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A Decade in the Making: Croatia Joins the European Union on July 1st

A Decade in the Making: Croatia Joins the European Union on July 1st

The story behind Croatia’s EU accession process and the impact of membership on the country’s economy.

I: Country Profile and History of Accession

Croatia, a small country of some 4 million people with a Mediterranean climate and long coast along the Adriatic, will become the European Union’s newest member on July 1st. It is one of the six nations which comprised the former Yugoslavia and will be the second former Yugoslav republic (after Slovenia) to join the EU. Upon declaring its independence in 1991, Croatia immediately entered into a protracted conflict with Serb nationalists. At one point, Serbs controlled about one quarter of modern-day Croatia – a territory they called the Republic of Serbian Krajina, which minted its own money and even had its own army. The war would ultimately leave 10,000 Croatians dead and the country’s economy in tatters.

While the violence eventually subsided, the 90s would nonetheless prove to be an arduous decade. Franjo Tudjman, Croatia’s president from 1991 until his death in 1999, was an authoritarian ruler and a Croat nationalist.  It was his chauvinistic rhetoric and ambition to create a ‘Greater Croatia’ which played a major role in inspiring the Serb insurrection. His tenure left the country internationally isolated and cost it dearly in terms of economic development.

It was under Prime Minister Ivo Sanader that Croatia began to align itself with Europe and experience real economic opening. In 2003, Sanader’s first year in office, Croatia applied for EU membership. It received official candidate status from the European Commission one year later. Yet despite these early accomplishments, Mr Sanader left an ambiguous legacy as Croatia’s leader. He abruptly fled the country in late 2010 after a warrant was issued for his arrest in connection with a bribery and corruption scandal.,  Last year, he was sentenced to 10 years in prison for accepting a € 5 million bribe from the Hungarian energy group MOL for controlling rights to Croatia’s state-run oil company INA. He is expected to appeal the verdict.

Croatia’s path to EU membership has been a testing one and public sentiment towards the EU has gone from being overwhelmingly positive, as it was in the early 90s, to what can at best be described as rather tepid today. A May 2013 poll indicates that only 45 percent of the population approves of the move to join the EU – mainly due to concerns over financial stability. The accession process has also forced Croatia to confront the ghosts of its past. In 2008, Slovenia blocked accession talks over a Yugoslav-era border dispute concerning a 20-square-kilometer patch of land and territorial water called Piran Bay., ,  It appears that Slovenia felt threatened because Croatia submitted maps and other documents of the disputed region to the European Commission, without precisely demarcating the contested area.

A further precondition to EU membership was that Croatia cooperate fully with the International Criminal Tribunal for the former Yugoslavia (ICTY) in The Hague. In 2005, Carla del Ponte, then the chief prosecutor for the ICTY, claimed that an alleged war criminal, General Ante Gotovina, was “within reach” of Croatian authorities and that not enough was being done to facilitate his extradition. General Gotovina and co-defendant General Mladen Markac were both ultimately acquitted by the ICTY and received a hero’s welcome upon their return to Zagreb. Croatia’s accession bid was delayed for several months as a result of the ICTY’s recommendation.

The shared animosity amongst the former Yugoslav republics could eventually became a stumbling block for expansion, particularly as the EU has made a strong point of encouraging Balkan participation in the European project. In a recent op-ed piece, European Commissioner for Enlargement and European Neighbourhood Policy Stefan Füle wrote with regard to the Balkans that enlargement is a “key policy of the EU”. However, Mr Füle did not mention how he intends to resolve region’s numerous disputes. For example, while declaring that negotiations with Kosovo concerning a Stabilisation and Association Agreement (the first step in applying for EU membership) were currently on the table, he did not elaborate on how the problem of non-recognition of the Republic amongst the present EU members will be remedied.,

The former Yugoslavia disintegrated in large part due to the idea that autonomy would be the best way to guarantee peace in one of the most ethnically and religiously diverse regions of Europe. With Marshal Tito’s death in 1980 and the resulting power grabs by Serbian politicians, fears over the centralization of power slowly grew. Croatia and Slovenia (the first republic to secede from Yugoslavia) began to worry that their sovereignty could fall prey to ambitions to create a “Greater Serbia”. Now, many of these countries which once fought fiercely with one another over land and independence seek to relinquish some of their sovereignty to unite under the EU’s banner.

