Retrospective 2023: Between the Introduction of the Euro and the Corruption Octopus

The year that is now ‘counting down’ its remaining days has been better than we all hoped. It will be remembered as the first year of using the euro and entering the Schengen mechanism. Today, we are among 20 eurozone countries, with which we conduct nearly 60 percent of our foreign trade in goods and 52 percent of our services exchange, and among 27 countries in the Schengen area ‘without borders’, which spans 4.4 million square kilometers, an area larger than the entire European Union.

What are the effects of these integrations? At the forefront, especially at the beginning of the year, was the impact of conversion on price growth. After a media artillery preparation, the state launched a real crusade against evil traders, their large margins, and ‘excess profits’. It later turned out that the effects of euroization were felt only once, in January, and that the new currency contributed to overall inflation by at most 0.4 percent (as estimated by the HNB), or only 0.04 – 0.18 percentage points (as jointly estimated by Eurostat and DZS).

Imported inflation will not be exported

Traders explained in vain that they had not raised margins, that they were operating on the edge of profitability with margins below three percent, but prices continued to rise, in euros just slightly slower than the previous year in kunas. The inflation we ‘imported’, primarily with rising energy prices, began to fade in other countries, especially in the eurozone, but Croatia proved to be special in this regard. Just as we are dependent on imported goods, we have become dependent on imported inflation, which seems to have only slightly mutated here and remained most acute where the state intervened the most by freezing prices of about 30 ‘basic’ products.

Meanwhile, the state had around five billion euros of EU support available this year, which is one-fifth of the budget, so the government, without investment concerns, could generously direct the money wherever it pleased. Thus, the wage indexation, which the government, encouraged by higher tax inflows, diligently applied to all employees in state and public services, certainly contributed to the inflationary spiral and forced entrepreneurs to raise wages themselves, although without a basis in productivity growth. Therefore, they raised the prices of their products in the domestic market (when they could no longer succeed in exports). Concurrently, the labor pool was depleted, leading to a record import of workers this year, not only from neighboring countries but also from distant places, which will likely have additional, perhaps even dramatic repercussions in the coming years.

The climate future has begun

The future is inevitably approaching us; everyone is already feeling climate change. The planet is struggling between the battle for a sustainable tomorrow and current interests – which is beautifully reflected at the 28th climate conference, held ‘on enemy territory’ in Dubai, one of the world’s oil capitals. Meanwhile, Croatia also lacks effective responses, even short-term ones – on how to adapt to the dramatic warming of the sea and increasingly frequent and severe extremes in the form of floods and storms; let alone the adaptation of tourism, agriculture, and other activities.

Somewhat parallel to this, the Croatian drama with garbage, or waste, is unfolding. Landslides in Zagreb’s Jakuševac, a fire in the Drava in Osijek, the stench from Kaštijun and Marišćina are just peak examples of the chaos that reigns in Croatia. And it has been chaotic (also) with the epidemic of African swine fever. This already significant problem, due to the sloppy response of the state, has turned into a key point of the political battle for Slavonia.

Before pig farmers, protests and strikes occurred elsewhere, especially in the judiciary. Court reporters were in the longest strike in Croatia, lasting eight weeks, almost completely blocking the work of the courts. However, if the courts had been working at full capacity, they would not have been able to rule in all cases that testify to the continued disintegration of the state apparatus. News about the dismissals of the highest state officials has become commonplace. Andrej Plenković has ‘spent’ 30 ministers in seven years. However, new ones hungry for ‘their share’ in the tacitly agreed distribution come to replace those who left due to corruption.

