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16 30 May 2013 CROATIA The Croatian economy is in poor health, and its revival will depend on the crisis-hit single currency, writes Dave Keating In the early part of the last decade, Croatia’s economy was enjoying a boom. Though it had missed out on the first waves of investment in central and eastern Europe after the fall of the Berlin Wall because of the 1991-95 war of independence, at the turn of the century things were looking up for Croatia. An increase in tourism and consumer spending was yielding steady growth in gross domestic product of 4%-6%. But since the onset of the global economic downturn in 2008, it has been a very different story. The country experienced a sudden downturn from which it has yet to recover. “Croatia depended on foreign finance rather significantly, so this has been a crisis in part induced by the drying out of credit and foreign finance internationally,” says Vladimir Gligorov, an economist specialising in the Balkans at the Vienna Institute for International Economic Studies. In 2008, foreign direct investment in the country was €4.2 billion, with unemployment at 13.4%. That figure had fallen to just €624 million by last year, and unemployment is expected to rise above the 20% mark this year. The country’s economy contracted by 2% last year and is expected to lose another 1% this year, according to Eurostat, the EU’s statistical office. It is in this context that Croatia joins the European Union in July. Perhaps matching the gloomy economic outlook, there is little expectation among the Croatian public that acces- REUTERS 2.9% Budget deficit as a percentage of GDP. (CIA World Factbook – 2012) sion will mean a quick fix to the country’s economic problems. “As far as overall effect of EU demand for what Croatia has to offer, this is going to be subdued in the short term, because the EU is not really having a very high growth rate, to put it mildly,” says Gligorov. Since Croatia fell back into recession in 2012, the government has cut spending and pursued liberalisation. It has also cracked down on tax avoidance and raised value added tax, and a new property tax is planned. But it will be some time before these reforms have an effect. In the short term, the cuts – including a plan to axe 15,000 public sector jobs – will be painful and may, in the eyes of many Croatians, be associated with joining the EU. A slow start The initial impact of EU accession on Croatian businesses may be negative. On 1 July, Croatia must leave the Central European Free Trade Agreement (CEFTA), the free-trade area for non- EU countries in southeastern Europe. Trade agreements with its Balkan neighbours will have to be renegotiated. In the meantime, some of the country’s manufacturing facilities may shift to Bosnia, Serbia or Macedonia in order to stay in CEFTA. Croatia’s star will instead be hitched to the eurozone’s wagon – although it will not be a member of the single currency. The country will, however, continue to behave like a pseudo-member of the eurozone, says Gligorov. If the eurozone’s woes continue, so will Croatia’s. But there is a recognition that, whatever the shortterm consequences, Croatian businesses face a new reality from 1 July. Natko Vlahović , executive director of the Croatia-EU business council, says Croatian small businesses have been preparing for the change for some time – particularly in retail, one of the country’s most-developed sectors. “One of the key challenges is that there will be a much bigger interest in Croatia from western companies,” he says. “You won’t have customs any more. The retail sector has been preparing and consolidating.” One example is Kozum, Croatia’s biggest retailer, which has been trying to expand into Slovenia so that it is well placed once EU competitors enter the market. As competition grows, niche sectors are likely to benefit, such as software development, specialty food All eyes on a eurozone recovery products, lumber and tourism. Vlahovic points out that the vast majority of small and medium-sized enterprises in Croatia are local players. Retailers seeking to move will stay in the Balkans or Turkey for the medium term, he says. “We will have to see whether 21.1% Population below the poverty line. (CIA World Factbook – 2012) some of the big Croatian companies will compete in EU markets, or whether they would rather compete in the region, where they can expand faster and more easily than in very developed EU markets.” One tricky new area for Croatian businesses will be state aid and competition policy. “Many businesses have been receiving state aid through different packages and subsidies – that will have to change,” says Vlahovic. Croatian companies will have to learn how to take advantage of the €11 billion of structural funds now available to the country from the EU. “It’s going to be disruptive for big guys like Croatia Airlines,” Vlahović says. “They haven’t restructured properly, they have always received money from the state.” Croatia’s state-owned companies may also have a hard time dealing with the liberalisation and deregulation that will have to follow accession. These companies, including the electricity, post, water and railways providers, will face serious challenges with their high employee numbers. With unemployment already dramatically high, that will not be easy. Pipeline diplomacy REUTERS Croatia is hoping for a new gas pipeline to end its energy dependency, writes Dave Keating Last week (23 May), three Balkan countries jointly endorsed a new pipeline project. The announcement