II: The Economic Consequences of Accession

At present, Croatia’s economy is in a difficult place. Foreign direct investment has dropped by 80 percent while unemployment is expected to top 20 percent this year – amongst youths aged 25 and under, unemployment is as high as 50 percent., ,  The population is also decreasing – from 4.7 million in 1991 to 4.3 million today – and aging, with 17.4 percent already over the age of 64. Output has fallen from its peak of $69.6 billion in 2008 to $62.5 billion in 2011.

Figure 1: Croatia GNI Per Capita (USD, PPP), 2003 - 2011

 200320042005200620072008200920102011
GNI (per capita, PPP)12,98014,20014,92016,31018,22019,53018,39018,04018,780
GDP (Billions of USD)34.141445059.369.662.259.562.5
Source: The World Bank 2012

However, in per capita terms, Croatia’s output still exceeds that of 8 other EU member states, including Poland and Hungary.

As with the decline in productivity, the sudden drop in FDI spending occurred in tandem with the financial crisis of 2007-8. From a high of 8.7 percent of GDP in 2008, FDI sunk to 2.02 percent in 2011. (See Figure 2)  This stands in sharp contrast to other countries in the region, some of which even saw increased FDI expenditures in the same period. For example, FDI in Albania grew from €717 million in 2009 to €793 million in 2010 while in the same period, Croatia’s dropped by 75 percent.  One reason for this marked decline is that Austria and the Netherlands, Croatia’s top two investment partners, both divested many of their interests in the Croatian economy in the period following the global financial crisis. FDI is important to Croatia’s economy for a number of reasons: Foreign firms create jobs and promote improved work methods, they transfer new technologies and they provide an important market for local enterprises. Furthermore, exports from well-known FDI destinations are generally perceived to be more attractive. Another key benefit of FDI particular to Croatia is that investments from other EU countries also help to hasten its integration into the internal market.

Figure 2: Croatia’s FDI as a Share of GDP, 1992 – 2011

Croatia’s largest trading partner is Italy (15.8 percent of exports) followed by Bosnia and Herzegovina (12.2 percent) and Germany (10.1 percent). In aggregate, over 60 percent of Croatia’s exports go to EU countries. As a percentage of GDP, goods exports are at 22.8 percent, which is low compared to other countries in the region such as Bulgaria (44 percent) or when compared to the NMS-10 in general (44.4 percent). If one counts services (which also includes tourism), the export share of GDP rises to 49.3 percent, which is just slightly lower than the NMS-10 average of 54.7 percent.  By comparison, Bulgaria’s combined exports in goods and services as a share of GDP is 60.1 percent while Romania’s is just 33.2 percent. Croatia’s primary exports are business services (21.1 percent), transport services (17.9 percent) and machinery and equipment (11.5 percent).

While the benefits of accession might not be immediately apparent to ordinary citizens in the short or medium term, Croatia is projected to benefit greatly from EU membership in the long term. Becoming part of the internal market will help reduce or even eliminate administrative and technical barriers such as customs checks and burdensome regulations. Furthermore, the EU Services Directive, which aims to streamline and simplify the “procedures and formalities that service providers need to comply with,” will boost Croatia’s services exports – its largest export sector. As a result, the volume of trade between the EU and Croatia could increase by as much as 45 percent. However, as Lejour, Mervar and Verweij point out, “[t]he European experience suggests that promoting competition and raising productivity is easier in manufacturing than in services.” This is due in part to the scalability and responsiveness of capital inputs.

EU membership also appears to confer a so-called ‘seal of approval’ which helps to bolster investor confidence and contributes to risk mitigation by promoting institutional convergence and adherence to ‘best practice’ standards. In other words, by publicly pronouncing a country’s conformity with the chapters of the acquis, Brussels guarantees the efficacy of a particular policy trajectory.

The institutional reforms that Croatia must undertake in order to conform to the acquis communautaire could possibly have an even more profound impact on the country’s economic health than the benefits resulting from increased trade. Corruption remains a major hindrance to business in Croatia and as the scandal with Mr Sanader demonstrated, the government is susceptible at even the highest levels. Transparency International, which maintains a ‘Corruption Perception Index’, ranks Croatia 62nd out of 176 countries.

