Tomislav Karamarko, the leader of the senior ruling Croatian Democratic Union (HDZ), said on June 4 that technocratic Prime Minister Tihomir Oreskovic should resign or HDZ will seek a government reshuffle. Early elections are also possible, according to Karamarko.

The collapse of Croatia’s ruling coalition appears to be just a few steps away now. Karamarko’s strike against Oreskovic came the day after Oreskovic called on both his deputies - Karamarko and Bozo Petrov, leader of the HDZ's junior coalition partner Bridge of Independent Lists (Most) - to resign due to an on-going row between the coalition partners over a non-confidence vote against Karamarko.

“At today's sessions ... we concluded that Tihomir Oreskovic no longer enjoys the trust of the democratic community. In the coming days we will invite members of the Croatian parliament to support the implementation of HDZ’s programme and explore options for forming a new parliamentary majority and a new government. We are prepared for all possibilities, including early elections!” Karamarko wrote on his Facebook page on June 4.

The previous day, the deputy prime minister said that Oreskovic “no longer enjoys our trust and support”.

However, Oreskovic said on June 3 that he did not plan to resign. Oreskovic also said that early elections would cost Croatia €1bn to €2bn and would also hurt on-going reforms, Bloomberg reported.

Karamarko did not clarify on June 4 which party would be HDZ’s partner in the upcoming government reshuffle process, though he ruled out continuation of the current partnership with Most. However, the HDZ’s options are limited since the second-largest party in the parliament is its main rival the Social Democratic Party (SDP).

At this stage, it is not certain whether HDZ can gather the required majority in the parliament to seek a non-confidence motion against Oreskovic, if the prime minister does not resign of his own accord. However, Karamarko said on June 4 that HDZ ministers would leave their posts in the government.

Karamarko did not specify the timing of the government reshuffle but he said it would be soon. The HDZ leader also said that he does not see a broad coalition with the SPD as being possible, About Croatia reported.

Tim Ash from Nomura Securities commented on June 6 that all scenarios are quite possible at this stage, including a new HDZ coalition, an SDP-led coalition and early elections. “Oreskovic seems to have burned his "bridges" (no pun intended) though with both Most (Bridge) and the HDZ, so looks like he is out in most likely scenarios. I struggle to see [Finance Minister Zdravko] Maric serving in a SDP-led coalition, and doubt Oreskovic would,”  Ash wrote.

“The question is now “can/will all this political uncertainty kill the recovery?”,” according to Ash.

Despite the ongoing political turmoil, macroeconomic indicators for Croatia have remained promising since last year. However, the political stability required to implement long-demanded reforms has not been achieved yet.

Teneo Intelligence said in an e-mailed comment on May 25 that Karamarko’s dismissal would probably lead to the collapse of the coalition and cause further delays to the implementation of economic reforms.

Karamarko may also face the risk of losing his support from his own party HDZ. Most, Oreskovic and other opposition parties have questioned Karamarko’s position within the government after claims surfaced about his wife Ana Karamarko’s business links with a lobbyist working for Hungarian state-owned energy company MOL. The SDP filed the confidence motion on May 18 after the links were revealed.

MOL owns a 49% stake in Croatian oil and gas company INA and is also in charge of INA’s management. The Croatian government, which holds a 44.85% stake in INA, has been locked in a dispute over the company’s management and investment strategy for several years.

The opposition questions Karamarko’s opposition to referring the dispute between INA and MOL to international arbitration, while Karamarko argues that the result of the international arbitration could be costly for Croatia and rejects any connection between his position and his wife’s business relations.

The HDZ leadership is trying to keep its options open and announced that it would only take an official position after the committee publishes its opinion on the matter, according to Teneo. There is no hard deadline for the decision of the committee, but its publication is expected before the vote.

Croatia’s independent State Commission of Conflicts of Interest announced on May 12 that it would investigate the alleged relationship between Karamarko and MOL. Dalija Oreskovic, head of the commission, said on June 2 that the commission still had not received necessary documents for making a decision, according to About Croatia.

Karamarko has repeatedly rejected the allegations, and said he would refrain from any decisions involving INA until a decision had been made by the commission. He said the move was to avoid media attacks on himself and his family.

The coalition came into power in January following the November 2015 elections, and holds only 76 seats in the 151-seat parliament, giving it a very slim majority especially following Most’s loss of four MPs.

This was highlighted on May 13, when the government failed for the third week running to gather the majority needed to pass legislation after three MPs from the coalition were unexpectedly absent from the parliament. The government has to gather at least 76 deputies approve any new legislation, according to Croatian law. However, the government could muster only 75 deputies on May 13.