Towards a Slow Economic Recovery
Initially, the country was not that strongly affected by the crisis, thanks to the wise policy of the Croatian National Bank, which aimed to curb loans and foreign debt. In March, the magazine The Banker named Governor Željko Rohatinski both Best Central Bank Governor in Europe and Best Central Bank Governor in the World in 2008. The measures undertaken by the National Bank helped the economy ride out the first wave of the crisis more easily. However, in the first nine months of 2009 GDP dropped by almost 7%, as compared to the previous year when the Croatian economy grew at an annual rate of 5.5%. This came on the heels of seven years of continuous growth. The fall could partly be attributed to spill-over from the global crisis, but at the same time it was the result of economic weaknesses in the country accumulated in previous years. Public consumption and investment were down, in contrast to public spending, which remained high, accounting for some 48% of GDP. The country is heavily indebted, with an external debt of more than 80% of GDP. However, in spite of these negative trends, its macroeconomic stability has been preserved. Croatian political analysts forecast that a slow economic recovery may begin at the end of the year.
The National Bank has warned that the recession will not be resolved if it is understood merely as a “temporary halt” to positive long-term trends in economic growth and development. On the contrary, it must primarily be regarded as a warning of the consequences of neglecting the sustainability of economic growth. Dealing with problems in an efficient and targeted way and speeding up reforms are seen as a much better solution than relying on the IMF (Rohatinski, 2009). The government’s first, highly unpopular response to the economic crisis was to cut public-sector wages. This was followed by three budget adjustments, which were too small to close the gap. Heavier budget cuts, increasing budgetary revenue and sound fiscal policy will be crucial in the coming period. The key challenges remain deeper and faster structural reforms that reduce state interventions in the economy, stimulate employment and remove administrative barriers from the economy.
The problems seem to have evolved from “over-accelerated growth” to “hard lending.” Key policy players are focussing on how to mitigate the effects of the spill-over from the global crisis on the country and reduce deficits and imbalances. However, the National Competitiveness Council has warned that decisiveness and speed in implementing structural reforms, further market liberalisation and developing a business-friendly environment are crucial to increasing economic competitiveness. In this regard, Croatia’s global competitiveness has stagnated or even fallen since 2006. In its Global Competitiveness Report 2008-2009, the World Economic Forum ranked Croatia 61 out of 134 countries (as compared to 57 in its previous report).
Nevertheless, in spite of these economic problems, Croatia remains the best performing country from South-Eastern Europe engaged in the EU accession process and a regional success story, playing the role of anchor for political stability in the region.
The End of Negotiations with the EU in Sight
The accession negotiations with the EU, which started in 2004, fell behind schedule in 2009 when they were blocked by neighbouring Slovenia for nine months beginning in December 2008. The reason for this was a bilateral border dispute regarding Piran Bay. The European Commission’s indicative Road Map for concluding the technical negotiations by the end of 2009 therefore could not be met, and its attempts to find a solution bore few results. The two countries were expected to find their own way out. The Croatian view that bilateral issues should be dealt with separately from the negotiations was not accepted. Bilateral negotiations between the Prime Ministers of Croatia and Slovenia (Kosor and Pahor) led to an agreement on 11 September 2009 on the means for resolving the bilateral border dispute. The Croatian-Slovenian arbitration agreement, signed on 4 November, laid the foundations for fully resolving the border dispute once the ratification procedure had been completed by both countries’ Parliaments. This marked the re-opening of the negotiations on Croatia’s EU membership.
By the end of 2009, Croatia had opened 28 of the 35 negotiating chapters, and 17 of them had been provisionally closed. The five remaining chapters are competition policy, fisheries, judiciary and fundamental rights, the environment and Common Foreign and Security Policy (CFSP). Three of these are still being blocked by Slovenia. The most difficult chapter seems to be that on judiciary and fundamental rights, including the fight against corruption and organised crime. The promotion of minority rights, including refugee return, the holding of war crime trials and the provision of access to documents for use by the International Criminal Tribunal for the former Yugoslavia (ICTY) are high on the agenda. Another important issue is public administration reform, which means strengthening the procedures and administrative capacities of relevant institutions, strengthening the civil service and depoliticising the public administration. Competition policy is likewise an important area, where the restructuring and privatisation of shipyards is slowly approaching the final stage.
