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Croatia

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

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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.

Bulgaria

Eastern Europe has some of EU’s most polluted cities - What are the challenges facing the region and what solutions exist?

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According to Eurostat, the highest concentration of dangerous fine particles is in urban areas of Bulgaria (19.6 μg / m3), Poland (19.3 μg / m3), Romania (16.4 μg /m3) and Croatia (16 μg / m3), writes Cristian Gherasim.

Among EU member states Bulgaria’s urban areas hold the highest concentration of fine particles, way above the levels recommended by the World Health Organization.

On the opposite end of the spectrum, Northern Europe holds the lowest levels of fine particle pollution with PM2,5 in the EU. Estonia (4,8 ľg/m3), Finlanda (5,1 ľg/m3) şi Suedia (5,8 ľg/m3), hold the top places for the cleanest air.

PM2.5 is the most dangerous of the pollutant fine particles, with a diameter of less than 2.5 microns. Unlike PM10 (ie 10 micron-sized particles), PM2.5 particles can be more harmful to health because they penetrate deep into the lungs. Pollutants such as fine particles suspended in the atmosphere reduce life expectancy and well-being and can lead to the appearance or worsening of many chronic and acute respiratory and cardiovascular diseases.

Romania has some of the hardest hit areas in the European Union by various air pollutants.

Air pollution

According to a study published in March by the global air quality platform IQAir, Romania ranked 15th amongst the most polluted countries in Europe in 2020, and the capital city of Bucharest ranked 51st worldwide. The most polluted capital in the world is Delhi (India). On the other hand, the cleanest air can be found on islands in the middle of the ocean, such as the Virgin Islands and New Zealand, or in the capitals of the Nordic countries Sweden and Finland.

Bad news regarding Romania comes also from the air quality monitoring company, Airly, which singled out Poland and Romania for some of the highest levels of pollution on the continent. The report also found that Cluj, another city in Romania is no listed amongst the most polluted cities in the EU and even holds top spot when it comes to nitrogen dioxide pollution.

According to the European Environment Agency air pollution is the highest health risk in the European Union, with around 379,000 premature deaths due to exposure. Power plants, heavy industry and increased car traffic are the main causes of pollution.

The European Union has appealed local authorities to better monitor air quality, to spot sources of pollution and promote policies that limit pollution by cutting down on traffic.

Brussels has already targeted Romania over air pollution. It launched legal action over excessive air pollution levels in three cities: Iasi, Bucharest and Brasov.

A London based NGO that specializing in sustainable behavior change says in urban areas people have to make decisions for a lifestyle favoring better air quality and the environment: choosing to travel by car sharing, with bicycles or electric scooters, instead of cars.

Waste management

In Eastern Europe, air pollution together with poor waste management and low levels of recycling has created a dangerous concoction. In Romania, next to air quality, the low level of recycling requires local authorities to step in.

It’s infamous that Romania is one of the European countries with the lowest levels of waste recycling and local authorities are required to pay significant amounts of money annually in fines for non-compliance with EU environmental regulations. Also, there is a legislative proposal that would mean that a certain tax for plastic, glass and aluminum packaging would be applied from next year.

EU Reporter previously presented the case of Ciugud community in central Romania that aims to reward recycling by using a locally developed cryptocurrency.

The virtual currency, eponymously named CIUGUban – putting together the name of the village with the Romanian word for money- will be used in its first stage of implementation solely to repay citizens that bring plastic containers to recycling collection units. CIUGUban will be given to locals bringing plastic, glass or aluminum packaging and cans to the collection centers.

Ciugud community is indeed answering EU’s call that local communities to step in and take change of their environmental issues.

As previously reported, in Ciugud the first such unit that gives cash for trash has already been set up in the local schoolyard. In a post on the Facebook of Ciugud Town hall, authorities mentioned that the unit is already full with plastic waste collected and brought there by kids. The pilot project is implemented by the local administration in partnership with an American company, one of the world's leading manufacturers of RVMs (Reverse Vending Machines).

When the project was launched earlier this month, officials mentioned that the deft approach is meant to particularly educate and encourage kids to collect and recycle reusable waste. According to the press release, children are challenged to recycle as much packaging as possible by the end of the summer holiday and to collect as many virtual coins as possible. At the beginning of the new school year, the virtual coins collected will be converted so that children will be able to use the money to finance small projects and educational or extracurricular activities.

Ciugud thus becomes the first community in Romania to launch its own virtual currency. The endeavor is part of a larger local strategy to turn Ciugud into Romania’s first smart village.

Ciugud is planning to go even further. In the second phase of the project, the local administration in Ciugud will set recycling stations in other areas of the commune, and citizens could receive in exchange for virtual coins discounts at village shops, which will enter this program.

Ciugud Town Hall is even analyzing the possibility that, in the future, citizens will be able to use virtual currencies to receive certain reductions in taxes, an idea that would include promoting a legislative initiative in this regard.

"Romania is second to last in the European Union when it comes to recyling, and this means penalties paid by our country for not meeting environmental targets. We launched this project as we want to educate the future citizens of Ciugud. It is important for our children to learn to recycle and protect the environment, this being the most important legacy they will receive," said Gheorghe Damian, the mayor of Ciugud Commune.

Speaking to EU Reporter, Dan Lungu, town hall representative, explained: “The project in Ciugud is part of several other endeavors designed to teach recycling, green energy and protecting the environment to kids. In addition to CiugudBan, we also set up an “Eco Patrol”, a group of school kids that go into the community and explain people about the importance of recycling, how to collect waste, and how to live greener.”

Dan Lungu told EU Reporter that only through getting kids involved they managed to collect and recycle more from Ciugud citizens. The second phase of the project will get a local vendor involved as well, offering in exchange for CiugudBan goods and services to locals.

