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Croatian report
by Euro Reporter
2014-10-03 09:31:13
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What difference has a year made?

Fireworks, fanfares and a massed chorus of Ode To Joy heralded Croatia's entry to the European Union last year. But the champagne moment did not last long. The country is still stuck in a seemingly endless recession that would tempt even the most sober-minded Croatian to reach for a stiff shot of rakija. It now seems unavoidable that Croatia will stagger into 2015 in recession for the sixth successive year. And finding the way out is proving a far from simple task. Over the past month, analysts have been raising the possibility of Brussels and the International Monetary Fund offering an economic aid programme. But that would depend on Croatia making big cuts to public spending and encouraging new businesses. At this point the first step seems unlikely. Cutting public spending would be political poison ahead of a general election due to be held towards the end of next year. As for helping new businesses, Croatia still seems to be finding its feet after decades as part of communist Yugoslavia.

And though EU membership theoretically brings access to various funds for small and medium enterprises, actually getting hold of the cash can be a challenge. Ivo Friganovic raises his eyebrows and takes a ruminative puff of his cigarette as he considers the conundrum facing Croatian business owners. He is the senior director for innovation at HAMAG-BICRO, a government agency that looks to foster the growth of new businesses, focusing on scientific and technological fields. Before EU accession he warned that Croatia was "illiterate in business terms" - and he is disappointed to find that little seems to have changed. In particular he is frustrated that the country has yet to take advantage of EU structural funds to give companies a push in the right direction. "We are still in the process of preparing all the documents which would allow us to use structural funds from the European Commission," he says. "We are speaking about a little over a billion euros a year. That would open enormously better funding for the development of new products by SMEs [small and medium-sized enterprises] in Croatia." At least local expectations of EU membership were low in the first place. An accession process that dragged on for more than a decade took the shine off the initial romance.

But the financial crisis that swept across Europe in 2008 left only the most blindly optimistic believing that membership would prove a panacea for Croatia's economic ailments. Still, Hrvoje Marusic, the Deputy Minister for Foreign Affairs and European Integration, tries to cast a positive light on the country's EU adventure. He points out that some gains have already been made. Exports to EU member states rose by 15% in the first year of Croatia's membership. "We finally have become part of the single market, with all its freedoms," he says. "Business owners tell me they are very optimistic and feel immediate benefits that it is much easier doing business than it was prior to membership." But those freedoms come with responsibility. Croatia now has to conform to the stringent demands of the economic policy co-ordination programme, known as the European Semester.


Campaign against Serbs underway in Croatia

Speaking to journalists in Kosovska Mitrovica, Pupovac said that that the campaign in Croatia is a cause for concern, not only because it is preventing the implementation of the law, but also because it is denying an alphabet of Slavic literacy, stigmatising it in a way that had no precedent even during the war.

“This creates a poor relationship not only for Serbs in Croatia, their freedom and sense of belonging, but also poor relations between Croatia and Serbia,” Pupovac noted. Pupovac also highlighted the problems with renovation of homes and providing housing to those who have lost their tenancy right, and noted that thousands of people are still waiting for official approval.

He also reminded of the problem of employment of Serbs, noting that their position in this regard had progressed and improved by the end of Croatia’s talks with the EU and its accession to the Union. “Unfortunately, the progress stopped once Croatia joined the EU and there has even been stagnation in some cases,” Pupovac concluded.


Croatia is still wandering to find the exit from the recession

In its September bulletin, the Croatian central bank (HNB) has revised downward its forecast about the real gross domestic product from its predictions in January for a 0.2% contraction of the Croatian economy. The bank does not offer a number how much does it expect the economic downturn to be but it believes that the main reason for this is the decline of domestic consumption. This means more problems with the budget deficit and the speedily growing public debt. But in spite of these bad news, the new political season in Croatia has started sluggishly. At its first session after the summer break, the centre-left coalition government of Zoran Milanovic has adopted a report on the implementation of the measures undertaken to reduce the excessive deficit, among which transferring money from the second to the first pension pillar, introducing a tax on fortune games, increasing health care contributions from 13% to 15%, increasing the excise of oil and gas, etc. According to the Council decision on Croatia's excessive budget deficit, Zagreb is expected to fill the budget hole up to 4.6% of GDP this year. It all seems, however, this this target will be missed. Prime Minister Milanovic's messages (Social Democratic Party) are quite contradicting at points. On the one hand, he is a true austerian - he says that the state should not spend more than it earns, that debts need to be paid and that the Croatian citizens need to be aware of the current state of things. But on the other hand, he says that the consolidation of public finances should not be done on the back of mass lay-offs. Another way has to be found. But what should it be?

In the beginning of September, the cabinet announced new measures aimed at increasing domestic consumption. A tax of 12% is to be introduced on interest rates for deposits. Separately, the ceilings for income taxation will be again moved upward. The minimum threshold that is not subject to taxation is to be increased from 2200 kunas (290 euros) to 2600 kunas (342) euros. The highest taxation rate of 40% is moved upward from the current net salary of 8800 kunas (1157 euros) to 13 200 kunas (1700 euros). According to Milanovic, Croatia should strive to level up the income taxes with the countries around it which have the lowest income taxes: Montenegro (9%), Serbia (10%), FYROM (10%), Bulgaria (10%), the Czech Republic and Lithuania (15%), Romania (16%). 40% and more can afford only rich countries, he said when presenting the measures on September 4th. The Croatian premier is confident that the new measures will increase in real terms the incomes of almost a million people which, for its part, will boost consumption and therefore the economy is going to start moving up. Zoran Milanovic admitted that it was a mistake to increase the taxes on the middle class in the beginning of his term and that public spending is huge, which means there is a risk the budget revenues to be less. There will be another new measure this autumn and it is a ban on new appointments of civil servants. If one retires, no one will take their place, Milanovic explained. In his speech [in Croatian] in the Sabor (parliament) on what his government has accomplished so far and the plans for the future, the premier explicitly pointed out that he would not work for the applause of the global credit rating agencies, the European Commission or the international financial institutions while in the same time the citizens are getting poorer and are losing rights.

The European excessive deficit procedure is a transparent and controlled process of creating stable and sustainable public finances, but cutting spending and lay-offs will not lead to consolidation if there is no economic growth. Moreover, he told the Croatian MPs, the budget deficit is not the main reason for the European crisis but the current account deficit. Zoran Milanovic's analysis shows that the countries that have the hardest problems, with no exception, are not those that had the biggest budget deficits, but those who had big current account deficits. Those are Spain, Italy, Greece. Bulgaria is a model to follow for Zoran Milanovic in terms of public finances and the current account.


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