Croatia remains the best performing country from South-Eastern Europe engaged in the EU accession process and a regional success story, playing the role of anchor for political stability in the region
The financial package for Croatia’s first two years of EU membership was adopted in December, based on the “working hypothesis” that Croatia will join the EU in January 2012. Similar packages were prepared for the countries that joined the EU in its fifth enlargement. The package covers the first two years of eventual EU membership, namely 2012 and 2013, which are also the last two years of the current seven-year EU Financial Perspective. Around €3.5 billion of EU budgetary funds will be allocated to Croatia. This is significantly higher than the current level of pre-accession support, and the absorption capacity in public administration should thus be raised. Croatia will be able to access most of the resources through the Cohesion and Structural Funds, as well as through direct payments to farmers and funds for rural development and fisheries. Finally, according to Commission estimates, Croatia is expected to pay €609 million into the EU budget in its first year of EU membership and €647 million in 2013. The work on drafting the Accession Treaty began in December 2009.
The recession seems not to have strongly affected the attractiveness of EU membership in Croatia, bearing in mind that support for accession was never very high even before it hit. Support for membership among Croatian citizens is rather low and varies according to different public opinion surveys. The Autumn 2009 Eurobarometer Survey showed only 24% of Croatian citizens supporting EU membership. Lower support was found only in some of the new EU Member States most strongly hit by the crisis (e.g., Latvia 23%). Some Croatian public opinion polls have shown a more optimistic attitude towards EU membership, albeit still not much higher than 50%. However, the government will have to make an additional effort to communicate with citizens regarding EU accession and focus on elaborating the benefits of future EU membership. According to current provisions of the Croatian Constitution (Article 141), accession to the EU must be confirmed in a referendum by a majority of the total number of electors in the country, which would be very difficult to achieve in current circumstances. Together with other necessary amendments to be made to the Constitution due to the requirements of different negotiation chapters, this issue is also being debated in the country. The work on Constitutional amendments began in October 2009, and the result is expected to establish similar requirements regarding the referendum on EU membership to those found in other acceding countries.
The recession seems not to have strongly affected the attractiveness of EU membership in Croatia, bearing in mind that support for accession was never very high even before it hit
In 2009, public attention was focused on two key issues affecting Croatian accession to the EU. The first was the EU’s ability (or inability) to act as a soft power in finding solutions to bilateral disputes between EU Member States and acceding countries that hamper the negotiation process (such as Croatia and Slovenia, Turkey and Cyprus, or Macedonia and Greece). The second was EU institutional transformation and ratification of the Lisbon Treaty. The Treaty’s entry into force paved the way for Croatia’s and other accessions to the EU. Being the first country in the queue for EU membership, Croatia followed the ratification process primarily from the vantage point of its potential impact on enlargement.
The forecasts regarding the conclusion of negotiations with the EU are optimistic. Croatia may be able to conclude all the chapters by the end of 2010, if the speed of the reform process allows it to meet all the remaining benchmarks. How fast the Accession Treaty is ratified will be another key factor in defining the date of accession, which is unlikely to be earlier than 2012 or early 2013. However, the success of the accession process will ultimately depend on how effectively Croatia implements the reforms.
References
Commission of the European Communities. Croatia 2009 Progress Report 2009. Brussels, 14 October 2009. SEC(2009) 1333.
Rohatinski, Željko. Economic Crisis and Monetary Policy. Croatian National Bank, 2009. Available at: www.hnb.hr/govori-intervjui/govori/egovor-rohatinski-7-7-2009.pdf.
Transparency International. Global Corruption Report 2009. Corruption and the Private Sector. Cambridge: Cambridge University Press, 2009.
World Economic Forum. The Global Competitiveness Report 2008-2009, 2009.