was monitored closely by the world’s energy markets, which may seem surprising given that the pipeline would merely skirt the three countries. The Trans-Adriatic Pipeline (TAP) aims to bring ten billion cubic metres of natural gas from Azerbaijan to Europe via Greece, Albania and Italy. Last week, Croatia, Montenegro and Bosnia and Herzegovina joined Albania in supporting the project, and the timing was no accident. The announcement came just weeks before the Shah Deniz 2 consortium chooses whether to use TAP or its rival, the Nabucco West project, to transport fresh gas supplies from the Caspian Sea to Europe. What really interests the three Balkan countries is the planned Ionian-Adriatic Pipeline (IAP). Croatia, Montenegro and Bosnia want the IAP and TAP to be connected, probably in Albania. That would give all four countries access to a new supply of gas, reducing their dependence on Russian imports. “For IAP, the most logical connection is with TAP,” says Michael Hoffmann, director of external affairs at TAP. “Our southern route means that TAP is the only pipeline in the southern gas corridor with the capability to connect to IAP.” Because of its limited energy resources, Croatia is heavily dependent on imported oil and gas: 64% of demand is satisfied domestically, while 34% is imported from Russia. Around 10% comes from Croatia’s four main hydroelectric plants. The country is keen to reduce its dependence on Russian energy, and sees the IAP pipeline as its main hope of doing so. The government has been vocal in its support for the IAP-TAP link. Vesna Pusić, the foreign minister, recently confirmed Croatia’s interest in TAP, and the country’s gas transmission operator, Plinacro, was the first company to sign a memorandum of understanding with TAP, in 2011. But the country is also keeping its options open just in case Nabucco ends up being the chosen project. There are also ambitions to exploit possible offshore oil and gas reserves in Croatian waters in the Adriatic Sea. Ivo Josipović, Croatia’s president, recently said that the country is looking for partners in exploring these offshore areas. Given the economic challenges the country is facing (see above), the government is hopeful of exploiting these Adriatic reserves, but it will have to convince oil companies of their worth.
CROATIA 30 May 2013 17 REUTERS Government loses its grip The Social Democratic Party will lead Croatia into the EU, but it has lost support at national and local level, writes Toby Vogel For much of the country’s two decades of independence, Croatia’s politics has been dominated by the conservative Croatian Democratic Union (HDZ). The current coalition government, which ousted the previous HDZ administration from power in December 2011, is only the second in Croatia’s post-independence history that does not include the HDZ. Led by the Social Democratic Party (SDP) – successor to Tito’s League of Communists – of Prime Minister Zoran Milanović, it also includes four ministers from the Croatian People’s Party (HNS), led by Foreign Minister Vesna Pusić, one from the Istrian Democratic Assembly (IDS), a regional party, and two without party affiliation. The government may be unpopular because of tough austerity measures and a sluggish economy, but it appears stable and is expected to last until the next general election, scheduled for December 2015. However, recent elections have suggested a high level of dissatisfaction with the SDP. In elections to the European Parliament on 14 April, the HDZ won six of the country’s 12 seats, doubling the share it had among Croatia’s observer MEPs, while the SDP fell from six to five seats. Turnout was just 20.75% – the lowest ever in any election in Croatia, and one of the lowest in any member state in elections to the European Parliament. Local elections on 19 May brought no relief, with the HDZ dominating the SDP in many of the country’s larger cities. Next Sunday (2 June), a second round of elections will be held in the country’s four largest cities – Zagreb, Split, Osijek and Rijeka. Particularly bitter for the SDP will be its expected failure to recapture the office of mayor of the capital, after its candidate, health minister Rajko Ostojić, trailed badly in the first round. Since 2000, this post has been held for most of the time by Milan Bandić, a former leading member of the SDP, who was expelled from the party when he stood (and lost) against Ivo Josipović, the party’s official candidate, in the January 2010 presidential election. Allegations of corruption and irregularities have dented Bandić’s image as a hands-on problemsolver. Nevertheless, he appears poised to win reelection on Sunday. Bandić is also expected to be able to forge a centreright coalition with the HDZ and other parties to form a majority in the city assembly. (Mayors are elected directly at the same time as city or municipal assemblies.) The SDP’s bids to win Split and Osijek also appear doomed to fail. Tomislav Karamarko, the HDZ leader, feels vindicated in his policy of returning the party toward the right end of the political spectrum. Perhaps the biggest blow early in the current government’s term came at the end of last year, when Radimir Cačić, its most powerful member after Milanović, was forced to resign as deputy prime minister and minister of economy following his conviction for causing a fatal car crash in Hungary before becoming minister. A construction entrepreneur, Cačić, a prominent leader of Pusić’s HNS, had also been minister of public works in the SDP -led government of 2000-03. He was seen as a