Ljubo Jurcic and Ivo Sanader Croatia faces a massive economic crisis, just as the majority of Western countries are. No one denies this any more, not even Prime Minister Ivo Sanader, who, up to a week ago, was signalling to the public that Croatia was in no danger, even though many economic experts and international analysis institutions, such as Stratford, the International Monetary Fund and Deutsche Bank, have over the past few months put Croatia at the top of a list of the most threatened countries of South-Eastern Europe.

In spite of that Croatian Government has met the crisis entirely unprepared, with an inappropriate economic policy and lacking any kind of strategy. That this is the case was confirmed indirectly by Prime Minister Sanader, from whose statements made last week it can be concluded that Government does not have a single measure ready to counter the fallout from the global financial meltdown and to face the danger that Croatia might over the coming months become bankrupt.

And that could very easily happen if the finance ministry does not soon find a way to pay off a 5 billion euro debt that is coming due for payment next year, if companies do not succeed in refinancing 6 billion euro in foreign debt, and if Government does not move quickly to implement measures that would stimulate production and stop the decline in economic growth, which will next year, according to the most optimistic forecasts, amount to only 2 percent.

Instead of concerning itself with the chief problems – how to implement structural reforms in the economy, save the majority of jobs and revive production, and how to help the economy not fall into a recession, the Government led by Prime Minister Sanader is proposing a ban on Christmas receptions, gifts and Christmas bonuses as a defence from the financial crisis, and is trying to gain time by illegally delaying the adoption of the national budget, as there is clearly no prepared scenario to deal with a situation that was foreboded a year ago. The news of doing away with Christmas joy, as an answer to the financial crisis, circled the world in the space of only a few days, and derogatory commentaries on the Prime Minister's stealing Christmas were put on the Internet sites of many respected global media houses, such as the US Forbes and the British BBC.

The Prime Minister's activities at the start of the week have shown that Government is occupied with itself and that the Prime Minister's chief preoccupation is how to preserve the ruling coalition and not to come up with a strategy to fight the crisis with those same partners. Meetings with coalition partners and unions on Monday had only one purpose – to convince the HSLS and HSS to accept reductions in the budgets of the ministries under their control, to have the pensioners forego the Christmas bonus and for unions not to seek wage hikes – i.e., to stay in power.

"There is no financial crisis, Croatia is financing its debt", Sanader told a session of cabinet in October of last year, referring to the IMF warning that Croatia faces the danger of a financial crisis. Just a month ago he said at the launching of construction on the Ernestinovo – Pecs high voltage transmission line that "at the moment in which the world is being shaken by a massive financial crisis and when the world's leading nations are entering recession, I want to send a message to Croatia that Government will, together with other institutions, do everything it can to preserve our stability both as regards finances and the economy. That is the context in which next year's national budget will be drafted." Sanader said Croatia was safe, and that Government and the Croatian National Bank would do everything they could to make it stay that way. A month later, when member countries of the European Union officially declared a recession, Sanader is announcing measures to counter the crisis, but, besides canon catchphrases on the need to cut down expenses, he has not offered a single coherent one, even though it is clear to all that the consequences of the global financial crisis are slowly spreading to Croatia. That this is the case was definitely confirmed last week in statements made by the national and monetary leadership and by numerous prominent economists, gathered at a traditional economic advisory meeting in Opatija.

