Monday, 1 July 2013

Croatia joins the EU!

Today Croatia became the 28th member of the European Union. After a long (12 year) EU accession process, after undergoing rigorous scrutiny (EC became careful after Bulgaria and Romania), a couple of corruption scandals, border issues with Slovenia and some attempts to strengthen domestic institutions, the European Commission has declared Croatia fit to join the EU.


The media across the globe has followed the story; the comments range from optimistic, realistic to pessimistic (see ReutersNew York TimesBBCFinancial Timesthe EconomistWSJGuardianDeutsche Welle, etc.). 

This 4,3 million populated country with GDP a bit over $60bn is hardly going to affect economic affairs in Europe. However, as we've seen by the examples in Cyprus or Slovenia, one can never be too careful. Having said that, it should be noted that Croatia didn't experience the financial troubles of Greece, Cyprus or Slovenia. In Croatia the banking system remained strong and well capitalized throughout the crisis. It was in fact the domestic (foreign-owned) banks that have bailed out the government in 2009 (by opening more liquidity when sources of financing were scarce). Croatia's problems are more structural not financial, and are linked to poor public management, corruption and expensive political concessions to various interest groups. Some attempt to reform domestic legal institutions was made thanks to outside pressure from the EU, but it remains to be seen how these institutions will interact in the new European environment. 

I have been asked on several occasions to comment on how the EU accession will impact Croatia, most recently by Neil Buckley of the Financial Times (in addition here is a text from an Irish journalist who quotes me as Dr Vuković - that's very nice of him). This is more or less what I've told the reporters: 

For a small open economy like Croatia the initial effect of EU accession will be significant, of course depending on the industry. For all those industries which haven't been able to adapt to the new market entry (via forming export clusters for example) will experience great difficulties and most likely go under. A decade long dependence on political concessions will hardly be helpful once the external competition enters the domestic market more strongly. On the other hand there is a possibility that the new increased competition from the EU will encourage new innovative solutions among Croatian entrepreneurs and thus contribute to more wealth creation. However, this is only possible if the domestic institutional system would encourage innovation and entrepreneurial incentives, and not discourage them by a huge number or regulatory and fiscal constraints or an inefficient bureaucracy (as was the case so far). It will be interesting to see how the EU bureaucratic apparatus will function in Croatia; will it add to the domestic woes or will it make things more efficient (a bit unlikely isn't it)? 

Secondly, the EU accession could paradoxically help Croatia's labour market situation by emulating the Polish effect. Since entering the EU almost 500,000 Polish citizens have emigrated to the UK, generally taking lower-paid jobs. The effect for the Polish economy was lower unemployment and lower pressure on its public finances, but also a significant increase of remittances being sent back home. (Croatia already experienced a similar scenario in the 70-ies when a lot of domestic labour emigrated to West Germany - these remittances have helped many families survive at the time). Such a scenario would imply a negative effect on the already poor domestic demographic picture, but it will be hard to avoid it since our governments haven't done much so far to maintain the educated and productive work force in Croatia. 
 
The only difference between 2004 and today is the poor labour market situation across Europe. This may after all keep the people at bay.

With regards to domestic aspirations, the people in general tend to feel that the EU will be helpful in terms of greater transparency and further fight against corruption. It was the pressure of EU negotiations that have forced governments to battle against huge domestic corruption scandals (most of them revolving around the ex PM Sanader and his party). Without outside pressure, the people feel this would have never been revealed.

Another thing almost everyone is looking forward to is using the money from EU structural funds. People like to stress out that we need to emulate the cases of Ireland, Poland or Estonia and how they have managed efficiently and effectively to use the EU funds into helping their domestic economies. So far, some funds have been allocated efficiently, but the general perception is that more needs to be done. 

