Serbia’s new government is set to take office next Monday.

It will be led by Ivica Dačić, the leader of the Socialist Party of Serbia (Социјалистичка партија Србије / SPS), the nationalist, center-left party that finished a surprisingly strong third place in May’s parliamentary elections.

The SPS is perhaps most notorious for being the party that Serbian strongman Slobodan Milošević himself founded in the 1990s.  But Dačić, who has been a fixture in Serbian politics since the post-Milošević era, and has previously served as interior minister, has worked to pull his party back into the Serbian mainstream and has vowed that his government will not mark a return to the 1990s.

His government comes after a Hamlet-esque back-and-forth in choosing a coalition partner.  Dačić’s ultimate choice was to form a rather unexpected coalition with the nationalist center-right Serbian Progressive Party (Српска напредна странка / SNS).  In the May elections, the SNS emerged as a narrow winner — it won a plurality of seats in Serbia’s parliament and its presidential candidate Tomislav Nikolić defeated incumbent Boris Tadić.  Tadić had served as president since 2004 and leads the pro-western, center-left Democratic Party (Демократска странка / DS) that has essentially governed Serbia since the fall of Milošević.

Although Nikolić and Dačić have both confirmed that they fully support Serbia’s further integration into Europe — the one-time pariah state applied formally to the European Union only earlier this spring — there is no doubt that Nikolić is much more sympathetic to Russia than his predecessor, and he has championed both closer strategic ties and increased trade with Russia.

Previously, however, it had been expected that the SPS would form a coalition with the DS under a government led by Tadić as its prime minister.  Although the SNS and the SPS both share a strong nationalist streak, the SPS had previously worked alongside the DS in coalition government and the SPS was seen as more ideologically compatible with the DS than with the more stridently right-wing, free-market SNS.

A SNS-SPS coalition, however, became increasingly attractive to Dačić, who would have been much less likely to head the government in any coalition with the DS.  The shift from an expected split government (with the SNS controlling the presidency and the DS controlling the parliament) to a SNS-dominated government has not exactly calmed the nerves of pro-European Serbians, to say nothing of Kosovo, the EU and the United States.

Although Nikolić’s first post-election trip was to Moscow, both he and Dačić have stressed that his government will remain pro-European.  Dačić has already flown to Berlin to reassure EU leaders that the terms of Serbia’s application to the EU remain unchanged and that he remains open to further dialogue with Pristina — without necessarily recognizing Kosovo’s independence (Dačić has considered the idea of creating a separate ministry focused on Kosovo).

In another move that seems designed to assure that there will be no wrinkles in Serbia’s EU policy, Dačić has offered the position of foreign minister to the DS’s Milica Delević, who is currently the head of the Serbian office for EU integration.

But while Dačić seems to have succeeded — for now — in becalming Europe and its Western allies, he does not seem to have impressed anyone with his plan to repair Serbia’s troubled economy.

As The Financial Times notes in a great overview yesterday, the new government has its work cut out for it:

The Serbian economy contracted by 1.3 per cent in the first quarter and is besieged by the eurozone crisis and hamstrung by structural difficulties at home. Unemployment stands at around 25 per cent, and wages remain pitifully low by European standards.  Loose fiscal policy has seen the deficit reach 111.2bn dinars in the first half of the year, against a full-year target of 152bn dinars and an IMF advisory target of 61bn dinars for the first six months….

Meanwhile, the [Serbian central bank] has been engaged in a battle to support the dinar, which hit an all-time low against the euro in May, and has weakened by more than 9 per cent this year. The bank’s policy of spending euro reserves to boost the currency has had limited success. The dinar’s devaluation has done nothing to curb inflation.

In the face of this onslaught, Dačić has outlined a schizophrenic “change of concept” for Serbia’s domestic policy — he is calling for radical cuts in the state’s expenses while prioritizing the just division of social wealth, and he has argued that he favors state intervention over ‘neoliberal measures.’  Perhaps the mishmash of themes comes from a coalition that spans both right and left; that can only add to fears that the government could well fall over the central issue it will face — how to reduce Serbia’s budget in the midst of an increasingly severe economic crisis.

Furthermore, he has also caused a stir by threatening to fire the governor of the National Bank of Serbia, Dejan Šoškić, who has raised interests rates in Serbia (recently to 10.25%) in the face of increasing inflation.  Šoškić has been fairly successful in lowering inflation, but Dačić has threatened to sack Šoškić if he continues to tighten monetary policy.  Šoškić, whose term ends only in 2016, has refused to resign, so it is unclear how exactly Dačić would remove Šoškić, short of changing Serbian law or somehow impeaching Šoškić — either of which would undermine central bank independence, as well as lead to higher borrowing costs for Serbia and possibly a return to soaring inflation.