Montenegro Reforms Opposed by EU

The small European republic of Montenegro, surrounded by several countries, as well as the Adriatic Sea, may soon find itself being pinched by non-neighboring (and non-neighborly) Europeans — particularly those in positions of power within the European Union (EU) bureaucracy.

But first, some background: Montenegro came into being officially in February 2003, when UN lawmakers allowed Serbia and Montenegro, formerly parts of Yugoslavia, to create their own loose federation consisting of the two republics. The ever-changing map of Eastern Europe reveals that Serbia only has access to the sea through Montenegro. Thus, the republics' fates are intertwined.

In order to reduce the high inflation rates that are holding it back economically, Montenegro adopted the euro as their currency. Yet the government's reforms did not stop there. Officials recently adopted a new tax law that will give Montenegro one of the lowest corporate tax rates in Europe, at a mere 9% — far lower than many of their competitors, whose economies are struggling under crippling taxes and regulations, despite replacing their sovereign currencies with the euro.

In addition to a business-friendly tax rate, Montenegro has lifted various capital-exchange restrictions, and freed up the repatriation of profits made by foreign investors. Interest rates are determined by the market, and more than 99 percent of prices within the country are set freely. Foreign investors are treated as well as domestic ones are, with the same rights and legal protections. In fact, in an effort to encourage the development of new businesses, the required starting capital for an LLC was reduced to only 1 euro.

Unlike other governments blessed with more revenues and resources, the republic's lawmakers intend to learn from the experiences of similar countries, and guide Montenegro's path by modeling it upon the development of Ireland (in terms of strategic aspects) and Estonia (for transitional aspects).

Montenegro recognizes that the free-market approach is far superior to the communism of their past. Officials point out that the underground economy there composes about 30 percent of the GDP, and operates more efficiently than the regulated economy.

But all is not well with the aforesaid reform attempts. Simply put, the EU is rather upset at this "unfair" tax competition. As Montenegro's Deputy Finance Minister explained to the Wall Street Journal recently, for Montenegro to sign the Association and Stabilization Agreement with the EU, Brussels insists upon a prerequisite "harmonization" of economic systems between Serbia and Montenegro. Since Montenegro intends to develop into a more free-market and open economy, while Serbia intends to protect its agriculture and heavy industries, the harmonization of these systems is "more than just problematic".

He further noted that, "As anywhere else in the world, the most vigorous objections to the implementation of economic freedom in Montenegro come from rent-seeking groups, monopolists, and people that benefit from state redistribution." Economic liberalization rarely comes easily.