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It’s not just the #Coronavirus putting a pin in #Croatia’s euro hopes

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According to the IMF, Croatia’s economy is set to be harder-hit by the coronavirus pandemic than any other country in south-east Europe. While most Balkan nations are predicted to see their GDP drop by 3-5% in 2020, Zagreb is looking down the barrel of a painful 9% contraction. This bitter blow is in part due to Zagreb’s outsized reliance on tourism: anything like a normal summer season is unlikely this year for Croatia’s tourism sector, which contributes some 20% of the country’s GDP. 

The financial crisis comes at a particularly bad time for the EU’s newest member state. After years of waiting, Croatia was planning to join the exchange rate mechanism (ERM-II) this summer. Spending a minimum of two years under the ERM-II scheme with a stable currency and a healthy banking sector is an essential prerequisite to Zagreb’s hopes to adopt the euro by 2024 at the latest.

While the Croatian central bank is insisting that it’s still ready to enter the euro waiting room this summer despite the economic downturn prompted by the pandemic, it’s difficult to see how Croatia could fulfill the criteria for adopting the single currency while recovering from the world’s worst financial crisis since the Great Depression. A particular challenge will be to bring public debt under 60% of GDP. Zagreb had made progress on this front before the coronavirus outbreak, but debt is likely to soar as the government tries to staunch the bleeding on the jobs market.

What’s more, the virus-related financial damage is likely to draw renewed attention to a number of missteps, from Zagreb’s backsliding on questions of corruption to its much-maligned currency conversion of loans, which have left Croatia’s economy on shaky ground.

The Croatian government has stepped up its courting of foreign investment in recent months as it attempts to get its finances in order ahead of euro adoption, but pervasive graft and financial crime continue to cause overseas firms to flee. Croatia loses over 10% of its GDP annually to corruption and fraud—a lacuna which will make it that much harder for Zagreb to cope with the pandemic-induced downturn.

To make matters worse, the ease of doing business in the country has actually slumped since Croatia joined the EU in 2013. This January, Zagreb sunk to its worst level in five years on Transparency International’s corruption index, amid concerns that a lack of scrutiny from the European Union since Croatia’s accession to the bloc has eaten away at progress to stamp out graft.

Questions over the independence of the judiciary and Zagreb’s willingness to take a hard line on graft abound, with little sign of progress. As the head of one NGO promoting the rule of law put it, “there is no external pressure to encourage change, the [European] Commission, for example, has abolished the anti-corruption reports it once had.”

It’s not only Croatia’s backsliding on corruption, however, which has spooked foreign investors. Their confidence in Croatia’s investment environment has been badly shaken by a particularly controversial decision: Zagreb’s conversion of loans denominated in Swiss francs (CHF) to loans denominated in euros, for which it left banks to pick up the tab.

In the 2000s, CHF loans were popular in Croatia and other Eastern European countries thanks to their low interest rates and the Swiss currency’s stability. In January 2015, however, the Swiss central bank dropped the peg which had locked the Swiss franc into a fixed exchange rate with the euro for years — sending the Swiss franc soaring and making it more difficult for Croatian borrowers to pay back their CHF-denominated loans.

Croatia’s reaction to the sudden surge in the Swiss franc alarmed foreign investors and European policymakers alike. Right before they were voted out of office in November 2015, Croatia’s Social Democrats pushed through a law forcibly converting all loans in CHF to loans in euros. More specifically, the conversions were carried out retroactively, using the CHF/EUR exchange rate in force on the day that the loan had initially been concluded. In many cases, this method of conversion meant that customers had significantly “overpaid” in their monthly installments—a €1.1 billion loss which Croatia forced its banks to swallow.

The measure’s problematic consequences were almost immediately apparent. Members of the new Croatian government declared that the outgoing Social Democrats had “not thoroughly thought through the conversion and had implemented it in a populist manner”. The European Commission asked Zagreb to rethink the law, arguing that it dealt a severe blow to investor confidence and placed a disproportionate burden on the country’s local banks—more than 90% of which are owned by parent companies from elsewhere in the European Union.

The European Central Bank, meanwhile, opined that while an EU directive allowed countries to regulate foreign currency loans, they were excluded from doing so with retroactive effect—raising the question of whether Croatia’s loan conversion legislation was compatible with European law.

