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Portfolio > Economy & Markets

Timing of Croatia’s EU Membership Suspect

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Croatia recently celebrated its status as the newest member of the European Union. This is something it had worked hard for, implementing changes required for membership so that it could gain access to the support and broader market offered by becoming a part of the group. But there are questions about whether Croatia chose the right time to join a group that is itself in trouble, beset by recessions in many of its 27 other member states. There’s also the matter of whether the EU itself may have rushed the process before its newest member demonstrated itself to be fully committed to reform—or even to be economically capable of taking advantage of all that membership has to offer.

Until July, there hadn’t been a new member admitted to the EU since 2007, when Bulgaria and Romania joined. These countries, Croatia, Slovenia, which became a member in 2004, and other nations formerly part of Yugoslavia are in one of the poorest regions in Europe, and the economic boost they hope for in joining the EU may or may not materialize.

Croatia went through a lot to gain its coveted membership, including trying to shed its authoritarian past. But problems remain, some of which it has in common with other countries in the region that have been unable to effectively weed out corruption in both their politics and their economies. And now that it is a member, with its prize already in hand, there are concerns that it may not hold quite so strongly to the goals set for it by the European Commission as it did when its goal was still out of reach.

That has certainly proved to be the case for Bulgaria and Romania, which hold rankings of 75 and 66, respectively on Transparency International’s Corruption Perception Index. Croatia itself stands at 62—but, to be fair, Greece and Italy don’t do all that well on the Index either, with the former ranked at 94 and the latter at 72.

Croatia’s economy, however, may prove to be its single biggest obstacle to successful integration into the EU. It has an unemployment rate hovering around 20%; youth unemployment is double that. While it’s made enough progress to get into the EU, most of its state monopolies are still alive and well; that, together with the fact that small companies have to fight their way through substantial bureaucratic barriers, has kept the country’s economy from growing. And in December, S&P dropped Croatia’s sovereign debt rating to junk.

Michele Napolitano of Fitch Ratings has categorized the country’s long-term foreign currency issuer default rating (IDR) as having a negative outlook. Napolitano said in research that the Croatian economy “suffers from high public and external debt ratios, high euroization, and poor economic performance since 2009. These factors create an unfavorable background for debt dynamics, making Croatia vulnerable to adverse shocks.”

Other difficulties include the harsh reality that many EU member states are facing their own economic hard times, which means there’s not likely to be a vast amount of foreign investment flooding the country. And while there are 14 billion euros ($18.544 billion) in EU financing available for Croatia to draw on between 2014 and 2020, its weak economy will make it tough for it to take full advantage of the money, since it must have matching funds to qualify for most of that total.

One bright spot, though, is that in mid-July—only a couple of weeks after joining—the country won approval for a loan of 13 million euros ($17 million) from the European Bank for Reconstruction and Development for its largest port, Rijeka, to improve its water supplies and expand its wastewater collection network.

If it manages to get additional funding, the country plans to use it to revitalize infrastructure that dates from the Communist era and is in need of upgrades. Upgrades to rail lines, including building a rail link to run from Slovenia the Serbian border for cargo transport, the building of new bridges and other infrastructure improvements, as well as some agricultural projects, including irrigation, are among the updates planned by Croatia’s government.

Another planned project is a route—bridge, tunnel, or highway—that will link Dubrovnik, its most popular tourist destination in the south, with the rest of the country while bypassing the segment of Bosnian territory that currently separates the two. Whichever option it chooses, it will be pricey—a bridge is estimated to cost 250 million euros—and it will have to satisfy conditions for membership in the passport-free Schengen area, another Croatian objective that it hopes to achieve by 2015.

To conform to those conditions, Croatia will have to, among other things, come to agreement with neighboring states Serbia and Montenegro on how to implement border controls that will complement accords already concluded with Bosnia-Herzegovina; that last country shares a 1,000-kilometer-long border with Croatia. The good thing is that Croatia stands to recoup part of the costs for bringing all this about from the EU.

Even if the broader EU is beset by its own economic woes because of the euro crisis, Croatia’s entry into the group opens the door to some 500 million consumers, at least some of whom will be potential customers. Probably at least at first, the country’s $63 billion economy will have to rely on its dominant industries of tourism and services, until it finds it footing—and hopefully investors as well.


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