Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Croatia and delivering a Council opinion on the 2017 Convergence Programme of Croatia
Date: 2017-05-22
Institutions: European Commission, Secretariat-General
Subjects: Croatia, administrative formalities, adult education, budget deficit, economic policy, economic reform, legal system, public service, retirement conditions, stability programme

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   EUROPEAN COMMISSION  Brussels, 22.5.2017  COM(2017) 510 final   Recommendation for a COUNCIL RECOMMENDATION on the 2017 National Reform Programme of Croatia  and delivering a Council opinion on the 2017 Convergence Programme of Croatia  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2017 National Reform Programme of Croatia 

and delivering a Council opinion on the 2017 Convergence Programme of Croatia 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) 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,1 and in particular Article 9(2) thereof, 

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,2 and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission,3 
Having regard to the resolutions of the European Parliament,4 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On  16 November  2016,  the  Commission  adopted  the  Annual  Growth  Survey,5 
marking  the  start  of  the  2017  European  Semester  of  economic  policy  coordination. 
The priorities of the Annual Growth Survey were endorsed by the European Council 
on  9-10 March  2017.  On  16 November  2016,  on  the  basis  of  Regulation  (EU) 
No 1176/2011,  the  Commission  adopted  the  Alert  Mechanism  Report,6  in  which  it 
identified Croatia as one of the Member States for which an in-depth review would 
be carried out.  

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2017) 510 final. 
P8_ TA(2017)0038, P8_ TA(2017)0039, and P8_ TA(2017)0040. 
COM(2016) 725 final. 
COM(2016) 728 final. 

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(5) 

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The 2017 country report for Croatia7 was published on 22 February 2017. It assessed 
Croatia’s  progress  in  addressing  the  country-specific  recommendations  adopted  by 
the Council on 12 July 2016, 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  22 February  2017.8  The  Commission’s 
analysis  leads  it  to  conclude  that  Croatia  is  experiencing  excessive  macroeconomic 
imbalances. In particular, in 2016, the general government debt ratio moved onto a 
declining path, but public debt is exposed to currency risk, and fiscal sustainability 
risks remain high in the medium term. Private sector debt has been decreasing, but 
remains high, especially in the corporate sector, and is heavily exposed to currency 
risk.  The  financial  sector  is  set  to  support  the  recovery,  but  remains  exposed  to 
currency-induced  credit  risk,  and  the  non-performing  loans  ratio  is  still  high.  The 
unemployment  rate  is  falling  rapidly,  thanks  to  moderate  job  creation,  but  also  a 
shrinking  labour  force.  Finally,  a  cumbersome  business  environment  depresses 
productive investment and productivity growth. 

On  27  April  2017,  Croatia  submitted  its  2017 National  Reform  Programme  and  its 
2017  Convergence  Programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

The relevant country-specific recommendations have been taken into account in the 
Member States’ programmes for the European Structural and Investment Funds (ESI 
Funds) covering the 2014-2020 period. As foreseen in the legislation governing the 
ESI Funds,9 where it is necessary to support the implementation of relevant country-
specific  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and  amend  its  relevant  ESI  Funds  programmes.  The  Commission  has  provided 
further guidelines on the application of those rules.10 

Following  the  abrogation  of  the  excessive  deficit  procedure,  Croatia  is  in  the 
preventive arm of the Stability and Growth Pact and  subject  to the debt rule. In  its 
2017 Convergence Programme, the government plans a gradual improvement of the 
general government balance from  -0.8% of GDP in 2016 to 0.5% of GDP in 2020. 
The medium-term budgetary objective, set at -1.75% of GDP in structural terms, was 
met  with  a  wide  margin  in  2016,  and  the  (recalculated11)  structural  balance  is 
planned to be at the medium-term budgetary objective in 2017 and 2018, but with no 
margin.  Thereafter,  it  is  projected  to  slightly  improve  again.  The  Convergence 
Programme expects the general government debt-to-GDP ratio to continue declining 
to  72.1%  by  2020,  after  peaking  at  86.7%  of  GDP  in  2015.  The  macroeconomic 
scenario underpinning these budgetary projections is favourable, in particular in view 
of  the  negative  impact  of  the  financial  difficulties  facing  Croatia's  largest  private 