The ministerial carousel continues

This year, three more ministers fell from the large circle of incompetents, but only one for not doing his job well – Minister of Construction Ivan Paladina. With his dismissal and the arrival of pragmatic Branko Bačić, serious reconstruction finally began, albeit three years after the earthquake. Mario Banožić from the Ministry of Defense was dismissed due to a traffic accident that caused the death of one person, and the investigation of this case was riddled with procedural gaps suggesting favoritism towards the (former) minister. The most recent dismissal of the head of the economic department Davor Filipović was caused by the case of his advisor Jurica Lovrinčević. However, the question is whether the compromising recording would have been sufficient for express dismissals if the prime minister had not realized that Lovrinčević was a mole working for the opposition, which is a sin greater than corruption. Thus, the ‘gas for a cent’ affair was elegantly concluded – Frane Barbarić had to leave HEP due to illegal construction, and his opponent from the Ministry due to corruption, or command responsibility, just to avoid further probing into the real causes and consequences.

Crime with political backing was joined this year by a novelty – the first major crypto affair, in which 800 naive investors lost 18.5 million euros. We are globalizing, especially in business. The Turks took over Petrokemija, Sunčani Hvar changed from Czech to Arab ownership, the Czechs took over the management of the Đuro Đaković group… However, this year was characterized by one novelty: foreigners are taking over, but our own are taking over too: Tankerska plovidba bought Atlantska plovidba and Turisthotel, Mlin and bakeries with pensioners were taken over by Čakovečki mlinovi, M San is the new owner of Data Link…

Nevertheless, the key story on the business scene is about Fortenova. The takeover, which Pavao Vujnovac and his associates recently presented to the business community, is at the forefront. The future of the largest system is uncertain because, faced with ownership uncertainty, it cannot find convincing investors and is operating ‘dry’ – to repay old debts.

But let us return to the key event of the year, the currency conversion. HNB Governor Boris Vujčić analyzed the economic effects of Croatia’s first year in the eurozone. The currency risk for debtors, who had about 77 billion euros in foreign currency debt, has been removed, thereby increasing the resilience of the economy, and banks have also eliminated currency and liquidity risk as practically all loans and deposits are in the same currency. Additionally, the state, as part of the euro system, can more effectively address disturbances, and there is also (God forbid) access to funds from a 500 billion euro fund. Vujčić also noted the lowering of interest rates, which are for the first time this year lower than the eurozone average for both households and companies, as well as lower transaction costs, and the entry into the eurozone is certainly linked to the improvement of the credit rating.

This should be supplemented by the benefits of the Schengen area without borders, such as the acceleration of the flow of people and goods and the reduction of administration, which domestic carriers and foreign tourists welcomed with equal enthusiasm.

How much have we profited from the euro?

No one has yet turned such analyses into concrete numbers that would show how much the state apparatus has profited from euroization, how much entrepreneurs, how much banks, and how much citizens. No one has yet assessed how much Croatia has financially profited from these integrations in the past year, but the euro and Schengen are certainly responsible for a good part of the GDP growth of 1.6 percent in the first and second quarters and 2.8 percent in the third quarter, which is among the top in the EU. The government often boasts about currency conversion, even more often about GDP growth, but the causal link between these two facts is hardly mentioned. It seems that the euro and Schengen have been triggers for increased investor interest, which this year initiated and announced a series of investments – from Osijek to Šibenik. The results of all this will only be seen later.

What awaits us in 2024? Changes caused by artificial intelligence, which entered the domestic business community this year in an ‘experimental’ phase, could be the dominant mass trend of the entire year. Immediately on January 1, the state takes over the management of county hospitals, and first, of course, it will set up its administrations. This will also be the first year without surtax, with a trap prepared especially for the three largest cities. HDZ fiercely criticizes Zagreb, Split, and Rijeka for replacing the surtax with an increase in income tax, but this party has not decided to reduce taxes that are within its, state jurisdiction, but rather waves at others, local budgets.

All of this is preparation for super-election year 2024, which will bring new Members of the European Parliament, a new president (or confirmation of the current one), and, most importantly, a new composition of the Parliament, which will produce the sixteenth government. Judging by the current situation, the main uncertainty of the parliamentary elections will be which tokens HDZ, despite all corruption and other scandals, will use to form a parliamentary majority.