The EU Will Be Ruthless Towards ‘Market Patients’

The European Union is a large and competitive market that will be ruthless towards ‘market patients’ and attractive to successful companies; thus, Croatia’s entry into the EU represents an extraordinary opportunity but also a threat, says Zrinka Živković-Matijević, director of the Economic Research Directorate at Raiffeisenbank Austria.

– Joining the single market does not in itself imply complete integration, prosperity, and progress for the new member state. Accession represents an extraordinary opportunity and challenge, but also a threat, especially to the real segment of the economy, says Živković-Matijević.

Recession, debt crisis, and a significant aversion to risk in the European market limit the positive effects of membership, while the unfavorable structure and insufficient competitiveness of the domestic industry hinder commodity exports and its positioning in that market.

– From a macroeconomic perspective, the greatest obstacle to growth and development in Croatia is low competitiveness and productivity, due to internal weaknesses in the system, lack of structural reforms, and eroded confidence in the credibility of fiscal policy. The impetus for positive changes, along with greater transparency, could come precisely from mechanisms that already exist within the framework of EU common policies, says Živković-Matijević.

The EU has a number of initiatives to strengthen fiscal and economic balance, such as the so-called ‘European Semester’, in which Croatia has voluntarily participated since the beginning of this year. This involves aligning fiscal and structural policies, stronger oversight of national budgets by the European Commission, an early warning system for macroeconomic imbalances, and sanctions.

Thus, the impetus for positive changes comes from outside and forces economic policymakers to rationally spend resources, while simultaneously placing structural policies in the context of fiscal policy, that is, the entire economy.

“The European Union is a large and competitive market that will be ruthless towards ‘market patients’ and attractive to successful companies. Therefore, it is up to us to prepare as best as we can,” says Živković-Matijević.

The benefits of entering the single European market are expected through greater capital inflows, a stronger institutional framework, continued reforms, strengthening the rule of law, fiscal adjustment…

– From structural and cohesion funds alone in 2013, Croatia has nearly 550 million euros at its disposal, and the annual amount in the next seven years exceeds 1.1 billion euros or just over 2 percent of GDP. The actual amount depends on absorption capacity, but the potential positive effect is indisputable, especially considering the limitations of domestic funding sources and still high aversion to risk in global markets, which, along with administrative barriers in the domestic market, hinders capital inflow into Croatia, says Živković-Matijević. However, this year a modest contribution from EU funds is expected.

– Experiences from countries that joined the EU earlier show that during the first two years, projects are mostly just applied for, so the utilization of funds is low. Slovenia did not draw almost anything in the year of accession, and the average for new EU members was 20 percent of the planned funds in the first three years. The next financial perspective is for the period from 2014 to 2020, when more than a billion euros will be allocated to us each year. Experiences show that the most funds are drawn precisely in those last years, explains Živković-Matijević.

Increasing the competitiveness of domestic products Entry into the EU is a challenge for Croatia because Croatian products will freely compete with products from the EU. The Stabilization and Association Agreement (SAA) regulated foreign trade relations between certain countries and the EU, establishing a period for adjusting customs tariffs and quotas for certain goods.

Thus, after entering the EU, the provisions of the CEFTA 2006 Agreement will cease to apply for Croatia, and foreign trade relations will be regulated by the provisions of the SAA, which most CEFTA countries have signed with the EU. This will bring certain changes to Croatia’s trade exchange with foreign countries.

– According to the SAA, for a large number of products imported from the EU, as well as those exported from Croatia to the EU, customs duties are no longer calculated. However, with Croatia’s entry into the EU, certain protective tariffs that exist for the import of agricultural and food products from the EU will be abolished, making them cheaper. For exports to the EU, which account for 60 percent of Croatia’s exports, there are mostly no customs duties already, but quotas on certain products, such as wine and some types of fish, will be abolished. On the other hand, the export of certain products to CEFTA countries could be burdened with higher customs rates, says Živković-Matijević.

Last year, nearly 20 percent of Croatia’s total commodity exports were to CEFTA countries, with the most significant foreign trade partners being Bosnia and Herzegovina, accounting for 12.8 percent of total commodity exports, and Serbia, with 4.4 percent of total commodity exports.

Far more important, Živković-Matijević believes, is the issue of the competitiveness of Croatian products.

“While Croatia was exporting to CEFTA countries, it was actually offering mostly technologically advanced products compared to the state of the market there; in the EU market, Croatian products are largely technologically simpler than European ones. Therefore, it is essential to increase allocations for research and development, which are among the lowest in Europe, and, along with restructuring the domestic industry, increase competitiveness by specializing in the production of technologically advanced products with high added value. In that case, Croatia will be able to take advantage of the benefits of a large and wealthy common market,” concludes Živković-Matijević.