They all agree in one thing – the greatest danger to the Croatian economy is the threat of a lack of capital. This is a direct result of the global financial crisis and inter-bank illiquidity, which have begun to slow financial allocations targeted to investment. In this kind of situation there will be a fall in consumer spending power and, as a result, of economic activity. When business people are no longer in a position to finance the cost of their businesses, they will have to put a stop to investments, sales, earnings and profits will fall, and sot he state too will collect less tax. In order to survive, companies will have to cut costs. As always, the first to bear the brunt are workers, and when companies start firing, social expenditure will rise, and thereby the cost to the national budget. It is an open question how the state will pay off the 5 billion euro of foreign debt that is coming due for payment next year in those conditions. So far Government has resolved this problem by taking on new debt, but as a result of the global financial crisis and banking illiquidity, it is hard to get to capital these days, and those that have it are lending it very dear. As far as the availability of capital is concerned, companies will find themselves in even more dire straits. The chief opposition economic strategist, Ljubo Jurcic, feels that the negative aspect of foreign ownership of the Croatian banking sector is now coming to the fore. "Croatian banks for years now lack sufficient money from domestic accumulation to finance demand, and therefore sought money abroad, from their parent banks. As these banks are, for the most part Austrian and Italian, today in troubled waters, they can no longer lend money to their subsidiaries in Croatia. The problem is that savings in banks are about 5 percent less than the amount banks place to the state and companies for investment. As a result of the global crisis, this difference can no longer be covered", says Jurcic.

Ivo Sanader That is why Government is counting on the assistance of the IMF, even thought that is for political reasons the Prime Minister's last option. Because for the help it would offer the IMF would, in return, demand drastic cost cutting across the board by the state. Among other things that does not mean freezing wages, but reducing them, and a reduction in all social expenditures, which are Sanader's traditional marketing ace in the hole. This pertains above all to baby bonuses and veteran's pensions.

One detail, however, warns of the fact that Sanader's administration has yet to find a solution that would patch up next year's financial holes and that they are counting on several option, one of which is turning to international financial institutions. The national budget will not be adopted by the legal deadline and little is know about how it will look. The only thing that is for sure is that the budget deficit will be cut to zero. It is clear from that that there will not be any investment into the economy and projects that could be generators of economic growth, and this kind of statement from the Prime Minister has met with much criticism from analysts and prominent economists. They claim that the chef reason for eliminating the budget deficit is the impossibility of reprogramming debts.

Ljubo Jurcic is opposed to a policy of reducing the budget deficit, because it does not bring much benefit in the long run and leaves the Government without the manoeuvring space to assist the economy, which is the only one that can pull the country out of crisis. “The cost of the crisis must be transferred to the national budget in order to save the economy. In this situation Government needs to spend money on stimulating production by way of subsidies, and not on non-productive investments such as sports arenas, or on investments with long payback periods, such as roads and expensive bridges", says Jurcic. The problem of falling Croatian exports, which is inevitable as a result of negative economic growth in the European Union, feels Jurcic, can only be resolved by using more of the domestic market. "The Croatian market is worth 30 billion dollars, and we have left it to others. Government is trying to solve the problem by freezing wages, but wages have never been a problem in a market economy. The problem is a crisis of production, which is already present. According to statistics, in nine months of last year industrial production grew by a rate of 6.6 percent, while it has grown by only 2.5 percent in the same period this year," he said.

Delays in adopting a national budget also demonstrates that Government has overly late begun to deal with the issues of the economic crisis, even though economists have been warning of it for months. Exactly a year ago President Mesic said in Opatija that a financial tsunami was approaching Croatia, referring to the effects of the mortgage crisis that has spread throughout the United States. Unlike Mesic, Government was last week saying that Croatia was not in danger and that economic and financial stability was guaranteed. The Prime Minister's somewhat nervous reaction that followed showed that that was not exactly the case, and indicative of the fact that the situation has caught the Government off guard is one of the more bizarre measures the Prime Minister has proposed – doing away with Christmas gifts.

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The unions have also reacted to the other Government crisis measure, that concerning a freezing of wages financed from the national budget. The leadership of the biggest of the unions, the Independent Union of Croatia, has announced that it does not accept a freezing or limit on wage growth for 2009, and have said that they are prepared to call for public protests and industrial action to defend wages, and are seeking integral measures to get us out of the crisis from Government, without throwing the brunt of the burden on the shoulders of the Croatian worker. This union reaction shows that along with financial problems, Government could face serious political problems in the coming year.

