A little more than a week after the European Commission published its first specific recommendations for Croatia since the country became a member of the EU and its participation in the European Semester is now mandatory, and just days after a session of the governing committee of the Social Democratic Party (SDP) where a decision was taken to expel former Minister of Finance Slavko Linic, Prime Minister and party leader Zoran Milanovic announced odd changes in the cabinet. In the public domain there were speculations about a government reshuffle with main suspects those SDP members who openly or not so openly supported Mr Linic. Mr Milanovic, however, announced a farewell to the minsters of education and of health care Zeljko Jovanovic and Rajko Ostojic. The reason for their replacement is even odder than the decision these two to be replaced - they need a rest.
The change is strange both from the perspective of Mr Milanovic's party problems in the SDP and from the point of view of the dramatically declining confidence in the government and the severe economic problems. The expectations of Croatian analysts and media were that Milanovic will get rid of the internal party opposition within the cabinet and will fire those who openly or not so openly supported the SDP wing that stood behind Slavko Linic - the so called Rijeka clan of SDP. It can be said about Rajko Ostojic that he was an internal opposition to the prime minister, but he is definitely not among the staunchest supporters of Slavko Linic in his war with the prime minister that continued for months. Zeljko Jovanovic is a staunch supporter of the prime minister in spite of the fact that he is from Rijeka.
At a special news conference on June 11th, Mr Milanovic explained that Mr Jovanovic and Mr Ostojic headed the toughest and most unpopular ministries. They were subjected to huge pressures from all sides, including financial pressure, especially given the fact that those are sectors which benefit the least from EU funds. That is why they need a rest and to "enhance" the party in Parliament. On his way out from the government meeting after his dismissal, Mr Ostojic said he did not at all feel tired, on the contrary - he is full of energy and strength. On their place the prime minister installed two experts. As minister of health care he appointed the recent head of the Croatian Institute for Health Insurance (HZZO) Sinisa Varga and as minister of education he appointed Vedran Mornar who was a dean of the Faculty of Electrical Engineering at the Zagreb University. Those are entirely expert figures, apolitical.
The latter explains to a certain extent the prime minister's actions who, obviously, wants to surround himself with experts and to remove any strong political competition within his cabinet. This is also supported by his decision to replace Slavko Linic with his deputy Boris Lalovac who, too, is rather an expert than a political figure.
Against the backdrop of the first specific recommendations, however, that reveal an urgent need for very deep reforms, the decision is quite odd. Although health care and education are sectors that spend a huge part of the state budget and need reforms, the main problems the Commission has pointed to are elsewhere and other ministers are responsible for them, mostly the premier. Croatia has been in a recession for six years in a row, unemployment is growing rapidly and last year the country lined up third after Greece and Spain in terms of youth unemployment. Since the beginning of the year, Croatia has been in an excessive deficit procedure and is, again, among the three countries with excessive macroeconomic imbalances in the company of Spain and Italy.
That is why, the Commission imposed specific deadlines for the implementation of each of the eight recommendations, major ones of which are reforms of the pension system, labour market, public administration, the judiciary, for which responsible are other ministers. Zagreb is expected to accelerate the equalisation of the retirement age between women and men, to increase it and to start a process of abolishing of early retirement schemes as well as tightening of the regime of invalidity pensions (war veterans). Also expected is better fiscal planning, accompanied by alignment with the ESA accounting methodology. This is especially important taking into account that the Croatian government was doing at least one revision of the state budget annually. Since the beginning of its term in 2012, there has been no year without a revision of the national budget.
By March next year the government has to have adopted the second phase of the reform of the labour market which includes a possibility employers to increase the working hours and to be able to dismiss workers easily. The business environment, too, needs radical reforms which need to be done by March next year as well. The public administration is sluggish and appointments in it are not transparent which is why the Commission recommends by October 2014 the government to present a plan for appointments in the boards of state-owned companies on the basis of competition and merits, not on a party principle. The commercial courts are stuck with pending cases and their work needs to be alleviated by, in the same time, giving them the possibility to apply independently the pre-bankruptcy procedure.
Last but not least, the Commission demanded from Croatia to hold stress tests and asset quality reviews of the smaller and medium-sized Croatian banks in parallel with the ECB's tests for the banks that originate from the euro area. And although it is explained that it is necessary the education to turn to the business and to optimise spending for health care, the Commission generally believes that these two sectors are doing relatively well and reforms are taking place. This is precisely why it is odd that the prime minister preferred to keep his deputy Branko Grcic, who is responsible for the EU funds, but his deputy prime ministerial function is to monitor the entire economic sector, instead of doing a serious government reform, provoked by the country-specific recommendations. Even worse, Mr Milanovic did not mention not even once the recommendations for Croatia during his news conference on June 11th.
He only said that he was aware that it is impossible to start serious reforms in the next two years, but against the backdrop of the urgency and depth of the problems it is never too late to start reforms, especially if a national consensus is sought for them. Croatia is in a severe crisis, with its public debt having surpassed the Stability and Growth Pact limit of 60%. Local economic analysts believe that if the country introduces the ESA accounting standards debt could emerge much higher - between 85% and 95% of GDP - which will put Croatia in the group of the most indebted member states with less perspectives for sustainable and dynamic economic growth. Zoran Milanovic should have done much more radical changes in the cabinet, stretching a hand to the most influential opposition parties thus ensuring sustainability of the reforms following the example of Portugal when it requested assistance from the Troika. This would have stabilised his position in the party, as well, which already is quite shaken.
What a pity! This government started with a great ambition for serious reforms, but will end up as the government that deals mainly with internal party battles. Even more unpleasant this is for the other parties in the ruling coalition who take all the negatives from the government and there is a risk their voters to remain unrepresented in the next parliament. It is unrealistic to expect reforms in the remaining less than two years of this government because the country will again enter an election phase because of the presidential election later this year.