5 comments:

  1. Vuk, dont be humble, you're more of an economist than a lot of people carring the doctor title ;)

    I was thinking about writing something on Croatia-EU relationship too, but I dont really have a lots of time lately. I must have some 10 drafts waiting.
    Anyways, there is one problem that comes with EU, to Croatia. I read a lot about Croatia and its problems, but most of the commenters seem to think that the main problem EU has is the downturn. Even though you know I advocate the view that there is mainly a demand side issue, I am very worried about the long run. One reason why I am worried, even though I welcomed Croatia's accesion into the bloc - is the push toward more harmonization in taxes and regulation. Other problems are, in my opinion democratically weak institutions of the Union. I am afraid that, Croatia will have a tendency to develop a sort of a negative feedback loop that will restrain supply side (potential growth) for Croatia, as well as the rest of EU.

    This is the question you excellently posted in the text:
    "Croatia's problems are more structural not financial, and are linked to poor public management, corruption and expensive political concessions to various interest groups. Some attempt to reform domestic legal institutions was made thanks to outside pressure from the EU, but it remains to be seen how these institutions will interact in the new European environment. "

    If there is no more push from the outside, croatian weak institutions will adopt to the EU institutional setting in such way that it will silently reap the rents of thousands of unelected eurocrats creating rules for the SEM. New regulations are costly and ,meanwhile , insane too, along with other EU central planing policies (fisheries, agriculture, cohesion/structural funds, energy, transport...etc)they are creating serious barriers to growth in my view. Tax harmonization is destroying, in my view one of last defenses against rampant government - tax competition. This way, EU is creating a sort of regulatory/tax prison which even strengthens the bad "aspects" of Croatian institutiuons since it gives the political elite even more power and rent seeking opportunities, but less democratic accountability since decisions are made in Brussels. You can see a part of the picture if you think of your post about the paper that linked low trust (?) and "demand" for increasing regulation - that can reinforce the aforementioned negative loop that chokes incentives to improve anything in such way that large public funds wont become misallocated capital and a huge opportunity cost(even more so than now). Same thing can be mirrored to management of EU funds - countries are responsible for this management, so there will be a lot of corruption going on there as well (think of Greece that created a whole industry for extracting these funds).

    One thing that EU politicians forget is that, even though its a big bloc, EU is not the global economy (its share is getting smaller by the day), and the regulatory/tax prison they are building, along with weakening control of rampant government/EU power, will maybe keep most citizens locked, but not the capital which will flee away eventually, to places where it is more welcome and more productive.

    Maybe Im too pesimistic, but seeing how people who are responsible for these things here at home, and in EU as well, are grapling with serious issues that affect future of millions, its just hard to be optimistic.
    *I may have overcomplicated the point, I hope you'll understand what I was getting at

    greets!

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    1. I do understand, and btw, you just wrote yourself a good text. Use it :)
      I have to say that I'm a bit more optimistic, even though you raise a few good issues. I still tend to think that perhaps the EU can force upon us a more efficient judicial system, as this is something we desperately need. I also tend to think that after the crisis (and after the cases of Bulgaria, Romania and Greece) the EU institutions will be more rigorous towards any attempts of frauds and extraction. However, this is purely an assumption, a hunch even. I have absolutely no evidence to back up this claim.

      As for the regulatory "imprisonment", I agree. As you've noticed in the negotiation process we have adopted a lot of new laws to correspond to the EU legal system and have simply added them to the existing pile. This created an additional confusion and I'm afraid this very well might continue..

      Finally, thanks for the compliment!

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  2. Now I see how much I wrote...sorry

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  3. I can think of many problems in tying a small open market economy to a bloated, bureaucratic, high tax, centralized apparatus with a shaky currency, millions of pettifogging rules, and nearly no accountability.

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  4. My family left on the 50's I have always tried to be optimistic visited many times and helped Croatia during the war with aid from uk.


    My mother is on her 70's and the initial optimisum has been replaced with sadness that a potentially thriving and natural resource rich country is beng sp badly run by individualists. I thought of working in Croatia but could not see how they can use my 25 years of it skills effectively.

    The eu layering will muddy the waters further but maybe we will see the inefficient and corupt be ousted out



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