Figure 3: CPI Ranking of the EU-27 and Selected Balkan States

CountryCPI ScoreRANK (World)RANK (EU)
Denmark9011
Finland9011
Portugal633313
Slovenia613714
Slovakia466220
Romania446621
Italy427222
Bulgaria417523
Greece369424
NON-EU
Croatia4662-
FYROM4369-
Bosnia and Herzegovina4272-
Serbia3980-
Source: Transparency International 2012

If Croatia were an EU member, it would rank on par with Slovakia in 20th place. This puts it ahead of Romania, Italy, Bulgaria and Greece. The accession process and the negotiations which accompanied it have already done much to mould Croatia’s current institutions to EU standards. One study, which assumes that EU membership will eventually put Croatia on par with Portugal in terms of its CPI ranking, projects that aggregate trade could rise 56 percent as a result. These projections do infer a time horizon of several decades however.

Finally, Croatia will also benefit from funding under the EU’s Agriculture and Cohesion Policies. In theory, individual regions in Croatia are eligible for up to 4 percent of their GDP in funds, which could total over €1 billion per year for the country as a whole. For a country with a stagnant economy and low FDI, structural funds represent a rapidly growing source of investment. The caveat is that this money is not guaranteed and can only be used for projects which meet a strict set of criteria. Keeping in line with the Europe 2020 strategy, the Commission has recommended that Croatia invest in making its economy more competitive, creating employment, improving the education system, expanding its administrative capacity and protecting the environment. EU funds are expected to stimulate an increase in productivity of up to 0.7 percent of GDP.

Croatia’s fate was already tied to the EU even before it became an official member or even a candidate country. With their economies so closely intertwined, a full recovery is unlikely until the rest of the Europe gets back on its feet. Yet, as the influx of EU structural funds and the continuing reform process also demonstrates, Croatia remains the master of its own fate. If it manages to overcome corruption and continues apace with institutional reforms, its numerous natural advantages will surely not go unnoticed by investors once money becomes available again.

(Wikimedia Commons image courtesy of Bogdan Giuşcă)

