Dušan Pavlović

Serbia after the 2012 May Elections

Serbia’s new government will need to work hard in order to avoid going down the Greek road.

The outcome of the elections on May 6 brought about partial political changes in Serbia. Serbia elected a new president, Tomislav Nikolić, but its government will most likely be composed of similar partners who have been in office since 2008. The new government is likely to be headed by the outgoing president Boris Tadić. Negotiations to form a government are still ongoing at the time of writing this article and the policy platform of the government is still to be announced, but it can be assumed that the next government will carry on with the moderate EU integration process and slow economic reforms with the overriding aim of avoiding the ‘Greek scenario’.

The May elections constituted a face-off between two large political blocs: the so-called European bloc led by the Democratic Party (DP) and Boris Tadić (Serbian president from 2004 to 2012) and the so-called conservative bloc led by the Serbian Progressive Party (SPP) and Tomislav Nikolić (the SPP splintered off from the Serbian Radical Party whose leader is currently charged in The Hague with war crimes in Croatia and Kosovo). Although the Democratic Party has been trailing the Serbian Progressive Party in the opinion polls by 5–10% over the past 12 months, the electoral outcome of the parliamentary elections between these two blocs was rather balanced, with the DP winning 24% and the SPP 25% of the vote. This means that the DP will be able to compose a more or less similar ruling coalition as the one that had been in office since 2008 when it received almost 40% of the vote. Its most likely partners are, again, the Socialist Party of Serbia (which used to be led by Slobodan Milošević in the 1990s) and either the Liberal Democratic Party (a splinter group from the DP) or a coalition named United Regions of Serbia (led by the G17 which has invariably been in the government since 2000).

Parallel to the parliamentary elections, Serbia held presidential elections too. Much to everyone’s surprise, Tadić lost to Nikolić in the run for presidency by some 80,000 votes. Although Tadić was a clear favourite (he came first after the first round by a narrow margin), it seems that Nikolić was more able to mobilise his conservative and right-wing voters in the run-off that took place on May 20.

Tadić hoped that the achievement of EU candidacy on March 1, 2012, would boost his popularity and translate into political gains, but the opinion polls conducted prior to the May elections showed that the support for EU integration among the citizens was in decline, dipping in some parts of Serbia below 50%. The most important reason for the decline in EU enthusiasm, apart from the already standard reason that the EU itself is in crisis, was the fact that the EU had pressured both Tadić and the Serbian government into giving concessions on the gradual recognition of the independent status of Kosovo, a former Serbian southern province that seceded in 1999 after NATO intervention. Tadić repeated that Serbia would never recognise Kosovo, but over time he accepted more and more signs and symbols of Kosovo’s sovereignty. (Kosovo is presently an international protectorate but – apart from four municipalities run by local ethnic Serbs – it is essentially independent from Serbia.) Tadić’s ‘willingness to cooperate’ was seen by a part of the electorate as a trade-off in which the EU got Serbia’s preparedness to accept independent Kosovo and Serbia was rewarded with EU candidacy status.

Over the past decade, Serbia was also pressured to complete its cooperation with the International Court for War Crimes in The Hague (the Tribunal, for short) and to fully comply with the Tribunal’s demands. In 2008 and in 2011, the Serbian government caught and handed over to the Tribunal two most wanted persons charged with war crimes and genocide in Bosnia – Radovan Karadžić and Ratko Mladić. A significant part of the electorate interpreted the cooperation with the Hague Tribunal as a weakness of Tadić and was dissatisfied with the Tribunal’s repeated failures to try and administer equitable sentences to individuals from Croatia, Bosnia and Kosovo charged with war crimes against Serbs.

Finally, Tadić’s electoral defeat was also a consequence of the economic crisis that had hit Serbia in the wake of the 2008 financial crisis. The Serbian government reacted by introducing fiscal stimuli in 2009 and in 2010. But this expansionary fiscal policy was paid for by accumulating a large public debt which almost doubled since 2008, thus breaking the legal ceiling of 45% of GDP by the end of 2011. Yet the government’s economic policy failed to improve the living standards of people within its four years’ mandate. Growth was sluggish (average real GDP growth for the 2008–2012 period is around 1%). From 2008 to 2012, an additional 200,000 people lost their jobs. The unemployment rate hit a historical high of 24% in October 2011.

It seems that voters wanted to punish Tadić in these elections, giving more votes to Nikolić who managed to run on a conservative policy platform despite his nationalist past and promised to bring changes and to open up the economy. This is probably one of the most important reasons why Nikolić won this time, as opposed to 2008 when he lost by some 100,000 votes. This time around Nikolić essentially reproduced the same policy platform that was embraced by Tadić in 2004 – he presented himself as a national conservative and a European at the same time, offering the voters the best of both worlds. This way Nikolić practically removed the fear of going back to the 1990s prevalent in 2008 when Tadić played up Nikolić’s open anti-Europeanism and aggressive nationalism based on territorial expansionism which Nikolić’s former party had inherited from the 1990s.

