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Croatia

Politics:

  • Analysis

    Croatia politics: Outs and ins

    Justice in Croatia: Outs and ins

    The political ramifications of several judicial rulings

    IN THE Balkans the big news is who is out of jail, who is in and who is going to court. All the cases are high-profile and all have political fallout. The most significant was the acquittal on November 16th of two Croatian generals by the UN war-crimes tribunal in The Hague. Croats were ecstatic, Serbs bitter.

    Ante Gotovina and Mladen Markac were first convicted in 2011 of conspiring, as part of a "joint criminal enterprise", to drive Serbs out of Croatia's Krajina region. When Yugoslavia disintegrated in the early 1990s the Serbs, backed by Serbia and the Yugoslav army, carved out their own mini-state in Krajina. But in 1995 the Croatian army took most of it back. Some 200,000 Serbs fled, most never to return. Nobody denies that war crimes took place. But the acquittal of the two generals means that the court believes there was no organised plan for "ethnically cleansing" the Serbs.

    The generals returned home to a heroes' welcome. Mr Gotovina may even enter politics. If he does it will be as a man of the right close to the Catholic church. No Croat has until now been convicted by the UN tribunal for actions during the war in Croatia. For Croats the ruling vindicates their struggle against the Serbs as one without original sin.

    Serbs greeted the release of the generals with fury. The decision "belittles the Serb victims and makes them worthless," said Ivica Dacic, Serbia's prime minister. Serbs have always believed that the UN tribunal is just an anti-Serb kangaroo court. Liberals have fought tooth and nail to persuade their compatriots otherwise. For them the ruling is a catastrophe. On November 29th the court will rule on the appeal of Ramush Haradinaj, a former prime minister of Kosovo, and two others. They were acquitted in 2008 but an appeal was allowed--in part, said the court, because of "serious witness intimidation". No Serbs expect them to be convicted now.

    If the court could not prove a "joint criminal enterprise" in Croatia, how can it prove that one existed in the cases of the two Bosnian Serb leaders on trial, Ratko Mladic and Radovan Karadzic? One of the UN court's remits is reconciliation. Legal judgments aside, achieving this will now be harder than ever.

    War crimes are not the only cases in the news. On November 20th Ivo Sanader, Croatia's former prime minister, was jailed for ten years for corruption. A week earlier Radimir Cacic, Croatia's deputy prime minister, resigned. He was convicted for causing two deaths in a road accident in Hungary and is set to go to prison. In Serbia a former deputy prime minister has been arrested as part of a fraud investigation. And in Kosovo Fatmir Limaj, a significant political figure, has been charged with organised crime and corruption and sent for retrial on war-crimes charges of which he was previously acquitted. There has never been a better time to be a Balkan lawyer.

    November 24, 2012

  • Background

    Croatia: Key figures

    Ivo Josipovic

    The president has surprised even his more fervent supporters since taking office in February 2010. The law professor and former member of the Social Democratic Party (SDP) won with 60% of the vote, ahead of the more populist and right-wing Milan Bandic. Since coming to office, Mr Josipovic has been eager to emphasise the principles of justice and fairness, and a need for regional reconciliation. He has a close working relationship with the new SDP-led government, leading to accusations that the neutrality of the office is being eroded. His authority and popularity have risen since taking office. He will continue to be a positive influence on regional relations.

    Zoran Milanovic

    Considered by many as inexperienced but charismatic, Mr Milanovic assumed the leadership of the largest opposition party, the SDP, in 2007, and became prime minister in 2011 following his party's victory at the polls. In advance of the 2011 election, he focused on building a coalition by forming alliances with the Croatian People's Party (HNS), the Istrian Democratic Assembly (IDS) and the Croatian Pensioners' Party (HSU). Since coming to power Mr Milanovic has asserted his authority, sometimes creating tensions within the coalition with his policy decisions. He has also been accused of implementing double standards towards his cabinet depending on which party they represent.

