The salvation of the Croatian economy does not lie in the EU, but in fundamentally reforming the entire system

Covid 19


Tales from the Region



Nikolina Lednicki

Jona Koprencka 200x250

It’s time for drastic changes.

Croatia was well on its way to full recovery from the 2008 financial crisis, which severely shook the economy and caused a wave of layoffs and considerable emigration of young workers. In the meantime, the country joined the European Union and the economy started picking up, which was reflected in GDP growth. However, the coronavirus pandemic put an unexpected stop to all ongoing processes, including economic growth and development. It should also be noted that the Croatian capital, Zagreb, was hit by a strong earthquake, which further aggravated the overall situation.

Since contacts had to be limited, due to epidemiological measures, the whole country came to a halt for a few months, in every sense of the word. Catering and hospitality facilities were closed, shops operated under restrictive rules, and the movement of people was strictly controlled. Many small businesses and artisans had to temporarily shut down. Since Croatia is a tourist country and a significant share of GDP is propped by the tourism industry, a large drop in revenue was expected. For example, season transport companies recorded a drop in revenue of an incredible 95 to 98 percent, and as many as 20,000 jobs were endangered. Due to the ban on large gatherings, the event industry, which earns over HRK 4.5 billion a year (EUR 597,062,700), also suffered a major blow. Many industries took a hard hit, economic forecasts were not conducive to positive developments, and citizens feared for their jobs.

Absurd closure of counties and municipalities

After the initial panic and stocking-up of non-perishable food from stores (such as flour, yeast, oil, etc.), the citizens adapted to the situation from the very onset. They became accustomed to wearing masks and constant disinfection of the space in which they live. However, more serious problems for citizens occurred when the National Civil Protection Headquarters ordered that county and municipal borders be closed and that everyone must have passes in order to enter the space of another county or municipality. Many bus, ferry and rail lines were limited, which posed a major problem for numerous workers working in counties and cities outside their place of residence. The islands were completely cut off from the coastal towns, which are important administrative centers.

Precisely because of the closure of county and municipal borders, the absurdity of many local governments in the country became evident, which is another major problem that needs to be addressed and reformed as soon as possible. One of the examples is the island of Vis, where the towns of Vis and Komiza are located. Administratively, the two cities function separately, yet functionally they form a whole. After the measures were introduced, the citizens of Komiza had to have passes to refuel at the only gas station located in Vis, or to go shopping in a larger store.

In addition to the difficulties in getting to work due to the above measures, citizens also faced problems with the organization of work. Namely, only some companies offered the opportunity to workers to work from home. A survey conducted by the Moj Posao portal showed that employees of large companies and employees in the IT sector were the majority of those working from home. Larger companies operating in Croatia, such as Atlantic Group, Erste & Steiermärkische Bank, A1 (telecommunications company), INA (Croatian oil company) and the Communications Laboratory (public relations agency) have recognized the benefits of working from home for many employees.

On the other hand, there are many jobs that simply cannot be done from home, which means that many workers have had to take annual leave, because they could not work. The work had to be organized in shifts, many people worked, for example, two weeks a month, and stayed at home the other two weeks. In many industries, work was discontinued altogether. For example, the ban on large gatherings virtually stopped the work of the entire event industry, which employs over 10,000 workers. This includes musicians, photographers and artisans and companies without which concerts, events and happenings would not be possible.

In addition, a recent ban on nightclubs and bars to work after midnight has jeopardized a host of jobs. Hospitality workers have been protesting for weeks over the imposed ban and are demanding tax cuts to protect workers. All these problems have stimulated a debate in Croatian society about changing the Labor Law, because it is obvious that everyone will have to adapt to the new conditions and accept that these are long-term changes.

In addition to job-related changes, many citizens have also faced a lack of adequate health care. Many oncology and high priority patients have been left without care, and the Ministry of Health is still struggling with this. Because of the high the number of epidemiological measures and instructions, there are disagreements within the medical profession itself, leading to patients bearing the consequences.

Serious consequences for the economy

Measures introduced to save the economy are still in place, which means we will have accurate data around the end of the year. It is assumed that the purchasing power of citizens will go down significantly, since Eurostat data from 2019 indicate that, even in the "good" times, Croatia had purchasing power that was one third less than the average EU citizen. Unfortunately, Croatia is at the back of the line within the European Union in nearly all aspects of economy. The crisis will certainly have great consequences on the economy and on citizens’ wallets.

