(2)The 2020 country report for Croatia was published on 26 February 2020. It assessed Croatia’s progress in addressing the country-specific recommendations adopted by the Council on 9 July 2019, the follow-up given to the recommendations adopted in previous years and Croatia’s progress towards its national Europe 2020 targets. It also included an in-depth review under Article 5 of Regulation (EU) No 1176/2011, the results of which were also published on 26 February 2020. The Commission’s analysis led it to conclude that Croatia is experiencing macroeconomic imbalances linked to high levels of public, private and external debt in a context of low potential growth.

(1)On 17 December 2019, the Commission adopted the Annual Sustainable Growth Strategy, marking the start of the 2020 European Semester for economic policy coordination. It took due account of the European Pillar of Social Rights, proclaimed by the European Parliament, the Council and the Commission on 17 November 2017. On 17 December 2019, on the basis of Regulation (EU) No 1176/2011, the Commission also adopted the Alert Mechanism Report, in which it identified Croatia as one of the Member States for which an in-depth review would be carried out.

Having regard to Regulation (EU) No 1176/2011 of the European Parliament and of the Council of 16 November 2011 on the prevention and correction of macroeconomic imbalances, and in particular Article 6(1) thereof,

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of the surveillance of budgetary positions and the surveillance and coordination of economic policies, and in particular Article 9(2) thereof,

(3)On 11 March 2020, the World Health Organization officially declared the COVID-19 outbreak a global pandemic. It is a severe public health emergency for citizens, societies and economies. It is putting national health systems under severe strain, disrupting global supply chains, causing volatility in financial markets, triggering consumer demand shocks and having negative effects across various sectors. It is threatening people’s jobs, their incomes and companies’ business. It has delivered a major economic shock that is already having serious repercussions in the European Union. On 13 March 2020, the Commission adopted a Communication calling for a coordinated economic response to the crisis, involving all actors at national and Union level.

(4)Several Member States have declared a state of emergency or introduced emergency measures. Any emergency measures should be strictly proportionate, necessary, limited in time, and in line with European and international standards. They should be subject to democratic oversight and independent judicial review.

(5)On 20 March 2020, the Commission adopted a Communication on the activation of the general escape clause of the Stability and Growth Pact. The clause, as set out in Articles 5(1), 6(3), 9(1) and 10(3) of Regulation (EC) 1466/97 and Articles 3(5) and 5(2) of Regulation (EC) 1467/97, facilitates the coordination of budgetary policies in times of severe economic downturn. In its Communication, the Commission shared with the Council its view that, given the expected severe economic downturn resulting from the COVID-19 outbreak, the current conditions permit activation of the clause. On 23 March 2020, the Ministers of Finance of the Member States agreed with the assessment of the Commission. The activation of the general escape clause allows for a temporary departure from the adjustment path towards the medium-term budgetary objective, provided that this does not endanger fiscal sustainability in the medium term. For the corrective arm, the Council may also decide, on a recommendation from the Commission, to adopt a revised fiscal trajectory. The general escape clause does not suspend the procedures of the Stability and Growth Pact. It allows Member States to depart from the budgetary requirements that would normally apply while enabling the Commission and the Council to undertake the necessary policy coordination measures within the framework of the Pact.

(6)Continued action is required to limit and control the spread of the pandemic, strengthen the resilience of the national health systems, mitigate the socio-economic consequences through supportive measures for business and households and to ensure adequate health and safety conditions at the workplace with a view to resuming economic activity. The Union should fully use the various tools at its disposal to support Member States’ efforts in those areas. In parallel, Member States and the Union should work together to prepare the measures necessary to get back to a normal functioning of our societies and economies and to sustainable growth, integrating inter alia the green transition and the digital transformation, and drawing all lessons from the crisis.

(7)The COVID-19 crisis has highlighted the flexibility that the single market offers to adapt to extraordinary situations. However, in order to ensure a swift and smooth transition to the recovery phase and the free movement of goods, services and workers, exceptional measures that prevent the single market from functioning normally must be removed as soon as they are no longer indispensable. The current crisis has shown the need for crisis preparedness plans in the health sector, which include in particular improved purchasing strategies, diversified supply chains and strategic reserves of essential supplies. They are key elements for developing broader crisis preparedness plans.

