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Bringing Serbia in from the cold? EU talks begin

Tuesday, 21 Jan 2014 | 2:41 AM ET
Suburban landscape in New Belgrade, Serbia
Koca Sulejmanovic | AFP | Getty Images
Suburban landscape in New Belgrade, Serbia

Serbia begins official negotiations to join the European Union (EU) on Tuesday, talks which it hopes will allow it to join the trading bloc by 2020 and give its sluggish economy a boost.

As talks between the Balkan nation and the 28-nation bloc started in Brussels Tuesday, the President of the European Commission Jose Manuel Barroso said they represented "the start of an entirely new chapter in our relations and a major success."

Indeed, relations have been thorny between Serbia -- a traditional ally of Russia -- and the EU over a number of issues that are politically and historically painful for both sides. A particular source of tension has been the fallout of the bloody conflict following the dissolution of the Balkan bloc of Yugoslavia in the 1990s.

Accession talks have previously been delayed or unsuccessful due to the Serbia's reluctance to give up suspected war criminals, recognize the independence of Kosovo and to reform its judiciary along European lines.

Why does Serbia need the EU?

Serbia needs access to the EU's 28-nation market after several years of financial crisis including two recessions. Deputy Prime Minister Aleksander Vucic himself caused a huge controversy late last year when he told national TV that his country was on the verge of bankruptcy – an assertion that was dismissed by economists.

(Read more: Experts dispute Serbia's 'bankruptcy' scare)

Serbia's consolidated budget deficit has risen to 7.1 percent of output, however, and there are concerns over delays to much-needed economic reforms. Such fears prompted ratings agency Fitch to downgrade Serbia's long-term local and foreign currency ratings from BB minus to B plus last Friday.

However, according to the Serbian Ministry of Finance, the country's gross domestic product (GDP) grew 2 percent in 2013, having contracted 1.7 percent in the previous year. Although its debt to GDP ratio stood at 59.1 percent in 2013, it's worth bearing in mind that the figure stood at 34.8 percent in 2009.

(Read more: Where are the best opportunities in emerging Europe?)

Responding to the Fitch report, the Finance Ministry said in a statement: "The ministry will insist on the diligent implementation and broadening of reforms to lower the fiscal deficit and public debt and to secure growth."

European Commission President Manuel Barroso commended for its reform efforts and for the progress made over the past years on Tuesday, however, and said the EU would "continue to support Serbia to make progress, step by step, on its European path."

Signalling that the road to the EU won't be easy, however, Barroso underlined the challenges for Serbia, a press release from the EU noted. The list said these challenges centered on "the key areas of rule of law, including the reform of the judiciary, the fight against corruption and against organized crime, public administration reform, independence of key institutions, media freedom, anti-discrimination and protection of minorities."

Timothy Ash, the head of emerging market research at Standard Bank, told CNBC that Serbia would not let its chance of EU membership pass it by, however.

"Serbs see themselves as having a European outlook and EU accession is important for the country and investors. It has a lot of economic problems -- particularly on the fiscal side and the country is servicing a lot of debt. EU membership would act as an anchor for them," Ash told CNBC on Tuesday.

He believed that the sticking point to talks could lie around the unresolved issue of the Republic of Kosovo, whose independence Serbia has, as yet, failed to recognize along with its political ally Russia.

"They've set this 2020 date but the Kosovo issue remains outstanding. I think the EU is pleased with the progress that the current nationalist administration has made since it came to power in 2012 in normalizing relations with Kosovo."

"Awarding Serbia this EU candidate status is a sign of that."

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt.

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