In late August, the piece of news that everyone feared became official. The Central Bureau of Statistics announced that in the second quarter of 2020, GDP fell by a staggering 15.1 percent compared with the same period last year. The worst-case scenarios predicted a 13 percent drop, but data showed that Croatia has one of the most affected economies in the European Union. The financial crisis has left huge consequences from which we have been recovering for many years. In 2009, GDP fell by as much as 8.8 percent, which today looks very good compared to the latest data.

The government of Andrej Plenkovic responded to the crisis by adopting measures for entrepreneurs and employees, by paying minimum wages of HRK 4,000 (EUR 530) and paying the taxes and contributions corresponding to that net amount. Although this seems as a substantial sum, it should be noted that the average Croatian salary is HRK 6,796 (900 EUR). Also, the Government issued a measure by which they wrote off or postponed the payment of tax liabilities. It should also be noted that Croatia held parliamentary elections in July, which kept many entrepreneurs and citizens in suspense. Since measures to save the economy were prescribed in April, no one could have predicted what might happen after the parliamentary elections. However, the Croatian Democratic Union regained the trust of the citizens and Andrej Plenkovic once again formed the government.

 Kolku poloso zdravstvo tolku polosa ekonomija 1Source: vecernji.hr

In early September, Prime Minister Plenkovic announced the continuation of measures for entrepreneurs and workers. Namely, part-time work will be co-financed up to a maximum of HRK 2,000 per employee with the corresponding contributions, in cases where the entrepreneur had a drop in turnover of more than 50 percent. Also, for professions that are particularly vulnerable, the support of HRK 4,000 per worker will continue until December 31 of this year. So called “Covid” loans will continue to be provided to entrepreneurs through the HAMAG-BICRO (Croatian Agency for Small Business, Innovation and Investment) and the HBOR (Croatian Bank for Reconstruction and Development) programmes.

Namely, these are extremely favorable loans with an interest rate of 0.1 to 0.5 percent and a repayment period of three to five years. As the interest of entrepreneurs in this type of assistance was huge, the calls for applications were closed in May. In mid-July, after processing the applications, the names of the companies and entrepreneurs who received the loans began to be published. As already mentioned, calls have recommenced and are available to entrepreneurs.

Although these measures sound good on paper and when the Government presents them as "assistance" to the economy and citizens, one should be aware of the fact that not everything is so simple. The government was quick to react back in March, but problems with bureaucracy and the implementation of the measures themselves were visible from the start. Entrepreneurs and artisans very often could not keep track of revised conditions or simply did not receive feedback on time.

Although "Covid" loans seem like a great option for entrepreneurs, the fact is that after having applied in spring, they waited until July for information on whether they are eligible for a loan. Also, all those who wanted to apply had to collect extensive documentation, which is an ever-present sore spot of the Croatian way of doing business. I believe that Croatia will never make progress if it does not improve its way of doing business and if it doesn’t digitalize its processes. In any developed country, it takes less than an hour to open a company or a handicraft business, while in Croatia it takes a few days.

Forced digitalisation

The measure that no one expected or planned (including both the government and the citizens) was "forced digitalisation". Croatia has one of the most expensive and worst bureaucracies in the European Union, as shown by numerous domestic and European surveys. Issuing documents, certificates and submitting applications was a very demanding process that relaxed over the years. Systems were introduced to speed up the process, but there was much more that needed to be done for digitalisation to succeed and fully come to life. However, the coronavirus pandemic has shown that it is, in fact, possible to do everything online, even in institutions that previously required showing up in person. Citizens were often told that this is an expensive project that will take years to complete, but it seems all it took was a virus outbreak to get the system running, despite everything.

