Croatia: Price Rise Despair On The Final Stretch To Eurozone

Food market Dolac, Zagreb Croatia. Photo: visitzagreb.hr

Croatian residents and companies and organisations have faced a rude shock when recently their new gas/energy bills arrived with sharp and unexpected spikes compared to the previous ones, many expressing absolute inability to pay the new energy costs with the government finding itself in the position of having to subsidise some organisations so they could survive their energy bills. It has all been put down to some generalised energy crisis in EU and the world that is sure to cause price increases in all goods and services. Prime Minister Andrej Plenkovic noted during the past month that vulnerable energy consumers, about 91,000 of them, are currently receiving vouchers of EUR 27 each to pay electricity bills. The program will be expanded to 5,700 beneficiaries of the national compensation for the elderly. Also, a voucher for gas will be introduced, and the amount doubled to EUR 54. A special one-time fee is envisaged for 721,000 pensioners with pensions lower than EUR 531, which will require a total payment of EUR 62 million. Not much help when one hears that energy bills have risen by double or triple amount from previous ones!

Prime Minister Andrej Plenkovic has also during the past month presented a plan for households, businesses, and farmers that would mitigate the rise in prices and pointed out that without the package the electricity bills would rise by 23 percent from April 1, compared to 79 percent for gas. The measures will become operational on April 1 and will be valid until March 31, 2023.  Plenkovic pointed to the wave of rising prices in Europe caused by the global energy crisis as the main reason for the adoption of the package. Still, the rise of energy costs in Croatia appears much higher than in other countries, especially the West. He did not refer to any possible correlation between prices increases and Croatia’s transitioning into the Eurozone, that is, swapping its kuna currency with the euro in 2023!

According to the government’s plan the increase of electricity costs will be limited to lower the expected price increase. Goods and Services TAX (PDV) on natural gas will be reduced from 23 percent to 5 percent and a subsidy of 1.3-euro cents per kWh will be introduced. The Ministry of Economy will reimburse power suppliers from April 1 until March 31, 2023. There will be PDV tax reduction on many food items or products. Micro, small, and medium entrepreneurs with an average annual consumption of up to 10 GWh are eligible for subsidies. The amount of aid is 2-euro cents. It will be paid through vouchers.

General price rises have been known to occur in countries of the European Union as they approached admission into the Eurozone and the introduction of euro as their official currency. Croatia is set to introduce the euro in 2023 and while the current astronomic rises in energy prices are said to be associated with world energy crisis the increases in all prices may indeed be at least partially due to possible fallout from exchange rate fluctuations between the kuna and the euro; to achieve a softer fall of purchase power so to speak once entering the euro monetary climate.

For Croatia to meet its goal to be admitted into Eurozone in January 2023, it needs a positive assessment by the European Commission in spring 2022 and a subsequent decision by the EU Council in summer 2022.

The Croatian National Bank has been optimistic that Croatia, whose economy relies largely on tourism and services, will meet the EU’s criteria to join. The country relies more than any other EU state on tourists, who generate a fifth of gross domestic product and find holidaying much easier when they needn’t grapple with exchange rates. Meanwhile, most private and corporate bank deposits are held in euros, along with more than two-thirds of debt totalling about 520 billion kuna (US$78 billion). Eurozone membership would lower interest rates, improve credit ratings and make Croatia more attractive to investors, according to central bank Governor Boris Vujcic last month.

Adopting the euro would reportedly formalise a large piece of economic activity that’s already carried out using the common currency — from apartment and car sales to short-term rentals for vacationers. It would trim foreign-exchange costs outside tourism to the tune of about 1.2 billion kuna a year, according to the central bank. Croatia would gain access to European Central Bank liquidity and potential bailout financing from the European Stability Mechanism during periods of crisis.

Inflation is the biggest uncertainty. Europe’s spike in energy costs alongside the Croatian economy’s rebound in 2021 have sent consumer prices surging. Inflation is set to come in at 3.5% in 2022, but what counts is how Croatia stacks up against a one-year average of the three euro-area states with the lowest rates. That calculation will be made once data for April are in.

Due to the recent surge in inflation, Croatia might breach the price stability criterion. However, as the price rises are also observable in the eurozone, the Croatian National Bank argued that Croatia should be considered as fulfilling the criterion, nevertheless.

Croatia’s Central Bureau of Statistics (CBS) released last Thursday Croatian inflation data for the month of January 2022, which went unnoticed due to the horrendous Russian attack on Ukraine, although prices did continue to rise significantly. In January 2022, prices were 5.7 percent higher than in the same month back in 2021.

There are solid indicators that the key cause of rising prices across Croatia is now not only the global energy prices but also transport prices (growth in January +10.8 percent), food and non-alcoholic beverages (+9.4 percent), alcoholic beverages and tobacco (+6.2 percent), furniture, household equipment and household maintenance costs (+5.0 percent) and at restaurants and hotels (+ 4.7 percent).

