Vladimir Gligorov , Photo by Hugo Blai

INTERNATIONAL ECONOMY

Gligorov: Croatia could become another Greece

Senior Economist at The Vienna Institute for International Economic Studies Vladimir Gligorov, an expert on the economy of former Yugoslav countries, participated in a international conference "Croatia on the Eve of EU Accession: The Path of Reform", organized by The Austro-French Centre for Rapprochement in Europe and French Institute for International Relations, held in Zagreb, at the and of April. The main topics of this important international event in Zagreb were challenges for Croatian reform process with respect to the requirements of EU accession, its current relations with neighbours and future role in the EU enlargement. Numerous high-ranking decision makers and experts from Austria, France, Croatia and other countries of Southeast Europe participated in the conference. Gligorov, who had worked as a consultant at the World Bank and OECD and is a leading expert on issues of economic development and economic policies, often present in public throughout the region, in an interview with the Corps Diplomatique Croatia especially addressed the new plan for economic recovery given by the Croatian government, and expressed his scepticism.

You are familiar with the new economic measures given by the Croatian government. What is your opinion on the fact that the budget deficit is projected to reach zero percent?

At this point, that is more of a desire, as far as I can see, than something that these measures are to achieve. As far as I understand these measures, their effect should be a redistribution of the tax burden, but I see no reduction in public expenditure, apart from the abolition of Christmas and Easter bonus, which is a very small amount. The dismissal of 5000 people is mentioned, but, as far as I understand, this will happen in a natural way, since people will retire. But expenses will not decrease and if revenues remain the same, and in my opinion they will be reduced, in order to ease the pressure in the corporate sector, then there is no other way out than the additional borrowing. The fiscal deficit can not be zero percent, at least not this or next even year. What will happen in three to four years depends primarily on growth rate and whether the next government will reform the public sector, because I think this government will not have the strength to do it, if it survives. The reform of public sector is also mentioned, but the exact intention is not clear. The best measure is to reduce subsidies, but I do not know how much it will cost. If you cut subsidies to the shipbuilding industry, for example, this means that the government must assume some liabilities. On the other hand, in the long term it would be very good, but I do not see that the short term costs have been calculated. And so far it was one of the major problems in restructuring.

Could Croatia become another Greece?

Financial markets are rather unselective in respect of, for example, Greece, Portugal, Spain and even Italy. The differences made between Portugal and Greece are smaller although the Greek problem is more of a public debt and the Portuguese more of a private debt. Croatia is therefore more like Portugal than Greece. Croatia has a relatively low public debt, but there is a high and rising private debt and what is worse, and this is what happened to Greece and Portugal, it has a high external debt. Croatia has an external debt which is around 100 percent of gross domestic product which is showing an increasing trend. Since the GDP growth is slower than the external debt growth, Croatia will have further debt growth relative to GDP. Changes in the structure will also occur because of the public debt growth and there will be stagnation or a decline of private debt. In this case, at some point the question of the exchange rate crisis will arise and that can cause the Greek-Portuguese situation. It does not matter whether you call it Greek or Portuguese.

What is your opinion on the fixed exchange rate policy? Is it good or bad for Croatia?

The fixed exchange rate has its deficiencies in Croatia. It can be beneficial only if you want to stabilize or so to say, find an anchor for inflation, for a shorter period of time. Fixed rates, especially when it comes to high inflation, are useful. Also, it might be useful when, as was the case with Austria, there is a country whose economy is strongly linked with another country, in the case Germany, and is able to conduct a careful income policy. Because of the fixed way in which wages are established, Austria has been able to control their growth and avoid the so-called appreciation of the real exchange rate, because with a fixed exchange rate the inflation is triggered by wage growth and it becomes more rapid than in the reference country. This causes a real appreciation which is dangerous. A problem in Croatia was the fixed exchange rate, introduced in order to perform stabilization. This happened in 1993 or 1994. However, it was decided that the so-called exit strategy for Croatian kuna is euro, rather than a flexible rate. Thus, for the last 15 years you have had a policy that has no other exit strategy than to adopt the euro. In the meantime, the control of public expenditure is still not satisfactory and Croatia has an appreciation, with the maintenance of the inadequate real exchange rate. Croatia has a constant and large trade and current account deficit and weak development of the tradable sector. Apart from tourism, Croatia has nothing to export and that is the bottom line. This is known as the problem of a fixed exchange rate. It would be different if you were, for example, to adopt the euro in two years time, but as we can see in case of Greece and Spain, it is not a permanent solution.

