| KRALJEVICA, Croatia
KRALJEVICA, Croatia The smell of machine oil and scrapped metal lingers in the musty workshops of the Kraljevica dock, the only reminder of the oldest Croatian shipyard's glory. That, and two almost-finished boats that may never be completed.
The workers in grey or blue overalls shuffle around, smoking and talking. Most of the machinery is at least 50 years old and unmanned.
From time to time, someone spots the cameras and microphones of visiting reporters and shouts a curse against the faraway officials who are sending the shipyard into bankruptcy to comply with European Union competition rules.
"After spending a lifetime here, it is not easy to accept that tomorrow it will be gone, because it shouldn't be. If there was some good will from the owners, the state, if we were restructured properly, we could survive," said metal worker Emil Matetic, who, at 63, is two years away from retirement.
Matetic and many other workers are angry at the role the EU has played, and believe their shipyard may have been offered up to the powerful grouping as a kind of sacrifice.
"It's the rule of profit that grinds," said the moustached, grey-haired worker who welds metal tubes. "There is only profit, profit, profit. No sentiment there."
Industry analysts say the docks had it coming after failing to modernise and overhaul their business for years.
Croatia has five major shipyards. Only one of them runs a profitable business. The remaining four, including Kraljevica, generate losses of around 1 billion kuna a year despite hefty state aid, considered illegal in the EU.
"Croatia does not even want to admit how much money it has poured into an industry that was globally competitive in the early 1980s but went steadily downhill since then," said Ante Babic of the Centre for International Development think-tank.
"In a way, the EU has done us a favour because we never tried to restructure them ourselves."
SLOW, STEADY FALL FROM GRACE
Located in a small, picturesque bay in the northern Adriatic, the shipyard was founded by King Charles VI in 1729 and built wooden warships for the Austro-Hungarian Empire. Wood later gave way to metal and business peaked during World War One.
World War Two bombing almost reduced it to rubble. Communist Yugoslavia, whose leader Tito briefly worked there in the 1920s, rebuilt it and made sure it worked at full capacity for 50 years.
Shipbuilding was a flagship export sector in Yugoslavia, which had been among the top five global players. But the sector declined irrevocably in the 1990s due to the wars in the Balkans, the loss of the traditional Russian market, mismanagement and failure to modernise.
While global shipbuilding boomed in 2004-2008, Croatia's share of the European shipbuilding output shrank to 6 percent in 2008 from 13 percent in 2004, according to a study by the Community of European Shipbuilding Associations CESA.L.
"The last ten years we've been hearing that we have no future. Restructuring was slow, the global crisis reduced the business, we were indebted, the EU banned the state from giving us new financial guarantees," said Kraljevica union leader Nenad Miskulin.
After three centuries of venerable history, the shipyard is now quiet. One car/passenger ferry built for Canadian owners and one asphalt carrier are moored in the murky waters, but there is little activity around them.
"What's left for us is to finish these boats, but even that is questionable because there is no money. So the question is: Will I earn my pension here or out on the street?" said Matetic.
SALE OR BANKRUPTCY FOR OTHERS
Before Croatia joins the European Union in July 2013, it must make sure that its shipyards operate without state aid. Unsure what to do with them, Zagreb opted to sell the loss-making docks but the process has been slow and bidders few, which has drawn criticism from Brussels.
"Croatia has had plenty of time to deal with the shipyards but it has moved very slowly," said a senior EU diplomat, who asked not to be named.
"By July 1, 2013, all privatisation contracts have to be signed," the diplomat said. "If that does not happen, the docks will have to reimburse all the state aid they received since 2006 or, should it not be possible, go bankrupt."
Last month, the new centre-left government agreed to sell the biggest dock, Brodosplit from the southern town of Split, to a private Croatian firm. But it rejected bids for the three other yards.
It said a solution for two of the three would be found before the summer but bankruptcy proceedings would start at Kraljevica.
"If we had made the decisions about the shipyards five years ago, we could have avoided some of this. We've taken these steps in good faith, but within the agreed framework that we couldn't breach," Prime Minister Zoran Milanovic said in April.
SHOCK AND BITTERNESS
General manager Zvonimir Novak is puzzled why Kraljevica, which made losses of 252 million kuna in 2010 and 135 million last year, was singled out for bankruptcy given that it is the smallest shipyard, with the lowest debt and only 460 workers.
The government's decision was a shock for workers, he said.
"Many of them may never find a job again. And the question is what the town of Kraljevica will do if this is locked up. The shipyard is the only major source of employment here," Novak said in his office, decorated with pictures and models of ships built in the dock.
"I did believe we could survive, with fewer workers and focus on repairs. But now that the decision was made, it should be implemented as soon as possible, to put an end to this uncertainty," he said.
He pointed at the two new ships docked outside his window. "These should have been finished. Now everything is uncertain."
Katarina Ott, the head of the Institut for Public Finances in Zagreb, said the government should get rid of the shipyards "because they are unprofitable, indebted, inefficient and a burden on public finances".
"The shipyards' debt is three times higher than their assets. Their 8,800 employees produce the same value as the 2,000 employed in Denmark," she wrote in her web column, entitled "The government has only postponed bankruptcy".
This logic matters little to the bitter workers of Kraljevica.
"The government is using us as a bone, to dangle it at Brussels and say 'See, we've closed it'. No one is asking us anything," one worker said.
(Editing by Sonya Hepinstall)