The outcome of the 6 May elections can be said to have brought about a partial political change in Serbia. Serbia has a new President – Tomislav Nikolić  –but will also most likely see a government in which the Democratic Party (still headed by outgoing Boris Tadić) will be replaced with the Serbian Progressive Party (whose leader Tomislav Nikolić resigned when he was elected for president on 20 May). As talks on forming the new government are still ongoing at the time of going to press, and while the policy platform of the government is still to be announced, it can still be assumed that the next government will carry on as before with a “moderate” EU integration process and slow economic reforms primarily   designedto avoid the “Greek scenario”.

The May elections were as ortofface-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 Tomislav Nikolićand his Serbian Progressive Party (SPP) (that splintered off in 2008 from the Serbian Radical Party whose leader, Vojislav Šešelj, is currently sitting in the Hague charged with war crimes in Croatia and Kosovo). Although the Democratic Party trailed the Serbian Progressive Party in the opinion polls by 5–10 per cent over the past 12 months, the electoral outcome of parliamentary elections between these two blocs was rather more balanced, with the DP winning 23.6 per cent of the votes and the SPP 25 per cent. This means that both blocs could form a ruling coalition with smaller partners.

Parallel to the parliamentary elections, Serbia held presidential elections as well. Much to everyone’s surprise, Boris Tadićlost to Tomislav Nikolićin the run-off for the presidency by some 80,000 votes. Although Tadić was a clear favourite (he came first, albeit narrowly, after the first round), it seems that Nikolićwas able to mobilize his conservative and right-wing voters in the run- off. Tadićwas hoping that the achievement of EU candidacy status on 1 March 2012 would boost his popularity and translate into political gains, but opinion polls conducted prior to the May elections showed that popular support for EU integration had fallen, even dipping below 50 per cent in some parts of Serbia. Aside from the now common perception of the EU as being in crisis, the most important reason for the decline in EU enthusiasm was the conviction that the EU has pressured both Boris Tadićand the Serbian Government into giving concessions in a process toward gradual recognition of the independent status of Kosovo, the former Southern province of Serbia that seceded in 1999 after the NATO military intervention. Tadićhad been repeating that Serbia would never recognize Kosovo, but, over time, he accepted more and more signs and symbols of independence. (Kosovo presently exists under an international protectorate, but, apart from four municipalities run by local ethnic Serbs, it is essentially independent.) Tadić’s “willingness to cooperate” was seen by a significant part of the electorate as a kind of trade-off in which the EU got Serbia’s readiness to accept an independent Kosovo, and in turn Serbia was rewarded by the EU candidacy status.

Over the past decade, it was felt that Serbia was also pressured to fully comply with the demands from the International Court for War Crimes in the Hague (also known as the Hague Tribunal). In 2008 and 2011, the Serbian Government caught and handed over to the Tribunal the two most wanted persons charged with war crimes and genocide in Bosnia – Radovan Karadžićand Ratko Mladić. A significant part of the electorate interpreted the cooperation with the Hague Tribunal as a sign of weakness from Tadić, and was unhappy with what it saw as repeated failures by the Tribunal to administer equitable sentences to individuals from Croatia, Bosnia and Kosovo charged with war crimes against ethnic Serbs.

Finally, Tadić’s electoral defeat was also a consequence of the economic crisis that hit Serbia following the 2008 financial crisis. The Serbian Government reacted by freezing public sector wages and pensions, but also by introducing fiscal stimuli in 2009 and 2010. In spite of the measures, the government’s economic policy failed to improve living standards within its four year mandate. Growth was sluggish (average real GDP growth for the 2008–2012 period was around 1 per cent) while between 2008 and 2012, around 200,000 people lost their jobs. The unemployment rate hit a historic high of 24 per cent in October 2011.

Hence, it seems that voters wanted to punish Boris Tadićat these elections, and rewarded Nikolićwho, despite his nationalistic past, managed to run on a conservative policy platform, promising to bring changes and open up the economy. This time around, in contrast to 2008 when he lost by some 100,000 votes, Nikolićessentially reproduced the same policy platform that was embraced by Tadićin 2004 – he presented himself as a moderate national conservative as well as a European, offering to voters the best of both worlds. In this way, Nikolić effectively removed the fear of a return to the 1990s that worked against him in 2008 when Tadićplayed up Nikolić’s open anti-Europeanism and aggressive nationalism based on territorial expansion, a policy Nikolić’s former party pursued in the 1990s.

