Croatia Turns to Deficit, Recession Fight as EU Membership Approval Nears

The Croatian government will slash the budget below its target and attract more investment to pull the nation out of a recession as it enters the final phase of joining the European Union, Prime Minister Jadranka Kosor said.

After the European Commission’s June 10 recommendation to wrap up talks and aim for July 2013 entry, Kosor said her Cabinet will reduce the size of the administration and may offer more financial incentives to lure businesses from abroad.

“I’m certain this is the year Croatia will get on the firm path of recovery,” Kosor, 57, said in a June 13 interview in her office in the capital, Zagreb. “By concluding the talks, we have definitely put the hardest, most complicated job behind us.”

Croatia is poised to become the second former Yugoslav republic to join the world’s largest trading bloc after Slovenia, giving investors more confidence to boost industry and tourism in the Adriatic Sea country. If approved by the 27 current members, Croatia would lengthen the EU’s reach into the Balkans region following the bloody civil wars of the 1990s.

The benchmark Crobex stock index is up 6.9 percent since the beginning of the year, the sixth-best performer in Europe, according to Bloomberg data. It fell to 2256.99 yesterday, down 0.63 percent from the previous close.

Kosor is focusing on modernizing Croatia’s communist-era buildings, streets and utilities after the economy contracted every year since 2008 following average growth after of 4.6 percent between 2000 and 2007. The economy may expand 1.5 percent this year, the premier said.

‘New Wind’

Croatia, which seeks to attract 14 billion euros ($20 billion) in investments for infrastructure projects alone, will experience a “new wind” of foreign direct investment, which dropped last year to one-third of 2009 inflows, she said.

A trained lawyer, Kosor rose to the position after former Premier Ivo Sanader left office without explanation in July 2009. After becoming prime minister, Kosor began an anti- corruption drive that opened hundreds of cases and eventually led to Sanader’s arrest on suspicion of abuse of power and corruption.

Kosor is planning a campaign to gain approval for a referendum on EU entry that must be held within 30 days of signing the accession treaty, planned in December. About 62 percent of citizens support membership, according to a Nov. 6 poll by IPSOS Puls d.d., commissioned by the Foreign Ministry.

‘No Viable Option’

“I’m convinced that people will vote in favor of EU entry in the referendum, because Croatia really has no other viable option,” she said. “Most people understand that cuts in public spending are necessary, that otherwise we cannot move forward economically.”

The government has forecast a budget shortfall of 4.2 percent of GDP this year. Cost-cutting plans include closing some of the roughly 500 local administrative units and adjusting collective bargaining agreements, Kosor said.

“We can’t have collective bargaining contracts that promise to deliver the same pay regardless of whether the economy is growing or contracting,” Kosor said. “We in Croatia need to work more.”

Unemployment reached 18.2 percent in April and Croatia has one of the lowest labor-force participation rates in Europe, just at 50 percent, according to the International Labour Organization in Geneva. By joining the EU in 2013, Croatia would gain access to at least 750 million euros of EU funds channeled into public-works projects.

The EU will want safeguards and see progress in Croatia’s fight to cut corruption, which Kosor says she welcomes.

‘Can’t Be Reversed’

“Monitoring is a chance to strengthen our reforms, and for the citizens to see that time can’t be turned back,” Kosor said. “The fight against corruption can’t be reversed. Nothing will ever be the same.”

Kosor faces general elections in the fall. The date will be set after the formal conclusion of EU talks, probably later this month. According to an IPSOS Puls pre-election poll on May 25, the ruling Croatian Democratic Union has 22 percent support, compared with the left-leaning Alliance for Change, led by the Social Democrats, which has 38 percent.

“The continuing corruption investigations and trials will be a huge burden, but I still hope for success. Only the strong parties are capable of cleaning their own house,” she said.

To contact the reporter on this story: Jasmina Kuzmanovic at jkuzmanovic@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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