    Radimir Cacic

    The head of the HNS and deputy prime minister in charge of the economy, Mr Cacic is a key figure in the coalition government. Mr Cacic has been a member of parliament since 1995, leading the HNS into a coalition with the SDP in 2000-03. He has attempted to put his own stamp on the coalition, often making policy announcements before the prime minister. Mr Cacic is a controversial politician, who has been engulfed in scandal on several occasions. In 2010, the Constitutional Court upheld a conflict of interest verdict against him over infrastructure tenders awarded while he was the public works minister in 2000-03. In 2012, a Hungarian court found him guilty of causing the death of two people in a car accident in 2010. Despite opposition calls for his resignation, he has retained the support of Mr Milanovic although some members of the HNS have expressed reservations about his leadership.

    Tomislav Karamarko

    Following a lengthy build-up and voting session, Mr Karamarko was elected leader of the main opposition Croatian Democratic Union (HDZ) in May 2012, replacing the ousted prime minister, Jadranka Kosor. Mr Karamarko is a former head of the Security and Intelligence Agency and a former interior minister. His election marks a shift within the HDZ back to its more nationalist roots. Mr Karamarko has pledged his commitment to the stamping out of corruption within the HDZ, as well as emphasising a need for unity within the party. Mr Karamarko's first electoral challenge will come in 2013, in the form of local elections. Before this, he is likely to seek to consolidate his position by embracing more populist policies and promoting younger officials in order to distance the HDZ from the corruption scandals that have plagued the high-ranking old guard.

    August 07, 2012

  • Structure

    Croatia: Political structure

    Official name

    Republic of Croatia

    Form of state

    Democratic republic

    Legal system

    Based on constitution of December 1990, amended in 1992, 2000 and 2001

    National legislature

    Parliament (Hrvatski Sabor) is unicameral and comprises 151 deputies. Both the Chamber of Representatives and the Chamber of Counties were abolished when their mandate expired in April 2001

    National elections

    January 2010 (presidential), December 2011 (parliamentary), Next elections: February 2015 (presidential); December 2015 (parliamentary)

    Head of state

    President of the republic, currently Ivo Josipovic, who was sworn in on February 18th 2010

    National government

    Appointed by the president and confirmed by parliament. A majority government, led by the centre-left Social Democratic Party and supported by the Croatian People's Party, the Istrian Democratic Assembly and the Croatian Pensioners' Party, and minority representatives, was appointed in December 2011

    Main political parties

    Social Democratic Party (SDP); Croatian Democratic Union (HDZ), Croatian People's Party (HNS); Istrian Democratic Assembly (IDS); Croatian Pensioners' Party (HSU); Croatia Labourists-Labour Party; Croatian Democratic Assembly of Slavonia and Baranja (HDSSB); Croatian Citizens Party (HGS); Democratic Centre (DC); Croatian Peasants' Party (HSS), Croatian Pure Party of Rights (HCSP) Independent Democratic Serbian Party (SDSS)

    Leading members of the government

    Prime minister: Zoran Milanovic (SDP)

    Deputy prime minister for foreign affairs: Vesna Pusic (HNS)

    Deputy prime minister for welfare & youth affairs: Milanka Opacic (SDP)

    Deputy prime minister for regional development & EU funds: Branko Grcic (SDP)

    Deputy prime minister for home, foreign & European affairs: Neven Mimica (SDP)

    Key ministers

    Administration: Arsen Bauk (SDP)

    Agriculture, fisheries & rural development: Tihomir Jakovina (SDP)

    Construction & spatial planning: Ana Mrak Taritas (HNS)

    Culture: Andrea Zlatar (HNS)

    Defence: Ante Kotromanovic (SDP)

    Economy: Ivan Vrdoljak (HNS)

    Enterprise: Gordan Maras (SDP)

    Environment: Mihael Zmajlovic (SDP)

    Finance: Slavko Linic (SDP)

    Health: Rajko Ostojic (SDP)

    Internal affairs: Ranko Ostojic (SDP)

    Justice: Orsat Miljenic (independent)

