There is a sense of deja vu in Croatia as polls indicate the September 11 general election will result in no party holding enough seats to form a government and the Bridge of Independent Lists (Most) in a kingmaker positions - a result in all key respects exactly the same as the outcome of the November 2015 election. 

Polls show a slight swing towards the centre-left Social Democratic Party (SDP), but given the ideological stance of the main parties another coalition between the conservative Croatian Democratic Union (HDZ) and Most is perhaps a likelier option. However, with the two parties still reeling from the breakup of their disastrous coalition earlier this year, this could also lead to more instability. Analysts do not rule out another round of early elections. 

That being said, Croatia’s economy has weathered the stormy 10 months since its last election extremely well. GDP beat expectations to accelerate to 2.8% in Q2, according to the preliminary estimate from the statistics office, with the economy buoyed by strong growth in consumption, industrial production and investment, as well as a strong tourist season. 

This now marks seven consecutive quarters of growth as the country finally emerged from its six-year recession. Croatia’s fiscal performance has also improved, with the budget deficit dropping to just 0.2% of GDP in the first half of 2016. 

“Extended political instability in Croatia has almost become the new normal, and businesses seem to have shrugged it off,” commented Miha Hribernik, senior analyst at global risk consultancy Verisk Maplecroft. 

According to Gunter Deuber, head of CEE research in Vienna at Raiffeisen Bank International, so far there has been little impact on the economy or investment from the extended period of uncertainty, both before the last government’s formation and after its collapse. He also considers that the lack of a functioning government could have contributed to recent fiscal consolidation, as politicians were unable to ramp up spending or introduce tax cuts ahead of the election. 

“However, this is not a sustainable solution from a longer-term perspective. We may now see a long period of negotiations, which may end up once again in a new round of elections, which we would interpret as rather negative,” Deuber warned. 

“It is too early to say if the recovery is sustainable. There has been a certain resilience to the political instability so far, but if there is another half-year with no clarity, this will backfire,” he added. 

Ahead of the election, both main parties have been stressing the need for reform in areas such as creating a better business environment, and improving the education and health services. However, some economists argue there is also a pressing need to continue with privatisations and reform of the pension system and public administration, which will be harder to sell to the population. 

The latest poll conducted by RTL and Jutanrji List in all 10 of Croatia’s electoral constituencies indicates that the SDP-led People’s Coalition will take 62 seats in the 151 seat parliament, followed by HDZ with 55 and Most with 12. 

Among the smaller parties, the anti-establishment Zivi Zid (Living Wall) party, the Istrian Democratic Party, Zagreb mayor Milan Bandic’s party and the far right Croatian Democratic Alliance of Slavonica and Baranja (HDSSB) are all expected to take a handful of seats in the new parliament. 

This leaves no party with a majority, and no obvious coalitions around either the SDP or the HDZ. Analysts are divided over the expected outcome of the post-election haggling, though they agree this is likely to be protracted and the resulting government could be unstable. 

Deuber anticipates a new HDZ-Most government, despite the collapse of the former government. “The most likely coalition from an ideological point of view is HDZ and Most, maybe some backing from small parties or minority representatives would be needed,” he told bne IntelliNews. 

However, Otilia Dhand, senior vice president of Teneo Intelligence, takes the opposite view in an September 6 analyst note. She believes that, “An SDP-led coalition remains the most likely scenario; however, cabinet formation will likely be protected and the new government may be highly unstable.” 

“If the SDP fails to build a coalition, the HDZ may well get another shot at forming a government,” says Hribernik. “While we would not entirely rule out another coalition with Most, the Oreskovic administration has left a legacy of mistrust between the two parties. If at all possible, the HDZ would try to avoid working with Most again.”

The previous HDZ-Most coalition headed by technocratic Prime Minister Tihomir Oreskovic ended acrimoniously after just a few months in office. Relations between Oreskovic and the leaders of the two parties deteriorated, and the prime minister lost a confidence vote called by the HDZ in June. 

HDZ leader Tomislav Karamarko’s reputation was also tarnished by the wrangling and by accusations of conflict of interest over his wife’s links to a lobbyist working for the Hungarian energy company MOL. Karamarko has since been replaced by former European Parliament member Andrej Plenkovic in an attempt to revive public support. Plenkovic, an experienced diplomat, said during the leadership poll that he wanted to “open a new page of cooperation” with Most, indicating the HDZ is looking to revive its partnership with the party post-election. 

Still, an August poll of Croatians preferences for their next prime minister by Promocija Plus shows Plenkovic in second place with 22.2% of respondents backing him compared to 32.2% for SDP leader Zoran Milanovic. 

Despite the fierce rivalry between the two parties, recent weeks have seen each encroach onto the other’s traditional territory in a bid to win over more voters. “[I]n terms of policy programmes delineated through the election campaign, there is not that much clear blue Adriatic water appearing before the two candidates,” wrote Tim Ash of Nomura in a September 6 analyst note. 

Plenkovic is known as a liberal - to such an extent that Milanovic once commented that he “belongs more to the liberal wing of the SDP” - and has attempted to shift his party towards the centre. 

Meanwhile, Milanovic has been spouting the kind of nationalist rhetoric more usually associated with the HDZ. A leaked recording of his conversation with veterans in August electrified the Balkans as he was heard describing Bosnia as “not even a state ... It’s a big s***” and accusing Serbia of wanting to “rule half the Balkans”. He also described Serbian Prime Minister Aleksandar Vucic's government as "arrogant and pathetic". 

A spike in nationalist rhetoric is usual before elections across the western Balkans, and does not typically lead to any longer-term damage to diplomatic relations or economic ties. However, developments in the run up to the current Croatian election have been more extreme than usual, and Hribernik warns that Milanovic’s comments “really inflamed anti-Croatian sentiment in Serbia”. 

Tensions had already been raised by two recent decisions by Croatian courts - the annulment of the verdict against Catholic cardinal Aloysius Stepinac, a backer of Croatia’s Second World War Ustashe regime, and the scrapping of the verdict against Branimir Glavas, a former general and lawmaker who was convicted of war crimes against Serbs.

This was followed by a flurry of diplomatic protest notes and mutual accusations, which exploded on August 4 and 5 when the both countries commemorated Operation Storm, which in Serbia marks the expulsion of 200,000 Serbs from their homes in Croatia, while Croats consider it a victory on their path to independence.

“The use of nationalist rhetoric for purely domestic purposes by Zagreb is dangerous, and has brought relations between the two countries to their lowest point since the 1990s,” Hribernik told bne IntelliNews. “Although it is too early to speak of any tangible deterioration in bilateral trade or investment, there is no sign that the genie of nationalism will be bottled back up any time soon.” 

This means that if and when a new government is formed, repairing relations with Bosnia and particularly Serbia is expected to be on the table along with carrying out long-awaited - and potentially unpopular - reforms.