Montenegro is set to implement the “Europe USA 2” economic reforms.

This program aims to raise the average earnings in October to around 1,000 euros, an increase from the current average salary of 850 euros.

Specifically, salaries will be increased by the portion that employees and employers previously contributed to the pension fund.

This change is expected to leave the state pension fund with a deficit of nearly EUR 400 million, which the Government has pledged to cover from the budget.

Additionally, there are new tax increases on specific sectors, including tourism and wine production.

In tourism, the value added tax (VAT) will rise from seven to 15 percent. Since contracts with operators for next year were established prior to the government’s decision, the increased VAT costs will burden the domestic tourism industry.

Tourism accounts for more than a fifth of the gross domestic product.

New taxes on wine exports and Montenegrin agricultural products have also been introduced, according to government statistics.

The Montenegrin government proposed these reforms, which were voted on by the Assembly, despite warnings from the President of the State, opposition members, and central banks regarding the potential sustainability issues.

The laws were adopted just three days before the Extraordinary elections in Podgorica, where a third of Montenegro’s population resides.

From Europe USA 1 to Europe USA 2

“Europe USA 2” is a continuation of the economic program of the same name from the time when Prime Minister Milojko Spajić and President Jakov Milatović served as ministers under the government of Zdravko Krivokapić.

This was the first administration following the removal of Mila Djukanovic’s Democratic Party of Socialists in August 2020.

The previous government’s program raised salaries by eliminating health insurance contributions for employees.

The “Europe USA 2” program was conceived while Spajić and Milatović were leading the Evora Movement ahead of the June elections last year.

Milatović left the party six months later and became one of Spajić’s government’s most vocal critics regarding this program.

Essential laws for implementing “Europe USA 2” were first passed in parliament in early September.

Milatović invoked constitutional law to return these laws to parliament for reconsideration.

Returned Laws Adopted Without Discussion

He indicated that reducing contributions threatens the stability of the pension insurance fund (PIO) and noted that a long-term impact analysis of this legal change had not been conducted.

Regarding the excise duty on wine, Milatović mentioned that its introduction would hurt the competitiveness of Montenegro’s tourism sector due to the increase in tax burdens.

However, despite these warnings, the parliamentary majority passed the same legal provisions in an extraordinary session on September 26.

During a session lasting roughly 20 minutes, Deputy Prime Minister Zdenka Popović from the ruling Democrats did not permit discussion on these three laws.

The laws were approved with votes from Site Bić’s Europe USA movement, the Democratic Front, and small coalition partners.

Warnings from the Central Bank Ignored

The re-voted legal solutions will reduce the employee contribution to the pension fund from 15 to 10 percent, while abolishing the company contribution of 5.5 percent to the same fund.

The Central Bank of Montenegro had previously advised the government to “consider the far-reaching consequences of eliminating pension contributions.”

“A simulation of pension sustainability over a 20-year horizon is necessary, as well as an assessment of these measures’ long-term effects on the revenues of PIO,” they suggested.

This recommendation from the government was not acted upon.

“This decision will create a financial black hole in the pension fund of at least 400 million euros a year, which will likely never return to normal levels,” stated Fidelity Consulting, an economic analysis firm.

They cautioned that the pension system is being maintained through a redistribution model that harms employees, who receive a mere fraction of what they have earned.

Former PIO director Ranko Aligrudić recently noted the challenge of replacing the hundreds of millions of euros needed annually for pension payments.

Highest VAT Among Competing Nations

In the tourism sector, the value-added tax will rise from the current seven percent to 15 for hotel accommodations and certain products and services.

“This is a severe blow to our competitiveness, akin to a bolt from the blue, for an industry that accounts for a third of the state budget,” said Dragan Ivančević from the Chamber of Commerce’s Tourism and Catering Committee.

He emphasized that the decision comes after more than 90 percent of contracts with tour operators had already been finalized, making any price adjustments impossible:

“They have already made their calculations, arranged charter flights and package deals to enter the market. Thus, this increase will heavily impact domestic tourism companies, which will struggle to survive.”

He added that instead of such an “unreasonable move,” the government should address long-standing tourism challenges, such as traffic infrastructure and the organization of tourist spots.

“Our tourist economy is entering a very difficult phase as a result.”

According to the Chamber of Commerce, price increases are expected, which will inevitably decrease the competitiveness of Montenegro’s tourism offerings.

Hoteliers from nine hotels and five-star resorts in Tivat, Kotor, and Herceg Novi have also expressed concerns.

The joint statement highlighted that nearly all competing countries have lower tax rates—Turkey and Albania at six to eight percent, Italy at ten percent, and Croatia and Greece at thirteen percent.

“The unilateral and hasty adoption of these legal solutions will adversely affect our business, endanger the tourist product, and jeopardize public financial stability,” warned the hoteliers.

Excise Duties on Wine Create Challenges for Winemakers

With the decision to impose excise duties of 25 euros per hectolitre on wine, the government plans to generate approximately three million euros annually.

Winemaker Mladen Rakčević commented that all wine producers, including state-owned ‘plantations,’ will be affected:

“The state ‘plantations’ are the driving force behind the entire wine sector. The stronger they are, the better we will fare in promoting Montenegrin wines.”

Rakčević warned that the new excises, compounded by competition from inexpensive foreign wines, will add an extra burden:

“Instead of stimulating us to cultivate more vineyards and assisting in distribution, the government is opting for taxes due to the significant import of wine.”

He believes that they are facing unfair competition from “cheap wines flooding into Montenegro with minimal taxes.”

In regional countries, particularly Croatia and Serbia, which are significant wine producers, no excise duties are applied to these products.

The new excises will take effect on January 1, 2025.