    Labour & pension system: Mirando Mrsic (SDP)

    Maritime affairs, transport & infrastructure: Sinisa Hajdas Doncic (SDP)

    Science, education & sports: Zeljko Jovanovic (SDP)

    Tourism: Veljko Ostojic (IDS)

    Veterans affairs: Predrag Matic (independent)

    Central bank governor

    Boris Vujcic

    December 01, 2012

  • Outlook

    Croatia: Key developments

    Outlook for 2013-17

    • A coalition government led by the Social Democratic Party (SDP) took power in December 2011. EU membership, supported by the main parties, will remain a linchpin of foreign policy and economic reform in 2013-17.
    • Following the completion of EU accession negotiations at the end of June 2011, Croatia is subject to a monitoring process until membership, currently scheduled for July 2013, and probably also after accession.
    • The Economist Intelligence Unit estimates a budget deficit of 3.5% of GDP in 2012, narrowing gradually to 2.9% by 2017. However, rising public debt will put a strain on the public finances.
    • Maintaining the stability of the kuna against the euro will be the priority of the Croatian National Bank (CNB, the central bank), which will intervene to act against appreciation or depreciation pressure.
    • The euro zone recession in 2012 and fiscal austerity has negatively affected growth in Croatia, with real GDP estimated to have contracted by 1.6%. We forecast ongoing recession in 2013 and annual average growth of 2% in 2014-17.
    • The current-account deficit is estimated to have narrowed to 0.4% of GDP in 2012, and it is forecast to expand to an average 1.6% per year in 2013-17.

    Review

    • On November 14th a Hungarian court imposed a 22-month prison sentence on Radimir Cacic, prompting the deputy prime minister and economy minister to tender his resignation.
    • On November 16th the appeals chamber of the International Criminal Tribunal for former Yugoslavia (ICTY) acquitted two Croatian ex-generals, Ante Gotovina and Mladen Markac, of war crimes against Serbs.
    • In November police detained the management of a local pharmaceutical firm, Farmal, alongside nearly 50 doctors implicated in a corruption probe.
    • The government has presented the 2013 budget, targeting a deficit equivalent to 3.1% of GDP compared with 2.9% in the revised 2012 budget.
    • Working-day-adjusted industrial production decreased by 7.7% year on year and by 3.3% month on month in September, weighed down by consumer durables.
    • In the first three quarters of 2012 goods exports fell by 2.2% year on year in euro terms, to EUR7bn (US$8.9bn), amid rapidly falling external demand for low-capital goods and transport equipment.
    • In October consumer prices increased by 4.8% year on year, driven by the rising cost of utilities and food.

    December 01, 2012

Economy:

  • Background

    Croatia: Country fact sheet

    Fact sheet

    Annual data2011aHistorical averages (%)2007-11
    Population (m)4.4Population growth-0.2
    GDP (US$ m; market exchange rate)62,493.4Real GDP growth-0.3
    GDP (US$ m; purchasing power parity)78,620bReal domestic demand growth-1.2
    GDP per head (US$; market exchange rate)14,197Inflation2.9
    GDP per head (US$; purchasing power parity)17,860bCurrent-account balance (% of GDP)-4.6
    Exchange rate HRK:US$ (av)5.34FDI inflows (% of GDP)5.1
    a Actual. b Economist Intelligence Unit estimates.

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    Background: Croatia declared independence from Yugoslavia on June 25th 1991. The president at the time was Franjo Tudjman, the founder of the hardline nationalist Croatian Democratic Union (HDZ). Mr Tudjman's authoritarian rule left Croatia shunned by the international community until his death in 1999. The centre-left coalition that took power in 2000 worked to undo the excesses of the Tudjman regime, but was only partly successful. Divisions within the coalition widened, and in the general election in November 2003 it was defeated by a reformed HDZ under the leadership of Ivo Sanader. After some delay, the HDZ-led government was able to resolve the country's problems with the International Criminal Tribunal for former Yugoslavia (ICTY) in The Hague, and successfully pursed EU membership, signing an accession treaty in December 2011. Membership is scheduled for July 2013. The HDZ was ousted in December 2011 by a centre-left coalition, led by the Social Democratic Party (SDP).