That is why many agree that Sanader, as an experienced politician, is actually buying time with the budget delay. "The budget has been announced for the second half of December, an until then he has to persuade the unions to accept a wage freeze, the Croatian Pensioners Party to give up their Christmas bonuses and the coalition partners to soften their demands. If the Prime Minister does not succeed in hammering out a deal with his partners, he has three to four weeks to try to get a picture of the real state of affairs and grasp the full depth of the crisis", says one analyst well informed of the Government's plans.

Drago Jakovcevic Former Croatian Finance Minister Borislav Skegro feels that a late adoption of the budget is not a problem because the important thing is that the budget be well put together rather than adopted a two weeks sooner or later: "It would be good if the budget was not adopted only as the product of a parliamentary majority, but rather that its drafting include, as much as possible, the representatives of the unions, employers and other social groups. As much cooperation as possible is, therefore, needed. There is no longer ay doubt that the crisis will hit Croatia, and even though it did not start here, we need to find a way to as successfully and quickly find a way out of it. I think that it is no longer a question of who needs to cut costs, but that everyone needs to start saving. That is why it is important that some kind of agreement is reached and that a new long term economic policy is defined as soon as possible."

And while the effects of the global crisis have yet to be felt in Croatia, all of the shortcomings of Croatian economic policy, if there is such a thing, have come to the surface. That is why many feel that Croatia, with its miserly industrial production, large foreign trade deficit, a foreign debt that is almost on par with the gross domestic product and insufficient economic growth, would have been hit by a crisis of similar proportions anyways within a few years. The global crisis has only sped the process up, and because of the unpreparedness of the Government to face the challenges the populace could suffer most.

That is also the thinking of Ljubo Jurcic. The American crisis, he feels, will only move on to Croatia next year. And that is when people will feel the effects directly. Government has already announced that wages will not grow, so that price hikes will be greater in real terms. For the moment what is known is that the price of natural gas will go up, by 30 percent. When energy costs rise, so does the cost of food, and construction material and cigarettes. Banks will, according to some forecasts, raise interest rates on loans, which will be a further financial strain on the population, and on businesses. The population of the Primorje, Dalmatian and Istrian regions involved in tourism and tourism-related service industries will fare more poorly than in previous years.

Experts warn of a reduction in economic activity, and the greatest danger lies in the possibility of a drop in exports, which is already half the size of imports. A drop in the standard of living of people in Europe will also reduce demand for Croatian exports. But what is most worrisome is a halt on the activities abroad of the largest Croatian companies. Exports will fall just based on the fact that tourism turnover will be worse than this year.

It is an open question how the economy will make up the forecast drop in foreign investment of 1.5 billion euro in comparison to 2008. Mentioned as a kind of Government response is the possibility of introducing a special tax on taking profits abroad. Foreign owners of Croatian companies drew 517 million euro abroad in the first half of this year by way of dividends.

Ivan Suker and Damir Polancec And while Prime Minister Sanader said last week that Government would stick to infrastructure investments and projects important to achieving the forecast GDP growth of between two and three percent, it is increasingly obvious that he and his associates will have to make a serious revision of the major projects financed from the national budget. The first of these is a new passenger terminal at Zagreb Airport. The Prime Minister has proposed that a concession be awarded for the construction of the airport in Zagreb, and that an international tender be offered for the construction of the Zagreb airport at no cost to the national budget. Those in the know say that Government has already adopted a decision that the new passenger terminal at Zagreb Airport be given to a private concessionary for management, to be selected by tender. Pressured by the financial crisis and the mature debts, Government has moved to an idea several years old, based on which the construction of the airport terminal would not cost a single kuna.

