Cause and Effect in European Politics and Law

The Economic Winter Will Stay in Croatia

Adelina Marini, May 6, 2013

Quite pessimistically is titled the spring forecast of the European Commission for Croatia - "Recovery slipping further away. Stuck in recession". Only two months before its accession to EU, the moods in Croatia are not at all festive. The economy has been in recession since 2008 as by now the economic activity has shrunk by almost 12%. The first signs of recovery are expected in 2014, but the conditionality is huge. In 2013, the Croatian economy is expected to contract by 1% as the main hamper to growth still is domestic demand which will continue to decline. The main reasons are continuing growth of unemployment as well as the nominal cuts of public sector wages by 3%. Inflation, too, is a factor for the not good economic perspectives ahead of the future 28th EU member state.

This year, the number of unemployed is expected to increase to 19.1% of the working force in the country, which is a correction to the winter forecast of the Commission. Then it was expected the number of jobless to be 15.9% with a forecast unemployment to drop in 2014 to 14.9%. According to the spring revision of the forecast, next year unemployment will exceed 20 per cent. This undoubtedly will have a significant impact on government debt, which will next year exceed the ceiling of 60% in the Stability and Growth Pact and will be 62.5%. In terms of government debt, the revision compared to the winter is also significant. In February, the Commission expected the general government debt to reach 57.4% this and 60.2% next year, but in May the expectations are different - 57.9 per cent of GDP in 2013 and next year - 62.5%.

In spite of the huge efforts of the government and the significantly increased tax compliance, the budgetary deficit will increase and will reach 4.7% of GDP this year, mainly as a result of weak economic activity. The Commission acknowledges that it is possible its expectations about the budget deficit for Croatia not to be very precise as the country is currently changing the calculation method. In any case, however, the government admitted that this spring the budget deficit is bigger compared to the same period of last year. And although it cited factors that are expected to be removed in the course of the year, the data are a fact. The EU ceiling for the budget deficit is 3 per cent as there is tolerance until 3.5%. But if a country exceeds this value, it is included in the excessive deficit procedure after a thorough analysis of the circumstances and durability of the excess.

At this stage, the Commission cannot say for sure whether immediately after the accession Croatia will be included in this procedure. Brussels says that the deficit figure for this year is still a forecast. After the country's accession, the Commission will make a full assessment of the situation and if there still is excessive deficit then the procedure will be triggered. But when will this happen is not clear at this stage, the EU executive said. Currently 20 out of 27 member states are in the procedure. Bulgaria was until last year among them, but in June last year there it was decided the EDP to be suspended because of the good results. Currently, there is a process of reconsideration of the procedure depending on specific circumstances. In this way, Spain and France received an extension of two years to achieve their fiscal targets and this approach is expected to be applied for other member states as well given that they implement certain reforms.

In the European Commission analysis it is also pointed out that the Croatian economy is facing serious risks. On the one hand, the tightened financial conditions could have bigger impact on investments than previously expected. Around the accession, scheduled for July 1st, not a few Croatian enterprises could prove not sufficiently prepared to face competition pressures. Moreover, one of the big problems for the country is that it will have to leave the very comfortable for its economy Central European Free Trade organisation (CEFTA) which could have a significant impact on the trade flows with the traditional regional partners, especially the countries from former Yugoslavia. Negotiations are already underway on specific agreements with the countries in the region aimed at softening the transition.

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