IVAN SUKER There is growing public sentiment that the Finance Minister is the chief obstacle to the necessary reformsIf Croatian Government fails to launch reforms demanded of it by the representatives of the Croatian Employers' Association (HUP) soon, the organisation is ready to pull its people out of the Economic & Social Council. This was confirmed off the record for Nacional by a high-ranking official at the HUP, who said that employers are no longer willing to wait for Government to start implementing concrete measures to help domestic companies do business and by doing so launch a new wave of economic growth.

He commented saying, "It is evident that there is at the moment not enough political will in the government to do so nor, it appears, the competence to implement even the most basic measures to assist the economy. Over the past year the HUP has presented Government with a number of concrete demands, but almost none have been positively resolved. Unfortunately, the employers do not have much with which to pressure Government and thereby see through their demands, unlike some other interest groups. We cannot block the roads with tractors, nor would we ever try to do so. We can, however, reassess our role as a social partner. That means that we are ready to freeze our membership in the Economic & Social Council. At this point in time there is no reason why we should participate in the work of the body and thereby legitimise the work of Government, while that same Government on the other hand refuses to meet even our most basic demands." The departure of employers from the Economic & Social Council would be a heavy blow to the Government led by Prime Minister Jadranka Kosor.

The council is the principal forum for social partnership in Croatia, which, along with representatives of Government, is comprised of the representatives of employers and unions. And while the council has no executive authority, over recent years there has practically not been a single major Government decision on labour law, tax policy, on policies pertaining to the cost of energy and that of other regulated goods and services that the Economic & Social Council did not deliberate on prior to adoption. Government thereby endeavoured to secure social stability and to afford as high a level of legitimacy to its policies as it could.
As a result it is certain that the departure of the employers from the Economic & Social Council would very much undermine the future legitimacy of Government and that Government would no longer enjoy the support of businesspeople. This could result in a number of negative consequences for Government, and some experts foresee that this kind of open war between Government and employers could significantly undermine Government's image abroad, and even lead to a new drop in Croatia's credit rating. If one adds to this the fact that elections for Parliament are up next year, it is not hard to conclude that it does not at all suit Government at this point in time to see this kind of escalation of a conflict with the top figures in the Croatian economy.
One of the top people at the Croatian Employers' Association and the CEO of Croatian telecom company T-HT Ivica Mudrinic was unwilling to talk about the possibility of leaving the Economic & Social Council, but did reiterate what employers were demanding of Government.

"The fundamental point is that Government finally acknowledges the fact that the existing Croatian economic model has been exhausted. When one analyses the current situation the country is in – from the aspect of indebtedness, from the aspect of competitiveness and from all other economic aspects – it is clear that we cannot go on this way. There is no money, we cannot take on more debt, and every tax hike only leads to a further escalation of the crisis. Government, therefore, has to do four things: reduce public expenditure, reduce taxes, stimulate consumer spending and find concrete money that would be placed into more investment. That is the recipe that will save us, but the manoeuvring space has been quite constricted, which is why success entails some painful sacrifices, for which Government is for the moment evidently not ready."
I can be concluded from Mudrinic's statements that, if she wishes to avoid an escalation of the conflict with employers, Prime Minister Jadranka Kosor will have to meet a number of concrete demands presented to her at last week's meeting at Government house very quickly. The employer's basic demands pertain to a reduction of the tax and contributions burden, especially of parafiscal levies. At issue are numerous levies and contributions paid into the national budget by Croatian companies alongside standard taxes, which for the most part are used to finance local administration and some national institutions such as the Croatian Chamber of Economy and the Croatian National Tourism Board. And it is in fact levies based on mandatory membership to these institutions, and on water fees and monument annuities that make up most of the 12.5 billion kuna that Croatian companies pay each year in parafiscal levies. Representatives of employers have sought a reduction in these intensively for over a year and a half, but to date the state has only secured a reduction in Croatian Chamber of Economy fees.

And while Government has not gone on the record saying what the reasons are for its unwillingness to consent to this demand from employers, off the record it can be heard that Government fears that the repeal of these levies would result in the bankruptcy of a number of municipalities and cities, for which these levies are the only serious source of income. In that situation, the fear is in Government, the burden of bailing out local budgets would once again fall to the national budget, which would result in a massive increase in the deficit, and a significant drop in Government's approval rating, which would be unacceptable with the elections coming up next year. Government is of a like frame of mind when it comes to the issue of reducing the VAT rate, contributions and scrapping the crisis tax, which employers are also demanding.

