Guy Norton in Zagreb -

When Croatian Prime Minister Zoran Milanovic took his seat alongside Brazilian President Dilma Roussef for Brazil-Croatia football match, the opening game in the 2014 Fifa World Cup on June 13, he no doubt pondered the fact that whatever the result – tournament favourites Brazil eventually ran out 3-1 winners – the Croatian football team has historically been far more successful than the Croatian economy.

Although US investment bank Goldman Sachs has forecast that Croatia has just a 0.1% chance of winning the World Cup, domestic cynics believe those are better odds than the country ever topping a global economic performance league table.

On June 10 when he left Zagreb to travel to Sao Paulo for the much-anticipated match at the Arena Corinthians, the Croatian Bureau of Statistics (CBS) announced the doleful news that the Croatian economy had contracted for the 10^th consecutive quarter, crushing any hopes of a feel-good factor on the economic front in Croatia even before a ball had been kicked in Brazil.

According to CBS data, GDP in the first quarter of this year shrank by 0.4%, continuing a series of disappointing figures that have seen the Croatian economy contract by a total of 12% since 2009. The tenacity of the negative economic climate that has buffeted Croatia in recent years has caused raised eyebrows among international institutions, with the International Monetary Fund (IMF) recently expressing surprise at Croatia’s “unusually long recession”.

Last year GDP shrank by a relatively modest 1%, but even that performance still left Croatia lagging far behind many of its Central and Eastern European peers. In 2013, for example, Romania recorded growth of 5.2%, Hungary and Poland each grew by 2.7%, while the Czech Republic and Slovakia posted rises of 1.3% and 1.5% respectively.

No accession benefit

Although the former Yugoslav state achieved its long-cherished dream of EU membership on July 1 last year, there’s been no discernible economic benefit for Croatia from entry as yet. In the period 2007-2103 Croatia garnered just under 22% of the pre-accession funding that it was eligible for from the EU, and there are fears the country will continue to miss out on billions of euros from Brussels because of its failure to present projects suitable for EU funding.

Furthermore, as a result of the country’s 6% budget deficit in 2013 Croatia was forced to enter the EU’s excessive deficit procedure, under which it must slash its fiscal gap to less than 3% of GDP by the end of 2016. In the run-up to Milanovic’s trip to Brazil, the European Commission expressed its approval for the measures proposed by the Croatia government to cut its budget deficit by 2.3% of GDP this year, but also stipulated a series of economic issues it expects the authorities in Zagreb to address over the next 18 months. 

These include improving economic planning, with an emphasis on improving the accuracy of macroeconomic and budgetary forecasts, which in recent years have tended to be wildly overoptimistic. On the pension front, Croatia has to introduce legislation harmonizing the retirement age for men and women, make plans for an increase in the statutory retirement age to 67 years, reduce opportunities for early retirement, and implement stricter assessment and control of disability pensions.

With regard to the labour market, Croatia needs to produce an action plan to boost the effectiveness and scope of labour market policy, in particular with regard to getting young people, the long-term unemployed and older workers into employment.

In terms of the ​​business environment Croatia needs to significantly reduce administrative barriers and para-fiscal levies, while it also needs to produce an action plan for the effective management of state assets and to guarantee the transparent management of public enterprises, while improving the legal oversight of the country’s pre-bankruptcy settlement procedures.

Thin-skinned

Reactions to the European Commission’s analysis and proposed reforms were predictably mixed in Croatia, with some observers believing them to be just and appropriate, while others dismissed them as wrong-headed or insufficiently rigorous.  

Deputy Prime Minister Branko Grcic, head of economic strategy for the Croatian government, told state news agency Hina that he felt the Commission’s views were “objective and realistic”, acknowledging the effectiveness of efforts that had already been put in place by the centre-left administration in the last 2-1/2 years, while at the same time providing welcome suggestions for further reforms which would help put Croatia back on the road to economic recovery.

According to Zdeslav Santic, chief economist at Splitska Banka, the assessment of the Croatian economy by the Commission was relatively positive, but cautioned: “there is still a long way to go as far as the stabilisation of public finances is concerned.” He welcomed the fact that Brussels was exerting pressure on the authorities in Zagreb to press ahead with much-needed economic reforms, but said: “The question remains whether and how fast these measures will be implemented.” 

For his part, labour leader Kresimir Sever, chairman of NHS, the independent Croatian trade unions movement, said most of the reforms proposed by the Commission with regard to fiscal consolidation by the Croatian government would be acceptable to his members, but he questioned the logic behind some of the proposals in the pension field. “The recommendations are a bit contradictory, because on the one hand [the Commission] is seeking to penalize early retirement, while on the other hand it mentions the needs to create the conditions for the increased employment of young people, "said Sever.

Finally, Davor Majetic, chief executive of HUP, the Croatian employers association, told Hina that while he welcomed the raft of economic reforms proposed by the European Commission, he said he wished that the timetable for their implementation was tighter.  "Europe wants to give Croatia the time to sort out and prepare for the reforms that must be implemented,” he said, adding that the government needs to start work on proposed changes straight away “because we do not have more time”.

So as PM Milanovic watched his compatriots put in a good performance against the footballing superstars of Brazil (but were hard done by from a terrible referee), he was no doubt hoping that a strong showing in the rest of the World Cup tournament by the Croatian team will help to ease his task of pushing through socially painful economic reforms in the months ahead.