In which area is transition in Croatia particularly visible and how would you compare the transition in our country to other countries of Eastern Europe?

In many other countries the private sector has taken on more burden than in Croatia. In Croatia, the transition is lagging behind in what is essential, and that is the private sector assuming the biggest burden. Croatia has very high levels of public spending and in that respect is similar to Hungary. One can not say that the advantage of Croatia is in private sector development either since the largest part of the development comes down to service. Secondly, there is no entrepreneurial enthusiasm which is a big problem. As for the positive things, Croatia has an advantage over other countries of former Yugoslavia primarily in its development. When you compare Croatia to Serbia or Bulgaria, you can see that Croatia has more advantages. Such is the case of Slovenia, as a result of leaving the former Yugoslavia at a relatively high level of development. Regarding the infrastructural investments, Croatia is ahead of other countries that have not done anything in this regard.

Croatia's GDP declined by 5 percent and is expected to further decline until the end of the year, with the growth expected in 2011. Poland is the only one with a positive GDP growth, while other countries are overcoming the recession. Why is Croatia lagging behind? The decline is significant when you take into account that Croatian has a closed economic system, much more than the other countries. On the other hand, in Croatia, the dependence on self-financing was higher than in other countries. In addition, Croatia has had to take care of finances, don not forget the budget rebalance. For example, the IMF had predicted that the GDP in Slovakia will increase by 4 percent since the demand for what this country produces is growing. Croatia on the other hand has nothing to sell and it is hard to see how a country whose growth was mainly based on domestic consumption and tourism will progress if it has to control the domestic consumption, because the banks will be even more cautious on lending. Savings will probably increase and the public sector can not stimulate the economy because it is complicated due to the exchange rate and the cost of borrowing. It is difficult to see what exactly will be the base of growth in the next few years. If this years GDP comes in at minus 1, or 0.5 as it is now planned, this is statistically almost the same as zero percent. A negative growth can be even greater because of some serious problems in the corporate sector. Where one could see the predicted growth of 3 percent in 2011, I do not know. I do not see how this could ever happen given the situation. The question is whether there will be foreign investments. This is almost like writing a play of Hamlet without the Danish prince. The main problem is the competitiveness of Croatia which is not mentioned in government measures, nor is the exchange rate, the adjustments and related issues.

Would the law on compulsory payment solve anything?

It is interesting that the measures include defining the term of compulsory payments, but what is the use if there is no money? What is use of the bank ordering me to repay the loan if I can not do that?

Can Croatia do without the help of the IMF?

This is almost a theoretical question. I see that the IMF is here and that the Finance Minister had said that everything depends on the IMF. Therefore I see no reason to debate or negotiate. Because if you have already decided to follow something that they had suggested, if you think that the credit rating depends on their reports, then I do not see the point in taking more expensive funds and to risk the lack of liquidity, if you can take the IMF funds. The government believes that this would have consequences in terms of credibility in the country, which might raise the question of monetary policy and no one is prepared for this. What is now happening in Greece could easily have consequences in a country like Croatia. All these countries have very high current account deficits, and are in a very complicated situation.

What are the mechanisms of ensuring the stability in the EU, this primarily concerns the euro, and how can the cohesion be achieved?

The EU is facing a great challenge. So far the EU had found ways to overcome the crisis by institutional innovations. It had worked well, but the problem is that the EU does not have a program for short-term resolving of the exchange rate crisis or what is called stabilization policies. It was thought to be unnecessary because of the euro, and for those who do not have the euro there is always the IMF and so this was not thought over. There was no will to do this, because it has fiscal consequences that Germany will not pay for. The issue in this crisis is whether it will result in the creation of certain mechanism. When it comes to Greece the action will be ad hoc, but a stable mechanism is now the biggest debate in the EU: whether to establish a European Monetary Fund, will it be something like a bank resolution authority which would take over the jurisdiction in order to regulate the fiscal side, or a guarantee fund and new fiscal rules...?
The question of cohesion and the differences in the degree of development are not so important. It is important in case you do not have other mechanisms. If Mexico was part of the U.S., I think that within a few decades it would be a brand new Mexico which would be good for both countries. I think that less developed countries are better off in a company of very developed countries. This provides the potential for accelerated growth, but there should be responsible entrepreneurial and political elite and not all EU countries have that, while the situation is more or less the same in the Balkans.