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The May elections were the third time that Tadić and Nikolić competedfor the office of the President.(In 2004 and 2008 Tadić won on both occasions by  a  narrow  margin.)  Yet  the  turnout  and  the  number  of  votes  both candidates received this time round was by far the lowest since 2004. Unlike the 2008 elections, when the turnout in the run-off reached 68 per cent, the

2012 turnout was barely 46 per cent, meaning that both candidates received a much smaller share of votes than in 2008. This points to the growing dissatisfaction among voters with politics and politicians that was mainly caused by the slow and ineffective reforms carried out by the DP-led government since 2008.

With the cooperation with the Hague Tribunal largely completed (there remains only one person the Serbian Government has to hand over), it is expected that the new government (whoever will be in charge) will continue with the EU integration policies. This will require a fiscal austerity package similar to the type that has been implemented throughout Europe since 2010 as well as a tax policy reform package and measures targeted to improve the investment climate, cut red tape, and liberalize the labour market.

The election of Tomislav Nikolićas Serbian President is unlikely to change Serbian policy toward Kosovo and ethnic minorities (especially if the government remains composed of the same partners as at present). Until now the Kosovo policy, pursued jointly by former President Tadićand the Serbian Government, comprised a gradual acceptance of Kosovo’s independence. The Serbian Government made two significant concessions during the past four years. First, it accepted the replacement of UNMIK (UN Mission in Kosovo) by the EULEX (European Union Rule of Law Mission in Kosovo) mission in February 2008 (the former was headed by the UN; the latter by the EU). Second, in the summer of 2011, the Serbian government accepted that the EULEX mission together with the Kosovo authorities would take over the last two border crossings – Jarinje and Brnjak – that until 2011 were controlled exclusively by the local ethnic Serbs. After two months of protests organized by local Serbs, the Serbian Government persuaded them to give in, and all crossings are now jointly patrolled by EULEX, together with both ethnic Albanians and Serbs. The Kosovo issue is unlikely  to be settled in a short period of time, but the new President is also unlikely to be an obstacle to the continuation of the policy of gradual acceptance of Kosovo’s independence, no matter how often he publically repeats that he will never recognize its independence.

After 2000, the largest ethnic minorities in Serbia (Hungarians, Bosnians and Albanians) mainly adopted a cooperative stance toward the dominant Serb majority. In 2002, all ethnic minorities were given the right to run ethnic councils, which are tasked to deal with cultural policies for minorities.

Probably due to the special status of the province of Vojvodina, where they make up a significant  minority, ethnic Hungarians have been able to achieve a high level of integration into Serbian political, economic, legal and educational structures. They are proportionally represented in all municipalities where they make up a significant majority or minority, and are also represented in the government structures of the Vojvodina province where they hold several executive offices. Although ethnic Hungarian political parties had an important role in the granting of a majority to the Serbian government in 2008–2012, and supported President Tadić, they did not request a post in the government but instead seemed to have been satisfied with positions in the Vojvodina executive council where they closely cooperated with the provincial branch of the DP that won a landslide victory in the Vojvodina Assembly elections.

The major challenge for the new government in 2012–2016 will be to avoid a so-called Greek scenario by trying to cut public spending and slash the budget deficit, and by doing so reduce the level of public debt. Serbia’s public debt is currently at some 50 per cent of GDP, but the four-year trend is quite worrisome. A current forecast suggests that if the new government does not act quickly, debt could reach 55 per cent of GDP by the end of 2012. This is a much smaller GDP/ debt ratio than Greece’s (which is presently about 160 per cent), but historical evidence suggests that less developed countries (such as Serbia) can experience trouble with much smaller GDP/debt ratios than developed ones. This especially goes for countries in which the economic growth rate is slower than the growth of the interest rate on foreign debt. In order to service the debt, Serbia’s economy would have to grow by at least 5 per cent (plus inflation rate of 2–3 per cent), but the current growth forecast by the Economist Intelligence Unit for the 2013–2016 period averages just 3.5 per cent.