(8)The Union legislator has already amended the relevant legislative frameworks to allow Member States to mobilise all unused resources from the European Structural and Investment Funds so they can address the exceptional effects of the COVID-19 pandemic. Those amendments will provide additional flexibility, as well as simplified and streamlined procedures. To alleviate cash flow pressures, Member States can also benefit from a 100% co-financing rate from the Union budget in the 2020-2021 accounting year. Croatia is encouraged to make full use of those possibilities to help the individuals and sectors most affected by the challenges.

(9)The socio-economic consequences of the pandemic are likely to be sizeable and unevenly distributed across Croatian regions due to different specialisation patterns. The coastal regions and the islands which markedly rely on tourism will be particularly affected. The current situation therefore calls for targeted policy responses.

(10)On 30 April 2020, Croatia submitted its 2020 National Reform Programme and its 2020 Convergence Programme. In order to take account of their interlinkages, the two programmes have been assessed at the same time.

(11)Croatia is currently in the preventive arm of the Stability and Growth Pact and subject to the debt rule.

(12)In its 2020 Convergence Programme, the government plans the headline balance to deteriorate from a surplus of 0,4% of GDP in 2019 to a deficit of 6,8% of GDP in 2020 and improve to a deficit of 2,4% of GDP in 2021. After decreasing to 73,2% of GDP in 2019, the general government debt-to-GDP ratio is expected to increase to 86,7% in 2020 according to the 2020 Convergence Programme. The macroeconomic and fiscal outlook are affected by high uncertainty related to the COVID-19 pandemic.

(13)In response to the COVID-19 pandemic, and as part of a coordinated Union approach, Croatia has adopted budgetary measures to increase the capacity of its health system, contain the pandemic, and provide relief to those individuals and businesses that have been particularly affected. According to the 2020 Convergence Programme, those budgetary measures amount to 2,8% of GDP. The two main measures are the subsidy paid out to businesses for retaining employees and tax exemptions granted to hardest-hit businesses. In addition, Croatia has adopted measures that, while not having a direct budgetary impact, will contribute to support liquidity to businesses, which the 2020 Convergence Programme estimates at 1,3% of GDP. Those measures include tax deferrals for personal and corporate income taxes and social contributions. Overall, the measures taken by Croatia are in line with the guidelines set out in the Commission Communication on a coordinated economic response to the COVID-19 outbreak. The full implementation of those measures, followed by a refocusing of fiscal policies towards achieving prudent medium-term fiscal positions when economic conditions allow, will contribute to preserving fiscal sustainability in the medium term.

(14)Based on the Commission 2020 spring forecast under unchanged policies, Croatia’s general government balance is forecast at -7,1% of GDP in 2020 and -2,2% in 2021. The general government debt ratio is projected to reach 88,6% of GDP in 2020 and moderate to 83,4% in 2021.

(15)On 20 May 2020, the Commission issued a report prepared in accordance with Article 126(3) of the Treaty due to Croatia’s planned breach of the 3% of GDP deficit threshold in 2020. Overall, the analysis suggests that the deficit criterion as defined in the Treaty and in Regulation (EC) No 1467/1997 is not fulfilled.

(16)In response to the pandemic, Croatia swiftly undertook far-reaching measures to protect its citizens and contain the spread of the virus. The pandemic (and associated containment measures) led to serious disruption to business activity, with resulting negative effects on the labour market. Real GDP is estimated to drop by 9,1% in 2020 and recover by 7,5% in 2021, while the unemployment rate is forecast to increase to 10,2% in 2020 and improve to 7,4% in 2021, according to the Commission forecast. The tourism sector, which represents a very significant share of the Croatian economy, will be heavily impacted. At the same time, Croatia also had to deal with the effects of a major earthquake in Zagreb on 22 March 2020. To mitigate the negative impact on the economy, Croatia undertook a set of ambitious measures including wage support measures, exemptions from and deferrals of taxes and social contributions, support for SMEs, additional guarantees for export insurance and moratoria on loan instalments, and specific measures for tourism and other highly affected sectors.

