* Election frontrunners pledge tough reforms
* Swollen public sector unsustainable, overhaul promised
* Centre-right SNS bidding for unprecedented mandate
* Serbia keen on EU membership after years of turmoil
By Ivana Sekularac
SMEDEREVO, Serbia, March 10 The steel mill in
this Danube river town has fed three generations of Milos's
family. But the 17-year veteran believes he will be the last.
"The plant will close down," he said. "There's no business
and we won't get salaries for much longer."
Milos, who declined to give his surname, is one of 5,000
workers at the Smederevo Steel Mill who face a growing threat of
redundancy following an election this weekend in Serbia.
The former Yugoslav republic's likely next rulers promise a
dramatic overhaul of the economic order, a costly and chaotic
hybrid of Socialist-era central planning and fledgling
capitalism that experts agree is no longer sustainable.
Facing the chop are dozens of factories and firms on state
life support, Smederevo among them. The public sector employs
nearly 800,000 people, or around half the Serbian workforce, and
is a huge drain on the meagre eight-billion-euro ($11.1 billion)
Successive governments since Serbia's emergence from
isolation with the fall of strongman president Slobodan
Milosevic in 2000 have shied away from reforming the public
sector for fear of being punished by voters.
But if opinion polls are to be trusted, the centre-right
Progressive Party (SNS) of Aleksandar Vucic will win big on
Sunday, and enter power on an unprecedented mandate to stabilise
The stakes are high, as the biggest market to emerge from
old federal Yugoslavia embarks on talks on joining the European
Union within the next decade.
"I didn't come to Smederevo to tell you that you will live
easy, that milk and honey will flow, that flowers will bloom if
you vote for us," Vucic said last month during campaigning in
the town. "Reforms will be difficult and painful. Those who say
cancer can be cured with aspirin are not being honest."
For decades, public sector jobs were coveted for security,
higher-than-average salaries and generous holidays. They were a
rich source of political patronage, doled out to the party
faithful with each change of government.
Now, pensions and public sector wages amount to the
equivalent of nearly a quarter of Serbian national output. Sixty
percent of state budget revenues are paid out in pensions and
wages. By comparison, affluent EU member state Austria last year
devoted some 32 percent of budget revenues to pensions, social
security and health sectors.
Serbia's consolidated budget deficit, which includes
municipal finances and support for public companies such as
Smederevo, has soared to 7.5 percent of gross domestic product,
and by some estimates will reach 8.5 percent this year.
Public debt has climbed by 30 percentage points since 2008,
hitting 69 percent of GDP last year, higher than the
International Monetary Fund recommends for similar emerging
It is testimony to the rapid rise in Vucic's personal
popularity - mainly on the back of a much-publicised fight
against crime and corruption - that his mantra of reform has not
hurt the party's chances in the March 16 election.
The outgoing government, in which he is deputy prime
minister, debated an overhaul of the labour market and public
sector, but backed down in the face of coalition tensions.
Forcing a snap election, the SNS said it needed a stronger
mandate to push through tough structural reforms. If it does so
now, it faces a public backlash, but to put off such measures
risks even greater economic consequences, economists warn.
"Serbia's political and economic leaders face some stark
choices," Tony Verhayden, the World Bank's top official in
Serbia, told a business forum last week in the Serbian ski
resort of Kopaonik.
Without reform of the public sector, "one does not have to
look too far south to see the potential consequences which, for
a country still outside the EU, are extremely dire," he said,
alluding to debt-laden Greece.
According to the Belgrade-based Economic Institute
think-tank, Serbia needs to attract 1.6 billion euros of foreign
investment per year to secure a growth rate of 4 percent by 2020
and catch up with regional peers and EU members Croatia and
Slovenia, two other ex-Yugoslav republics.
Last year, 700 million euros of foreign direct investment
(FDI) entered the country. Smederevo was once a shining example,
sold to U.S. Steel for $23 million in 2003 in the biggest
post-Milosevic era privatisation. But U.S. Steel sold it back
for a token $1 in 2012 as the state stepped in to prevent the
mill's closure after years of losses.
Other investors have been put off by suffocating red tape,
widespread corruption and political turbulence.
The lack of an IMF safety net since early 2012 has also
unnerved investors. That may change quickly after the creation
of a new government, with SNS-chosen Finance Minister Lazar
Krstic now in talks with a visiting mission from the Fund.
The IMF will seek spending cuts through structural reforms.
The outgoing government has already raised value-added tax and
cut into public sector salaries, which triggered a protest by
doctors on Monday. Further measures may meet resistance in the
streets, testing Vucic's mettle.
"Even if the government would be ready to start painful
reforms, it would be difficult," said Zoran Cirjakovic, a media
and communications analyst at Singidunum University in Belgrade.
"People working in the public sector are not ready for reforms.
They don't think they should be the ones to sacrifice."
Or, as Milos in Smederevo put it: "As soon as we stop
getting paid, we'll take to the streets and block the roads."
($1 = 0.7214 euros)
(Additional reporting Georgina Prodhan in Vienna; Editing by
Matt Robinson/Mark Heinrich)