How is the EU Transforming Serbia’s Economy? Andrea Hochhuber on Economic Reforms and Future Plans

The European Commission recently published its annual Progress Report on Serbia, which highlights moderate progress in building a functional market economy. The report places particular emphasis on the manufacturing and service sectors, which have shown positive results thanks to foreign investments and integration with the EU. However, challenges remain in areas such as education, public procurement, and competition, all of which are crucial for Serbia’s further alignment with European standards.

"Serbia is moderately prepared and has made some progress in dealing with competitive pressures and market forces within the EU. The structure of the economy is favourable, with growing manufacturing and service sectors benefiting from substantial foreign direct investment and close economic integration with the EU.

However, the quality and relevance of education and training still do not fully meet the labour market’s needs. Public investments remain high, underlining the need to improve public investment management. Small and medium-sized enterprises (SMEs) still face numerous obstacles, including unequal conditions compared to large companies and foreign investors.

Overall, Serbia is at a good level of preparedness and has made some progress in developing a functional market economy. A sound monetary and fiscal policy has helped reduce inflation, while economic growth is on a recovery path. The reform of the public sector wage system has continued to progress slowly. Structural challenges remain in state aid, competition, and public procurement, with state-owned enterprises still playing a significant role in the economy.

Regarding the Growth Plan, we are pleased that the Serbian Government has submitted an ambitious Reform Agenda, which has received positive feedback from EU member states and approval from the European Commission.

Through the Growth Plan for the Western Balkans, we have made an unprecedented offer to help accelerate reforms and close the socio-economic gap between the region and the EU. To support this, we have mobilised nearly €1.6 billion in additional funding for Serbia, linked to the implementation of the comprehensive Reform Agenda. This funding will be provided as a mix of grants and loans for national budgets and co-financing for infrastructure projects."

What are the key goals of the Growth Plan, and how will Serbia benefit?

"One aim of the Growth Plan is to offer some of the benefits of EU membership to the Western Balkans before accession, bringing the region closer to the EU’s single market. To achieve this, efforts are already underway in several key areas.

For instance, Serbia is working to join the Single Euro Payments Area (SEPA). Through SEPA, financial transfers between member countries are easier and significantly cheaper. This means that you will be able to transfer money between Serbia and the EU, and vice versa, with virtually no fees.

Another example is the development of Green Corridors. To accelerate border crossing procedures for trucks and significantly reduce long queues at border crossings, we are working on improving procedures and investing in border infrastructure. In the short term, the goal is to reduce waiting times by at least three hours per truck. This reduction in waiting time could effectively lower the price of every traded product by 2%. Considering that trade between Serbia and its main trading partner, the EU, amounted to around €40 billion last year, this could result in significant savings, ultimately benefiting consumers.

We are also focusing on areas such as agreements on conformity assessments for industrial products to ease exports and linking the Western Balkans to the EU’s digital identity wallet. Other initiatives will follow."

How would you assess Serbia’s economic progress in terms of GDP growth, foreign direct investment, and trade relations with the EU since the Stabilisation and Association Agreement came into effect in 2013?

"Serbia’s economic progress over the past decade, following the entry into force of the Stabilisation and Association Agreement (SAA), is evident. After a period of robust macroeconomic stabilisation from 2013 to 2016, during which average GDP growth rates were around 1–2%, Serbia entered a phase of stronger growth, with GDP rising by an average of 4–4.5%. This positive trend was briefly interrupted by a mild contraction of 0.9% in 2020 due to the pandemic, but the economy rebounded strongly in 2021 with growth of 7.7%. Following moderate growth of 2.5% over the past two years, Serbia’s economy is expected to return to a cycle of stronger growth rates.

However, this is not sufficient—Serbia needs to strengthen and grow more rapidly to catch up with the EU average. This is why the EU has offered Serbia and the Western Balkans the Growth Plan, with a vision to drive growth through renewed momentum in the coming years.

Serbia’s growth has been primarily driven by foreign direct investment (FDI) and strong export growth, with the EU playing a pivotal role as Serbia’s largest trading and investment partner. EU-based companies are by far the largest foreign investors in Serbia, accounting for about 60% of total FDI registered between 2010 and 2022. This represents more than €20.5 billion in investments from the EU during this period.

EU companies directly employ around 280,000–300,000 people in Serbia, with many more Serbian citizens indirectly employed in companies and SMEs that work with EU investors as suppliers or clients across various value chains.

Additionally, the EU has traditionally been Serbia’s most important trading partner, accounting for an average of 60–63% of Serbia’s total trade in goods over the past decade. These figures have remained consistent for over ten years."

What structural reforms in Serbia have had a significant impact on its economy?

Serbia is well-positioned to evolve into a fast-growing, sophisticated, modern economy driven by the private sector. The country’s economy is undoubtedly in a better place than it was a decade ago. Significant efforts have been made to establish and maintain macro-fiscal stability, which is the cornerstone for the further expansion of any economy.

In this context, Serbia’s economic resilience has been demonstrated through successive crises in recent years, including the COVID-19 pandemic. Serbia’s strong macro-fiscal performance has also contributed to a steady improvement in its international economic standing. This was affirmed when S&P Global Ratings recently upgraded Serbia’s credit rating to investment grade for the first time in the country’s history, placing it on par with some neighbouring EU member states.

This achievement signals that Serbia has succeeded in establishing a record of macroeconomic and fiscal stability, shown resilience during consecutive crises, and continues to strengthen its international reputation.

Notable progress has also been made in areas such as connectivity. Serbia’s infrastructure networks—roads, railways, and energy—are undeniably improving, making the transport of people, goods, and services easier across the country and the region. Additionally, substantial work has been done in areas such as e-governance, digitalisation, regulatory reform, and improved public administration.