close associate of Milanović in a way that Pusić is not. Presidency Ivo Josipović is Croatia’s third post-independence president, and his low-key manner signals a shift in the presidency’s powers. Croatia changed its constitution following the death of Franjo Tudjman at the end of 1999, abandoning the presidential semi-authoritarianism of the 1990s. But Tudjman’s successor, Stipe Mesić, who had left the HDZ in protest against Tudjman’s policies, was not one to shy away from seeking to influence politics. It is only now, with the soft-spoken Josipović, that the presidency has become largely ceremonial. Josipović was elected in January 2010 and the next presidential election is scheduled for February 2015. Once bitten, twice shy The EU claims to have learnt the lessons of the 2007 enlargement, but the legacy of the war with Serbia has hung over Croatia’s accession process, writes Andrew Gardner When the European Commission published its last report on Croatia’s accession process in March, the message was unequivocally that the changes wrought over the eight years since the country began negotiations with the EU were irreversible. The EU should not be worried about this new member state. Its conclusion is buttressed by the contention that it has learnt lessons from the EU’s enlargement to Romania and Bulgaria, particularly about the importance of starting to tackle the trickiest issues for candidate countries early in the process and closing them only at the end. (The experience of dealing with Croatia has reinforced the lesson: chapters 23 and 24 – on the judiciary and fundamental rights, and on freedom and security – are now opened with subsequent candidates at the start of talks and closed last.) An extended period of pressure on Croatia means that the Commission is very confident that corruption and the rule of law will not become a headache. On the political level, the climate has also changed, with little of the pressure to bring Croatia into the EU swiftly that was evident in the case of the 2007 enlargement. This has made for a slower, lower-key process for Croatia, with the main risk from adverse public opinion being in Croatia rather than in EU member states. Nonetheless, Croatia’s path to the EU was thorny – because other EU member states have been prickly. In the latter stages, German doubts may have been the most visible, but the Dutch have been the most consistently wary. The hard line taken by the Dutch reflects a recent generalised hostility to enlargement. But it also reflected a principled concern that Croatian governments were unwilling to send two generals – Ante Gotovina and Mladen Markač – to the International Criminal Tribunal for the former Yugoslavia to face war-crimes charges over the conflict with Serbia. As a result, talks began only after Gotovina was captured and transferred to The Hague in 2005. The two men were eventually acquitted in November, to much jubilation in Croatia. For many Croats, the issue of war crimes became a matter of two men – who had been duly cleared. But as Vesna Pusić, Croatia’s foreign minister, commented at the time, the verdict did not 81 Rank in Global Competitiveness Index 2012-13 (out of 144) clear others already found guilty of crimes. The legacy of the war had been a running sore in relations with the EU since accession talks began in 2003, and while issues related to war crimes did not feature in the final to-do list given to Croatia by the Commission, details in the final progress report hint at some of the previous problems. War-crimes cases were addressed by courts in the areas where the crimes were alleged to have taken place – an approach unlikely to convince the victims or ensure speedy processes. Only recently have cases been passed to specialised courts. Political scandals Croatia also had to battle a perception of corruption created by a string of scandals, including the killing of the daughter of a prominent lawyer in 2008. The then prime minister, Ivo Sanader, suggested the murder was the work of the mafia and sacked two ministers. Sanader himself, the premier between 2003 and 2009, was later convicted of corruption and is serving a ten-year sentence. Perhaps unsurprisingly, Croats have a low view of their political and business elite. Croatia ranked only 62nd in the world for transparency in a survey by Transparency International in 2012. But those perceptions 47 Rank in Human Development Index 2012 (out of 187) perhaps need re-touching. The Commission thinks so: it points to hundreds of convictions in recent years as an indication that anticorruption institutions have put down roots. The effort has been reinforced since January by the creation of a conflict-of-information commission that has already ensnared some politicians. Prime Minister Zoran Milanović, who served under Sanader in the foreign ministry many years before he became Sanader’s political rival, suggests that Sanader’s trial is testament to the system’s willingness to reform itself.
Page 1 and 2: Welcome, Croatia A special report o
Page 3 and 4: NEWS 30 May 2013 3 PARLIAMENT Anti-
Page 5 and 6: NEWS SPECIAL 30 May 2013 5 Mind you
Page 7 and 8: 30 May 2013 7 ANALYSIS Trade Long w
Page 9 and 10: COMMENT 30 May 2013 9 On the wrong
Page 11 and 12: COMMENT 30 May 2013 11 Edward Lucas
Page 13 and 14: COMMENT 30 May 2013 13 Europe’s t
Page 15: 30 May 2013 15 SPECIAL REPORT Croat
Page 19 and 20: CROATIA 30 May 2013 19 Željko Jova
Page 21 and 22: CAREERS 30 May 2013 21 JOBS Commiss
Page 23 and 24: 30 May 2013 23 ENTRE NOUS !Jens Fer

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