Government's decision means that the future terminal will not look like what Jure Radic, the top man at the Croatian Civil Engineering Institute (IGH) company has conceived, because the construction is to be financed by a private concessionary, and not the state and City of Zagreb. Quite concretely – the recently selected project by the IGH and architects Velimir Neidhardt and Branko Kincl will not be built. According to the latest expert opinion, drafted three years ago, the new passenger terminal at Zagreb's Pleso airport should not cost in excess of 120 million euro, including infrastructure and access roads, so that there is no likelihood that a future concessionary would build a terminal based on a design that foresees a cost of 280 million euro. Also questionable is the continued construction of roads and motorways, even thought the Prime Minister indicated in Opatija last week that projects underway would not be halted. These are the Zagreb – Sisak motorway, worth 4.4 billion kuna, the Sestanovac – Ploce road, worth 4 billion kuna, the Dakovo - Osijek road, the cost of which is estimated to be 1.8 billion kuna, and the completion of the second tunnels at Sveti Rok and Mala Kapela, of a total cost of 680 million kuna. If one adds to that the, in the opinion of many unnecessary, Peljesac bridge and the construction of a lowland Zagreb - Rijeka railroad, Government would spend over 20 billion kuna on these projects alone by 2010. Many rightly ask where the state is to get the money when the chief investor into roadways construction, the state-owned Hrvatske autoceste (Croatian Motorways, HAC) company, was unable recently, with a Government guarantee to secure a 200 million euro loan. The Croatian Bank for Reconstruction and Development, which credited entrepreneurial projects under special conditions, had to stop a number of credit lines because, like HAC, is was unable to sell bonds on the international market to secure 330 million euro.

Drago Jakovcevic, a professor at the Faculty of Economics at the University of Zagreb, feels that the economic crisis will hit hardest in those sectors that have seen the strongest growth over the past years. "In my opinion the construction sector will suffer the most, because it saw the greatest growth over past period. That growth was based on overly high and unrealistically pumped prices. Now it is obvious that purchasing power will drop at all levels in Croatia. This pertains not only to the general populace, the purchasing power of companies will also fall, and that of the state itself. That balloon may burst. On the other hand, I feel that Croatia has great potential in the agricultural sectors and processing industry. The state should use subsidies and cheap lines of credit to stimulate production in these sectors. On the long term that would have an excellent effect on the Croatian economy. Investments should also be made into energy, a branch in which Croatia has a deficiency, and is exceedingly important to the development of all other branches of the economy. In the end, more should be invested into healthcare on the long term, as that can have an effect on negative demographic trends," commented Jakovcevic.

Nevertheless, unlike most of his colleagues, Jakovcevic feels that the state must not back out of large-scale infrastructure investments. "If the state were to give up on large-scale investments, that would have very serious repercussion on the growth of the Croatian GDP. Public spending, namely, makes up a large portion of the structure of the GDP and it is hard to believe that the private sector could make up the loss. It is very important for us at this point in time to maintain as high as possible a level of GDP growth. Croatia is not like developed European countries for which 1 to 2 percent economic growth is sufficient. In my opinion Croatian economic growth should not be under 3 percent. Without large-scale investments by the state, that will be very hard to achieve," he said.

Jakovcevic feels that the measures being undertaken by the central banks of large European countries will also have a positive effect on Croatia. There is, namely, a global trend to reduce reference interest rates, which should result in the greater availability of capital with which to finance the development of the economy. "I feel that the reduction of reference interest rates is an excellent move, but also proof that people have begun to understand that recession is a greater evil than inflation. The cheapening of capital on the global market could result in a reduction of interest rates in Croatia, but that depends above all on the Croatian National Bank. Nevertheless, Croatian Government has to be very careful in this situation and that is why I feel that a delay on the adoption of a national budget is at this juncture a rational decision", says Jakovcevic.

Based on all this, it turns out that Croatia's greatest problem is that it does not have at this moment to worry about saving factories, because there are none, but rather how to pay off debts and prevent foreigners from drawing money earned in Croatia to their countries of origin.