The joys of Croatia’s EU membership are eclipsed by its economic woes

Croatia’s EU accession only 18 months ago has been overshadowed by the effects of the country’s prolonged recession. The government’s economic policy has been much debated, but now there seems some light at the end of the tunnel raising hopes that six years of economic hardship may be coming to an end.

The European Commission’s latest forecast sees a modest recovery for Croatia this year, with 0.2% GDP growth in 2015 that will be the slowest in the EU. It will be driven mostly by increased exports and EU-funded investment, and is expected to accelerate slowly in 2016. Croatia would therefore follow the growth trend Brussels envisages for all EU members, but more slowly.

Consolidating Croatia’s public finances will still top the government’s agenda following last year’s introduction of the EU’s Excessive Deficit Procedure. Last October, economic difficulties saw the government revise the year’s budget deficit target to 5%, up from the initial 4.4% goal. Reducing the budget deficit to below 3% of GDP cannot now be expected before 2017, a year later than planned. The country’s public debt has increased from some 60% of GDP in 2011 to the current level of over 80%, and the EU’s economic and financial affairs commissioner Pierre Moscovici has warned that consolidating its public finances will remain crucial in the coming few years.

None of these trends surprises Croatia’s leading economic analysts, who generally share the opinion that Croatia is facing a challenge of social and structural reform if it is to achieve sustainable recovery. Unemployment is high at 17% and is only slowly decreasing, while youth unemployment of some 45% is among the highest in Europe.

The Zagreb government has responded to its economic situation with a number of ad hoc measures. Reactions, notably by foreign analysts, have been mixed, especially to a scheme to help over 300,000 of the country’s poorest and most indebted citizens whose bank accounts have been blocked. This involves the creditors cancelling personal debts of people who meet specific criteria (size of the debt, personal property and monthly income), and will wipe out the debts of some 60,000 to give them a fresh start. Other measures include those aimed to help people who had borrowed in schemes denominated in Swiss francs. The government’s weaknesses in handling the recession did more to help conservative opposition candidate Kolinda Grabar Kitarovic to narrowly win January’s presidential elections against the centre-left’s popular incumbent, Ivo Josipovic. Economic issues are also due to dominate next year’s parliamentary elections, due to be held by the end of the year or earlier.