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Jul 1, 2013 | 10:41 GMT

7 mins read

Croatia's EU Membership: A Long Process with Dubious Rewards

Croatia's EU Membership: A Long Process with Dubious Rewards
(ANDREJ ISAKOVIC/AFP/Getty Images)
Summary

For all the problems afflicting the European Union, EU membership remains a priority for many nations, particularly those of the Western Balkans. Croatia, for example, has long courted the bloc for accession, and its efforts were rewarded July 1, when it officially became the European Union's 28th member.

Because of its location in the European borderlands, Croatia traditionally has been influenced politically and economically by external powers, including Austria, Hungary, Italy and Turkey. The country has long been a battleground for Catholicism and Orthodoxy, the Ottoman and Habsburg empires and, more recently, communism and capitalism. After the collapse of Yugoslavia, Croatia adopted a Western orientation, and the country's leaders prioritized NATO and EU membership accordingly. But Croatia joins the bloc in a time of crisis, during which Brussels may not be able to give new members due diligence. The government in Zagreb will have to implement painful reforms to stabilize the country's economy and restore growth with little hope of getting much in return from Europe.

Croatia's internal geography is marked by three key features, which in turn have shaped the country's history: the lowlands in the east, the Dalmatian coast in the west, and the Dinaric Alps separate them.

Croatia's lowlands represent the western border of the Pannonian Basin, which has some of the most fertile soils in southeastern Europe. Two long rivers, the Sava and Drava, both of which drain into the Danube River, facilitate agricultural development and trade in the lowlands. Thus, the region became Croatia's breadbasket and the region in which Zagreb was founded. Because of the quality of its lands, Western Croatia has been repeatedly invaded by more powerful neighbors such as Hungary and Austria.

The cities along the Dalmatian developed independently of those in the west. Their position between the barriers of the Adriatic Sea and the Dinaric Alps afforded them this autonomy. Several powers, including the Byzantine Empire, the Kingdom of Bosnia and the Venetian Republic, have competed for influence over these cities

Croatia's EU Membership: A Long Process with Dubious Rewards

Croatia Locator Map

An independent Kingdom of Croatia existed in the 10th and 11th centuries until Croatia entered a political union with Hungary in 1102. As the Ottoman Empire expanded into the Balkans in the 13th and 14th centuries, Croatia became the battleground for Ottoman and Christian forces. It later joined the Habsburg Empire after the Ottomans defeated the Christians in the Battle of Mohacs in 1526.

In the mid-1800s, Croatian nationalism emerged in response to what many perceived as an intrusion of German and Hungarian culture. After World War I, Austria-Hungary collapsed, and Croatia joined Serbia in the creation of the Kingdom of Yugoslavia. During World War II, the kingdom was occupied and partitioned by the Axis powers. In 1943, the Socialist Federal Republic of Yugoslavia emerged under the Communist leadership of Josip Broz Tito.

Croatia After Communism

Tito's death in 1980 triggered a slow political process that culminated in the collapse of Yugoslavia between 1990 and 1991. Croatia held its first free parliamentary elections in April and May of 1990, and the country formally declared independence in June 1991. This marked the beginning of four years of armed conflicts between Croat forces loyal to Zagreb and the Yugoslav People's Army (which was disbanded in 1992) and local Serb forces that opposed the secession. This conflict rekindled centuries-old tensions between Catholic Croats and Orthodox Serbs.

The 1990s were transitional for Croatia. The Balkan Wars dominated the first half of the decade, while at the economic level then-President Franjo Tudman applied a series of controversial privatizations that were tainted by accusations of corruption and nepotism. Croatia began the formal process to join the European Union in October 2001 and was granted EU applicant status in June 2004. It simultaneously negotiated its accession to NATO, which it joined in 2009. Key elements to both negotiations were Zagreb's cooperation with the International Criminal Tribunal for the former Yugoslavia and the delivery of war criminals. Later in the 2000s, Slovenia threatened to block Croatia's EU accession due to ongoing bilateral disputes, but the two sides reached an agreement in 2013.

