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As Croatia moves into the eurozone, corruption and banking issues remain unaddressed

Colin Stevens

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Croatia is now approaching the endgame for its entry into the Eurozone. Last month, the European Central Bank (ECB) put out a list of five Bulgarian and eight Croatian banks that it would be directly supervising starting on October 1st, including the Croatian subsidiaries of Unicredit, Erste, Intesa, Raiffeisen, Sberbank, and Addiko, writes Colin Stevens.

The announcement followed Croatia’s official admittance to the Eurozone’s exchange rate mechanism (ERM II) in July, and fulfils ECB regulatory requirements that all of Croatia’s major banks be placed under its supervision. To move forward and officially join the eurozone, Croatia will now need to take part in ERM II “for at least two years without severe tensions,” and especially without devaluing its current currency, the kuna, against the Euro.

Of course, this being 2020, severe fiscal tensions have become a fact of life for European governments.

Trouble on multiple fronts

According to the World Bank, Croatia’s overall GDP is now expected to plummet by 8.1% this year, admittedly an improvement over the 9.3% annual drop the Bank had predicted in June. Croatia’s economy, heavily reliant as it is on tourism, has been buffeted by the ongoing pandemic. Worse still, the country’s attempt to make up for lost ground with a post-lockdown rush of summer holidaymakers has seen it blamed for jumpstarting the surge in Covid-19 cases in several other European countries.

Nor is the Covid-driven downturn the only economic issue facing prime minister Andrej Plenković, whose Croatian Democratic Union (HDZ) held onto power in the country’s July elections, and the independent finance minister Zdravko Marić, who has been in his post since before Plenković took office.

Even as Croatia receives a coveted endorsement from the other economies of the Eurozone, the country continues to be rocked by corruption scandals – the most recent being the salacious revelations of a secret club in Zagreb frequented the country’s political and business elites, including multiple ministers. While the rest of the population endured strict confinement measures, many of Croatia’s most powerful people flouted lockdown rules, exchanged bribes, and even enjoyed the company of escorts brought in from Serbia.

There is also the ongoing matter of how Croatia’s government in 2015 forced banks to retroactively convert loans from Swiss francs to euros and pay out over €1.1 billion in reimbursements to customers it had lent money too. The issue continues to roil Zagreb’s relationships with its own banking sector and with the European financial industry more broadly, with Hungary’s OTP Bank filing suit against Croatia at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) this month to recoup approximately 224 million Kuna (€29.58 million) in losses.

Croatia’s endemic corruption problem

Much like its counterparts in other parts of the former Yugoslavia, corruption has become an endemic issue in Croatia, with even the gains made after the country acceded to the EU now at risk of being lost.

Much of the blame for the country’s perceived backsliding lies at the feet of the HDZ, in no small part on account of the ongoing legal saga surrounding former premier and HDZ party boss Ivo Sanader. Whereas Sanader’s 2010 arrest was taken as a sign of the country’s commitment to uprooting corruption as it worked to join the EU, the country’s Constitutional Court nullified the sentence in 2015. Today, only one of the cases against him – for war profiteering – has officially been concluded.

The inability to effectively prosecute past wrongdoing has driven Croatia down Transparency International’s rankings, with the country how earning just 47 of 100 points in the group’s “perceived corruption” index. With civil society leaders such as Oriana Ivkovic Novokmet pointing to corruption cases that languish in the courts or never get brought at all, the decline is hardly surprising.

Instead of turning a corner, the current members of the HDZ government face allegations of their own. The Zagreb speakeasy frequented by Croatian leaders included transportation minister Oleg Butković, labour minister Josip Aladrović, and economic minister Tomislav Ćorić amongst its clientele. Andrej Plenkovic himself is currently locked in a war of words over the country’s anticorruption efforts with his chief political opponent, Croatian president Zoran Milanović. The former leader of the rival Social Democratic Party and Plenkovic’s predecessor as prime minister, Milanović was also a club patron.

Zdravko Marić between a rock and a banking crisis

Finance minister (and deputy PM) Zdravko Marić, despite operating outside the established political groupings, has been dogged by questions of potential misconduct as well. Earlier in his term, Marić faced the prospect of an investigation into his ties with food group Agrokor, Croatia’s largest private company, on conflict of interest grounds. Despite being a former employee of Argokor himself, Marić nonetheless undertook secret negotiations with his former company and its creditors (primarily the Russian state-owned bank Sberbank) that exploded into the local press in March 2017.

Weeks later, Agrokor was put under state administration on account of its crippling debt load. By 2019, the company had been wound down and its operations rebranded. Marić himself ultimately survived the Agrokor scandal, with his fellow minister Martina Dalić (who headed the economy ministry) forced out of office instead.

Agrokor, however, has not been the only business crisis undermining Plenkovic’s government. Going into Croatia’s 2015 elections, in which Zoran Milanović’s Social Democrats lost power to the HDZ, Milanović undertook a number of populist economic measures in a bid to shore up his own electoral position. They included a debt cancellation scheme for poor Croatians who owed money to the government or municipal utilities, but also sweeping legislation that converted billions of dollars in loans made by banks to Croatian customers from Swiss francs to euros, with retroactive effect. Milanović’s government forced the banks themselves to bear the costs of this sudden shift, prompting years of legal action by the affected lenders.

Of course, having lost the election, these populist moves ultimately turned into a poisoned chalice for Milanović’s successors in government. The loan conversion issue has plagued the HDZ since 2016, when the first suit against Croatia was filed by Unicredit. At the time, Marić argued in favour of an agreement with the banks to avoid the substantial costs of arbitration, especially with the country under pressure from the European Commission to change course. Four years later, the issue instead remains an albatross around the government’s neck.

