June 25, 2013 6:20 pm

Croatia: A cool reception on arrival

Many economic doubts remain about the EU’s 28th member
Passengers are seen riding a tram at night through the city of Zagreb, Croatia©Bloomberg

Just days after Croatia declared independence from Yugoslavia, Sandra Veic Sukreski, a young journalist from Zagreb, received an ominous tip-off. A friend told her that Serbian fighters were gathering in woods near Osijek, in Croatia’s east. It was July 1991 and tensions between Croats and ethnic Serbs had been building for months.

After driving from Croatia’s capital, Ms Veic Sukreski stopped for coffee at her friend’s house near Osijek’s gothic cathedral. As her boyfriend stood up from the table, a sniper’s bullet whizzed past his ear. War had returned to Europe.

Joining the club

Joining the club
Data on Croatia and candidate countries for EU entry

Croatia’s four-year war of independence would leave 20,000 dead and 2,000 people missing; neighbouring Bosnia-Herzegovina’s was even bloodier. Ms Veic Sukreski covered both, witnessing conflicts whose savagery echoed not just the second world war but conflicts from centuries past.

“I never thought I’d have war stories like my granny, who was born in 1921,” she says. “I realised war can happen anywhere, however unthinkable it might seem.”

Almost exactly 22 years after that journey to Osijek, on July 1 Croatia will become the 28th member of the EU – only the second former Yugoslav republic and first of the main protagonists of the 1990s wars to join. No other recent entrant has followed such a tricky path. For those such as Ms Veic Sukreski, who lived through the war, Croatia’s EU accession marks a closure.

“I want Croatia to be seen as a normal European country, like France or the UK,” she says, “and not as some problematic Balkan war zone.”

Croatia’s entry also provides, to an EU mired in economic crisis, a reminder of its origins. Dejan Jovic, an adviser to Ivo Josipovic, Croatia’s president, says Croats view the union just as its founders did, “as an anti-war concept. They founded the EU because they had the experience of a war.”

Yet for all the symbolism, much of the EU seems unsure whether to celebrate 4.5m-strong Croatia’s entry or treat it with suspicion. There is little of the jubilation that surrounded the EU’s absorption in 2004 of eight former communist states, including Croatia’s former Yugoslav neighbour, Slovenia. That “big bang” enlargement was seen as reuniting Europe, definitively burying the cold war. Since then, backsliding in countries such as Hungary has served as a warning that EU membership does not make progress towards democracy irreversible.

More importantly, many EU governments and citizens are wary of admitting another weak southern European economy whose biggest industry is tourism. Croatia has had four consecutive years of recession, surpassed in the EU only by Greece. Joblessness is at 20 per cent – and among young people is closer to 50 per cent. Germany’s Bild newspaper last month dubbed Croatia a country of “debt, corruption and unemployment”, set to be the EU’s “next billion-euro grave”.

For their part, Croats watching the EU’s stumbling attempts to contain the eurozone crisis wonder if they are joining “just in time for the funeral”, jokes Zarko Puhovski, a former political philosophy professor at Zagreb University.

Zoran Milanovic, the country’s Social Democrat prime minister, insists the doomsayers will be proved wrong. “Not a single post-communist country was scrutinised as much as Croatia was during its accession. We should be readier to join than any other – much readier,” he says.

Before the war Croatia and its Yugoslav neighbours might have seemed excellent candidates for EU absorption. Yugoslavia’s less stifling communism delivered higher living standards than in much of the socialist bloc. Yugoslavs wore jeans and drank Coca-Cola. They could travel and mixed freely with visitors; 10m tourists a year flocked to the 1,800km Croatian coastline. Croats seethe that Romania and Bulgaria – poorer and more repressive under communism – joined the EU before they did.