Accession Talks Amid the Crisis

Croatia experienced strong economic growth in the 2000s. Between 2000 and 2008, its gross domestic product rose by an average of 4.3 percent annually. During that time, unemployment fell from around 16 percent to roughly 8 percent, according to the International Monetary Fund.

But the European crisis halted Croatia's economic progression. Some of the country's main export destinations, including Italy and Slovenia, were deeply affected by the crisis, while the economic slowdown of Germany also had a negative impact on Croatia's exports. According to Eurostat's winter forecast, the Croatian economy contracted by 1.9 percent in 2012 and is projected to contract by 0.4 percent this year. Unemployment reached 18.3 percent in the first quarter of 2013 — the third highest rate of any EU member, save Spain and Greece.

In 2012, the country's budget deficit was 4.6 percent, and it is expected to remain around that level this year (the European Union's target budget deficit is 3 percent for its members). This means that Croatia may have to enter the bloc's disciplinary procedure immediately upon membership. In addition, Croatia's gross debt accounted for 53.6 percent of gross domestic product in 2012 — up from 28.8 percent in 2008. Croatia's modest banking sector, which is mostly dominated by Italian and Austrian banks, accounts for roughly 120 percent of its gross domestic product. By comparison, neighboring Slovenia's banking sector accounts for roughly 140 percent of gross domestic product. Due to the crisis, non-performing loans in Croatian banks tripled between 2007 and 2011, reaching 12.4 percent. Slovenia is currently struggling with a banking crisis, and Croatia will need to strengthen its banks to stay out of danger.

Several related issues complicated Croatia's EU accession negotiations. Unlike other former communist countries, Croatia did not implement substantial economic reforms before joining the European Union. Its public sector remains large, and the reforms are difficult and politically costly to Zagreb, which has relied on public sector employment to fight unemployment and, along with local governments, to gain votes. In its reports on Croatia, Brussels has also warned about the pervasiveness of corruption in the country and the presence of organized crime.

Croatia will receive economic aid from the European Union — Brussels approved 687.5 million euros (roughly $895 million) for Croatia for the second half of the year — and the country is expected to receive an additional 13.7 billion euros between 2014 and 2020. Zagreb will also try to use its membership in the bloc to try to attract foreign investment, which fell from 4.2 billion euros in 2008 to 973.3 million euros in 2012. But Croatia will probably struggle to absorb EU funds, and foreign companies often complain about corruption and excessive bureaucracy in the country. This means that Croatia will have to apply substantial institutional reforms to receive more investment and European assistance.

Because of the size of its economy (Croatia's gross domestic product is around 44 billion euros, roughly the size of Bulgaria's), Croatia will not pose a systemic challenge for the economic stability of the European Union. Moreover, the country is not expected to join the eurozone anytime soon. However, Croatia will face a challenge of cleaning up its economy in the context of a deepening European crisis.

Domestic Interests vs. EU Reforms

A decade ago, Zagreb saw EU membership as an effective way to attract foreign investment and integrate with the economies in Western Europe. For the European Union, Croatia's accession represented another step in the pacification of the Western Balkans.

But over the past decade, Western Europe has become increasingly disappointed with EU enlargement. Even if the inclusion of Romania and Bulgaria in the European Union in 2007 made sense geopolitically (both countries border with the former Soviet Union), many EU members saw their accession as unnecessarily hasty. Bulgaria and Romania are still bloc's poorest nations, corruption is still rampant in both countries and neither country is part of the Schengen area.

Some EU members believe that the bloc is making a similar mistake with Croatia. Countries such as Germany, the United Kingdom, the Netherlands, Austria and Slovenia have said that they would impose temporary employment restrictions on Croatian workers. Media and politicians in Western Europe also criticize Croatia for the criminal organizations operating in the country. In this context, Croatia is likely to be the last country to join the European Union this decade.

The elimination of trade barriers will help Croatian exports to the Continent, but it will also expose local industries to competition from abroad. The Croatians are also worried about the future of sectors such as shipbuilding, which receives state subsidies that are criticized by the European Union. Thus, Croatia's EU membership will probably be less beneficial than Zagreb expected when it began accession talks a decade ago. This will force the country to find a balance between its domestic interests and the reforms imposed on it by Brussels — a trend that already is well underway in most non-eurozone countries.

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