On July 1, 2013, Croatia became the 28th member of the European Union. This
achievement crowned more than a decade of macroeconomic and institutional reforms by the
Croatian authorities and other stakeholders that yielded important development results. Croatia’s
institutions are now stronger than a decade ago, reflecting broad and deep institutional
adjustments that underpinned the pre-accession process and Croatia has become a high-income
country within a decade.
2. Yet, the global economic crisis, with the loss of credit, exposed Croatia’s
macroeconomic vulnerabilities. The stimulus for a significant share of Croatia’s pre-crisis
growth has been withdrawn resulting in five consecutive years in recession through 2013. Prior
to the crisis, large, relatively cheap capital inflows circulated into the economy, creating credit,
consumption, and real estate booms that subsequently reversed. Such capital inflows are not
expected to return, due to Croatia’s weak growth outlook and the more competitive, risk adverse
post-crisis international environment. Unemployment rose to 17 percent in 2013, much higher
than the Eurozone average (12 percent). Public debt has doubled since 2008 and remains on an
upward trajectory, and the private sector has continued deleveraging. Credit agencies took note,
reducing Croatia’s sovereign debt to speculative status in 2013.
3. Underpinning these macroeconomic imbalances, Croatia faces deep structural
problems that are holding back a recovery of output, exports, and jobs:
 Croatia has only recently begun to improve the flexibility of its labor market by making it
easier to hire or release workers in the formal sector, which has been contributing to high
and persistent unemployment.
 The business climate for domestic and foreign investors remains cumbersome1
. Perhaps
because Croatia received relatively robust capital inflows before the global crisis, there
was little pressure to improve the investment climate, which is weaker than in many highincome
countries.
 Croatia delayed fiscal adjustment in response to the global crisis in the hope that the
country would “grow out” of the downturn as global economic conditions improved,
despite growing deficit and debt levels. As a result, public debt and fiscal positions have
become unsustainable; and
 Public sector efficiency is at the low end and the cost of public services at the high end
among the European club of countries to which it acceded. The fiscal footprint of the
state remains comparatively large, both in terms of employment and involvement in
productive sectors. This has been a drag on the fiscal deficit and debt levels.