Croatia is now near the end of the game for its entry into the euro zone. Last month, the European Central Bank (ECB) make a list of five Bulgarian banks and eight Croatian banks that it would supervise directly from 1 Octoberst, including the Croatian subsidiaries of Unicredit, Erste, Intesa, Raiffeisen, Sberbank and Addiko, writes Colin Stevens.
This announcement follows Croatia’s official admission to the euro area exchange rate mechanism (ERM II) in July, and meets the ECB’s regulatory requirements that all major Croatian banks must be placed under its supervision. To move forward and officially join the euro zone, Croatia will now have to participate in ERM II “for at least two years without serious tensions”, and above all without devaluing its current currency, the kuna, against the euro.
Of course, in 2020 serious budget pressures have become a reality for European governments.
Problems on several fronts
According to the World Bank, Croatia’s overall GDP is now should collapse 8.1% this year, certainly an improvement over the annual decline of 9.3% that the Bank had forecast in June. The Croatian economy, heavily dependent on tourism, has been shaken by the ongoing pandemic. Worse, the country’s attempt to make up for lost ground with a post-containment rush of summer vacationers saw him blamed for triggering the surge in Covid-19 cases in several other European countries.
The slowdown caused by Covid is also not the only economic problem facing Prime Minister Andrej PlenkoviÄ, including the Croatian Democratic Union (HDZ). held in power in the July elections in the country, and the independent Minister of Finance Zdravko MariÄ, who had been in office since before PlenkoviÄ took office.
Even as Croatia receives coveted support from other eurozone economies, the country continues to be rocked by corruption scandals – the most recent being the salacious revelations of a secret club in Zagreb frequented the country’s political and business elites, including several ministers. While the rest of the population endured strict containment measures, many of Croatia’s most powerful people flouted lockdown rules, exchanged bribes and even enjoyed the company of escorts brought in from Serbia.
There is also the ongoing question of how the Croatian government in 2015 forced the banks to retroactively convert loans from Swiss francs to euros and pay more 1.1 billion euros in customer repayments, she had also loaned money. The issue continues to disrupt Zagreb’s relations with its own banking sector and with the European financial industry more broadly, with the Hungarian bank OTP filing complaint against Croatia at the World Bank’s International Center for Settlement of Investment Disputes (ICSID) this month to recoup an estimated 224 million kuna (29.58 million euros) in losses.
The endemic problem of corruption in Croatia
Like its counterparts in other parts of the former Yugoslavia, corruption has become a endemic problem in Croatia, even the gains made after the country’s accession to the EU are now in danger of being lost.
Much of the blame for the country’s perceived setback lies at the feet of the HDZ, largely due to the lawsuit legal saga surrounding former prime minister and HDZ party leader Ivo Sanader. While Sanader’s arrest in 2010 was seen as a sign of the country’s commitment to rooting out corruption as it strived to join the EU, the country’s Constitutional Court overturned the sentence in 2015. Today ‘hui, only one of the cases against him – for war profiteers – has been officially concluded.
The inability to effectively prosecute past wrongdoing caused Croatia to drop in Transparency International’s rankings, with the country scoring just 47 out of 100 points in the group’s “Perceived Corruption” index. With civil society leaders such as Oriana Ivkovic Novokmet pointing the finger at corruption cases that languish in court or never be brought at all, the decline is hardly surprising.
Instead of turning a corner, the current members of the HDZ government are facing their own allegations. Zagreb’s sweatshop frequented by Croatian leaders included Minister of Transport Oleg ButkoviÄ, Minister of Labor Josip AladroviÄ and Minister of Economy Tomislav ÄoriÄ among his clientele. Andrej Plenkovic himself is currently locked in a war of words over the country’s anti-corruption efforts with his main political opponent, Croatian President Zoran MilanoviÄ. A former leader of the rival Social Democratic Party and Plenkovic’s predecessor as prime minister, MilanoviÄ was also a club boss.
Zdravko MariÄ between stone and banking crisis
Finance Minister (and Deputy Prime Minister) Zdravko MariÄ, although operating outside established political groups, has also been dogged by questions of potential misconduct. Earlier in his tenure, MariÄ faced the prospect of investigation in its links with the food group Agrokor, Croatia’s largest private company, for reasons of conflict of interest. Although he himself is a former employee of Argokor, MariÄ nevertheless entered into secret negotiations with his former company and its creditors (mainly the Russian state-owned bank Sberbank) who exploded in the local press in March 2017.
A few weeks later, Agrokor was put under state administration because of his crushing debt. In 2019, the company had been relax and its renamed operations. MariÄ himself finally survived the Agrokor scandal, with her colleague Minister Martina DaliÄ (who headed the Ministry of the Economy) forced to leave office rather.
Agrokor, however, was not the only economic crisis that plagued Plenkovic’s government. Prior to the 2015 Croatian elections, in which Zoran MilanoviÄ’s Social Democrats lost power to the HDZ, MilanoviÄ undertook a number of populist economic measures in order to consolidate its own electoral position. They included a debt cancellation program for poor Croats who owed money to the government or municipal utilities, but also radical legislation which converted billions of dollars in loans granted by banks to Croatian customers from Swiss francs into euros, with retroactive effect. MilanoviÄ’s government forced the banks themselves to bear the costs of this sudden change, causing years of legal action by the lenders concerned.
Of course, after losing the election, these populist movements eventually turned into a poisoned chalice for MilanoviÄ’s successors in government. The loan conversion problem plagued the HDZ since 2016, when the first lawsuit against Croatia was filed by Unicredit. At the time, MariÄ argued in favor of an agreement with the banks to avoid the substantial costs of arbitration, especially with the country under pressure of the European Commission to change course. Four years later, the issue remains more of an albatross around the government’s neck.
Challenges for the euro
Neither Croatia’s corruption problems nor its conflicts with the banking sector were enough to derail the country’s ambitions for the euro area, but to bring this process to completion, Zagreb will need to commit to a level of budgetary discipline and reform that it has not yet demonstrated. The reforms needed include reducing budget deficits, strengthening anti-money laundering measures and improving corporate governance in state-owned enterprises.
If Croatia is successful, the potential benefits including lower interest rates, greater investor confidence and closer links with the rest of the single market. As is so often the case with European integration, the biggest gains are the improvements to the house along the way.