Mixed responses on the EU’s reaction and growing fear of recession in Croatia

Institute for International Relations
Croatia’s fears of recession and devastating effects of the global economic crisis
The intensive preoccupation of the Croatian public with the world financial crisis and its reflections on Croatia started in the summer of 2008. First reactions of government officials reflected the attempt to play down the proportions of crisis and its possible effects on the Croatian economy. It was hoped that the financial crisis would be limited to US financial institutions and its economy.
The autumn of 2008 brought the sobering up of and acknowledgement of the realistic scope of the threat and since then, governmental and public interest is primarily directed on the potential impact of the crisis to the Croatian economy as well as its accession process to the EU.
The reactions to the crisis and how to overcome it have come from practically all social actors; the government, employers, banks, trade unions, experts, opinion makers, media analysts etc. Trade unions for instance, have focused mainly on the protection of jobs and the living standards of employees and citizens. In the expectations of a worsening of financial crisis and its spill-over effect into the real sector, the government offered social partners, employers and unions, to freeze salaries in the 2009 in order to bring the state budget deficit closer to zero,[1] however the trade unions declined it as an unfair attempt to put the burden of crisis solely on the shoulders of workers.[2] The government also formed the ‘Council of Economic Advisors l’ in November 2008 to ensure the needed expert advice on prudent economic policies and measures to mitigate the immediate financial crisis effects on the Croatian economy. In February 2009 the government however rejected a set of anti-recession measures suggested by the economic council; and adopted a much milder policy approach to deal with it. As local elections are scheduled for May 2009, the government which is led by HDZ was for a long time reluctant to declare openly that Croatia has entered into recession.[3] The Social Democratic Party (SDP) has come out with its proposal of anti-recession measures earlier.[4]
Thanks to prudent regulation of Croatian National Bank (CNB), banking sector in Croatia is still strong and has not been hurt much by the crisis thus far.[5] The CNB is presently helping to preserve the monetary stability by using the high foreign currency reserves for intervening on the money market and also ensuring the debt service of the government.[6] The thorough assessment of the financial crisis’ potential impact on the Croatian economy was presented in the recent CNB Bulletin.[7] It has emphasised that the consequences of the international financial crisis on the Croatian economy will be first seen in the increased interest rates on foreign debt and in the decrease of Croatian exports of goods and services. Within the conducted simulation model, CNB illustrated that the cost of borrowing from abroad (for Croatian banks, companies and the government) will increase by 4 percent, due to which commercial banks might increase interest rates on households and corporate loans (by 5.8 percent and 5.9 percent, respectively). Finally, this would result in a decrease of household loans by 28 percent. As a response to such a scenario, the Governor of CNB, Željko Rohatinski, emphasized that forecasts from the model do not necessarily become reality and that some of these negative effects, can be mitigated by the already adopted CNB measures such as the lowering of the obligatory reserves for banks.[8]
The perceptions on EU response to the effects of the financial crisis are mixed in Croatia
The Croatian media reports focused quite intensively on how the EU is handling the financial crisis – its role in dealing with the consequences of the crisis, undertaken measures, and cooperation with the rest of the world, as well as the analysis of the EU plans for overcoming the crisis.
Most of the debates and analyses were focused on the dynamics of the crisis and the performance of the EU in this context. The fears of recession were portrayed as reasonable, while the reports were centred on the measures of the EU governments which were desperately trying to save their financial institutions. The media reports stressed the lack of a clear vision of EU actions in solving the problems in the financial sector. Most media reported on the appeal of José Manuel Barroso, the President of the European Commission, for the cooperation between member countries since neither of them will be able to overcome the crisis alone.[9] The media also initially reported that the Union rejected the possibility of setting up agencies which would monitor bank operations throughout its territory and announce the ad hoc meetings which would deal with each individual company. The EU also rejected the French proposal to establish a European fund that could react similarly as the American Ministry of Finance with large injections of money in the squalid business. French President Nicolas Sarkozy concerns on the future of the Eurozone if it continues to function without a clearly defined economic management body, were also widely reported here. Such economic government should cooperate closer with the European Central Bank (ECB), but the French President also stressed that cooperation would not disrupt the independent monetary policy. The Croatian media also reported about the divisions in the reactions of the members of the European Parliament e.g. that Germans fear that it will undermine the independence of the ECB and create division between the EU member states.[10] German Chancellor Angela Merkel’s opinion was often singled out by media as the strongest opponent to the joint action.[11]
Opinions on how the EU is handling the crisis have been expressed also by the experts and academic analysts. Ivan Lovrinović, Professor at The Faculty of Economics and Business, is of opinion that the economy of the European Union is about to face major challenges, especially the European Central Bank which thus far has not been influenced by external pressures of such kind. He also stressed that the European Union does not have a unique strategy for overcoming the financial crisis, yet that each member state individually creates the arrangements for dealing with it, which can easily be seen in the actions of Sarkozy, Merkel and Brown.[12] Lovrinović also addressed the role of the European single currency – Euro – in dealing with the crisis. In the last two years, the exchange rates for the dollar and the Euro have depreciated by fifty percent which made the EU countries unable to protect their economies. In addition, depreciation of the dollar represents also an external shock to the economic activity, and according to him the EU has no instruments to fight back the ‘intercurrency war’ that has spread to the Japanese and Chinese currency.[13]
The relationship between the EU and the USA as well as with other countries in the context of solving the crisis was also commented on in Croatia. Croatian Prime Minister Ivo Sanader considers that Europe cannot be separated outside the Euro-Atlantic line and thinks that it is important for the EU to coordinate measures with the United States because both economies are mutually dependent.[14] In his speech on the 16th Conference of the “Croatian Society of Economists” held on 12 November 2008 in Opatija, Croatian President Stjepan Mesić pointed out that the world is searching for common solutions, while simultaneously trying to protect both existing international integrations and their individual interests.[15] After the G20 summit, from which much was expected, the countries ended without specific measures for economic recovery. The market expected a joint strategy, not a decision on leaving each government to tailor the response to the crisis according to their individual circumstances. In addition, the media reported different views on the approach to the financial crisis – that of Europe and of the USA. There are also other countries, such as Brazil and China, with large developing markets, which seek to participate more in the decision-making process. Some analysts note that all of these directly imply a decrease in the influence and power, both of the United States and European countries.[16]