Whether global energy crisis or not, most Croatians believe the introduction of the euro will have positive consequences for the country, according to a 2021 Eurobarometer poll. However, 70% believe it could and will lead to price increases. Perhaps this is where much of price increases come from during this year that leads to Eurozone for Croatia.  And, by the way, the past year has seen about 13,000 newly poor in Croatia as standard of living continues to drop for many and indications are that multitudes in Croatia will step into the Eurozone with their feet far below the poverty line. Prices growth usually do affect the poorest and Croatia is one of the poorest countries in the EU. Bumping up economic activity, apart from tourism, has been and remains the biggest stumbling block for Croatia, euro, or no euro. Work and employment culture and practices are still heavily founded on corrupt nepotism and largely irresponsible work habits inherited from communist Yugoslavia, where accountability had been the weak point undermining economic and living standard progress. Regretfully. Ina Vukic

Warning: Eurozone Turbulence Ahead For Croatia

Croatia’s Prime Minister
Andrej Plenkovic

 

According to Prime Minister Andrej Plenkovic’s words on Monday 30 October 2017 at an economic conference devoted to the introduction of the euro in Croatia, Croatia aims to become a Eurozone member within the next seven to eight years.

So now what? Can the madness of Eurozone failure and struggle be stopped from infecting Croatia? The United Kingdom’s 2016 shock referendum vote for Brexit was a warning about the gap between angry voters and pro-immigration, pro-globalisation élites. Globalisation in the eyes of those that voted for Brexit would rather apply to spreading ones country’s interests across the globe than being a part of a melting-pot of countries tied by a union, such as the EU, in which pot some countries suffer while others, particularly the bigger ones, benefit. As Jean-Claude Juncker, the president of the European Commission, has memorably said in 2014 on Eurozone economic policy and democracy, “We all know what to do, but we don’t know how to get re-elected after we’ve done it.” That doesn’t sound like a prediction of radical reform. It’s a dangerous moment for Europe.

In 1992, the European Union made what the Nobel Prize-winning economist Joseph Stiglitz in August of 2016 called “a fatal decision”: the choice “to adopt a single currency, without providing for the institutions that would make it work.”  In “The Euro: How a Common Currency Threatens the Future of Europe” (Norton), Stiglitz lucidly and forcefully argues that this was an economic experiment of unprecedented magnitude: “No one had ever tried a monetary union on such a scale, among so many countries that were so disparate.”

When Lehman Brothers collapsed, in September, 2008, and the global financial crisis hit, all Western economies went into recession, but the Eurozone countries suffered the most and for the longest. The U.S. unemployment rate hit ten per cent for a single month in 2009 and is now below five per cent; the Eurozone unemployment rate hit ten per cent around the same time, and it was only in July 2017 that it fell just below that figure while in individual countries there it still lingers in double digits. The Eurozone’s economy is smaller than it was when the crisis hit and many world’s top economy experts, including Stiglitz, the euro is to blame for all this underperformance. But let’s say the euro can’t be blamed for everything economically grim in the Eurozone and if it’s not only the euro then one can safely argue that the economic politics attached to it certainly complete the picture of failure causes. Eurozone takes away the two main monetary tools a country can use to manage its economy. The first is to cut interest rates in order to stimulate demand and the second is to reduce the value of the currency in order to stimulate exports.

In Europe, the first thing that happened after the crisis was that all the bubbles popped. The “peripheral” countries suffered dramatic economic contractions, compounded by bank implosions, and had to appeal for financial assistance to avert complete collapse. To make things even darker, a complex mixture of international politics, economics, and law meant that the body that stepped in to help the crisis economies was a triple-headed entity, the Troika, made up of the European Commission, the European Central Bank, and the International Monetary Fund.

The Troika had strong views about how the afflicted economies should be fixed. They rolled into town demanding austerity, meaning severe cuts to government spending, and structural reform, meaning changes to the way a country’s economy works. They doled out money on the condition that these policies were implemented, and accompanied the package with fancy charts showing how the economy was going to recover after the austerity medicine took effect. It is, if you have a twisted sense of humour, just possible to see the funny side of these bailout-and-austerity packages, especially the ones concerning Greece. The numbers are grim, and the human realities are worse—joblessness, hopelessness, forced emigration, spikes in the suicide rate.

The pendulum swings no differently in Croatia. It has not all this time been a member of the Eurozone, but has since 2013 as member state of EU been affected by the Troika medicine, or should we say – infection.

And now we have Croatia revving to jump into the Eurozone disaster zone! One wonders how much of the revving fuel is contained in a wild notion of romanticising about the saving power of Eurozone amidst current threats of bankrupting Croatia that are unfolding in dealing with “Agrokor” disaster and corruption has been poured into the political plights to save Croatia’s government from falling – yet again!

