Cause and Effect in European Politics and Law

Croatia Will Find It Difficult to Be a Success Story for Enlargement

Adelina Marini, December 18, 2012

In the end of November, EU Enlargement Commissioner Stefan Fule came to Zagreb to make sure that the Croatian authorities are aware of the great hopes the EU has invested in the country's membership to the Union, scheduled for 1st of July 2013. His message was that the EU desperately needs a success story that would energise the enlargement process which is now stuck in seemingly unresolvable issues like Macedonia's name dispute with Greece, the relations between Serbia and Kosovo, and we should also not forget the not very successful stories of the accession of Bulgaria and Romania, which not simply do not score any progress but are even regressing. Croatia seems a good example, the swallow that will be a harbinger of spring in a eurozone gripped by economic frost and an EU, threatened by a break-up. Alas, Croatia will find it very difficult to meet such expectations.

Bad news for the economy

Throughout the autumn, in Croatia the main topic was will the government avoid a downgrade of the credit rating to the junk area and will it resist the strong social pressure while cutting spending. In the beginning of September the Fitch credit rating agency pleased the government of Socialist Zoran Milanovic by raising its outlook for Croatia from "negative" to "stable", mainly due to the cabinet's efforts to cut spending and the budget deficit. Fitch's positive assessment was influenced also by the record high tax collection, due to the decision of the cabinet to publish the names of all big debtors on the Internet. But in November, the Moody's credit rating agency maintained the country's rating in the investment zone Baa3 but with a negative outlook, which was the first sign that bad news were to be expected around Christmas.

That happened after the government in Zagreb announced that it is revising the 2012 budget because it had failed to achieved the set goals for spending cuts. The ministers in the government who failed to stick to their commitments were determined that they were unable to cut more. Now the revision is already a fact, as well as the budget plans of the government for 2013 where the picture looks very much similar to that of 2012 - spending curs where socially affordable. Probably this is one of the reasons for the pre-Christmas bad news number one - the influential credit rating agency Standard&Poor's threw Croatia in the junk zone. This happened on Friday afternoon, December 14th.

The minister of finance summoned media to an urgent press conference at 2000 hrs on Friday evening to tell them, wringing his hands and with an expression fully corresponding to the scale of the information, that the agency's assessment was due to the lack of political determination for structural and fiscal reforms. In spite of this very bad assessment, however, Minister Linic said the government would not cut wages and pensions. Besides, as borrowing could become more expensive for Croatia because of the downgrade, financing will be sought on the domestic market which, for its part, is expected to increase interest rates and to stifle further the economic activity of the country, economic experts commented.

For most media the Standard&Poors' decision was a leading topic. One of the most circulating newspapers in the country, Vecernji list, recalled the evolution of the agency's assessments - from BBB in March 2009 to BBB- in December 2010, to BB+ on 14th of December 2012. The newspaper compared the agency's assessments with other countries in the region - Slovenia with A; Romania with BB+; Serbia with BB-; and Poland with A-. The newspaper does not mention Bulgaria which Standard&Poors' confirmed the country's rating on December 13 at BBB/A-2 with a stable outlook. In an editorial, Vecernji list wrote that Prime Minister Zoran Milanovic was facing his biggest challenges so far - to decide whether to continue with the austerity policy thus risking his political career or to decide to support his ministers, risking in this way "us and the future of our children". "Zoran Milanovic, what do you say?", the daily asked and pointed out that now it was time for the IMF.

According to Premier Milanovic and Minister Linic, however, it is still early for the IMF. In Slavko Linic's words, the government will talk to the Fund and the European Commission but in principle. The Novi list daily quotes Linic as saying that what is imperative to be done is to continue with privatisation but society seems to be strongly allergic to it. Linic believes that in Croatia a lot of people are not inclined to change their habits. There are still big companies in the country that are state-owned or with big share of the state, which are a burden for the budget, but their possible privatisation worries trade unions that it might lead to the lay off of thousands of workers at a time when unemployment stroke a new peak - now more than 350 thousand people are jobless. Such a big unemployment was last seen 10 years ago and the government expects the number of unemployed to grow further by spring after which it is expected to slowly decrease.

Beside unemployment, indebtedness too is growing and is expected to reach 53% of GDP next year, according to the government, but there is no unanimity in the forecasts. According to the president of the central bank, Boris Vujcic, indebtedness will surpass 57 per cent (57.5%). There is disagreement in terms of economic growth as well. The government has set an expectation for economic growth of 1.8% next year, due mainly to public investment. According to the HNB, however, growth will not be more than 0.3%. Unemployment will reach 20 per cent, the bank believes, thus lining Croatia among the countries with highest unemployment rate in the EU.

More bad news

In 2011 the European Council has recommended at the final December summit, Croatia to continue with the structural reforms and to improve its growth potential. In the summit conclusions it was written that Croatia should increase its international competitiveness. However, in the 14 December 2012 conclusions there are no recommendations whatsoever related to the economy. The tone in the document last year was positive and reflected the signing of the country's accession treaty on December 9th.

The situation a year later is quite different. The conclusions from the summit on December 13-14 are cool and contain recommendations mainly related to Croatia's regional relations which casts another tinge of doubt in the country's capacity to be the so needed by the EU spring harbinger. Although noting with satisfaction the findings in the progress report for the country this year, the Council recalls that aside from the ten points the Commission has outlined, Croatia has made a lot of commitments on other chapters as well during the negotiations where additional or more efforts are needed. It is underscored that Croatia is under special monitoring of the implementation of commitments made during the accession negotiations and before that.

It is also recalled that Croatia has commitments related to bilateral relations and more specifically it is said that those relations should not be an obstacle for the European integration process of the candidate countries. Croatia is called upon to continue solving all issues left unresolved after the break-up of Yugoslavia. Although none of those issues is mentioned by name, there are already hints that this sentence is targeted mainly on the ongoing dispute between Croatia and Slovenia about the old deposits in the now non-existent Ljubljanska banka. The resolution of this dispute is put by Slovenia as a pre-condition for the ratification of Croatia's accession treaty. By the end of the year, it is expected around 20 member states to ratify the document and 6 have already started ratification procedures. Germany has already announced that it will wait for the spring report by the Commission and then it will move forward the ratification procedure.

The ruling coalition Kukuriku (cock-a-doodle-doo) in Zagreb (centre-left) has completed 1 year in government in the beginning of December and can already boast several reshuffles in the cabinet, as the most significant one was the resignation of the first deputy prime minister and minister of the economy Radimir Cacic. It can also boast many successes but almost as many failures. It is clear that Croatia's problems will not be solved in one night nor for the time left to accession. But the remaining semester will be a big test as for Zoran Milanovic's government so for the EU itself. The former because he will have to prove that he means reforms and the latter because it really does desperately need a positive story. It might not be an excellent one, just positive.

euinside in Croatia
Kolinda Grabar-Kitarovic | © KGKKolinda Grabar-Kitarovic | © KGK
Croatia's Nationalistic Paradox*
Aleksandar Vucic, Andrej Plenkovic | © Vlada RHAleksandar Vucic, Andrej Plenkovic | © Vlada RH
The Incident Nobody Saw but Everybody Condemned