Croatia: Is EU membership a gateway to economic success?

07 May, 2014 | Posted By: Oren Laurent

By Oren Laurent
President, Banc De Binary

It has been 10 months now since Croatia became the 28th member state in the European Union, and still the economy is shrinking. GDP is down and unemployment is up. It is a cautionary tale to the country’s ex-Yugoslav neighbours that membership of the bloc is far from an automatic gateway to prosperity.
In the years prior to the 2008-9 financial crisis, the country’s economy enjoyed an annual growth of 4-5%. Today, Croatia is experiencing its sixth year of recession and is the EU’s worst economic performer so far this year. Croatia’s public debt increased above 60% of GDP in 2013 and the youth unemployment is over 40%, one of the highest in the continent. In 2014, GDP is predicted to fall by 0.5%.
How is this picture compatible with the new EU entry requirements put in place to ensure that members have strong enough economies to thrive within the Union?
When Croatia entered the Union, its government hoped to raise its competitiveness to compete in the EU market and take advantage of membership rewards such as Structural Funds. There was a strong argument that membership would empower the country and help it to make a full recovery after the wars of the 1990s. However, it seems to have been unprepared to benefit from the opportunities presented. The country used just 18% of the total funds available in 2007-13 and its infrastructures, including the legal system, are not all up to EU standards.
Although Croatia’s skilled workforce and quick access to Western Europe is highly attractive, companies currently investing are hindered by slow bureaucracy and oft-changing laws. The short-term outlook is nothing to boast about. Yet it is not all doom and gloom. Both the government and conservative opposition have now pledged to do more to attract and retain foreign investors.
Plus, Croatia does have a few other strings to its bow. Despite being one of the only members not to benefit from the Eurozone’s recovery and growth, its relatively secure banking system means that it also gives little cause for concern to the greater bloc. Fortuitously, its $60 billion economy is small and its banks are controlled by foreign parent banks: unlike Greece and Cyprus, this country won’t be needing any bailouts.
There is also hope for better growth prospects in 2015 and the years ahead. The Government has launched structural reforms to improve the labour market and social benefits as well as the investment climate. If successful, these could stimulate employment and industry, with positive consequences for the economy. This would put Croatia in a stronger position to actively utilize their EU membership.
The EU may be seen as a golden ticket to better trade and free movement for citizens, but even within the boundaries of a shared currency and trade zone, countries remain largely responsible for their own economic welfare. Will Croatia follow through with reforms and prove itself a worthy member of this ever-strengthening trade Union? With Eurozone exports and private investments projected to increase, and the availability of EU funds expected to rise, there really is no time like the present.