Stakes for the Euro

Neither Croatia’s corruption issues nor its conflicts with the banking sector have been enough to derail the country’s Eurozone ambitions, but to successfully see this process through to its conclusion, Zagreb will need to a commit to a level of fiscal discipline and reform that it has not yet demonstrated. Needed reforms include reduced budget deficits, strengthened measures against money laundering, and improved corporate governance in state-owned companies.

If Croatia succeeds, the potential benefits include lower interest rates, higher investor confidence, and closer links to the rest of the single market. As is so often the case with European integration, though, the most important gains are the improvements made at home along the way.

Croatia

EU Cohesion policy: €61 million to support research and innovation for innovative applications in economy and society in Croatia

EU Reporter Correspondent

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The European Commission has approved an investment of more than €61 million from the European Regional Development Fund to modernise and expand the Ruđer Bošković Institute (RBI) in Zagreb, Croatia, to increase its scientific research capacity with the project ‘Open Scientific Infrastructural Platforms for Innovative Applications in Economy and Society' (O-ZIP).

Cohesion and Reforms Commissioner Elisa Ferreira (pictured) said: “Thanks to this EU project, the institute will become more competitive and will increase its collaboration with local and international research partners and business stakeholders. Given the global challenges we face, it is essential to invest in European research institutes and projects to solve societal problems in sectors like health, food and the environment.”

The institute's improved capacity and working environment will help train a new generation of students in multidisciplinary scientific fields with the additional aim to motivate the current generation of scientists to stay in Croatia, contributing to the country's economic development and innovation. Better links with business and industry will ensure that the institute's research meets real societal problems in areas such as the environment, climate change, energy, health and ageing. The O-ZIP project will help the country implement its Smart Specialization Strategy (S3) and projects under the EU Research and Innovation programme (Horizon 2020) priorities. More on EU funded investments in Croatia is available on the Open Data Platform.

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Croatia

European Court of Human Rights finds Croatian response to violent homophobic attack to foster impunity for acts of violent hate crime

EU Reporter Correspondent

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A judgement issued on 14 January by the European Court of Human Rights finds that the response of Croatian authorities to a hate crime against a lesbian woman was “particularly destructive of fundamental human rights”.  

In the judgment in Sabalic v Croatia, the European Court of Human Rights (ECtHR) found a violation of Article 3 (prohibition of inhuman or degrading treatment) in conjunction with Article 14 (prohibition of discrimination) of the European Convention on the account of Croatian authorities’ failure to respond effectively to the applicant’s allegations of a violent homophobic attack against her.

Background

Sabalić was attacked in a nightclub when she had refused a man’s advances, disclosing to him that she was a lesbian. The man, known as M.M, severely beat and kicked her, while shouting "All of you should be killed!" and threatening to rape her. Sabalić sustained multiple injuries, for which she was treated in hospital.

M.M. was convicted in minor-offence proceedings of breach of public peace and order and given a fine of 300 Croatian kunas (approximately €40). Sabalić, who had not been informed of those proceedings, lodged a criminal complaint against M.M. before the State Attorney’s Office, alleging that she had been the victim of a violent hate crime and discrimination.

Although Croatia has hate crime legislation and offences based on sexual orientation are to be charged as an aggravated crime, it is generally disregarded and violent acts are considered as minor offences, as in the applicant’s case.

ECtHR finding

The European Court found that “such a response of the domestic authorities through the minor offences proceedings is not capable of demonstrating the State’s Convention commitment to ensuring that homophobic ill-treatment does not remain ignored by the relevant authorities and to providing effective protection against acts of ill-treatment motivated by the applicant’s sexual orientation”.

It stressed that “the sole recourse to the minor offences proceedings against [the aggressor] could be considered rather as a response that fosters a sense of impunity for the acts of violent hate crime.” Such conduct by Croatian authorities was found to be “particularly destructive of fundamental human rights”.

The Court’s judgment was informed by a third party intervention submitted jointly by the AIRE Centre (Advice on individual rights in Europe), ILGA-Europe, and the International Commission of Jurists (ICJ).

Marko Jurcic, an activist at Zagreb Pride who provided victim support for the case, said: "The European Court of Human Rights has proven something we have been saying for decades: the Croatian police are failing to protect victims of homophobic and transphobic violence. Unfortunately, the practice of treating homophobic and transphobic hate crimes as misdemeanors is continuing in Croatia. In the last couple of years, three hate-crime complaints by Zagreb Pride have also been rejected by the public prosecutor because of police misconduct."

According to ILGA-Europe’s Head of Litigation, Arpi Avetisyan: “Today’s judgment sends a strong signal to the Council of Europe member states to ensure effective investigation, prosecution and punishment of homophobic and transphobic violent crimes. Downplaying such crimes and letting the aggressors get away without due punishment serves as encouragement to homophobia and transphobia.”

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Croatia

Croatia earthquake: EU member states offer further assistance

EU Reporter Correspondent

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Following the initial offers of assistance to Croatia – most of it dispatched in the first 24 hours after the devastating earthquake of 29 December 2020 – EU member states are offering further in-kind assistance. Sleeping bags, housing containers, lighting systems and mattresses, provided by Germany, France and Austria, are on their way to Croatia or will be in the coming days. Slovenia delivered supplementary housing containers to Croatia on 11 January 2021. “Once more, I would like to thank all EU Member States for their prompt response to the earthquake. The overwhelming response of 15 EU member states and one participating state helping the Croatian people in times of need is a tangible example of EU solidarity,” said Crisis Management Commissioner Janez Lenarčič. In 2020 alone, the EU's Emergency Response Coordination Centre co-ordinated more than 100 times assistance to countries in Europe and worldwide due to crises.

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