Tables as Images
Notes:
1. Croatia Country Profile, BBC News (http://www.bbc.co.uk/news/world-europe-17212572) [15.06.2013]
2. HEWITT, Cameron: Understanding Yugoslavia, All Things Cruise (http://allthingscruise.com/understanding-yugoslavia-why-did-it-break-up-in-the-1990s/) [18.06.2013]
3. Croatia’s on-off love affair with the EU, BBC News (http://www.bbc.co.uk/news/world-europe-22386837) [18.06.2013]
4. TRAYNORIan: WikiLeaks cables: Former Croatia PM flees over corruption claims, The Guardian (http://www.guardian.co.uk/world/2010/dec/09/wikileaks-cables-croatia-pm-corruption) [20.06.2013]
5. DRAKULIC, Slavenka: Croatia’s Ivo Sanader was corrupted by the arrogance of power, The Guardian (http://www.guardian.co.uk/commentisfree/2010/dec/14/croatia-ivo-sanader-arrest) [24.06.2013]
6. BILEFSKY, Dan: Former Premier of Croatia is Sentenced for Graft, The New York Times (http://www.nytimes.com/2012/11/21/world/europe/former-premier-of-croatia-ivo-sanader-is-sentenced-for-graft.html?_r=0) [24.06.2013]
7. Croatia’s on-off love affair with the EU, BBC News (http://www.bbc.co.uk/news/world-europe-22386837) [18.06.2013]
8. Slovenia, Croatia seek to end border dispute, EUbusiness.com (http://www.eubusiness.com/news-eu/slovenia-croatia.edf/) [19.06.2013]
9. ALIC, Anes: Slovenia, Croatia, the EU and Piran Bay, International Relations and Security Network (http://www.isn.ethz.ch/Digital-Library/Articles/Detail//?id=53176&lng=en) [19.06.2013]
10. PERISIC, Vuk: Bridging an irreconcilable divide, Presseurop (http://www.presseurop.eu/en/content/article/3372651-bridging-irreconcilable-divide) [19.06.2013]
11. http://www.sta.si/vest.php?s=s&t=0&id=1347695 (“Jernej Šmajdek: Slovenija v petek z blokado hrvaških pogajanj z EU” (in Slovene). STA. 17 December 2001.)
12. EU delays Croatia entry talks over missing war general, The Guardian (http://www.guardian.co.uk/world/2005/mar/16/warcrimes.eu) [19.06.2013]
13. Hague war court acquits Croat Generals Gotovina and Markac, BCC News (http://www.bbc.co.uk/news/world-europe-20352187) [19.06.2013]
14. Maintaining Momentum for EU Enlargement, Eurasia Review (http://www.eurasiareview.com/26052013-maintaining-momentum-for-eu-enlargement-oped/) [20.06.2013]
15. Cyprus, Greece, Romania, Slovakia and Spain do not currently recognize Kosovo out of fears that doing so would set a precedent that could ultimately be unfavourable to their own territorial claims or disputes.
16. European Parliament urges EU members to recognise Kosovo, SETimes.com (Link to article) [21.06.2013]
17. HEWITT, Cameron: Understanding Yugoslavia, All Things Cruise (http://allthingscruise.com/understanding-yugoslavia-why-did-it-break-up-in-the-1990s/) [18.06.2013]
18. JUDAH, Tim: Croatia: From isolation to EU membership, BBC News (http://www.bbc.co.uk/news/world-europe-22218640) [18.06.2013]
19. Croatia Country Profile, BBC News (http://www.bbc.co.uk/news/world-europe-17212572) [15.06.2013]
20. O’HALLORAN, Barry: Croatia looks to put the past behind it with EU Accession, The Irish Times (http://www.irishtimes.com/business/2.790/croatia-looks-to-put-past-behind-it-with-eu-accession-1.1422580) [18.06.2013]
21. This appears to be the result of the global financial crisis rather than due to structural problems in Croatia’s economy. Between 2003 (the year Croatia applied for EU membership) and 2008, the country’s economic output nearly doubled. See Figure 1.
22. Report on Foreign Direct Investment in Albania (http://www.mete.gov.al/doc/web_fdi_report_english.pdf) [22.06.2013]
23. Figures are for 2011. Source: CIA Factbook.
24. JUDAH, Tim: Croatia: From isolation to EU membership, BBC News (http://www.bbc.co.uk/news/world-europe-22218640) [18.06.2013]
25. LEJOUR, Arjan, MERVAR, Andrea & VERWEIJ, Gerard: The Economic Effects of Croatia’s Accession to the European Union. Eastern European Economics, Vol. 47, No. 6 (November – December 2009) P. 64
26. Ibid. P. 66
28. LEJOUR, Arjan, MERVAR, Andrea & VERWEIJ, Gerard: The Economic Effects of Croatia’s Accession to the European Union. Eastern European Economics, Vol. 47, No. 6 (November – December 2009) P. 68
29. GRAY, Julia: International Organization as a Seal of Approval: European Union Accession and Investor Risk. American Journal of Political Science, Vol. 54, No. 4 (Oct. 2009) P. 944
30. Ibid.
31. LEJOUR, Arjan, MERVAR, Andrea & VERWEIJ, Gerard: The Economic Effects of Croatia’s Accession to the European Union. Eastern European Economics, Vol. 47, No. 6 (November – December 2009) P. 71, 79f
32. Ibid.
33. Ibid. P. 72
Croatia Country Profile, BBC News (http://www.bbc.co.uk/news/world-europe-17212572) [15.06.2013]
HEWITT, Cameron: Understanding Yugoslavia, All Things Cruise (http://allthingscruise.com/understanding-yugoslavia-why-did-it-break-up-in-the-1990s/) [18.06.2013]