But the Yugoslav implosion left Croatia’s path to Brussels studded with landmines. Conflict degraded Croatia’s institutions and judiciary and damaged its industry, even as it struggled to establish itself as an independent state. Corruption inherited from the communist era grew, which tainted the economic reforms. Franjo Tudjman, the nationalist first post- independence president, held competitive elections but kept tight control through bestowing patronage on handpicked officials.

Many west European capitals also thought Bulgaria and Romania, which joined the EU in 2007, were admitted too soon, without doing enough to tackle organised crime and corruption. As a result, Croatia’s entry talks, which began in 2005, were more exhaustive and demanding than any previous applicant’s. Not only did Zagreb have to finish privatising its industry, reform its bureaucracy and adopt thousands of pages of EU law, it also had to hand over to prosecutors at The Hague alleged war criminals often seen as heroes at home.

It was the EU-inspired fight against corruption, however, that delivered Croatia’s most dramatic episode since the war. In December 2010, former prime minister Ivo Sanader was arrested by Austrian police on a highway near Salzburg after fleeing Croatia facing bribery charges.

Mr Sanader succeeded Tudjman as head of the Croatian Democratic Union, or HDZ, which he steered away from nationalism towards mainstream European Christian Democracy. European centre-right parties and leaders, including Germany’s Angela Merkel, embraced him. But after his surprise 2009 resignation, Mr Sanader came under investigation.

He was alleged to have accepted a €480,000 kickback for arranging a loan from Austria’s Hypo Alpe Adria Bank to Croatia in 1995, described by prosecutors as “war profiteering”. Mr Sanader was also accused of accepting a €5m bribe to help Mol, the Hungarian oil company, secure full management rights when it bought part of Ina, Croatia’s national oil company. After a trial that heard how his house was stuffed with expensive paintings, Mr Sanader was jailed for 10 years in November. His supporters and the companies dispute the allegations and fairness of the process against him.

Mr Sanader became a kind of sacrificial victim, whose arrest cleared the way for EU entry. Senior Croats could brag that no other applicant had gone as far as imprisoning a prime minister. Critics argue, however, that Mr Sanader’s jailing, while eye-catching, left lower-level corruption intact.

. . .

The Adriatic Institute for Public Policy, a think-tank that has campaigned to delay Croatia’s EU entry, calls the Sanader arrest a mere “pinprick”. It cites US estimates that Croatia saw illicit financial outflows through crime, corruption and tax evasion of $15.2bn between 2001-10.

Vesna Pusic, Croatia’s foreign minister, insists great strides have been made in tackling corruption. Criticism of Mr Sanader’s arrest is, she says, a case of “damned if you do and damned if you don’t”. Transparency International, the anti-graft group, also says Croatia has made progress since 2003. In its most recent rankings, Croatia was judged less corrupt than four EU members: Romania, Bulgaria, Greece and Italy.

But what about warnings that Croatia might quickly become a candidate for an EU bailout? Both Standard & Poor’s and Moody’s in recent months downgraded its bonds to junk, citing its frail economy.

Mr Milanovic, the prime minister, says the eurozone will not end up bailing Croatia out – not least because it is not entering the euro. Government debt, at just under 60 per cent of gross domestic product this year, is high compared with most former communist EU members but half that of Ireland and a third of Greece’s. Velimir Sonje, a business consultant in Zagreb, says the likelihood of international financial markets closing completely to Croatia is small.

Yet while it may not face dramatic and immediate risks, its economic challenges are real. Membership might entail a short-term hit. Turkish and Russian visitors will, from July 1, require visas, a potential blow to the tourist trade even if most visitors come from the EU.

More importantly, Croatia will lose its privileged access to non-EU Balkan markets such as Bosnia, Serbia and Montenegro, where business links have revived in the past decade. Jobs could be lost as Croatian factories relocate across the border to, say, Bosnia, to escape customs duties.

Emil Tedeschi, chief executive of Atlantic Grupa, a food manufacturer that is one of Croatia’s few international success stories, says his company prepared for membership by expanding across the Balkans and in the EU. But many did not.