Public debt increased by 5,7 billion euros in 2008–2011. The outgoing government incurred this massive debt in order to pursue an expansionary fiscal policy as a response to the financial crisis that began in 2008. Another reason for the large debt, however, is the huge public sector in Serbia. The state sector – state and local administration, legal, education, health and socialsecurity systems – employs some 440,000 people. Add to this another 150,000 employed by public sector and municipal enterprises, and the workforce under the control of the government comprises almost 600,000 people, which is approximately one-third of the total workforce.

Public sector firms are under the direct control of the government and often serve as a political spoil, meaning that each political party uses the public sector as an opportunity to employ its members and supporters, and extract rents. Workers in the public sector are typically rewarded by safe jobs and high salaries. In the EU-10 group of countries who entered the EU in 2004, average public sector wages are 26 per cent higher than average wages in the private sector. This compares with a figure of 40 per cent in Serbia. In addition, public sector wages in Serbia have risen faster than private sector wages, while the total number of people employed by the Serbian public sector at the end of 2011 was almost the same as in 2008 when the crisis began. In contrast, the private sector responded to the crisis with massive lay-offs. Most public enterprises and socially-owned firms are loss-making. In 2010, the aggregate loss made by both public and socially-owned firms amounted to some 3.5 per cent of GDP. All losses are covered from the state budget. It follows that if there were no socially-owned firms and public sector enterprises were restructured and liberalized, the savings from the unallocated state support would halve the current budget deficit. A change in behaviour of these firms does not incur significant financial costs. Yet, the transformation of the public sector would necessarily lead to the loss of rent- extraction on which the political system in Serbia is currently based.

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The major generator of the public debt in Serbia is the budget deficit, which by the end of 2011 stood at 4.5 per cent of GDP, and by the end of 2012 is projected to reach some 6 per cent of GDP.  Most European economies managed to slash their budget deficits by the end of 2011, but in Serbia the deficit continues to grow.

Serbia’s large deficit 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. Hence, the most efficient way to save money is to restructure public spending by making cuts in the above areas and by reforming tax policy. In other words, the situation calls for fiscal austerity measures. Yet it is precisely these kind of moves which are likely to face political opposition from future coalition partners.

The Socialist Party and the Party of United Pensioners (Serbia has as many pensioners – 1.7 million – as officially employed people) are opposed to fiscal austerity measures (most notably to freezing public sector wages and pensions), saying that pensions and welfare should not be affected by the next government’s fiscal policy. Ivica Daćić, 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, after the Serbian Government increased the budget deficit for 2011, thus breaking the terms of the arrangement. The IMF said it would only continue negotiations on the resumption of the deal upon the completion of the new government.

If the next government does not resume the deal with the IMF, and fails to bring the deficit down to 1 per cent of GDP by 2016, and the level of public debt under 45 per cent of GDP, there is a risk that foreign investors will lose confidence and respond by increasing interest rates. This will make it increasingly difficult for Serbia to roll over credits, and, assuming zero growth in 2012 and the continuous depreciation of the local currency (by the end of May 2012 the dinar was down by 16.5 per cent year-on-year against the euro), public debt could reach some 70 per cent of GDP by the end of 2013. This could set the stage for a Greek scenario in which the government will not be able to sustain the current level of spending on social welfare, public sector wages and pensions, which could then bring about social and political instability.

The chances of avoiding this scenario are low at the present time. The Serbian parliamentary system is based on proportional representation that 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 want to push for policy change regardless of dissenting voices. This institutional design was one of the major obstacles against faster and more substantial reforms after 2000, when Slobodan Miloševićstepped down. It seems that a similar pattern could take place after these elections, with the Socialists and the Pensioners (who together received 16 per cent of the votes, enough to secure a kingmaker position) opposing the required fiscal policy changes. The next Prime Minister will need to employ huge skill to be able to keep the government majority together and, at the same time, steer clear of the Greek scenario.