    Political structure: The upper house of parliament was abolished in 2001, and the unicameral parliament (Sabor) has a maximum of 160 members (with 151 in the current Sabor). If asked by the government, the president can dissolve parliament-in case the government loses a confidence vote or parliament fails to pass a budget within 120 days of receiving the bill-but otherwise the head of state is largely a figurehead.

    Policy issues: Post-independence governments maintained loose fiscal policies, despite pressure from the IMF. Along with a boom in consumer credit following bank restructuring and privatisation, this expanded the current-account deficit to an annual average of around 7% of GDP in 2004-08. Following the economic crisis, fiscal consolidation and structural reforms are topping the agenda. The Croatian National Bank (CNB, the central bank) targets exchange-rate stability of the kuna to the euro, given the high proportion of euro-denominated consumer loans.

    Taxation: Personal income is taxed at three rates: 12%, 25% and 40%. There are three rates for value-added tax (VAT): zero (on bread, milk, books and educational materials), 10% (on tourist services) and 25% (since March 2012). In some cases, the zero and 10% VAT rates are potentially incompatible with EU rules. The corporate tax rate is set at 20%.

    Foreign trade: The current-account deficit narrowed from a trough of 8.7% of GDP in 2008 to 0.7% in 2011. Tourism receipts covered nearly the entire merchandise trade deficit.

    Major exports 2011% of totalMajor imports 2011% of total
    Machines & transport equipment29.6Machines & transport equipment22.2
    Mineral fuels & lubricants12.1Mineral fuels & lubricants21.7
    Chemical products11.4Chemical products13.8
    Food, live animals, beverages & tobacco10.7Food, live animals, beverages & tobacco10.3
        
    Leading markets 2011% of totalLeading suppliers 2011% of total
    Italy14.6Italy14.3
    Bosnia & Hercegovina11.1Germany11.3
    Germany9.2Russia6.3
    Austria5.1Austria3.9

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    December 01, 2012

  • Structure

    Croatia: Economic structure

    Data and charts: Annual trends charts


    December 01, 2012

  • Outlook

    Croatia: Country outlook

    Croatia: Country outlook

    FROM THE ECONOMIST INTELLIGENCE UNIT

    POLITICAL STABILITY: A four-party coalition was elected in December 2011, ousting the centre-right alliance led by the Croatian Democratic Union (HDZ). The coalition is led by the Social Democratic Party (SDP), and includes the Croatian People's Party (HNS), the Istrian Democratic Assembly (IDS) and the Croatian Pensioners' Party (HSU). All the leading parties support EU membership. Alongside EU mandated reform, the SDP is focusing on fiscal consolidation and a clampdown on corruption. The SDP leader and prime minister, Zoran Milanovic, has hinted that he would be willing to seek an arrangement with the IMF if Croatia struggled to secure financing on capital markets. Weak economic performance and fiscal austerity are generating social unrest and protests, which would test the unity of the coalition government. Tax reform has also been contentious.

    ELECTION WATCH: The SDP-led ruling coalition secured 40% of the vote and 80 seats in the 151-member parliament in the most recent election, in December 2011. The HDZ suffered only its second election defeat since 1991, taking just 23.8% of the vote. A last-minute deal with the Croatian Citizens Party (HGS) and Democratic Centre (DC) secured the HDZ 47 seats in parliament, including the three seats voted for by the Croatian diaspora. Tomislav Karamarko, who was elected HDZ president in May 2012, is struggling to rebuild voter loyalty and internal unity.

    INTERNATIONAL RELATIONS: The referendum on EU membership in January 2012 was supported by the main political parties and more than 60% of those who voted. Croatia is targeting July 2013 for membership. In line with this, it is shifting its foreign policy focus away from the Balkans and towards the bloc.

