Croatia’s economy on the brink of depression

 

Zeljko Lovrincevic, an expert at the Zagreb Institute of Economics, summarises the situation: ”Croatia is no longer in recession – it is on the brink of depression.”

 

Lovrincevic thinks that the Croatian government chose the wrong strategy in fighting the economic crisis when it raised VAT and water, gas and electricity prices. Indeed, the expert is predicting that disposable incomes will fall by four to five percent and believes that raising VAT was of no tangible benefit to the budget. The Croatian government has also admitted that the country’s economy is in crisis, and is not expecting any growth this year. When the government was elected at the end of 2011, gross domestic product (GDP) was expected to grow by 0.8 percent – but officials are now preparing to face possible stagnation. ”Government investment in the public sector during the first half of the year has still not had any significant impact on the economy,” said Finance Minister Slavko Linic recently. ”However, the battle for zero growth is one we can win with increased investment.” Croatian economist and former Minister for the Economy Ljubo Jurcic also expects to see further economic decline. Speaking to the Croatian newspaper Vecernji list, Jurcic explained that, at the onset of the crisis, Croatian banks initially converted loans, but these arrangements are now coming to the end of their term and the situation has not improved.

 

Trade deficit following CEFTA exit
Croatia may also have to swallow heavy losses in exports following its intended accession to the EU on 1st July 2013. At least, that is according to calculations by the Croatian National Bank (HNB). The institution is anticipating a decline in exports equivalent to between 0.1 and 0.2 percent of GDP – a loss of up to 100 million euros. This assumption is based on the experiences of those EU member states that left the duty-free CEFTA market on entering the European common market. Speaking to APA, Ruzica Gelo, Director of the EU Centre in the Croatian Chamber of Economy (HGK), stated that Croatia’s abandonment of the CEFTA free trade agreement will lead to increases in customs duties for certain exports to CEFTA member states, particularly for the agricultural and food sectors. This increase in tariffs may not automatically bring exports to a standstill ”but will certainly have an impact on export volumes”. US economist Paul Krugman, however, sees Croatia’s economic recovery as wholly dependent on its export-oriented industry. Indeed, he is quoted by the Croatian newspaper Vecernji list as saying: ”Croatia is too small for its recovery to be driven by domestic consumption alone, though it must be apparent that its economy cannot recover unless the situation in the eurozone is stabilised.” Economist Vladimir Gligorov at the Vienna Institute of Economic Studies (WIIW) also believes that exports are the key to saving Croatia’s economy, stating that the HNB must therefore be prepared to change its monetary policy. In a recent interview with Novi list, Gligorov said: ”The question is whether an agreement can be reached with the central bank regarding a devaluation of the Croatian currency. If so, the kuna could be steadily weakened, thus helping to attract investment into the export sector.”