Croatia Defence and Security Report Q1 2009

Croatia is certainly closing in on EU membership, having opened 21 of the 35 pre-accession negotiating chapters and closed three of them. The government has indicated that it is hoping to close several more by the end of 2009 and to open the remaining chapters at the same time. Three main issues remain to be resolved: corruption, Croatia's loss-making shipbuilding sector, and the country's relations with Slovenia.

The corruption, graft and organised crime issues are particularly crucial. Either a major improvement will have to be evident in 2009, or we would expect that the EU's annual progress report, which is due in November, will not be as positive as the Croatian government is hoping for. It is also expected that the nation's loss-making shipbuilding sector will need to be privatized, except for the profitable Uljanik shipyard in the northern city of Pula, The country's relations with Slovenia are also significant. In order to join the EU, all of the existing members have to ratify the accession treaty. However, Croatia and Slovenia have never agreed their border. Without a settlement between the two nations, Slovenia could refuse to ratify the accession treaty, which would have the effect of potentially holding up Croatia's application indefinitely.

Defence spending increased slightly in 2007. It is expected to continue rising through to the end of 2012.

The general trends are: the downsizing and modernisation of the army; the general reduction of defence spending as a percentage of total government spending; and the continuing reduction - from what was, 10 years ago, a fairly high level - of defence spending as a percentage of GDP. The political nature of the downsizing of the military will likely slow the modernisation process. Nonetheless, the vast majority of the defence budgets will be taken up with personnel costs and compensation for those who will be included in the army cutbacks. Internal stability remains good, and external security is improving as a result of strengthened relationships with NATO and the EU. Beyond its problems with Slovenia there is little threat of conflict for Croatia. Overcoming the challenges related to border control is a high priority for Croatia in the context of its drive for EU membership. Improved regional co-operation and border security are therefore policy priorities.

We see a significant slowdown in the Croatian economy over our forecast period, but predict that the landing will be a soft one. After 2007's 5.6% jump in real GDP, which was well above the 10-year average of 4.1%, we anticipated a cooling in growth to 3.9% in 2008. This is in line with the recently revised forecasts of the Croatian National Bank, which have seen the monetary authority write down its expectation for 2008 from 4.4% to 3.7-3.9%. As momentum gathers for the country's entry into the EU, it should also witness an increase in investments as firms position for the country's full entrance to the European single market. Croatia will also be able to access many hundreds of millions of euros in preaccession aid.