Executive Summary

Swift economic
Over the course of 2021, Croatia stayed economically and politically stable. The economy staged a swift recovery due to a combination of several factors, particularly the reliance on extensive furlough schemes that had been rolled out in 2020, the policy credibility furnished by the pending euro adoption in 2023, and mild epidemiological restrictions adopted in 2021 that were in turn very conducive to a successful tourist season of 2021. The government remained firmly in power and was spared from major societal protests, despite the general dissatisfaction of the majority of the population with the direction in which the country is heading.
Marginal gains in
several areas
All in all, there were some marginal improvements in several policy areas such as the labor market, social inclusion, research, innovation and infrastructure, the global financial system, global inequalities and global environmental protection. On the other hand, the only area showing a notable deterioration in performance is the health sector, due to the large number of coronavirus deaths, its dire financial state and the influence of powerful interest groups that have opposed reforms aimed at putting healthcare on a sustainable footing. No major change was evident in other policy areas. On the surface, the government can boast some achievements including the swift economic rebound from the coronavirus-induced recession and the correspondingly improved labor market performance, as well as the imminent successes of strategic importance such as euro adoption and accession into the Schengen Area. However, there are still major unresolved challenges down the road.
Insufficient policy
coherence; concerns
over flow of EU funds
All these developments reveal the incumbent HDZ-led government’s limited commitment to solving various key issues. Given the scale of challenges it faces, including post-earthquake reconstruction, fighting the coronavirus, reforming the economy and the social welfare system, maintaining the pace of economic recovery, and averting demographic decline, current government structures are unable to respond effectively due to the absence of policy coherence and sustainability. Strategic capacity remains weak in spite of the adoption of a new national development strategy. The use of evidence-based instruments, societal consultation and carefully prepared policy communication is more of an exception than the rule. This is most visible in the proportion of legal acts that are adopted using urgency procedures, and which lack satisfactory regulatory impact assessments. Policy coordination and implementation are inadequate, as encapsulated in the failed efforts to launch post-earthquake reconstruction efforts in the Banija region and in the capital city of Zagreb, which were badly hit in March and December 2020. This situation might even lead to the loss of €683.7 million granted to Croatia by European Commission from the EU Solidarity Fund. Therefore, this episode invokes serious concerns over the capacity of Croatia’s governance structures to organize and facilitate the flow of record sums of EU funding granted to Croatia as a part of the NextGenerationEU program and the Multiannual Financial Framework 2021-2017.
Short-term growth prospects good; strong external pressure needed
The sheer fact that Croatia obtained the highest level of funding per capita clashes with its low absorption capacity and the questionable productivity of state investments. In the short and medium run, the EU funding will certainly lift growth prospects. However, the watershed of EU spending, which will comprise a staggering 16%-18% of the general government budget from 2022 to 2024, might overwhelm reform efforts and thereby reduce potential growth. The extent to which the EU-imposed conditionality might transform the status quo remains to be seen. The European Semester did not play a prominent role in the implementation of country-specific recommendations before the outbreak of the coronavirus. The National Recovery and Resilience Plan might lead to the same outcome in the absence of strong external and internal pressure on the government to get its act together. However, the fragmented and feeble opposition will not be a significant source of pressure in the near term. Therefore, the state of democracy is still tarnished by inadequate political representation and participation.
Back to Top