Securing Stability and Confidence Amid High Uncertainty

December 12, 2011

Zagreb, December 12, 2011 - The 2011 has not quite turned out as expected. The external environment has been more challenging than hoped for, especially in the second half of the year. Growth is slowing across Europe, dampened by the crisis in parts of the Euro area and worries about the global economy. Prospects are not only weaker, but also more uncertain. Downside risks to the growth outlook have increased significantly and the region might likely see another contraction in 2012, according to the World Bank’s latest Croatia Supplement to the EU10 Regular Economic Report, presented today in Zagreb.

The Croatian economy faces a very difficult economic outlook as it confronts new external challenges while still working to overcome the legacy of the previous crisis. The renewed concerns about fiscal sustainability in Europe have not only increased uncertainty, but also pushed the cost of borrowing up, decreased capital flows to the region and reduced business and consumer confidence -- leading to a likely contraction in Europe in 2012.

As the Croatian economy is reliant on the EU, it is highly likely that Croatia will also undergo another contraction in 2012 after very small growth in 2011. While all EU10 countries are tightening their fiscal positions in response to higher costs of financing, the general government fiscal deficit in Croatia will likely increase for the third consecutive year in 2011. This calls for immediate action to reverse the widening fiscal deficits and put public debt on a downward path.

“The foremost challenge is to restore sound public finances. It is therefore important for Croatia to swiftly move forward with an expenditure-based fiscal adjustment to alleviate refinancing risks and protect the investment credit rating” said Sanja Madžarević-Šujster Senior Country Economist in the World Bank’s Croatia Office. These reforms need to address the efficiency and sustainability of the public sector wage bill, pension, health and social benefit systems.

“This does not mean cutting spending across the board or eliminating social programs for the poor or basic healthcare provision. But it does mean better targeting, to ensure that precious public resources go to the truly needy and vulnerable”, said Hongjoo Hahm, World Bank Country Manager for Croatia.

 “Growth prospects beyond 2012 depend on the implementation of a credible reform agenda, which needs to address declining competitiveness”, added Madžarević Šujster.

These reforms need to focus on raising the productivity of the Croatian economy so that Croatia is ready to take advantage of the eventual global recovery. This means supporting research and development to spur innovation and growth, improving labor productivity through better education policies and more flexible labor legislation, and providing a better business environment for the private sector.

The EU10 Regular Economic Report with the Croatia supplement monitors macroeconomic and reform developments, and provides in-depth analyses of key policy issues.

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Vanja Frajtić
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