Also, of considerable public interest were analyses related to the present desirability of the membership in the European Union. The main question that appears in media is how much is it worth to be part of the united Europe now. Almost ironically, the financial crisis could play an important role in the process of EU enlargement which can be seen on an example of Iceland, Denmark and Ireland. Comments conclude that, even with the crisis, the integration is very much desirable and worthwhile.[17] Croatian media closely followed the chain of events in these countries. After being shaken up by the dimension of the economic crisis, Iceland expressed interest in joining the European Union, and Denmark enunciated the possibility of entering the Eurozone.[18] The crisis also pushes Ireland to the EU – it has finally announced some progress associated with the Lisbon Treaty, which is important for the realization of further EU enlargement. Irish people are starting to wonder whether they act wisely while saying ‘No’ to the Lisbon agreement.[19] Croatian public is very much interested in the situation in Ireland, because their growing support to the Lisbon agreement opens the EU door to Croatia.[20]
Regarding the potential implications of the crisis on Croatia’s status as one of the candidate countries, Croatian Government and the general public welcomed the statement of the European Commissioner for enlargement Olli Rehn who said that the process of Croatian accession to the EU will not slow down due to the global financial crisis. However, he added that it is true that the EU suffers from an increased fatigue from an enlargement which is associated with the financial crisis.[21] Jadranka Kosor, Vice-President of the government and Minister of the Family, Veterans' Affairs and Intergenerational Solidarity, believes that Croatia will triple the efforts in finishing the negotiations by the end of the year 2009, partly due to the fact that in times like this, it would much better to be part of the EU.[22]
Several Croatian experts commented also on the European plan for solving the crisis by lowering the taxes and increasing spending. This plan is based on the belief that the economy will recover if each member state takes some money from the budget and redirects it in to spending. The fiscal incentives (in a large number VAT reduction), will be launched and completed in the year 2009. Although each country will individually draw up a program that best suits her needs, countries will have to be coordinated in their measures.[23] In her comment on the EU plan on tax incentives, Katarina Ott, the director of the Institute of Public Finance stated that Croatia may even have to raise taxes, not reduce them. She pointed out that the measure of reducing taxes in a time of recession does not have to increase spending and employment. Furthermore, economies are in different circumstances, and there are countries like Croatia that cannot afford such a fiscal stimulation. She also thinks that this measure cannot be undertaken in a country with high fiscal deficit and foreign debt. At the same time, Daniel Nestić from The Institute of Economics, Zagreb, also points out that Croatia should not follow the EU in its measures and impose large fiscal benefits because this money would spill over in import and would not encourage the recovery of domestic industry.[24]
In short, the crisis within the Union, as mentioned in the media, can be seen as two-sided. On the one hand it can be said that the crisis hit the Union a few years too early, before the joint system of financial operations and its control was organized. In such a situation the actions of individual governments of the member countries could create a chaotic situation within the Union (for example, the Irish and Greek rescue of national banks is highly criticized). On the other hand, the crisis can be helpful, since the Union will find the need for the establishment of a common strategy and safety measures for similar crises in the future.[25]
During the conference entitled “The impact of world financial crisis on Croatia” which was held on 8 December 2008 in Zagreb, one of the leading lobbyists in Brussels, Daniel Gueguen, said that the problem the EU will have to face is much bigger than the recession. In his speech he stated that, in the EU, there is no fiscal, economic and social coordination and that he is very disappointed by the poor management of the Union. He also added that the Union’s rescue plan is the worst document that he has seen so far.[26]
In its recent analysis, the Croatian Association of Banks concluded that Croatia should carefully monitor developments in the EU, since in the context of the crisis the old rules are being redefined and the new ones established. Some of the changes could even redefine the relationship between large and small countries within the Union. As an important historical event that determines the direction of reforms, they point out the provision of five billion Euros in loans to Hungary by the European Central Bank, in the light of the fact that Hungary is not included in the Eurozone.[27]

[1] “Croatian Govt in 2008, from Elctions to Blockade”, available at: http://www.javno.com/pr.php?id=218629(last access: 28 January 2009).

