The Council of the European Union said it opened on Tuesday, Jan 28, an excessive deficit procedure (EDP) for Croatia after the country broke the EU’s deficit and public debt criteria last year.

The Council’s decision to launch the EDP comes after in December 2013 the EC proposed to put Croatia under the procedure, recommending the country to reduce this year's deficit to 4.6% of GDP (an annual improvement of the structural balance of 0.5% of GDP in 2014).

The Council said in a statement it agrees with the EC’s view that Croatia does not meet the  deficit and debt criteria as its 2013 deficit was significantly above the EU's 3.0% of GDP reference value and is set to increase in 2014 and 2015.

The EC has also warned the deficit could rise above 6% of GDP in 2013-2015 if no corrective measures are taken – partly as a consequence of the severe downturn in the country with the economic activity estimated to have contracted by 12% since its 2008 peak.

Croatia's 2014 budget bill plans a deficit of HRK 17.5bn (EUR 2.3bn), or 5% of the projected GDP, but finance minister Slavko Linic said earlier in January the budget should be revised in February in order to meet the EC recommendations for cutting the deficit.

According to the EC, Croatia’s general government debt reached 59.7% of GDP in 2013 and is expected to rise above the EU’ limit of 60% of GDP this year if the government does not change its policy. This trend will likely persist considering the continuing high deficits and weak economic activity.

The Council thus advises, in line with the EC’s recommendations, that Croatia should correct the deficit by 2016. It sets deficit targets of 4.6 % of GDP for 2014, 3.5 % of GDP for 2015 and 2.7 % of GDP for 2016, consistent with an annual improvement in the structural balance of 0.5 % of GDP in 2014, 0.9 % of GDP in 2015 and 0.7 % of GDP in 2016.

Croatia should take effective action in order to meet these targets by April 30, 2014, the Council said. It should also report in detail on the consolidation strategy it plans to implement in order to achieve the set goals.

The Council also called on the Croatian authorities to carry out a thorough expenditure review, to improve tax compliance and increase the efficiency of the tax administration, as well as to improve the institutional framework of its public finances.

The Croatian authorities should address labour market rigidities and the unfavourable business environment as well as improve the quality of public administration, with a view to promoting potential GDP growth, the Council said.