“And in the third part of the project we want to use CiugudBan to pay taxes and public servicec,” he told EU Reporter.

It remains to be seen is such small scale projects throughout Europe would be enough the efficiently tackle the environmental challenges facing Eastern Europe.

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Bulgaria

Southern Europe’s top performers in tackling climate change

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A report published by the European Council on Foreign Relations shows that Romania and Greece are amongst the region’s most active EU member states on climate change issues, writes Cristian Gherasim, Bucharest correspondent.

Efforts to increase the use of renewable energy have picked up in Greece, as well as plans to close down coal fueled power plants and continue with the green energy transition.

The economic downturn brought about by the COVID 19 pandemic might also have played a role in setting the agenda for Greece’s efforts to develop alternative means of energy. Greece is seeking to bring much need foreign investors and moving towards green energy might just be the way to do it. Greece is also aiming to position itself as a leader on the issue of climate action and is now currently involved in a development project with the German carmaker Volkswagen, the ECFR report shows.

Another front runner in seeking green technologies is Romania which sees the much discussed European Green Deal as an opportunity to develop its economy and rely more on green energy as investors become more aware of the climate challenge issue.

In Romania as well, there have been lengthy debates about phasing out coal. Past month nation-wide controversy broke out when more than 100 miners in the Jiu Valley in Romania had barricaded themselves underground to protest unpaid wages.

The coal miners’ issue in Romania highlights a real national and European issue. Many country face issues making the transition to green energy with politicians from both sides of the aisle making the case for and against the move.

Then, Commission Vice President Frans Timmermans stepped in and said that there's no future for coal in Europe and Romania needs to leave coal behind. Timmermans heads the realization and implementation of the Green Deal and the directives that will ensure climate neutrality by 2050 in the EU.

Bulgaria on the other hand has committed to keep its coal sector for another 20-30 years, the report shows. The S-E European country is trying to catch up with the rest of EU in transitioning to greener alternative energy sources. Yet the report notes a significant shift in its attitude towards green technologies in the past years.

A notable example of an EU member state embracing a conservative approach towards climate strategy can be found in Slovenia.

Slovenia, the report notes, decreased its climate ambitions significantly once the new government took over in January 2020. The new government does not regard the European Green Deal as an economic opportunity for the country.

Unlike Slovenia, Croatia has been considerably more open to the European Green Deal. In Croatia, the EU’s climate efforts have generally had a positive reception from the government, citizens, and media outlets, but the impact of the COVID-19 pandemic has marginalized the issue. Also, the adoption and implementation of key climate-related policies have faced repeated delays, according to the report.

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Croatia

Recovery and Resilience Facility: Croatia and Lithuania submit official recovery and resilience plans

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The Commission has received official recovery and resilience plans from Croatia and Lithuania. These plans set out the reforms and public investment projects that each member state plans to implement with the support of the Recovery and Resilience Facility (RRF).

The RRF is the key instrument at the heart of NextGenerationEU, the EU's plan for emerging stronger from the COVID-19 pandemic. It will provide up to €672.5 billion to support investments and reforms (in 2018 prices). This breaks down into grants worth a total of €312.5bn and €360bn in loans. The RRF will play a crucial role in helping Europe emerge stronger from the crisis, and securing the green and digital transitions.

The presentation of these plans follows an intensive dialogue between the Commission and the national authorities of these member states over the past number of months.

Croatia's recovery and resilience plan 

Croatia has requested a total of almost €6.4bn in grants under the RRF.

The Croatian plan is structured around five components: green and digital economy, public administration and judiciary, education, science and research, labour market and social protection, healthcare. It also encompasses one initiative on building renovation. The plan includes measures to improve business environment, education, research and development, energy-efficiency in buildings, zero-emission transport and the development of renewable energy sources. Projects in the plan cover the entire lifetime of the RRF until 2026. The plan proposes projects in all seven European flagship areas.

Lithuania's recovery and resilience plan

Lithuania has requested a total of €2.2bn in grants under the RRF.

The Lithuanian plan is structured around seven components: a resilient health sector, green and digital transitions, high quality education, innovation and higher education, efficient public sector, and social inclusion. The plan includes measures in areas such as renewable energy, energy efficiency, sustainable transport, digital skills, research and innovation, digitalisation of public administration, and the strengthening of active labour market policies. Projects in the plan cover the entire lifetime of the RRF until 2026. The plan proposes projects in all seven European flagship areas.

Next steps

The Commission will assess the plans within the next two months based on the eleven criteria set out in the Regulation and translate their contents into legally binding acts. This assessment will notably include a review of whether the plans contribute to effectively addressing all or a significant subset of challenges identified in the relevant country-specific recommendations issued in the context of the European Semester. The Commission will also assess whether the plans dedicate at least 37% of expenditure to investments and reforms that support climate objectives, and 20% to the digital transition.          

The Council will have, as a rule, four weeks to adopt the Commission proposal for a Council Implementing Decision.

The Council's approval of the plans would pave the way for the disbursement of a 13% pre-financing to these member states. This is subject to the entry into force of the Own Resources Decision, which must first be approved by all member states.

The Commission has now received a total of 17 recovery and resilience plans, from Belgium, Denmark, Germany, Greece, Spain, France, Croatia, Italy, Latvia, Lithuania, Luxembourg, Hungary, Austria, Poland, Portugal, Slovenia, and Slovakia. It will continue to engage intensively with the remaining member states to help them deliver high quality plans.

More information

Recovery and Resilience Facility: Questions and Answers

Factsheet on the Recovery and Resilience Facility

Recovery and Resilience Facility: Grants allocation

Recovery and Resilience Facility Regulation

Recovery and Resilience Facility website

RECOVER team website

DG ECFIN website

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