in Serbia. The latter is currently the EU’s key instrument for accelerating convergence of the Western Balkan candidate countries on its economic fundamentals, as well as, ultimately, socio-economic indicators of citizen’s well-being.

The New Growth Plan for the Western Balkans

The New Growth Plan for the Western Balkans represents a pivotal European Union instrument designed to accelerate the socio-economic convergence of the region with EU standards. Its core distinction lies in the fact that it serves to program reforms, but also to reward them, establishing a strict correlation between progress in structural changes and access to financial resources. By linking performance to funding, the Plan acts as a strategic framework that allows the region to experience the benefits of EU integration prior to formal accession, provided that agreed-upon reform agendas are strictly met.

The Growth Plan stands on four essential pillars that drive regional transformation:

1. Economic integration with the EU’s single market — allowing for early alignment with European rules and standards
2. Economic integration within the Western Balkans — through a Common Regional Market
3. Acceleration of fundamental reforms — through reform agendas focusing on areas such as the rule of law, anti-corruption and private sector development
4. Increased financial assistance — through the Reform and Growth Facility, a performance-based fund that ensures every implemented reform directly unlocks investment to foster long-term competitiveness and stability

The Reform Agenda (RA) is the pillar that sets the structural measures and reforms whose accomplishment would substantially advance the fundamentals, including the strengthening of democratic institutions, the rule of law, and economic governance — so we lend it particular attention. Macroeconomic balance is covered by the Economic Reform Programme (ERP).

Good Economic Governance: The Philosophy of This Report

The overarching objective of economic governance in a country that has not yet achieved high-income status, nor reached the global frontiers of productivity, is to catalyze sustainable and equitable socio-economic development. This objective is anchored in a balanced progress across two fundamental dimensions: human development and economic performance. While the former focuses on improving the quality of life and social cohesion, the latter is increasingly defined through the lens of competitiveness, as articulated in the European Union’s strategic framework.

Within this context, competitiveness transcends simple output metrics, encompassing the pillars of sustainable growth, economic resilience, and environmental viability. Therefore, a comprehensive assessment of economic governance must look beyond the mere adoption of reforms. It requires a holistic evaluation that bridges the gap between the qualitative characteristics of institutional frameworks — such as transparency, efficiency, and the rule of law — and the concrete socio-economic outcomes they deliver. Only by analyzing this intersection of institutional quality and tangible results can we determine the effectiveness of governance in driving long-term convergence and societal well-being.

The Role of a Functioning Market Economy

A functioning market economy is one that effectively mobilizes private initiative while ensuring that market outcomes are disciplined by competition, sound institutions, and macroeconomic stability. The experience of the 20th century is that markets are irreplaceable when it comes to the fundamental signaling and coordination of literally millions of economic actors. They are also best capable of adequately rewarding productivity and efficiency.

However, markets are characterized by structural imperfections, including information asymmetries, coordination failures, and unequal access to finance, which can result in underinvestment, weak productivity growth and reinforcement of existing inequalities and concentrations of power if left unaddressed. Legal certainty, equal treatment of market participants, and policy predictability are central to ensuring competition and investment.

Hence, the effective functioning of markets depends on the quality of economic governance — i.e., the state’s capacity to “design and implement sound macroeconomic and structural policies,” enforce rules that provide a level playing field and correct market failures, and provide key public goods. A capable state is therefore essential not to replace markets, but to shape and discipline them through predictable, rule-based interventions.

On the other hand, state support that is not linked to measurable outcomes or that protects inefficient actors ultimately weakens markets rather than strengthening them. In the absence of accountability, even well-intentioned interventions risk reinforcing unproductive behavior and weakening competitive pressures.

In this sense, strengthening the developmental capacity of the state is not an alternative to market-based development, but a prerequisite for a functioning market economy capable of withstanding competitive pressure within the EU single market and meeting the Copenhagen economic criteria for accession.

The EU Economic Fundamentals Framework

In its assessment of economic governance, this Report relies on the EU’s “economic fundamentals” conceptual framework. The logic of this framework is an excellent way to articulate the economic operation of a democratic developmental state.

However, this baseline report is being published at a critical juncture where Serbia’s trajectory on the EU accession path is no longer as certain or clearly defined as it once was. We focus on alignment with the EU economic governance framework nevertheless, because the “European economic model” has for many decades proved as a successful alternative to unfettered liberalism, even if it now faces an existential need for modernization.

As highlighted in the 2024 Draghi Report on the Future of European Competitiveness, the European model requires radical structural and governance reforms — particularly in closing the innovation gap and reducing regulatory fragmentation — if it is to survive global competition. While these challenges expose weaknesses in the EU’s current supra-national architecture, the underlying logic of the framework remains a valuable developmental blueprint for an individual country.

Moreover, as a candidate country, Serbia has for years been developing a host of instruments and commitments tied to this framework. Regardless of the current political fluctuations in the accession process, the true implementation of these instruments would serve Serbia’s internal economic development and long-term resilience well.

The Copenhagen Economic Criteria

The “economic fundamentals” that need to be met for a country to be eligible to join the EU are laid out together with the political criteria and the need to align with the Acquis in the Copenhagen criteria, agreed in 1993. They consist of:

1. The existence of a functioning market economy, including the criterion of macroeconomic stability which is often treated separately
2. The capacity to withstand competitive pressure and market forces within the EU single market

Category	Key Requirements & Elements
A Functioning Market Economy	High quality of economic governance
	Macroeconomic stability (including adequate price stability as well as sustainable public finances and external accounts)
	Proper functioning of the goods and services market (including business environment, state influence on product markets, and privatisation and restructuring)
	Proper functioning of the financial market (including financial stability and access to finance)
	Proper functioning of the labour market
Being Competitive in the EU	Human capital: Sufficient amount of education, research, innovation, and future developments
	Physical capital: Sufficient amount and quality of physical capital and infrastructure
	Economic structure: Changes in the sector and enterprise structure, including the role of SMEs
	Integration: Sufficient degree and pace of economic integration with the Union, and price competitiveness

Source: European Commission Economic Accession Criteria

Structure of the Report

This Report innovates relative to many other reform monitoring tools by shifting the focus beyond mere regulatory compliance to a dual-track analysis of policy and resource allocation. While traditional tools track whether laws are passed, this framework evaluates the actual commitment of policy-maker time, strategic effort, and the specific funding required for implementation. These critical resource allocations are primarily reflected in a country’s fiscal programs and public expenditure, which serve as the ultimate evidence of reform prioritization.

By aligning regulatory benchmarks with budgetary realities, the Report provides a more granular view of whether reform goals are matched by the necessary financial and institutional weight.

The logic of this Report is anchored in the principle that genuine economic governance must transcend formal regulatory compliance to achieve sustainable and equitable socio-economic development, particularly within the strategic framework of the EU’s Growth Plan. Structurally, the Report transitions from broad macroeconomic fundamentals to the granular realities of resource allocation:

1. Macroeconomic sustainability — evaluated through the lens of the Real Effective Exchange Rate (REER), which we treat not merely as a price index but as the “tip of the competitiveness iceberg” shaped by fiscal and monetary policies that often favor non-tradable sectors over domestic investment

2. Functional market economy — where the focus shifts from standard judicial benchmarks to the executive branch’s behavior—specifically how state aid, procurement, and investment planning either foster or stifle market trust

3. Resource allocation — a critical assessment arguing that current fiscal choices—such as the prioritization of defense over education and the institutional neglect of the SME sector—reflect a policy bias toward control rather than the structural transformation and human capital development necessary for long-term productivity and competitiveness