[2] Kresimir Sever: Statement at the meeting of the Socio-Economic Council, 2 December 2008.

[3] “Economic Council presents the first anti-recession measures”, available at: http://www.totalportal.hr/article.php?article_id=254797 (last access: 30 January 2009).

[4] More details on SDP web portal, available at: http://www.sdp.hr/vijesti/sdp_predstavio_paket_antirecesijskih_mjera (last access: 30 January 2008).

[5] Governor Rohatinski was awarded by the journal The Banker as the best European Governor and the best Central Banker in the world.

[6] Interview with Governor Rohatinski, Business monthly BANKA, vol. 16, no.1, January 2009.

[7] Croatian National Bank: “Bulletin No.143”, December 2008, p. 11, available at: http://www.hnb.hr/publikac/bilten/arhiv/bilten-143/hbilt143.pdf?tsfsg=b5... (last access: 25 February 2009).

[8] Željko Rohatinski: “Interest rates are not increasing”, 16 January 2009, available at: http://www.net.hr/novac/page/2009/01/16/0016006.html (last access: 25 February 2009).

[9] “European Parliament members discussed about resolving the financial and economic crisis after the G20 summit”, EnterEurope, 19 November 2008, available at: http://www.entereurope.hr/cpage.aspx?page=clanci.aspx&pageID=13&clanakID... (last acess: 29 January 2009).

[10] Petra Kostanjšak: “Sarkozy: Eurozone needs the economic government”, Vjesnik, 6 November 2008, p. 23.

[11] Gojko Driljača: “Europe in panic from the credit collapse”, Večernji list, 7 October 2008, p. 16.

[12] Vesna Roller: “The government must cut the life on debt”, 8 October 2008, available at: http://glasistre.hr/?d27f361163cf2826d0d2bcdc50149c52,TS,4032,4083,20546... (last access: 25 February 2009).

[13] Vesna Roller: “The government must cut the life on debt”, 8 October 2008, available at: http://glasistre.hr/?d27f361163cf2826d0d2bcdc50149c52,TS,4032,4083,20546... (last access: 25 February 2009).

[14] Jurica Körbler: “Government and CNB have done everything to be safe”, Vjesnik, 16 October 2008, p. 3.

[15] “Speech by President Mesić on the 16th Croatian Society of Economists Conference”, 12 November 2008, available at: http://www.predsjednik.hr/default.asp?ru=345&gl=200811120000003&sid=&jez... (last access: 25 February 2009).

[16] Luka Capar, “The world and the crisis after the G20 summit – Without specific measures for economic recovery”, Vjesnik, 20 November 2008, p. 22.

[17] Bruno Lopandić: “The crisis and the integrations”, Vjesnik, 22 and 23 November 2008, p. 24.

[18] Bruno Lopandić: “Everyone in the eurozone”, Diplomatic portal, Vjesnik, 29 and 30 November 2008, pp. 24.

[19] Ines Sabalić: “The financial crisis pushes Ireland to Europe”, Slobodna Dalmacija, 18 October 2008, available at: http://www.slobodnadalmacija.hr/Svijet/tabid/67/articleType/ArticleView/... (last access: 25 February 2009).

[20] Milan Lazarević: “Ireland, due to the crisis for the Lisbon agreement”, Jutarnji list, 27 November 2008, p. 8.

[21] “Rehn: financial crisis will not slow down the Croatian accession to the EU”, 13 November 2008, available at: http://www.poslovni.hr/98448.aspx (last access: 25 February 2009).

[22] Silvana Oruč Ivoš: “Jadranka Kosor: Despite all the difficulties, we need to work harder and faster on the completion of negotiations”, Vjesnik, 1 December 2008, pp. 4-5.

[23] Ines Sablić: “Against recession – by demand”, Slobodna Dalmacija, 28 November 2008, p. 15.

[24] Ljubica Gatarić: “The European model and Croatia”, Večernji list, 27 November 2008, p. 3.

[25] Jovan Dragišić: “Will the financial crisis have an impact on Croatia? Of course it will”, 5 October 2008, available at: http://www.index.hr/vijesti/clanak.aspx?id=404732 (last access: 25 February 2009).

[26] Miho Dobrašin: “Euro will soon become questionable currency”, 9 December 2008, available at: http://www.poslovni.hr/103024.aspx (last access: 25 February 2009).

[27] Dinko Boić: “Croatian Bank Association: The financial crisis will leave deep and long lasting mark in Croatia”, 4 November 2008, available at: http://business.hr/Default2.aspx?ArticleID=de2c6919-c9b2-4995-ba48-f3fd7... (last access: 25 February 2009).