“You can hear lots of complaints from Croatian companies,” he says “But we had, to be honest, enough time to be prepared.”

Croatia’s overwhelming challenge is to restore growth. But even if the EU economy begins to recover, where Croatian growth will come from is particularly uncertain.

“Practically the whole of industry in Croatia has been damaged, either through the war, or through [badly handled] privatisation, or through mismanagement,” says Mr Puhovski. “We have tourism, but this is four months a year.”

A best-case scenario would see Croatia emulate countries such as Poland, the Czech Republic, Slovakia and Hungary, which saw investments flood into manufacturing, especially car making. But unlike these countries, Croatia’s EU entry comes amid Europe’s biggest downturn in decades. Grabbing some of the limited investment flows into eastern Europe will require deep structural reforms.

. . .

Another hope is the €14bn of EU funds Croatia is eligible to receive up to 2020, and its strategic position astride planned transcontinental road and rail corridors linking the southern Balkans to central Europe. But critics question whether Zagreb has the administrative capacity to apply for and spend such funds effectively.

The uncertainties over how Croatia will fare highlight the fact that, however much Brussels tries to set objective criteria, any decision on whether a country is “ready” remains ultimately political. Absorbing Croatia brings the EU to the border of Bosnia, arguably Europe’s most unstable state. It is intended to signal to all Balkan states that the door remains open.

Ms Pusic says that for the EU to have turned its back on Croatia now would have been not just unfair but risky. Southeast Europe is the continent’s transition zone to the Middle East; political ferment in Turkey and war in Syria lie just beyond.

“If the EU loses its soft power, then it loses the power to stabilise southeast Europe,” she says. “And without stabilising southeast Europe, the danger of instability spreading from southeast Europe, from the southern Mediterranean and from the Middle East into Europe, becomes much bigger.”

. . .

Serbia: Brussels must maintain its magnetism

When a government led by former nationalists was elected in Serbiain May 2012, it sent jitters through Europe. President Tomislav Nikolic was once the right-hand man to Vojislav Seselj, an ultranationalist now on trial in The Hague for alleged war crimes. Ivica Dacic, the prime minister, is a former spokesman for Slobodan Milosevic, the late Serbian strongman.

But the new leadership in Belgrade has continued the pro-EU course set by its more overtly pro-western predecessor, pressing hard for a date to start accession talks.

Its agreement on normalising relations with the breakaway province of Kosovo in April showed it was perhaps more able than its predecessor to take unpopular steps in pursuit of strategic aims and carry Serbs in Kosovo with it.

Even this government seems to feel Serbia’s eventual destination must be the EU – or at least that pursuing membership is popular.

Croatia’s EU entry is sending a message to other Balkan states, says Dejan Jovic, an adviser to Ivo Josipovic, Croatia’s president. “We are more similar to you than to the rest of Europe and if we can make it then you can make it, if you want to,” he says.

But there are concerns that gradual EU expansion could be destabilising, too. Bosnia-Herzegovina remains a flashpoint. The 1995 Dayton agreement that ended the Bosnian war left its three main ethnic communities of Serbs, Croats and Bosniaks (Bosnian Muslims) dissatisfied.

Some analysts forecast Croatia’s EU entry might cause some instability in Bosnia, given that the many Bosnian Croats who hold Croatian passports will have EU rights that other Bosnians do not. That could fuel resentment with Republika Srpska, the Bosnian Serb entity.

The EU’s pull – and ability to act as a spur for reform – may also lessen as other hopefuls from the region, such as the former Yugoslav Republic of Macedonia and Albania, realise entry may be decades away. Even Serbia is not expected to join before the early 2020s at best.

But Mr Jovic suggests the EU is still a “magnet” and should do everything it can to remain one.

“I think if you don’t have this EU magnet – well, look at some post-Soviet states, they are going back to authoritarianism,” he says. “Without that external magnet, I don’t even think communism would have fallen.”

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