Nearly five years after the law on loan conversions was passed, it’s still prompting legal battles and undercutting investor confidence. I parallel with Zagreb’s legislative crackdown on CHF loans, a lawsuit initially launched by a Croatian consumer association has slowly made its way through the country’s courts. As things currently stand, Croatian courts have declared the currency clauses which denominated the loans in CHF in the first place null and void, meaning that individual consumers can seek compensation from banks—including for loans which have already been repaid.

Even before Croatia’s finances took a nosedive amid the current pandemic, banks and financial analysts were warning that the CHF loans saga had fragilized the country’s banking sector. If the Croatian Supreme Court rules that banks must compensate borrowers above and beyond the initial capital of their loans, they could bear fresh costs of close to €2.5 billion. Such a blow could, along with the steadily growing pandemic damage, serve as a one-two punch to Zagreb’s hopes to join the ERM-II this summer.

Conservative Party

Johnson to levy £10,000 fine on COVID-19 rule-breakers

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People in England who break new rules requiring them to self-isolate if they have been in contact with someone infected with COVID-19 will face a fine of up to £10,000 ($12,914), Prime Minister Boris Johnson said on Saturday (19 September), writes David Milliken.

The rules will apply from 28 September to anyone in England who tests positive for the virus or is notified by public health workers that they have been in contact with someone infectious.

“People who choose to ignore the rules will face significant fines,” Johnson said in a statement.

Fines will start at 1,000 pounds for a first offence, rising to 10,000 pounds for repeat offenders or cases where employers threaten to sack staff who self-isolate rather than go to work.

Some low-income workers who suffer a loss of earnings will receive a £500 support payment, on top of other benefits such as sick pay to which they may be entitled.

Current British government guidance tells people to stay at home for at least 10 days after they start to suffer COVID-19 symptoms, and for other people in their household not to leave the house for 14 days.

Anyone who tests positive is also asked to provide details of people outside their household who they have been in close contact with, who may then also be told to self-isolate.

To date there has been little enforcement of self-isolation rules, except in some cases where people have returned from abroad.

However, Britain is now facing a rapid increase in cases, and the government said police would be involved in checking compliance in areas with the highest infection rates.

Johnson has also faced calls to reintroduce more wide-ranging lockdown rules for the general public.

However, the Sunday Times reported he was poised to reject calls from scientific advisors for an immediate two-week nationwide lockdown to slow the spread of the disease, and instead reconsider it when schools take a late-October break.

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Ireland tightens Dublin COVID-19 restrictions as cases surge

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The Irish government on Friday (18 September) announced strict new COVID-19 restrictions for the capital Dublin, banning indoor restaurant dining and advising against all non-essential travel, after a surge in cases in recent days. Ireland, which was one of the slowest countries in Europe to emerge from lockdown, has seen average daily case numbers roughly double in the past two weeks and significant increases in those being treated for the virus in hospitals, writes Conor Humphries.

“Here in the capital, despite people’s best efforts over recent weeks, we are in a very dangerous place,” Prime Minister Micheal Martin said in a televised address to the country, announcing the restrictions.

“Without further urgent and decisive action, there is a very real threat that Dublin could return to the worst days of this crisis.” The measures, which include a ban on indoor events, will last for three weeks, he said. Ireland had the 17th highest COVID-19 infection rate out of 31 European countries monitored by the European Centre for Disease Control on Friday, with 57.4 cases per 100,000 people in the past 14 days.

The government reported three deaths from the virus on Friday, bringing the total toll to 1,792. Countries across Europe, including Britain, Greece and Denmark, on Friday announced new restrictions to curb surging coronavirus infections in some of their largest cities. Ireland on Thursday tightened its COVID-19 travel restrictions by imposing quarantines on travellers from major holiday markets Italy and Greece.

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France reports new daily record in #COVID-19 cases

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France reported 13,498 new confirmed COVID-19 cases over the previous 24 hours, setting another record in daily additional infections since the start of the epidemic, writes Mathieu Rosemain.

The new cases pushed the cumulative total to 442,194 as the seven-day moving average of daily new infections rose to more than 9,700, compared with a low of 272 at the end of May, two weeks after the lockdown was lifted.

A faster circulation of the virus and a six-fold increase in testing since the government made it free are the two main reasons for the scale of the increase, epidemiologists have said.

The number of people in France who have died from COVID-19 was up by 26 on Saturday at 31,274, a growth significantly lower than registered the previous day.

Health authorities reported a sudden jump in the country’s daily death toll from COVID-19 on Friday (18 September)  because of unreported cases in one hospital near Paris.

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