On the Path to a Gradual Economic Recovery
Initially, the country was not as severely affected by the crisis thanks to the wise policies of the National Bank of Croatia, which were aimed at limiting credit and external debt. In March, *The Banker* magazine named Governor Želko Rogatinski the best central bank governor in Europe and the best central bank governor in the world in 2008. The measures taken by the National Bank helped the economy weather the first wave of the crisis more easily. However, in the first nine months of 2009, GDP fell by nearly 7% compared to the previous year, when the Croatian economy was growing at an annual rate of 5.5%. This occurred after seven years of continuous growth. The decline can be partly attributed to the effects of the global crisis, but it was also the result of the country’s economic weaknesses that had accumulated in previous years. Public consumption and investment declined, in contrast to public spending, which remained high at about 48% of GDP. The country has a large debt burden, with external debt exceeding 80% of GDP. However, despite these negative trends, macroeconomic stability has been maintained. Croatian political analysts predict that a slow economic recovery may begin toward the end of the year.
The National Bank has warned that it will not be possible to overcome the recession if it is viewed merely as a “temporary pause” in positive long-term trends of economic growth and development. On the contrary, it should be viewed first and foremost as a warning about the consequences of neglecting the sustainability of economic growth. An effective and targeted approach to solving problems and accelerating reforms is considered a far better solution than relying on the IMF (Rohatynsky, 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 modest to close the gap. In the coming period, more substantial budget cuts, increased budget revenues, and a balanced fiscal policy will be crucial. The key challenges remain deeper and faster structural reforms that reduce government intervention in the economy, stimulate employment, and remove administrative barriers in the economy.
The problems appear to have evolved from “excessively rapid growth” to “tight credit conditions.” Key political players are focused on mitigating the impact of the global crisis on the country and reducing deficits and imbalances. However, the National Council for Competitiveness warns that decisiveness and speed in implementing structural reforms, further market liberalization, and the creation of a favorable business environment are crucial for improving economic competitiveness. In this regard, Croatia’s global competitiveness has been stagnating or even declining since 2006. In its Global Competitiveness Report for 2008–2009, the World Economic Forum ranked Croatia 61st out of 134 countries (compared to 57th in the previous report).
Nevertheless, despite these economic challenges, Croatia remains the most effective country in Southeast Europe participating in the EU accession process, as well as a regional success story, serving as an anchor of political stability in the region.
The end of negotiations with the EU is just around the corner
EU accession negotiations, which began in 2004, fell behind schedule in 2009 when neighboring Slovenia blocked them for nine months, starting in December 2008. The reason for this was a bilateral border dispute over the Bay of Piran. Consequently, the European Commission’s indicative roadmap for completing technical negotiations by the end of 2009 was not met, and attempts to find a solution were largely unsuccessful. It was expected that both countries would find their own way forward. Croatia’s position—that bilateral issues should be resolved separately from the negotiations—was not accepted. Bilateral talks between the prime ministers of Croatia and Slovenia (Kosor and Pahor) led to an agreement on September 11, 2009, regarding ways to resolve the bilateral border dispute. The Croatian-Slovenian arbitration agreement, signed on November 4, laid the foundation for a comprehensive resolution of the border dispute following the completion of the ratification process by the parliaments of both countries. This marked the resumption of negotiations on Croatia’s EU membership.
By the end of 2009, Croatia had opened 28 of the 35 negotiation chapters, 17 of which were provisionally closed. The remaining five chapters concern competition policy, fisheries, the judiciary and fundamental rights, the environment, and the Common Foreign and Security Policy (CFSP). Three of them are still being blocked by Slovenia. The most challenging chapter appears to be the one on the judiciary and fundamental rights, including the fight against corruption and organized crime. Promoting minority rights—including the return of refugees, the prosecution of war crimes, and providing access to documents for use by the International Criminal Tribunal for the Former Yugoslavia (ICTY)—are key items on the agenda. Another important issue is public administration reform, which involves strengthening procedures and the administrative capacity of relevant institutions, consolidating the civil service, and depoliticizing public administration. Competition policy is also an important area, where the restructuring and privatization of shipyards is slowly approaching its final stage.
Croatia remains the most effective country in Southeast Europe participating in the EU accession process and a regional success story, serving as an anchor of political stability in the region
The financial package for Croatia for the first two years of its EU membership was adopted in December, based on the "working assumption" that Croatia would join the EU in January 2012. Similar packages were prepared for the countries that joined the EU during the fifth enlargement. The package covers the first two years of potential EU membership—namely, 2012 and 2013—which are also the last two years of the current seven-year EU Financial Perspective. Croatia will be allocated approximately 3.5 billion euros in EU budget funds. This is significantly more than the current level of pre-accession support, and therefore, the government’s capacity to absorb these funds must be improved. Croatia will be able to access most of these resources through the Cohesion Fund and the Structural Funds, as well as through direct payments to farmers and funds for rural development and fisheries. Finally, according to European Commission estimates, Croatia will contribute 609 million euros to the EU budget in the first year of its EU membership and 647 million euros in 2013. Work on the draft Accession Treaty began in December 2009.
The recession does not seem to have had a significant impact on the appeal of EU membership for Croatia, given that support for EU accession was never very high, even before the recession began. Support for membership among Croatian citizens is quite low and varies depending on the opinion poll. The fall 2009 Eurobarometer survey showed that only 24% of Croatian citizens support EU membership. Lower support was found only in some of the new EU member states that were hardest hit by the crisis (for example, in Latvia—23%). Some Croatian public opinion polls show a more optimistic attitude toward EU membership, although support still does not exceed 50% by much. However, the government will have to make additional efforts to communicate with citizens about EU accession and focus on explaining the benefits of future EU membership. According to the current provisions of the Croatian Constitution (Article 141), EU accession must be approved by a majority of the country’s total electorate in a referendum, which will be very difficult to achieve under current circumstances. Along with other necessary amendments to be made to the Constitution in accordance with the requirements of various chapters of the negotiations, this issue is also being discussed within the country. Work on constitutional amendments began in October 2009, and it is expected that the result will be the establishment of requirements for a referendum on EU membership similar to those that exist in other countries joining the EU.
The recession does not seem to have had much of an impact on the appeal of EU membership in Croatia, given that support for EU accession was never very high even before the recession began.
In 2009, public attention focused on two key issues affecting Croatia’s accession to the EU. The first was the EU’s ability (or inability) to act as a “soft power” in resolving bilateral disputes between EU member states and accession countries that hinder the negotiation process (for example, Croatia and Slovenia, Turkey and Cyprus, Macedonia and Greece). The second was the institutional transformation of the EU and the ratification of the Treaty of Lisbon. The Treaty’s entry into force paved the way for Croatia and other countries to join the EU. As the first country in line for EU membership, Croatia closely monitored the ratification process, primarily in terms of its potential impact on enlargement.
The outlook for the conclusion of negotiations with the EU is optimistic. Croatia may complete all chapters by the end of 2010 if the pace of the reform process allows it to meet all remaining benchmarks. The speed of ratification of the Accession Treaty will be another key factor in determining the accession date, which is unlikely to occur before 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, October 14, 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.
https://www.econstor.eu/bitstream/10419/226070/1/wiiw-bo-wp-032.pdf