Country Report Croatia June 2008

Outlook for 2008-09

• Although the renewed mandate secured in 2007 by the Croatian Democratic Union (HDZ) promises political continuity, the government's majority depends on its continued good relations with a small centrist alliance.
• This alliance, of the Croatian Peasants' Party (HSS) and the Croatian Social Liberal Party (HSLS), could prove an abrasive partner for agricultural reform.
• There are few fundamental policy differences between the current and previous governments, but the HSS-HSLS's stance could bring the government into conflict with the EU, as membership talks intensify in 2008-09.
• Croatia aims to complete negotiations on all 33 chapters of the acquis communautaire (the body of EU law) in 2009, but has so far provisionally closed talks on just two chapters.
• The Economist Intelligence Unit expects the Croatian government to adhere to an agenda of EU-mandated reforms, although these will proceed slowly in politically sensitive sectors, such as agriculture, fishing, shipbuilding and steel.
• It is not clear whether the government will have the appetite to cut discretionary spending and labour taxes sufficiently to achieve an acceleration in economic growth, led by the private sector.
• Over the forecast period consumer spending growth will remain strong, and improving productivity in Croatia's export sector should help to drive a steady upturn in foreign sales, keeping annual average real growth above 5%.

Monthly review

• The Croatian authorities are keen to make as much progress as possible towards EU accession before 2009, when a new European Commission will be appointed and elections will be held for the European Parliament.
• The trend of improving relations between Croatia and both Serbia and the Bosnian-Serb entity in Bosnia and Hercegovina has been interrupted by recent acrimonious political and diplomatic exchanges and ICJ cases.
• Despite the strains it faced in its first few months in power, Croatia's ruling coalition is holding together. However, the HSS could yet prove a more abrasive governing partner as EU discussions continue.
• The government has announced plans to revise this year's budget to allow for additional expenditure. However, revenue overperformance and adoption of the EU's fiscal methodology should offset the impact on the budget balance.
• Although data for April show some stabilisation of consumer price inflation, it is too early to talk of inflation having passed its peak, with producer prices still accelerating.