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.
#Coronavirus response: €135 million of Cohesion policy to strengthen the health sector and support the economy in Croatia
The Commission has approved the modification of the Operational Programme Competitiveness and Cohesion in Croatia redirecting almost €135 million of Cohesion policy funding to help the country tackle the effects of the coronavirus crisis. In particular, €50m of EU funds will serve to purchase medical and protective equipment for over 1200 hospitals, other health institutions and elderly homes, while Croatian SMEs will benefit from almost €85m for continuing their operations and saving employment.
In addition, the programme will temporarily benefit from 100% co-financing from the EU budget. Cohesion and Reforms Commissioner Elisa Ferreira said: “Cohesion policy is playing an important role in the response to the pandemic and prompting a sustainable way to recovery. Thanks to the joint and swift efforts of the Croatian authorities and the Commission, these resources are providing much needed relief and support to the country's health sector and economy.”
The modifications are possible thanks to the exceptional flexibility under the Coronavirus Response Investment Initiative (CRII) and Coronavirus Response Investment Initiative Plus (CRII+), which allow member states to use Cohesion policy funding to support the sectors most exposed to the pandemic and its economic consequences, such as health care, SMEs and labour markets. More information is available here.
MEP protests with Croatian farmers
Ivan Vilibor Sinčić MEP held a protest with Croatian farmers in front of the Government building today (10 SEptember) Sinčić and his sympathizers brought a van full of watermelons in front of the government building, which they threw in front of the entrance to the building. We remind you that farmers decided to protest due to, as they say, the unequal position of Croatian farmers on the market.
Sincic, who climbed on the roof of the van, warned that the broken watermelons represent "hundreds of thousands of other watermelons and other fruits and vegetables that will be plowed or destroyed this year" because imported products, often of lower quality, have flooded the Croatian market and systematically destroyed domestic production.
"Fairy tales that we hear on television from the Minister of Agriculture and earlier from the former Minister of Agriculture and various other ministers do not work in practice," Sincic said.
The protest could not be avoided even by the ministers who started arriving before the government session.
"We call you to urge for us farmers. Only Croatia is doing nothing, all other countries are protecting their producers," protester Marina Galovic told Finance Minister Zdravko Maric.
She offered the minister a watermelon, but Maric refused.
"The minister did not want to take the watermelon. Taxes and contributions were paid on that watermelon. I guess out of humiliation. You eat what we produce and you humiliate us. It's not just us, it applies to all industries," the indignant protester said after the meeting with the minister.
#Coronavirus - Germany issues travel warning for parts of Croatia
Germany issued a warning against travel to parts of Croatia on Thursday (20 August) as Europe’s largest economy battles to contain a rising number of coronavirus cases during the summer season, write Caroline Copley, Michael Nienaber and Andreas Rinke in Berlin.
The German foreign ministry advised against travel to the regions of Sibenik-Knin and Split Dalmatia, which are popular with tourists, after the public health agency declared them coronavirus risk regions, making tests for returnees mandatory.
The number of new cases in Germany has been rising steadily since early July and has accelerated in recent weeks. On Thursday, the number of confirmed cases climbed by 1,707 to 228,621, marking their biggest daily increase since April 26.
Imported cases of the coronavirus have risen to 39% of overall new infections in Germany this week, up from around 30% last week.
Croatia is the source of the third-highest number of infections among people returning to Germany, after Kosovo and Turkey, according to data from the Robert Koch Institute for infectious diseases.
Concern is growing that people may be getting infected while visiting family members in those countries.
Davor Bozinovic, Croatia’s interior minister, said a ban on nightclubs staying open beyond midnight would likely be extended and added: “Less than 1% of tourists got infected (in Croatia).”
Statistics from the health ministry in North Rhine-Westphalia, Germany’s most populous state and hit relatively hard by the pandemic, found more than a third of returnees who tested positive for coronavirus between July 1 and Aug. 16 came from Kosovo, with Turkey in second place at almost 20%.
Those returning from more traditional holiday countries, such as Spain and Greece, made up just 2.5% and 0.5% of positive cases in the state, respectively.
Germany also urged people not to travel to the Valcea region of Romania, but removed a warning for the regions of Ialomita, Mehedinti and Timis. It also lifted a travel warning for Luxembourg.
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