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Croatia Chooses To Be in the EU Core

Published on , , Zagreb, Twitter: @AdelinaMarini
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Croatia made its choice for its future in the EU by choosing, out of the several options of integration, to be in the core of the EU, which this autumn begins a major overhaul that will deepen the integration in areas like defence, security, justice, the euro area. Croatia Prime Minister Andrej Plenkovic announced at the opening of the regular government meeting on October 5th that in the coming weeks the government, together with the Croatian People's Bank (HNB) will publish a roadmap for the country's accession to the euro area. He believes membership is possible in several years.

Croatia's accession to the currency club has been a priority for this government from the very beginning of its term (October 2016), but the European speech of French President Emmanuel Macron, which Mr Plenkovic described as "inspiring", as well as the informal EU summit in Tallinn last week, pushed the government in Zagreb to accelerate the preparations for the country's accession not only in the Economic and Monetary Union (EMU), but also Schengen. "Our firm conviction is that we have to belong to the closest circle and thus we will have greater influence and more benefits from our EU membership", the prime minister said. In his words, at the working dinner in the Estonian capital, the member states were practically stating their choices of integration speeds.

About an acceleration in Zagreb also speaks the fact that Finance Minister Zdravko Maric recently told euinside that for now Croatia will not be defining the dynamics of its accession. He said that public expert discussions are yet to be held on the pros and cons of the euro. Only a week later however, the premier said Croatia will join in several years.

Regarding the Schengen membership, Andrej Plenkovic said he was strongly encouraged by his talks with Home Affairs Commissioner Dimitris Avramopoulos (Greece, EPP), who was this week in Zagreb. According to the prime minister, Croatia will be ready with the implementation of the technical criteria for Schengen accession in the first half of 2019, and it will then await a political decision to join, a decision that Bulgaria and Romania have been waiting for for years. The Croatian premier has got the message of encouragement of European Commission President Jean-Claude Juncker (Luxembourg, EPP), who called in his annual state of the Union address for the accession of the three countries in Schengen.

However, the implementation of the euro area criteria will take more time because Croatia is not meeting the public debt criterion. In the 2016 convergence report, which the European Central Bank publishes every two years, it is concluded that Croatia does not meet the budget deficit and the public debt criteria. The situation with the budget deficit, though, has significantly improved since then and in June this year the country exited the excessive deficit procedure. In 2014, when the procedure was launched, Croatia's budget deficit was -5.5% of gross domestic product. Last year, it shrank to -0.8% of GDP. According to the European Commission spring forecast, the Croatian budget deficit is expected to increase this year to -1.1% of GDP but will drop back to -0.9% next year.

The situation with debt is more serious. The debt-to-GDP ratio dropped in 2016 to 84.2% from a peak of 86.7% a year earlier. It is expected the decline will continue to 79.4% next year. Croatia is meeting all the other criteria for inflation, exchange rate stability of the kuna and the long-term interest rates. In the 2016 report, the ECB praised the work of the HNB for the stability of the kuna and for the stabilisation of the long-term interest rates. In other words, Croatia could file a request to enter the currency mechanism for preparation for membership (ERMII) the minute it reduces its debt to below 60% as is the allowed maximum under the Stability and Growth Pact. Prime Minister Plenkovic recalled that the strategic goal of the government is to reduce the public debt by 10% by 2020.

When it comes to the upcoming overhaul of the EU, Andrej Plenkovic said he expected by the European elections in 2019 "a reasonably ambitious" approach to the European project, but refrained from elaborating. Plenkovic has established a tradition of reporting at the public sessions of the government and in the Sabor (parliament) about his participation in the European Council meetings, thus putting European issues on the agenda of the Croatian public. This is a rare success, especially in a country which is entirely consumed by its own domestic problems.

Emmanuel Macron's speech as well as European Commission President Jean-Claude Juncker's plan, outlined in his annual address in September, have obviously pushed not only Croatia but Hungary as well to reflect on an acceleration of integration in the euro area. Bloomberg reports that Hungary could join the currency club much earlier than its political leaders are willing to admit. According to signals coming from Budapest, the forint could be replaced by the euro by the end of the decade. The main argument why Hungary, Poland and the Czech Republic are delaying their membership has been economic divergences with the richer euro area countries as well as the divisions in perceptions about European integration, especially in Warsaw and Budapest.

The acceleration of the integration processes in the euro area however, especially after Berlin forms a government, is already ringing the alarm bells in the slower and more sceptic members that they might drop off of the European project if they refuse to enter deeper integration waters.

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