Podgorica Pays Its Own Way

Montenegro has taken a strong step away from the Yugo zone and towards the euro zone by introducing the German mark as an official currency.

Podgorica Pays Its Own Way

Montenegro has taken a strong step away from the Yugo zone and towards the euro zone by introducing the German mark as an official currency.

Wednesday, 16 November, 2005
Montenegro has taken a further step towards independence by introducing the German mark as an official currency within the second Yugoslav republic.

The proclamation, November 2, by Prime Minister Filip Vujanovic, effectively suspends federal financial laws, the jurisdiction of the National Bank of Yugoslavia, the federal law on hard currency transactions and other federal ordinances banning payment in hard currency on the territory of Montenegro.

"The takeover of financial policy does not mean separation from Serbia," Vujanovic said in an address to the Montenegrin Parliament. "It is only a protection of the citizens of Montenegro and its economy from hyperinflation and the chaos it brings."

Yet in signalling the end of a common financial regime, the new policy will inevitably raise questions as to whether the Federal Republic of Yugoslavia still exists. The Yugoslav dinar will continue in use as a parallel currency. But salaries and pensions will be paid mainly in the convertible German currency.

The finance council and the National Bank of Montenegro now control the republic's financial policy. These institutions will set the exchange rate of the German mark against the Yugoslav dinar daily. The exchange rate will fluctuate, unlike in Serbia, where despite inflation the dinar's value has been artificially maintained for months.

The government says that its decision to break with the financial authorities in Belgrade was forced upon it. Montenegrin Finance Minister Miroslav Ivanisevic has argued that it was necessary to introduce the parallel currency to protect the small republic's economy from an "irresponsible financial policy which Montenegro cannot influence."

According to Ivanisevic, the dinar has devalued by 100 per cent over the past year, losing a third of its value in the last 20 days alone. "The fall of the dinar is a consequence of an obvious financial destruction by Belgrade," he said.

Montenegrin President Milo Djukanovic has for some time been seeking a mechanism for currency protection, since his republic lost authority over financial policy. Montenegro's representatives were thrown out of the Central Bank of the Federal Republic of Yugoslavia at the beginning of the summer.

After the end of the NATO bombing, Yugoslav President Slobodan Milosevic began to print money without restraint. The resulting inflation has affected Montenegro, leaving it to pay a high price for the reconstruction of Serbia.

The inflationary shocks have depleted the value of salaries and pensions, which were low anyway. The economy is at risk of hyperinflation, which would seriously damage Djukanovic's economic reforms--and potentially his own political position.

The project of establishing the German mark within Montenegro has been in preparation for many months, under the supervision of US economist Steve Hanke, an advisor to Djukanovic. But the government only recently confirmed that it would take such a radical step, announcing several weeks ago the intention to introduce a currency board, based in Switzerland, and thus break from the dinar-based financial policy. Customs barriers were erected between the republics, and Montenegro assumed control over all foreign trade and customs issues.

Montenegrin government sources say that the parallel currency system is only a middle solution, to reduce political and economic risks. The evident further options are a full break with the dinar, and a formal political break with the federation.

But the introduction of the German mark has a significant political impact anyway. After breaking with Belgrade two and a half years ago, Djukanovic has now led the republic to its most serious move towards complete economic independence. Economists in Montenegro project that the dinar will be completely "expelled" from Montenegro, and that state payments to Serbia will cease in a matter of days.

Podgorica is concerned that Yugoslav authorities will seek to undermine Montenegro's "financial reform", such as by introducing a large amount of dinars from Serbia, disrupting the financial market. Citing reliable Podgorica sources, the government daily

Pobjeda claims that Montenegro is protecting its own money supply from an incursion by Serbia by physically securing the border between the two republics. Rigorous controls will be introduced regulating the flow of German marks being taken out Montenegro, and Yugoslav dinars being brought in.

Montenegro's decision to assert sovereignty over financial policy was made despite the opposition of some of Djukanovic's international allies. Western capitals have warned that the introduction of the parallel currency could worsen relations between Podgorica and the government in Belgrade. Bodo Hombach, coordinator of the Balkan Stability Pact to reconstruct the region, asked Djukanovic not to proceed.

Belgrade, unsurprisingly, has reacted with fury. Socialist Party spokesman Ivica Dacic described the Montenegrin move as a "tragicomedy" and the "legalisation of smuggling". Meanwhile, Dusan Vlakovic, governor of the National Bank of Yugoslavia, banned all dinar payments between Montenegrin banks and companies and Serbia.

Within Montenegro, the move has been fiercely attacked by Milosevic's allies, the Socialist People's Party (SNP). "The decision to introduce a parallel financial system is a classic secessionist act," says Momcilo Vucetic, an MP for the SNP. Vucetic adds that the Montenegrin government has violated the federal constitution and destroyed the unified Yugoslav market.

A critical question remains the reaction of the Yugoslav Army. Djukanovic recently announced that, under the new policy, members of the Yugoslav Second Army stationed in Montenegro will receive salaries from the republican budget in a convertible currency. The gambit could win over some members of the armed forces, who for months have received their pay irregularly.

But Milosevic has sent his own signal. On the same day as the parallel currency came into effect, he dispatched Yugoslav Army chief of staff Gen. Dragoljub Ojdanic to Montenegro. Odjanic is among the top political figures indicted for war crimes by the tribunal in The Hague along with Milosevic.

The general spent the first part of his visit in Pljevlja, a town controled by the pro-Belgrade SNP. Then he flew by helicopter to the Masline barracks in Podgorica. Later he met with Prime Minister Vujanovic.

Nevertheless, this was Ojdanic's first visit to Montenegro since the NATO intervention, and it was taken as an additional signal that, in the words of Yugoslav Deputy Prime Minister Vojislav Seselj, the "common state will be defended with all means."

Milka Tadic is editor of the independent magazine Monitor in Podgorica.

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