EU AFFAIRS: European Commission Expresses Concerns on Croatian Post Monopoly & EU Funds Capacity

Due to the forthcoming Croatian accession to the EU, the Croatian government delivered its 2013 economic program to the European Commission. Last week, the Commission issued its assessment of the economic program and concluded that the Croatian pre-crisis boom, fuelled by a high inflow of FDI, turned into a protracted downturn, further amplified by the structural weaknesses of the economy. In 2013, the economy is expected to contract by 1% as a result of the on-going bank deleveraging and unfavourable developments in the labour market. However, a moderate recovery could happen in 2014, due to the improved international environment, EU accession and the adoption of new legislation that will reinforce the investment climate.

With reference to the postal sector, the Commission indicated that the Croatian Post (HP) still holds a major share in the postal market. According to the Commission, the new legislation establishing the full liberalisation of the postal markets in Croatia (entered into force in January 2013) is not always interpreted and applied by the Croatian authorities in accordance with the principles and objectives of the EU; most notably in the area of postal services and public procurement. Consequently, this could lead to a serious distortion of competition and marginalisation of alternative operators by preventing these operators from gaining access to public tenders and/or by applying anticompetitive practices (e.g. unfair discounts and tariffs.)

Regarding Croatia’s structural capacity to absorb EU funding, the Commission suggests that ensuring effective and timely use of EU funds will be a challenge for Croatia. The country has fulfilled the conditions for the relinquishment of ex ante controls that were applied under the pre-accession programme (IPA.) Nevertheless, further efforts should be made in order to manage and benefit from a much larger number of projects funded from EU funds. In particular, the government needs to achieve additional progress in building an efficient and strong public administration, finalising investment strategies and preparing a stock of high quality and innovative projects that would allow a swift increase in the absorption rate. Otherwise, the absence of a fully functioning management, monitoring and evaluation system for EU funds could lead to subsequent monetary corrections with a negative budgetary impact.

In other areas, the Commission suggests that Croatia needs to reduce its high budget deficit and resolve the liabilities carried by state-owned companies; the state maintains an important role in a large number of companies, many of which are loss-making and highly indebted, posing risks to public finances. Furthermore, the Croatian economy is burdened with a large share of non-performing loans (14% in the last year) and the private sector is exposed to currency risk due to the fact that a high share of its debt is denominated in or indexed to foreign currency (75.3% in February this year.) Finally, the business climate is low, as indicated by Croatia’s ranking in international surveys, and the unemployment rate has doubled since 2008.  The Commission concludes that enhancing administrative efficiency and capacity, as well as the efficiency of the judiciary, is particularly important for the economic progress of Croatia…

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