Helping the economy versus helping the citizens

Surveys showed that as many as 61 percent of citizens supported the initial measures and considered them to be appropriate. Citizens feared the 2008 scenario, when unemployment began to rise and reached its peak in 2014, when Croatia recorded 384,376 unemployed persons (17.7%). This limited support of Government measures was because they were presented as aid to the economy rather than as aid directly to citizens. It should be noted that the announced measures initially boosted the trust of citizens and entrepreneurs, but it turned out that helping out the economy was not so simple. The measures were paid regularly in March, April and May. However, with the arrival of summer, things changed. In August, entrepreneurs and artisans reported that the Croatian Employment Service had not made payments as per the measures since June. Also, it is important to point out that entrepreneurs have faced a series of issues in the process of applying for measures, due to the fact that procedures and conditions were revised several times. All this caused fewer and fewer entrepreneurs and artisans to apply for payments provided by the measures. It should also be noted that entrepreneurs and artisans initially supported economic measures because they hoped that they would lead to the necessary comprehensive reforms that would create real change.

This, in fact, was the positive thing that came out of the economic measures – the unity formed between entrepreneurs and artisans. The measures are not sustainable in the long run, and it is necessary to find ways to boost the economy and reduce levies, which in turn will encourage the development of entrepreneurship and attract foreign investors.

For now, the measures have staved off a wave of layoffs and the collapse of many entrepreneurs and artisans, but they are not a permanent solution. It should also be noted that Croatia, as a member of the European Union, has gained access to significant funds. Two separate financial mega-packages were introduced. The Next Generation EU instrument was created in response to the coronavirus pandemic, and for Croatia it was estimated at 9.4 billion euros. The second package is the European Multiannual Financial Framework (MFF) of € 12.7 billion for the period 2021-2027. Although the Government presented these funds to the Croatian public as a "hefty" package that will "save" the economy, this is nowhere near the truth.

Many states have received much more significant aid packages that will indeed make a significant difference. Croatia did not use the European funds it had at its disposal in the previous period, and the ones it did use were constantly under public scrutiny due to corruption. Many Croatian entrepreneurs, economists and experts are concerned about the way the government will allocate available funds, due to previous experiences.

With the outbreak, the introduction of epidemiological measures and the closure of borders, much-needed reforms became the topic of discussion in Croatian society. For years, there has been talk about how we shouldn’t rely on tourism as the single most important branch of the economy. GDP growth also depends on the success of the tourist season. The economy overall and all economic activities rely too much on this branch of the economy.

Croatia has difficulties in attracting foreign investment, due to huge levies and red tape that hinders competitiveness. I believe that the Government should have consulted much more with experts and entrepreneurs who have proven to be successful. One example is the digital nomad visa, a project launched by Dutch entrepreneur Jan de Jong, who lives and works in Croatia. In addition, the Voice of Entrepreneurs association was formed, and it managed to gather a huge number of entrepreneurs (over 12,000) and hundreds of thousands of sympathizers in a very short time. The association has become a relevant source of information for entrepreneurs, as well as a factor in creating economic policy in this crisis period. Many of their proposals for measures were accepted by the ruling party, largely due to media pressure.

A time of radical change is coming

The best possible solution for Croatia will be the cooperation of the Government and institutions with citizens and entrepreneurs. What needs to be done now is to adapt the economy for the future. The fact is that, due to the crisis, many entrepreneurs and artisans will have to shut down their businesses, leading to layoffs. However, we will have to adapt as a market and find ways to jump-start the economy. The people of Croatia are a massive resource and a great potential for the country. For example, a Eurostat survey showed that Croatia’s youth have the best digital (information, communication, problem solving and software) skills, compared to young people from the rest of Europe. Entrepreneurs and artisans will have to adapt their business to the new conditions on the market and look for new sources of revenue.

The government will need to find ways to ensure that Croatia is competitive in the global market. It is certain that it will not be through mass production, but the development of high-tech companies and investment in agriculture. There is a lot of unused potential, even in the tourism sector, which needs to be the focus of efforts in the coming period. Another determining factor for Croatia's success is tax policy, educational reform and judicial reform. Croatia is facing a time of radical change, in every sense of the word.

This blog is published as part of the regional blogging initiative “Tales from the Region”, led by Res Publica in partnership with Analiziraj.ba (BiH), Sbunker (Kosovo) Ne Davimo Beograd (Serbia), PCNEN (Montenegro), Prlija (Croatia), ABCnews.al (Albania) and SEGA (Bulgaria).


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Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of the Institute of Communication Studies or the donor.