    POLICY TRENDS: The government will continue to adhere to an agenda of EU-mandated reforms. In order to defend Croatia's credit rating, the government is pursing fiscal consolidation, which includes restructuring and privatisation of state-owned companies. Provided that the government implements fiscal discipline, it should be able to finance the fiscal deficit on international markets throughout the forecast period. Narrowing the fiscal deficit will remain a government priority, owing to the increased importance of budget sustainability for the EU; however, it is likely to prove difficult in the short term owing to the dominance of social transfers in expenditure and the added pressure of Croatia's contribution to the EU budget after it becomes a member. There is political consensus on the need to attract more investment and to boost economic competitiveness. Reforms to simplify tax regulation, improve government institutions and reduce the role of the state will take time to yield results.

    ECONOMIC GROWTH: Following contractions of 6.9% in 2009 and 1.4% in 2010, the economy stagnated in 2011, with zero growth. Real GDP contracted by 1.3% year on year in the first quarter of 2012 and by 2.2% in the second quarter as exports, domestic demand and investment tumbled. With the euro zone, Croatia's main export market, estimated to have contracted by 0.4% in 2012, the Economist Intelligence Unit estimates a recession in Croatia, with real GDP shrinking by 1.6%. Direct financial and trade links with the bloc leave Croatia exposed to substantial spillovers. With the euro zone recession forecast to extend to 2013, we expect real GDP in Croatia to contract by 0.3% in that year. We forecast a return to growth in 2014, and annual average growth of 2% in 2014-17--well below the 4.2% average in 2004-08, before the crisis.

    INFLATION: The value-added tax (VAT) rate increase in March 2012, a rise in regulated gas and electricity prices in May, and rising global food prices have increased inflationary pressures. We estimate annual average consumer price inflation of 3.2% in 2012. From 2013 energy companies will be allowed to set gas and electricity prices, which is likely to increase inflationary pressures in the short term. Nonetheless, we expect a tight wage policy and limited liquidity to contain inflationary pressures in 2013-17. We forecast that global oil prices will remain at US$100-115/barrel in 2013-17. We therefore forecast average annual inflation of 2.9% in 2013-17.

    EXCHANGE RATES: The currency depreciated to an average of HRK7.36:EUR1 in 2009, strengthened to HRK7.29:EUR1 in 2010 and depreciated again in 2011, to HRK7.44:EUR1. We expect that the average exchange rate will remain broadly stable throughout the forecast period, within a band of HRK7.3-7.5:EUR1. The Croatian National Bank (CNB, the central bank) will continue to intervene in the currency market to minimise volatility, and it has a substantial stock of foreign reserves at its disposal to act against depreciation pressures. We expect the CNB to remain committed to this exchange-rate policy in 2013-17, given Croatia's large net foreign-currency exposure and its medium-term aim of joining the EU's exchange-rate mechanism (ERM2). However, there is unlikely to be any rush to euro adoption, given the turmoil facing the euro zone. There remains a risk of significant depreciation pressure if the budget deficit were to widen, or if there were problems in accessing external finance.

    EXTERNAL SECTOR: The current-account deficit moderated from a trough of 8.7% of GDP in 2008 to 0.7% of GDP in 2011 owing to declining import demand and stronger tourism revenue. We expect the seasonal pattern of external deficits in the first, second and fourth quarters, interrupted by a tourism-driven surplus in July-September, to be repeated throughout the forecast period. We estimate that exports and imports fell in 2012 as recession hit at home and abroad, and high unemployment, sluggish wage growth, soaring inflation and a renewed austerity drive depressed demand for higher-cost imported goods. Import demand is forecast to regain momentum in 2013-17, widening deficits. We estimate that the current-account deficit contracted to 0.4% of GDP in 2012, and forecast it to expand to an annual average of 1.6% in 2013-17.

