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Croats Voting on European Union Accession With Outcome in Doubt

Croatians began voting today in a referendum on joining the European Union with citizens split over whether accession will drag the former Yugoslav republic into a debt crisis and erode its sovereignty.

Polls opened at 7 a.m. in Zagreb with the country’s 4.2 million inhabitants deciding if the government should proceed with its planned July 2013 entry into the 27-nation bloc. Support was at 53 percent in a poll published on Jan. 19 by IPSOS-Puls, making it possible a second vote will be needed before EU members begin ratification. Voting ends at 7 p.m. with results expected later in the evening.

Two decades after the country won independence in the bloody breakup of Yugoslavia, the government counts on EU entry to boost investment and economic growth and cement its break from a communist past. Enthusiasm for EU unity is waning among its eastern states, including Hungary and the Czech Republic, as the continent faces a return to a recession and politicians increasingly oppose efforts to merge fiscal policies.

“The passing of the referendum would boost nearly all of Croatia’s prospects, while a rejection would be a huge opportunity loss for the country and the economy,” Sanja Madzarevic-Sujster, senior economist in the World Bank’s office in Zagreb, said on Jan. 20. “The credit rating would be immediately endangered, and implications for the country’s finances, development and investment prospects would be broad.”

Membership in the world’s largest trading bloc is expected to provide the Adriatic nation with hundreds of millions of euros in regional development and infrastructure subsidies. Companies such as Germany’s Siemens AG (SIE) and Deutsche Telekom AG (DTE), and Sweden’s Ericsson AB are counting on expansion into the Balkans as EU growth stalls over the debt crisis.

Angry Citizens

“People are angry because of corruption and distrustful of the political elite,” said Damir Grubisa, a political scientist and head of the European Studies Center in Zagreb. “There are also those who fear they will lose some of the widely cast state benefits, or are simply afraid of change and new challenges.”

Central bank Governor Zeljko Rohatinski said in December that the nation, which emerged from a two-year recession in 2011, may slide into another contraction this year because of faltering demand for Croatian exports and waning tourism.

Elections on Dec. 4 voted out the government and the new prime minister, Zoran Milanovic, has said his budget proposal expected in February will trim the deficit, currently forecast at 7 percent of economic output this year, trimming the country’s extensive welfare system and bloated public sector.

Sovereignty Questions

“An independent and sovereign Croatia is the only framework that can guarantee Croats freedom, cultural progress and material wealth,” said Milovan Sibl, the head of Only Croatia -- Movement for Croatia a group that is organizing opposition to approval.

Croatia’s credit rating was reduced a year ago to BBB-, one step above junk at Standard & Poor’s, which cited a “deteriorated fiscal position and continuously weak” external financing.

Fitch Ratings said on Dec. 5 it will review its assessment in the first quarter in 2012, by which time it expects to have more information regarding the government’s fiscal and economic program.

Croatian five-year credit-default swaps, which are used to insure bondholders against the risk of non-payment, were at 530 points on Jan. 20, up from 523 points on Dec. 5, the day after the elections. Croatian debt is the third-most expensive to insure against default in eastern Europe after Hungary and Ukraine and compares with Italy at 469 points.

‘Positive Element’

“In the context of the credit rating, EU membership is regarded as a positive element when it comes to investment security,” Standard & Poor’s analyst Marko Mrsnik said by phone on Jan. 16. “Rejecting the entry could slow investment and the loss of EU funds intended for infrastructure would further hinder investment and slow economic growth.”

The government campaigned hard for passage in the final days before today’s vote, with Foreign Minister Vesna Pusic warning that rejection “would be like shooting yourself in the foot” as neighbors clamor for membership.

Montenegro, another former Yugoslav republic, will start entry negotiations in June, while Serbia will hear in March whether the EU has accepted its application for candidacy.

“What other strategic alignments are there in the world for Croatia, if it rejects entry?” said Hongjoo Hahm, the World Bank’s country manager in Zagreb.

Croatia is culturally and politically aligned with Europe, Hahm said and the “most convincing argument for entry is economic, as you see a rapid convergence of income in all the countries that have joined.”

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

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

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