However, is this enough? Serbia’s economy currently stands at 46% of the EU average, making faster growth and convergence essential. We believe this is achievable, and that by continuing and accelerating the right reforms, this figure can increase significantly. In fact, we believe Serbia’s economy could more than double in size over the next decade.

To achieve this, it is critical that reforms continue in areas such as the rule of law, media freedom, good neighbourly relations, public administration reform, public procurement, state-owned enterprise management, green transition, digitalisation, and others. Serbia, alongside the rest of the region, must advance toward EU membership. The EU enlargement process and a clear perspective on membership remain key drivers of economic and social prosperity.

How has Serbia’s access to the EU market evolved since gaining associated status, and what are the main benefits for Serbian companies?

Products made in Serbia have enjoyed preferential access to the EU market long before the SAA came into force, as the EU unilaterally granted Serbia autonomous trade preferences as early as 2000. This allowed Serbian products to access the EU market tariff-free well before the SAA’s formal implementation.

The SAA, in turn, established a free trade area between the EU and Serbia, enabling the gradual alignment of trade policies, such as customs, competition, state aid, and intellectual property rights. It also addressed other critical areas for Serbia and foreign investors, including public procurement, consumer protection, standardisation, and quality infrastructure.

Overall, the EU accession process has played a crucial role as an anchor of stability for businesses, entrepreneurs, and foreign investors, predominantly from the EU.

These investors—mainly EU-based companies—have established operations in Serbia and become integral to its economy, with a strong presence in key sectors such as automotive manufacturing, electrical machinery, rubber and chemicals, banking, retail, and pharmaceuticals. Many of these companies have consistently ranked among Serbia’s top 15 exporters.

EU companies have introduced efficiency, modern technologies, and expertise to the Serbian economy, creating jobs for many Serbian citizens. They have also brought new corporate cultures and EU values to Serbia, transforming how the Serbian economy impacts individuals and society as a whole.

This, in turn, has significantly increased the productivity and competitiveness of Serbia’s economy, boosted its export potential, raised budget revenues, and generated economic growth. Finally, opening the Serbian market to EU companies has created a broader range of choices and lower prices for Serbian consumers.

What are the main economic challenges Serbia faces in the EU integration process?

Every country faces economic challenges. In recent years alone, we have collectively dealt with issues such as the migration crisis, COVID-19, and the economic crisis triggered by Russia's unprovoked large-scale invasion of Ukraine, which has caused inflation and supply shortages across Europe and the world. Serbia has faced these challenges alongside the rest of Europe.

As I previously mentioned, Serbia’s economy has shown resilience in the face of these challenges and has managed to maintain macroeconomic and fiscal stability—a commendable achievement.

At the same time, however, Serbia must address several key structural challenges that are hindering its dynamic growth. For example, despite progress in reducing regulatory and administrative burdens for businesses, weaknesses remain, particularly affecting small and medium-sized enterprises (SMEs). The state continues to play a significant role in the economy, which hampers competition. To address this, state-owned enterprises need to adopt strengthened corporate governance standards and operate under equal conditions.

Despite the ongoing implementation of the education strategy until 2030, the quality of education and training still needs to improve to meet labour market demands. Additionally, public procurement practices must become more competitive, transparent, and efficient.

How effective has EU financial assistance been in supporting Serbia’s economic development?

EU assistance to Serbia has had significant direct and indirect economic impacts. With over €4 billion in direct grant funding over the past decade, the EU is by far the largest donor to the country. This funding has been crucial in supporting Serbia’s socio-economic development, infrastructure projects, energy transition, and competitiveness. Overall, our support for reforms and alignment with EU legislation has spurred Serbia’s trade with the EU and its attractiveness for investments, which are key drivers of economic growth.

Specifically, the EU has provided over €250 million to support SMEs, science, research, and innovation. More than €230 million has been made available to Serbian farmers through the IPARD programme. Thanks to EU-supported private sector programmes in partnership with international financial institutions, Serbian companies have also secured more than €2.5 billion in favourable financing for expanding production, innovation, and job creation.

The EU-led Western Balkans Investment Framework has supported investments of approximately €9.4 billion in sustainable transport, energy, water, and digital infrastructure, benefiting people and businesses in Serbia on its path to EU membership.

How is Serbia progressing in transitioning to a green economy under the Green Agenda for the Western Balkans?

In Serbia and the region, there is growing public awareness that a safer environment benefits both people and the economy. Naturally, the demand for greener business practices has grown rapidly in recent years, with an increasing number of public and private companies seeking to invest in and transform their operations.

The EU aims to support this demand by drawing on its successful policies, such as the European Green Deal and the Green Agenda for the Western Balkans. In Serbia, we have launched several initiatives, including the EU-funded project "EU for the Green Agenda in Serbia", in collaboration with the Ministry of the Environment and implemented by UNDP.

Through this project, we invite companies to propose projects tackling decarbonisation, circular economy, pollution prevention, biodiversity support, and organic food production. Our partner, UNDP, selects the best projects and offers mentoring programmes before directly investing in green initiatives. So far, 66 projects have been funded in just two years, with a total investment of around €25 million, including over €4 million in EU grants. These are strong examples of how EU funding can be leveraged to green Serbia’s economy while creating new jobs.

What are the most important economic steps Serbia needs to take?

I have already mentioned several key areas critical for unlocking Serbia’s economic potential and competitiveness. This list, of course, is much longer, and all these steps are equally important.

Ultimately, the priority is to create a healthy business environment that provides citizens, companies, civil society organisations, and other stakeholders with the sense of stability, transparency, and predictability they need to thrive and grow.