    December 01, 2012

  • Forecast

    Croatia: Country forecast summary

    Country forecast overview: Highlights

    • The four-party coalition led by the Social Democratic Party (SDP) came to power in December 2011. It controls 80 of the 151 seats in parliament. EU membership will remain a linchpin of foreign policy and economic reform. Public confidence in the political elite will remain low owing to several high-profile corruption scandals.
    • The government is committed to consolidating the public finances through tax increases, cuts in public spending, abolishing collective bargaining agreements, rationalising the public sector and restarting the privatisation process. Perceptions of foot-dragging could see credit rating agencies downgrade government debt to junk status.
    • The Economist Intelligence Unit expects the consensus between the main parties on EU-related reforms to continue. Croatia will remain under EU pressure to pursue reforms on anti-corruption policy, the judiciary and public administration, as well as adhering to the bloc's stringent competition rules.
    • Croatia is subject to a monitoring process until EU membership, which has been scheduled for July 2013, and probably also after accession. Fresh tensions with Slovenia over a bilateral banking dispute are unlikely to delay Croatia's accession.
    • After three years of falling or stagnating, real GDP is estimated to have contracted by 1.6% in 2012 amid a euro zone recession. We forecast ongoing recession in 2013 and annual average growth of 2% in 2014-17.
    • Private consumption is expected to fall in 2012-13, owing to unfavourable labour market conditions, tight credit, government austerity, the erosion of disposable incomes, and sluggish wage growth. Growth in consumer spending is forecast to return in 2014 as unemployment falls and EU membership makes EUR2bn (US$2.8bn) in bloc funds available to Croatia.
    • Slower economic growth will act as a drag on budget revenue, but fiscal tightening should narrow the budget deficit to a forecast 2.9% of GDP by 2017. Off-budget deficits will remain a burden.
    • Imported inflationary pressures will be offset by subdued domestic demand, moderate wage growth and kuna stability. Consumer price inflation is forecast to average 2.9% in 2013-17.
    • The current-account deficit is estimated to have narrowed again in 2012, to 0.4%, amid subdued domestic demand. It is forecast to widen to 2.5% of GDP by 2017 as import demand strengthens.

    Country forecast overview: Key indicators

    Key indicators201220132014201520162017
    Real GDP growth (%)-1.6-0.31.32.02.32.5
    Consumer price inflation (av; %)3.22.82.72.93.12.9
    Budget balance (% of GDP)-3.5-3.9-3.7-3.5-3.1-2.9
    Current-account balance (% of GDP)-0.4-0.7-1.1-1.6-2.1-2.5
    Exchange rate HRK:US$ (av)5.855.885.905.965.855.85
    Exchange rate HRK:€ (av)7.517.437.397.387.377.36

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    December 01, 2012

Croatia

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Country Briefing

Population

4.49m (2008)

From the 2001 census:

City of Zagreb: 779,145

County of Split-Dalmatia: 463,676

County of Osijek-Baranja: 330,506

County of Primorje-Gorski kotar: 305,505

County of Istria: 206,344

County of Vukovar-Sirmium: 204,768

Climate

Mediterranean on the coast, continental inland

Weather in Zagreb

Hottest month, July, 21.7°C (daily average temperature); coldest month, January, 0.9°C; driest month, November, 45.4 mm rainfall; wettest month, October, 195.8 mm rainfall

Weather in Split

Hottest month, July, 26.9°C (daily average temperature); coldest month, January, 6.4°C; driest month, July, 0.5mm rainfall; wettest month, December, 235.5 mm rainfall

Language

Croatian

Measures

Metric system

Currency

Croatian kuna (HRK), subdivided into 100 lipas

Time

One hour ahead of GMT in winter; two hours ahead in summer

Fiscal year

Calendar year

Public holidays

January 1st; January 6th (Epiphany); April 9th (Easter Monday); May 1st (Labour Day), June 7th (Corpus Christi); June 22nd (Day of Anti-fascist Struggle); June 25th (Croatian National Day); August 5th (National Thanksgiving Day); August 15th (Assumption); October 8th (Independence Day); November 1st (All Saints' Day); December 25th (Christmas Day); December 26th (St Stephen's Day)

March 14, 2012

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