“We don’t want to specify the exact dates, but we want Croatia to become a euro zone member within two government terms in office,” Plenkovic said during the conference on 30 October 2017, continuing: “We have two key aims – one is to join the Schengen area, or rather be ready for the political decision in 2019, and the other is to join the Eurozone.”

EU members that have not yet adopted the euro are expected to spend at least two years in the Exchange Rate Mechanism (ERM) II, a mechanism aimed to ensure currency stability before joining the eurozone.

Plenkovic’s centre-right HDZ government came to power in 2016, three years after Croatia joined the EU. Croatia is still one of the poorest member states and its economy contracted steadily from 2008 to 2015, with a mild rebound in the last two years. The Croatian central bank already keeps the kuna currency in a narrowly managed float, with minor fluctuations during the year, and steps in to prevent sharp changes by intervening on the local exchange market.

The toughest challenge for Croatia to join the Eurozone will be bringing the public debt level to below 60% of GDP. It is slightly above 80% of GDP now. “Our goal is to reduce the public debt to 72% of GDP by 2020 … We are undertaking a major fiscal consolidation and this year the budget gap will be even lower than last year’s 0.9% of GDP,” Plenkovic said.

Central Bank Governor Boris Vujcic said Croatia was the most “euroised” EU country of those that had not yet adopted the euro (Czech Republic, Poland, Hungary, Croatia, Romania and Bulgaria).

“Some 75% of local deposits and 67% of local debt is denominated in the euro. Some 60% of Croatia’s trade exchange is related to the euro zone, while 70% of tourism receipts comes from the euro zone countries,” Vujcic told the conference.

It is, however, crystal clear that over time the EU  has no longer been pursuing the route of a free trade area but it became increasingly politicised, and the idea was to set up a centralised power structure in Brussels to transfer national sovereignty rights on to the supranational decision making structure. Now the EU policy is about interventionism, they try to interfere in all sorts of economic and social fields to push through all kinds of political concepts and that’s a very dangerous idea. This being so, one cannot quietly and compliantly accept Prime Miniser Andrej Plenkovic’s statement from 30 October 2017 in which he said: “We said yes to the Eurozone when we joined the EU. The reason we’re not there yet is that we still have to meet all the criteria and not because we need the political decision.” This only gives muscle to the EU political battle for survival while living standards in Croatia keep plummeting and working-age people keep emigrating in droves. What a mess! It’s a mess that can possibly be sorted to benefit Croatia, rather than the EU, by people political power. If Croatia’s government keeps referring to the EU referendum of 2012 as something Croatian people committed themselves to then the reality and people-legitimacy of that referendum needs to be re-examined. It was, after all, a referendum at which barely 29% of Croatian voters turned out for voting! Ina Vukic

Croatia: How Government’s Kicking the Can Along Economic Junk Road

kicking the can

Croatia’s credit rating is on the junk heap. This will affect all facets of the economy and place growth onto a wish-list, rather than on the done-list.

Rating agency Standard & Poor’s on Friday 14 December lowered Croatia into junk status to BB-plus from BBB-minus, concluding that the recent government reforms will not be enough to boost the economy.

Oh what a tangled web Croatia’s Cock-a-doodle-doo coalition government weaves as it spends the money it doesn’t have.

Oh what a tangled web Croatia’s Cock-a-doodle-doo coalition government weaves as it’s Prime Minister Zoran Milanovic stamps his feet, shouting: ratings are not important … one rating agency says one thing and another says something entirely different three months later … have we done anything scandalous during the last three months to deserved reduction in rating … no we haven’t…we will sort it out ourselves … we don’t need the IMF (International Monetary Fund) … government does not save … government takes out loans … all countries take out loans … we will borrow more money … we won’t lower the wages … we won’t reduce the numbers of workers paid from the public purse (source: Prime Minister Zoran Milanovic on Croatian HRT TV news 16th December 2012).

Well, it’s true nothing scandalous, or otherwise, has been done by Milanovic’s government in the past three months. It is precisely that inactivity that has earned the junk status for Croatia’s credit rating and Milanovic simply does not seem to see that.

Déjà vu overpowers me. I’ve heard this before. Croatians have lived this before. When Tito ruled over Communist Yugoslavia. Anything – even the rigid and productivity based unsustainable job security – to keep people believing the “party” is keeping the individual afloat, while the economy’s flushing down the toilet!

The question that must be asked: Why isn’t the Croatian government prepared to implement painful changes/cuts to its public expenditure, introduce real and meaningful incentives for private business enterprise that will benefit all in the long run? The answer could well lie in its fear that it will lose votes at the next elections if it cuts public expenditure/public jobs.

