After the big conflict between Brussels and Zagreb this summer, which marked the beginning of Croatia's membership in the EU, comes the next big bad news - the country is preparing to enter the European Commission Excessive Deficit Procedure (EDP). This became clear after the publication of the autumn data by Eurostat on the member states' levels of public debt and budget deficit revealing another flaw in the preparation for membership - Croatia is using a different methodology to calculate its budget deficit, which does not detect the government loan guarantees nor some types of subsidies. Thus the country ended up with a sensibly bigger budget deficit from what the public knew. For the period 2009-2011 the gap in the country's public finances has grown from 5.3% of GDP to 7.8%.
The hour of truth
The publication of the data provoked Finance Minster Slavko Linic to call immediately a news conference, which was something between a triumph that finally an external force (the Commission and Eurostat) point a problem he has been sounding the alarm of for a long time (the Commission too) and a call of desperation that there are not many measures that can be undertaken to change the situation. And although he said this external assessment puts an end to domestic fights whose merit are the big public debt and the budget deficit, Mr Linic recalled that the reviewed period of growth of deficits and debt, which jumped from 36.6% of GDP to 51.6% in the same period, shows quite clearly who is to blame. Those are the severest crisis years when the country was constantly on loss, but in the same time it was the time when no reforms were performed.
Linic, nonetheless, threw a rescue rope not only to the government, but to the opposition as well by pointing out another big culprit for the looming up as a continuous trend of growth of the budget deficit - the EU. During his conversation with journalists on Monday noon in Zagreb, Slavko Linic underscored on a number of times that only because of EU membership the deficit bubbles up by another four and a half billion kunas (a little over half a billion euros). Comprehensive talks with the Commission are about to be launched, during which the Croatian government will defend its positions on four basic points: the continuous recession, the end of which is expected next year, although it will be put into question if further austerity measures are to be introduced or the VAT is raised as there are such attitudes; the EU membership and the payment of contributions; the reforms that are under way as well as those that are planned in the future; the expected weak economic recovery.
But to what extent will the Commission be inclined to be flexible in Croatia's case is still too early to say, but in general, due to the conflict between austerians and spenders from the beginning of this year, and also due the problems France is causing in relation to the implementation of the country-specific recommendations, a good understanding of Croatia's problems is possible. Under the condition, though, that sufficiently reliable and realistic measures are agreed.
The biggest share in the budget deficit is that of the pension system, for which annually are spent 36 billion kunas, while the revenues are only 18 billion. There significant cuts cannot be expected because, in Linic's words, the average pension in the country is approximately 2400 kunas, but 80% of the pensioners get less than this amount. Another big generator of budget holes is the payment of the debts for the motorways. In the next ten years Croatia has to pay back 4 billion euros for the motorways, but at this stage, although the toll fees are among the highest in Europe, the chances they will suffice to pay the debt are miserable. According to financial ministry's assessment, 35 years will be needed to pay back that debt. If, of course, the interest rate is excluded which amounts to another 7 billion, Mr Linic recalled, sounding almost completely desperate of the lack of understanding in Croatian society of the genuine situation.
He made several word outpourings pointing out that there is no serious discussion in society about economic categories, only other issues are debated. Besides, if there is any talk at all only PhDs in economy talk. That is why a clear message has to be sent, he said - we went too far with the debts, we went too far with the deficits and we did not do reforms. "Not easy moments lie ahead. In Croatia we do not communicate well, we do not understand each other, we do not speak of numbers, we do not discuss the mistakes", the finance minister added. He underscored, though, that for that severe situation the government is not the only one to blame, but society as well (see the video above).
Croatia is against austerity
This was another message by the minster of finance who pointed out that the government did not have many options, apart from introducing a property tax, which was rejected by the junior coalition partner HNS (Vesna Pusic's Liberals). Another option is to increase the VAT, which currently is 25%. A possible increase could be between 27% or 30%. Minster Linic refused to speculate whether and with how much the tax could be increased saying that until the necessary reforms are agreed with the Commission nothing specific can be discussed.
Apart from society, which is not interested in reforms or at least not when they affect the pocket of each member, Slavko Linic blamed the banking sector as well which, in his words, has managed to motivate everyone not to save. "Wonderful. Simply wonderful!", Minister Linic exclaimed while conducting some form of a monologue provoked by sporadic journalistic questions. "Indeed, I am speechless. I have to tell you, I'm shocked. This only shows where Croatia is. Many people have not yet comprehended what is the problem with the deficit". What not only society but at very high governing levels is not comprehended, too, is what awaits the country, which now officially participates in the European Semester. This year Croatia participated voluntarily by exchanging documents with the Commission, but it was not included in the country-specific recommendations nor was it included in the imbalances procedure.
And this is something that is forthcoming and will become clearer in November. Then it will formally become clear whether the country will enter the EDP. Mr Linic was completely convinced that this is certain. The question is, though, how will the government react to these news and the need of more measures that limit spending, boost economic growth and reduce unemployment, especially youth unemployment, which is among the five highest in the entire EU - 52%.