(17)The COVID-19 outbreak is a test of the resilience of the Croatian health system. Although access to health care is generally good in Croatia, unmet medical needs due to distance are amongst the highest in the Union. A more balanced geographical distribution of health workers and facilities would allow easier access to health services. The division of responsibility for health care facilities in Croatia between the central government and county authorities leaves scope for improvement. The central government has to cover the debts of hospitals owned by counties but has limited means of influencing how they are managed. Closer cooperation between the central government and counties is crucial to ensuring the supply of critical medical products and for being able to take steps to limit the spread of COVID-19. Use of eHealth tools enables direct contacts between health workers and patients to be reduced, also lowering the risk of infections. Use of e-prescriptions is widespread, but a very low proportion of referrals and health records is digital.

(18)Due to a slowdown in economic activity, employers have difficulty paying wages, which is expected to result in increased unemployment and poverty levels, with even more pronounced territorial disparities. Traditionally, participation in active labour market policy measures has been very low, but under the current circumstances such programmes are gaining more prominence. In order to provide support to employers and minimize the number of dismissals, such measures, but also other time-bound support schemes, in particular short-time work schemes, should be enhanced. In the short term, they preserve jobs, but in the medium term too, there is scope for improving the anticipation of labour market needs during the recovery phase. The Croatian public employment service should step up its efforts to support the workforce in developing appropriate skills (e.g. digital skills), develop outreach strategies towards the inactive population and fight undeclared work. The unemployment benefit does not provide a safety net for dismissed workers, as both the coverage and adequacy are low. The poverty reduction capacity of the minimum income benefit is also evaluated as weak, in a context of high rates of poverty and social exclusion, territorial disparities and risk factors related to age, gender and disability.

(19)The reliability of internet connectivity poses concerns. Households in Croatia do not have widespread high-speed internet access at home. About 70% of households have fixed broadband take-up, and only 6% have at least 100Mbps fixed broadband take-up. Especially in rural areas, this might prevent telework and distance learning, particularly amongst vulnerable groups, such as students from disadvantaged families or those with disabilities. These groups risk being excluded from the sudden shift to a more digitalised society. Alternative working arrangements employing digital technology should be stepped up, in close cooperation with social partners, as the share of workers who telework (6 to 7%) stands at half the EU average.

(20)Labour shortages have continually affected some sectors of the economy, mainly because of skills gaps. Promoting the acquisition of adequate skills, including digital skills, during initial education and training and later via re- and up-skilling could raise productivity and close skills gaps. The quality and inclusiveness of the education and training system need to be improved at all levels, and the curricular reform needs to continue. The introduction of digital education has already proven its value in this crisis; further development of infrastructure and material for digital education and training and of the digital skills of teachers, pupils and adults are needed.

(21)Croatia should support the continuous flow of credit and other financing, including non-bank financing, to viable borrowers that are negatively affected by the crisis. Croatia has adopted a number of stimulus and support schemes for small and medium-sized enterprises (SMEs). Efforts should continue to provide swift and continued liquidity support to businesses through loans and guarantees, in particular state guarantees, with a focus on SMEs, to overcome the crisis and smooth the path to recovery. Businesses in Croatia rely heavily on bank loans and cash flow to meet their funding needs. The banking system should be supported with guarantees in order to open up for new SME financing and improve access to finance. In the process of designing and implementing these measures the resilience of the banking sector needs to be taken into account. Exempting from and allowing deferred payments of taxes and social contributions has also helped improve businesses’ liquidity.

(22)There has been renewed effort to reduce the administrative burden and regulatory restrictions. However, the operation of businesses in general continues to be held back by the still high regulatory and administrative burden, for example as regards permits, reporting requirements and tax procedures. Identification of the administrative and financial burdens is progressing through consultations with stakeholders and via a dedicated website, and measures to reduce the most burdensome obligations are being introduced. Ensuring smooth access to and exercise of professions, through streamlining their regulatory frameworks and related administrative procedures, is also of crucial importance, especially for SMEs and micro enterprises, including sole practitioners. A review of parafiscal charges has been carried out and a first action plan was adopted by the government in May 2020.