Croatia – Economic and monetary affairs

Candidate countries conduct negotiations with the European Union (EU) in order to prepare themselves for accession. The accession negotiations cover the adoption and implementation of European legislation (acquis) and, more specifically, the priorities identified jointly by the Commission and the candidate countries in the analytical assessment (or ‘screening’) of the EU’s political and legislative acquis. Each year, the Commission reviews the progress made by candidates and evaluates the efforts required before their accession. This monitoring is the subject of annual reports presented to the Council and the European Parliament.

ACT

Commission Report [COM(2010) 660 final – SEC(2010) 1326 - Not published in the Official Journal].

SUMMARY

The 2010 Report presents the reforms that have advanced the general level of alignment with the acquis, despite the international financial and economic crisis. However, alignment is not complete and the policy of economic and monetary coordination should be improved.

EUROPEAN UNION ACQUIS (according to the Commission’s words)

EU legislation on Economic and Monetary Union (EMU) contains specific rules requiring the independence of central banks in Member States, prohibiting direct financing of the public sector by the central banks and privileged access of the public sector to financial institutions. Moreover, all Member States are bound to lay down specific measures necessary for the protection of the euro against counterfeiting. These rules must have been implemented by the date of accession. Upon accession, new Member States will be expected to coordinate their economic policies and will be subject to the provisions of the Stability and Growth Pact and the Statute of the European System of Central Banks. They are also committed to complying with the criteria laid down in the Treaty in order to be able to adopt the euro. Until they adopt the euro, they will participate in Economic and Monetary Union as a Member State with a derogation and will treat the exchange rate of their currency as a matter of common concern.

EVALUATION (according to the Commission’s words)

There has been further progress in the area of economic and monetary policy where, overall, alignment with the acquis is effectively complete.

The economy of Croatia has been severely affected by the global economic and financial crisis. The country fell into recession in the first quarter of 2009 and there were no clear signs of a recovery by mid-2010. Unemployment, public deficit and debt have increased significantly. External indebtedness rose further and remains a key vulnerability of the economy. Monetary stability was preserved by the policies of the central bank and the financial sector weathered the crisis relatively well.

Broad political consensus on the fundamentals of a market economy was maintained. The Economic Recovery Programme has given economic policy a medium-term orientation. The programme's benefit for growth and international competitiveness depends on its effective implementation. Given the existing constraints, macroeconomic policy has, by and large, been appropriate to address the consequences of the global economic and financial crisis. Monetary policy succeeded to preserve exchange rate and financial stability while alleviating liquidity pressures. The current account deficit narrowed as a consequence of the recession and inflationary pressures subsided further. The banking sector remained resilient to shocks.

However, structural reforms generally advanced at a very slow pace, not least with respect to privatisation and the restructuring of loss-making enterprises. The labour market remained highly rigid, with low employment and participation rates which declined further during the recession.

In the fiscal area, the authorities made limited efforts to contain the rising deficit and to increase the efficiency of public spending. Social transfer payments remained high and not well-targeted and a large number of state-owned enterprises continued to receive State support through direct and indirect subsidies and guarantees. For achieving medium-term fiscal sustainability, it remains a key challenge to improve the budgetary process and discipline and to enhance the efficiency of public spending. The investment climate continued to suffer from a heavy regulatory burden and numerous para-fiscal taxes.

RELATED ACTS

Commission Report [COM(2009) 533 final – SEC(2009) 1333 final – Not published in the Official Journal].

Commission Report [COM(2008) 674 final – SEC(2008) 2694 final – Not published in the Official Journal].

The 2008 Report noted significant progress and that alignment with the acquis had reached a satisfactory level in the areas of budget and finance. New regulations and procedures were necessary to increase the efficiency of public expenditure and administrative capacity.

Commission Report [COM(2007) 663 final - SEC(2007) 1431 - Not published in the Official Journal]. The 2007 Report recorded major progress in alignment with the acquis in the area of “economic and monetary affairs”. However, the Commission observed that Croatia had not yet completed the necessary alignment.

Commission Report [COM(2006) 649 final - Not published in the Official Journal]. The 2006 Report did not observe any progress in the area of monetary policy. Croatia should continue to make headway with introducing indispensable changes to its institutional and legal system, especially as regards the total independence of its Central Bank. However, in the area of economic policy, the country had made some progress in its alignment with the acquis.

Commission Report [COM(2005) 561 final – SEC(2005) 1424 – Not published in the Official Journal]. The 2005 Report observed that the country should be capable of coping with competition and market forces within the Union. Inflation was kept relatively low, the exchange rate seemed to have stabilised; the substantial deficits which existed in the public accounts and current transactions had been reduced. However, Croatia needed to take steps to consolidate public finances, notably through structural measures in the area of subsidies and transfer payments. The privatisation process speeded up in 2005. On the other hand, little progress had been made with the reorganisation of the major public companies, especially those in the energy sector. Telecoms deregulation, on the other hand, was proving a great success.

Commission Opinion [COM(2004) 257 final - Not published in the Official Journal]. In its Opinion of 20 April 2004, the Commission concluded that Croatia was a stable democracy with a functioning market economy and that it must be able to meet the demands stemming from the Community acquis in the field of economic and monetary union (EMU). The same was true of provisions on monetary financing, privileged access by public authorities to financial institutions and the protection of the euro. As regards Croatia’s participation in the third stage of EMU, the Commission took the view that it had enough time to prepare for participation as a Member State subject to a derogation.

See also