Croatia’s on-off love affair with the EU, BBC News (http://www.bbc.co.uk/news/world-europe-22386837) [18.06.2013]
TRAYNORIan: WikiLeaks cables: Former Croatia PM flees over corruption claims, The Guardian (http://www.guardian.co.uk/world/2010/dec/09/wikileaks-cables-croatia-pm-corruption) [20.06.2013]
DRAKULIC, Slavenka: Croatia’s Ivo Sanader was corrupted by the arrogance of power, The Guardian (http://www.guardian.co.uk/commentisfree/2010/dec/14/croatia-ivo-sanader-arrest) [24.06.2013]
BILEFSKY, Dan: Former Premier of Croatia is Sentenced for Graft, The New York Times (http://www.nytimes.com/2012/11/21/world/europe/former-premier-of-croatia-ivo-sanader-is-sentenced-for-graft.html?_r=0) [24.06.2013]
Croatia’s on-off love affair with the EU, BBC News (http://www.bbc.co.uk/news/world-europe-22386837) [18.06.2013]
Slovenia, Croatia seek to end border dispute, EUbusiness.com (http://www.eubusiness.com/news-eu/slovenia-croatia.edf/) [19.06.2013]
ALIC, Anes: Slovenia, Croatia, the EU and Piran Bay, International Relations and Security Network (http://www.isn.ethz.ch/Digital-Library/Articles/Detail//?id=53176&lng=en) [19.06.2013]
PERISIC, Vuk: Bridging an irreconcilable divide, Presseurop (http://www.presseurop.eu/en/content/article/3372651-bridging-irreconcilable-divide) [19.06.2013]
http://www.sta.si/vest.php?s=s&t=0&id=1347695 (“Jernej Šmajdek: Slovenija v petek z blokado hrvaških pogajanj z EU” (in Slovene). STA. 17 December 2001.)
EU delays Croatia entry talks over missing war general, The Guardian (http://www.guardian.co.uk/world/2005/mar/16/warcrimes.eu) [19.06.2013]
Hague war court acquits Croat Generals Gotovina and Markac, BCC News (http://www.bbc.co.uk/news/world-europe-20352187) [19.06.2013]
Maintaining Momentum for EU Enlargement, Eurasia Review (http://www.eurasiareview.com/26052013-maintaining-momentum-for-eu-enlargement-oped/) [20.06.2013]
Cyprus, Greece, Romania, Slovakia and Spain do not currently recognize Kosovo out of fears that doing so would set a precedent that could ultimately be unfavourable to their own territorial claims or disputes.
European Parliament urges EU members to recognise Kosovo, SETimes.com (Link to article) [21.06.2013]
HEWITT, Cameron: Understanding Yugoslavia, All Things Cruise (http://allthingscruise.com/understanding-yugoslavia-why-did-it-break-up-in-the-1990s/) [18.06.2013]
JUDAH, Tim: Croatia: From isolation to EU membership, BBC News (http://www.bbc.co.uk/news/world-europe-22218640) [18.06.2013]
Croatia Country Profile, BBC News (http://www.bbc.co.uk/news/world-europe-17212572) [15.06.2013]
O’HALLORAN, Barry: Croatia looks to put the past behind it with EU Accession, The Irish Times (http://www.irishtimes.com/business/2.790/croatia-looks-to-put-past-behind-it-with-eu-accession-1.1422580) [18.06.2013]
This appears to be the result of the global financial crisis rather than due to structural problems in Croatia’s economy. Between 2003 (the year Croatia applied for EU membership) and 2008, the country’s economic output nearly doubled. See Figure 1.
Report on Foreign Direct Investment in Albania (http://www.mete.gov.al/doc/web_fdi_report_english.pdf) [22.06.2013]
Figures are for 2011. Source: CIA Factbook.
JUDAH, Tim: Croatia: From isolation to EU membership, BBC News (http://www.bbc.co.uk/news/world-europe-22218640) [18.06.2013]
LEJOUR, Arjan, MERVAR, Andrea & VERWEIJ, Gerard: The Economic Effects of Croatia’s Accession to the European Union. Eastern European Economics, Vol. 47, No. 6 (November – December 2009) P. 64
Ibid. P. 66
LEJOUR, Arjan, MERVAR, Andrea & VERWEIJ, Gerard: The Economic Effects of Croatia’s Accession to the European Union. Eastern European Economics, Vol. 47, No. 6 (November – December 2009) P. 68
GRAY, Julia: International Organization as a Seal of Approval: European Union Accession and Investor Risk. American Journal of Political Science, Vol. 54, No. 4 (Oct. 2009) P. 944
Ibid.
LEJOUR, Arjan, MERVAR, Andrea & VERWEIJ, Gerard: The Economic Effects of Croatia’s Accession to the European Union. Eastern European Economics, Vol. 47, No. 6 (November – December 2009) P. 71, 79f
Ibid.
Ibid. P. 72

About the Author:

Sebastian Andrei is NABATAEANS’ editor for EU - Middle East Trade and Political Relations. He completed his undergraduate studies at the University of Vienna, where he majored in journalism with minors in political science as well as business and economics. Sebastian is responsible for reporting on the European Union’s external trade relations. He also writes about economic development and investment opportunities in Europe as well as about policy changes which affect the EU common market.

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