It’s about votes; bugger the consequences for “Joe Bloggs” down the street.

Standard & Poor wrote: “In our opinion, the Croatian government’s reforms have so far been insufficient to eliminate the structural rigidities that hamper the country’s growth potential… We believe that the government’s fiscal resolve has weakened, leaving structural budgetary weaknesses, such as high personnel and social expenditures, which together make up just under three quarters of central  government spending, unaddressed. The outlook is stable, reflecting our view that Croatia’s wealth levels, relatively diversified economy, and future receipt of EU funds could help stabilize external imbalances and government finances while improving  growth prospects.”

Milanovic crows about borrowing more money. He talks of other countries that are doing the same as if that’s very fine and O.K.
Well, it’s not OK.
It’s not O.K. to drown along with others.

The issue of debt won’t go away by borrowing more money.  The more you borrow the more you must return. The issue won’t go away until the debts are liquidated. New loans are most likely going to prop up banks’ balance sheets or, God save the people from this one: more government bonds. Most likely nothing will go towards extending loans to businesses or households and getting out of the economic rut.

If the Croatia Bank for Reconstruction and Development (HBOR), headed by Anton Kovacev, appalling track record in instigating and supporting changes to and development of new private business enterprise is anything to go by, then Croatia is likely to stay on the junk heap for some time to come. HBOR has, according to Croatian HRT TV news December 17, also been placed onto the junk pile of economic performance/credit rating.

Finance minister Slavko Linic said December 17 that the government will be borrowing but the borrowing would mostly be internally, rather than externally. Kind of keep-things-local approach.

Next year will not pose any problems with borrowing and the Croatian government can take out loans to the value of HRK 28 billion which are equal to its dues, with most of these being taken on the domestic market, and we will not release government bonds in the first quarter because there is no need for us to crash the value of our bonds on the foreign market and there is also no need to take out a loan with the International Monetary Fund (IMF),” Finance Minister Slavko Linic said on Monday 17 December.

To throw a spanner into the government’s works, the Croatian National Bank governor Boris Vujcic holds that dependence upon domestic borrowing is not a good plan to recovery and economic growth. Vujcic states that in such circumstances interest rates would grow and it’d push out private borrowing – and that would result in a further ratings fall.

With HBOR’s poor rating and performance and Croatian National Bank (HNB) governor being at loggerheads with the government over the source of funds for government borrowing the real issues of desperately needed financial, public expenditure, private enterprise invigoration get lost and economic growth is in the can the government keeps kicking down the road. Decisions to implement real changes, get rid of structural rigidities, keep being delayed and the children of today will indeed bear the full burden when the government debt collectors start banging – not knocking – on the door.

If Milanovic was looking up to countries like Portugal, Spain, Greece … when he gave borrowing a thumbs up, then he’d better look again. One wouldn’t want Croatia to end up where these countries are heading – bankruptcy! Milanovic and his government have said several times over recently that foreign investment in Croatia hasn’t been coming as they thought it would. Of course it hasn’t – private investors look for security and flexibility that would allow decent profits and Milanovic’s government just hasn’t been delivering its part of the deal. They seem to be stuck in business operational rigidity, much of which corroded the economy of Communist Yugoslavia.

The reality is that national banking systems in Europe are having a hard time borrowing money from private investors and, hence, the European Central Bank (ECB) is becoming the lender of last resort. Perhaps ECB loan “terms and conditions” aren’t as rigid as those of the private sector and Milanovic might put on a pair of rosy-coloured glasses on his way to grab some ECB seemingly free money – if he sides with HNB governor rather than his Finance minister on the issue of borrowing, that is.

Don’t hold your breath for a better future on “free” or “easy” money terms ECB’s peddling.

Then Croatia (like Portugal or Greece) will become overborrowed, have an even smaller chance of growing the economy. Finance minister’s statement that new borrowings in 2013 will just be enough to service existing debt supports such dire consequences for the ever growing number of the unemployed and poverty stricken individuals!

Such government borrowing is, in reality,  a “rob Peter to pay Paul” self-inflicted predicament. What happens next?!

This is the biggest threat to the country and the people’s wealth and measures must be taken to protect the people and avoid utter misery. Such measures do not include inhaling solace, like Milanovic does, from comparing Croatia to other countries that borrow money.

Milanovic and his government are perhaps also marking time, kicking the can down the road, until EU funds start kicking in after 1 July 2013 (when Croatia is expected to become member of EU). That’s what Tito would do if he and the Communist Yugoslavia were still alive. Well, this just isn’t good enough. No EU fund will save the Croatian economy unless Croatia itself walks the hard yards and implements required changes to its public expenditure and vigorously stimulates sustained growth in small to medium private business enterprises. Ina Vukic, Prof. (Zgb); B.A., M.A.Ps. (Syd)

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