DAMIR KUSTRAK is one of the leading members of the Croatian Employers' Association and a member of the President's economic advisory councilThey consider Finance Minister Ivan Suker to be the chief Government opponent of these initiatives, who allegedly reacted vehemently to the proposals made by employers at last week's meeting. Suker feels that any reduction in taxes and other direct contributions would on the short term undermine the stability of state finances. Government would in that case be forced to reduce budget expenditure, and that is not possible without impinging on numerous welfare rights of individual segments of society, and the wages of those employed in the public and civil service, which would without a doubt result in mass protests.

Government evidently wishes to avoid this scenario for political reasons, but has now been forced into a situation to have to choose between a falling out with employers or one with individual unions and interest groups. This is a very uncomfortable situation for Government, and Minister Suker could soon find himself in a particularly uncomfortable situation, as there is growing public sentiment that he is the chief obstacle to the necessary reforms, and appears to have lost the support of employers. What is more the feeling among the leaders of major Croatian corporations is that Suker is acting exclusively from the position of Finance Minister, and is in the process entirely ignoring that he is also the Deputy Prime Minister responsible for the economy. Indeed, they describe the negotiations with Suker as "autistic discussions" at which Government representatives ask employers to propose concrete measures, and then offer the most unbelievable reasons why these measures cannot be implemented.

Nacional's source at the HUP says that there is growing doubt in the ability of the Prime Minister's aids to come up with sustainable measures to get out of the crisis. "At the HUP we are aware that as an interest group we can only submit requests and proposals to Government, and that concrete economic policy measures have to come from the top down. The problem is that at this point in time Government is not demonstrating that it possesses the necessary competence to do so. That is a shame, because out meetings with Prime Minister Kosor could leave the impression that she wants to implement some of the measures we are proposing to her. Unfortunately, the problem is in the people around her. Take for example just the fact that the idea of a new hike in the VAT rate has emerged in the Prime Minister's team of advisors, while it is obvious to all that the previous hike only augmented the effects of the recession. These people either have no understanding whatsoever of the situation in which Croatia finds herself, or are willing to sacrifice the country for political interests, but in either case are evidently not working in Croatia's national interest."

This kind of evident unhappiness with the work of the Prime Minister's aids is probably further emphasised by the moves made by President Ivo Josipovic, who has gathered a number of respected businesspeople from the HUP leadership in his team of advisors, such as Damir Kustrak, Ivica Mudrinic and Emil Tedeschi. Off the record Josipovic himself has allegedly on several occasions already stated that he considers his team superior to that of Jadranka Kosor, and if the HUP quits the Economic & Social Council, it is to be expected that its leaders will further strengthen their links with the President. As a result an escalation of the conflict between the HUP and Government could also have significant consequences on the political scene, and with a possible departure from the Economic & Social Council the employers could in fact use the President's economic advisory board as a platform for their public statements and initiatives. The first such initiative is allegedly the HUP demand that Government urgently launch the privatisation of the remaining state portfolio.

At the HUP they feel that this is necessary to gain funds that would be used for structural reforms in the economy. "Whatever measures you launch, the fact is that you will need money for them. Croatia currently has no money, without cuts to public spending we will have to take on more debt to cover a growing deficit in the budget. In this situation absolutely all of the national resources have to be invested into the business sector. Since the country has already on countless occasions demonstrated that it is chronically inept in managing the nation's assets, why should it not be turned over to the real sector? We are not, of course, advocating a sell-off of the national wealth, nor are we talking only about selling. There could be concessions, public-private partnerships or any other model, but it is important that we make use of what we have. It is, for example, incomprehensible that Croatia touts itself as a tourism destination in which tourism is a strategic branch of the economy, while dozens of devastated hotels on the Adriatic coast in state ownership go to ruin from year to year instead of creating tourism income. Privatisation has to be launched again."

Nevertheless, allegedly not even this proposal from employers was well received in Government, and it is as a result not hard to understand the unhappiness of the HUP membership, or that their departure from the Economic & Social Council is a real possibility. Insofar it is clear that Prime Minister Jadranka Kosor is currently facing her toughest national policy challenge since coming to the helm of Government.

IVICA MUDRINIC the CEO of telecom corporation T-HT warns: 'The fundamental point is that Government finally acknowledges the fact that the existing Croatian economic model has been exhausted'If she loses the support of employers her authority will suffer a significant blow, but there will obviously not be good relations with the HUP without the launching of a number of tough reforms that could significantly reduce Government's approval rating in certain segments of the population. She evidently also lacks sufficient support among her closest aids and party political colleagues, and it is realistic to expect that she might have to carry out some personnel shuffles in her cabinet to see reforms through.

Whether Croatia will start its economic recovery by the end of 2010 or whether the domestic economy will continue its stagnation in the coming year largely depends on her decisiveness to undertake these kinds of measures.