The presidential elections in May constituted already the third time that Tadić and Nikolić competed for the presidential office. (Tadić won both in 2004 and in 2008 by a narrow margin.) Yet the turnout and the number of votes both candidates received was by far the lowest since 2004. In contrast to the 2008 elections, when the turnout in the run-off was as high as 68%, the 2012 turnout was 46%, meaning that both candidates received a much smaller number of votes than in 2008. This points to a growing dissatisfaction among voters with politics and with politicians mainly caused by slow and ineffective reforms carried out by the DS-led government since 2008.

As Serbia’s cooperation with the Hague Tribunal is close to completion (there is only one person the Serbian government still has to hand over), it is expected that the new government (whoever will be in charge) will continue with EU integration. This will require a fiscal austerity package similar to that implemented throughout Europe in 2010–2011, but also a tax policy reform followed by measures targeted to improve the investment climate, to cut red tape and to liberalise the labour market.

The major challenge for the new government in 2012–2016 will be to avoid the so-called Greek scenario by trying to cut public spending and to slash budget deficit. This is seen as a way to reduce the level of public debt. Serbia’s public debt is currently at 50% of GDP, but the growing trend in public debt over the last four years is quite worrisome. A current forecast suggests that if the new government does not do something quickly, it could reach 55% by the end of 2012. This is a much smaller GDP/debt ratio than that of Greece (which is presently about 160% of GDP), but history suggests that less developed countries (such as Serbia) can experience trouble with much smaller GDP/debt ratios than developed ones.

Serbia’s public debt increased by 5.7 billion euros from 2008 to 2011. The outgoing government incurred such a massive debt in order to pursue an expansionary fiscal policy as a response to the financial crisis that hit the world in 2008. But another reason for such a large debt is Serbia’s massive public sector. The public sector – state and local administration, public enterprises and unprivatised (socially-owned) firms – consists of about 1,340 firms employing approximately 280,000 workers. These firms are under the direct control of the government and often serve as political spoils, meaning that each political party uses the public sector to employ its members and supporters and to receive ‘rent’. Public sector employees are typically rewarded with safe jobs and high salaries. Serbia is one of the countries where public sector wages rise faster than private sector wages. At the end of 2011, the total number of public sector employees was up by 2,000 compared to 2008 when the crisis began and the private sector responded with massive lay-offs. Most public enterprises and socially-owned firms operate at a loss. In 2010, the aggregate loss generated by both public and socially-owned firms amounted to 3.5% of GDP. All losses are covered from the state budget. This means that if there were no socially-owned firms and public sector enterprises were restructured and liberalised, the absence of such assistance would halve the current budget deficit. It does not require significant financial costs to change the behaviour of these firms. Yet the transformation of the public sector would necessarily lead to the loss of ‘political rent’ on which the political system in Serbia is currently based.

The major generator of public debt in Serbia is its budget deficit, which was 4.5% at the end of 2011 and is projected to reach 6% by the end of 2012. As opposed to most European economies that managed to slash their budget deficits by the end of 2011, in Serbia the deficit tends to grow.

The high level of deficit in Serbia is mainly structural in nature. It emerged as a consequence of a discrete increase in spending on public sector wages, pensions, subventions, social welfare and tax breaks. This means that the most efficient way to save money is to restructure public spending by cutting public sector wages, pensions, subventions and social welfare costs and by doing a tax policy reform, which basically means the introduction of fiscal austerity measures. Yet precisely these kinds of moves are likely to face political opposition from some future coalition partners.

The Socialist Party and the Party of United Pensioners (Serbia has about as many pensioners as officially employed people – 1.7 million) are opposed to fiscal austerity measures, saying that pensions and welfare must not be affected by the next government’s fiscal policy. Ivica Daāić, head of the Socialist Party, keeps repeating that the IMF has no business in Serbia. (The IMF suspended the current fiscal arrangement with Serbia in the summer of 2011 because the Serbian government increased its budget deficit for 2011, thus breaking the arrangement. The IMF said it would continue negotiations on the resumption of the deal after the formulation of a new government.)

If the next government will not resume the deal with the IMF, bringing the deficit down to 1% of GDP by 2016 and keeping the level of public debt under 45% of GDP, foreign investors might lose confidence and increase interest rates. This will make it increasingly difficult for Serbia to roll over credit and – assuming zero growth in 2012 and continuous depreciation of the local currency (the dinar has lost 15% of its value against the euro over the past 12 months) – its debt could reach 70% of GDP by 2013. This could set the stage for the Greek scenario in which the Serbian government will not be able to sustain the current level of social welfare, public sector wages and pensions, which in turn could bring about social and political instability.

The chances of avoiding this are not good at the present time. The Serbian parliamentary system is based on proportional representation; it produces coalition governments that are typically composed of one major party, one junior partner and several smaller parties. Each of these actors is a veto-player that can block policy changes or bring the coalition down if the majority in the government wants to push for changes nevertheless. This institutional design has been one of the major obstacles to faster and more substantial reforms since 2000 when Milošević stepped down. It seems that a similar pattern is about to emerge after these elections too, with the Socialists and the Pensioners (which received 16% of the vote and appear to have secured their position as junior partners in the next government whatever the outcome of the negotiations) opposing the needed fiscal policy changes. The next prime minister will have to be very skilful to be able to keep the government majority together and to steer clear of the Greek scenario at the same time.