ZAGREB May 4 Ten months after Croatia achieved
its dream of joining the European Union, its economy is still
shrinking, sending a troubling reminder to its ex-Yugoslav
neighbours that the bloc cannot promise prosperity.
EU entry requirements and membership rules are meant to
ensure new entrants have strengthened their economies and
institutions enough to thrive within the trading union.
For countries such as Croatia and Serbia, EU membership was
also meant to help the region move on from the wars of the 1990s
to shared economic development in the new millennium.
But Croatia, the bloc's 28th member state, is its worst
economic performer this year, along with bailed-out Greece and
Cyprus, and there is little sign so far of local start-ups or
foreign investors generating viable businesses beyond tourism.
"Only a few in Croatia seem to understand that attracting
investors is nothing but a beauty contest all over Europe. Hence
all the failed privatisations here," said a Western business
veteran in Zagreb.
Even Slovenia, the state best-equipped to make its own way
economically when Communist Yugoslavia broke up, has struggled
to let go of state ownership - notably of its debt-laden banks -
despite graduating to euro zone membership in 2007. Elsewhere in
the region, apart from a Fiat factory in Serbia few new jobs
have emerged to replace those lost as state-owned industry
Croatia's Communist-era industry, including shipbuilding,
largely collapsed in the 1990s. Diplomats say it was unprepared
for the EU and is reaping no benefits from membership.
"There are a lot of uncompetitive companies, lots of
imported goods. EU funds are not flowing. There is no planning,
security, the legal system is not up to EU standards," said an
EU diplomat based in Zagreb.
World Bank data shows Croatia to be the only European
country, along with Greece, whose economy has been shrinking
since 2008. Croatia has shed almost 13 percent of gross domestic
product in five years.
Although industrial output rose for three straight months in
the first quarter, for the first time since 2009, analysts
expect further decline this year and marginal growth in 2015.
"Now that Greece has growth again, we are an increasingly
obvious underperformer," said Velimir Sonje of the
ArhivAnalitika consultancy in Zagreb.
"Markets see that: our (bond) yields have barely budged in
the past year, while those on Slovenian and Hungarian debt have
fallen sharply," he said, referring to Croatia's stubbornly high
The latest European Commission data put Croatia at the
bottom of EU fund beneficiaries, having used just 18 percent of
the funds available in 2007-13.
SHIFT FROM STATE TO FOREIGN INVESTMENTS
Despite the poor outlook, the small size of Croatia's 43
billion euro ($60 billion) economy and its relatively sound
banking system, controlled by foreign parent banks, will
probably keep it from becoming a major headache for the bloc.
Analysts say the European Commission's monitoring, which has
forced Zagreb to rejig the budget already twice this year, will
help keep public debt in check. The bigger problem is how to
develop the economy.
"Stagnation is our best-case scenario," said Andrej
Grubisic, a U.S.-educated consultant. He said 200,000 people had
lost jobs in private firms since 2008 while 10,000 have been
hired in Croatia's inefficient and costly public sector.
"Without serious cuts in public spending there just won't be
a better life but the government is showing no ambition to do
it," he said.
In a marked shift from reliance on major state investments,
both the government and the conservative opposition HDZ now say
they must do more to attract and keep foreign investors.
"Investors are giving us a wide berth, that must be
changed," HDZ leader Tomislav Karamarko told a business forum
last week. His party is pledging to cut taxes and reform the
administration if they came to power.
Deputy Prime Minister Vesna Pusic promised "radical changes"
and a new strategy to attract investors in the next few months.
But diplomats point to a poor reform record for both
parties, which between them have ruled Croatia since
independence in 1991.
In the past year, the government has failed to find buyers
for flag carrier Croatia Airlines, railway cargo firm HZ, the
last major state bank and fertiliser producer Petrokemija.
Investors already in Croatia praise its skilled workforce
and quick access to Western Europe via roads and its Adriatic
ports. But they remain frustrated by slow bureaucracy and
"We decided to invest again because we were successful. But
it took a very long time to get the incentives promised for the
project and we're still waiting for some, which is very
frustrating," said Mikael Boire, manufacturing manager at Saint
Jean Industries, a French car parts manufacturer.
The company completed a second investment in Croatia last
year, after buying and rebuilding a small plant in 2008.
"Slovakia and Romania also have lots of advantages,
incentives for new jobs. They are much more efficient and they
realise what they advertise. So Croatia is a location to be
studied, but it is not the only one," he said.
($1 = 0.7212 Euros)
(Reporting by Zoran Radosavljevic and Igor Ilic; Editing by