SWD(2017) 76 final. 
COM(2017) 90 final. 
Article  23  of  Regulation  (EU)  No  1303/2013  of  the  European  Parliament  and  of  the  Council  of  17 
December  2013  laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the 
European Social Fund, the Cohesion Fund, the European Agricultural Fund for Rural Development and 
the  European  Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European 
Regional Development Fund, the European Social Fund, the Cohesion Fund and the European Maritime 
and  Fisheries  Fund  and  repealing  Council  Regulation  (EC)  No  1083/2006,  OJ  L  347,  20.12.2013,  p. 
320. 
COM(2014) 494 final. 
Cyclically-adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
using the commonly agreed methodology. 

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company Agrokor, which the programme projections do not consider. The Agrokor 
crisis  also  poses  direct  risks  to  the  budgetary  projections.  Moreover,  the  measures 
needed to support the planned deficit targets from 2017 onwards have not yet been 
fully specified. 

On  12  July  2016,  the  Council  recommended  Croatia  to  achieve  an  annual  fiscal 
adjustment of at least 0.6% of GDP towards the medium-term budgetary objective in 
2017. Outturn data showing a sizeable improvement in the headline balance for 2016 
indicate  that  Croatia  already  reached  its  medium  term  budgetary  objective  in  that 
year. The Commission 2017 spring forecast projects the structural balance to remain 
above  the  medium-term  budgetary  objective  in  2017,  in  spite  of  its  decline  from  -
0.3% of GDP in 2016 to -1.7% of GDP in 2017. In 2018, Croatia is recommended to 
remain  at  the  medium-term  budgetary  objective.  The  Commission  2017  spring 
forecast expects the structural balance to further decrease to -2.1% of GDP, pointing 
to  a  risk  of  some  deviation  from  the  medium-term  budgetary  objective.  Croatia  is 
forecast to comply with the debt rule in 2017 and 2018. Overall, the Council is of the 
opinion that Croatia needs to stand ready to take further measures in 2018 to ensure 
compliance with the provisions of the Stability and Growth Pact. 

Croatia’s  fiscal  governance  framework  shows  shortcomings.  The  new  fiscal 
responsibility  act,  supposed  to  strengthen  the  budgetary  framework  as  well  as  the 
independence  and  mandate  of  the  Fiscal  Policy  Commission,  has  not  yet  been 
adopted.  The  amendment  of  the  budget  act,  aimed  inter  alia  at  addressing  the 
frequent  revisions  of  budgetary  plans  at  both  central  and  local  levels,  has  been 
delayed.  The  reliability  of  the  projections  underlying  the  budgetary  plans  remains 
weak.   

Croatia  has  relatively  low  revenue  from  recurrent  taxation  of  immovable  property. 
Revenue is collected by local authority units through charges linked to property, but 
with  considerable  variations  in  their  calculation  and  coverage.  It  also  relies  on  the 
less efficient taxation of property transfers. By way of follow-up to repeated country-
specific  recommendations,  as  part  of  the  tax  reform  of  late  2016,  as  of  2018  some 
local charges and taxes will be replaced by a recurrent property tax calculated on the 
basis of five parameters which approximate the value of the property. It is considered 
a first step to a fully fledged value based recurrent property tax envisaged for 2020. 

Croatia’s sovereign financing needs and the exposure of sovereign debt to currency 
risk  highlight  the  importance  of  reliable  financing  sources  and  prudent  risk 
management.  Addressing  a  country-specific  recommendation,  in  early  2017  a  debt 
management strategy for the central government was adopted, covering 2017-2019. 
It came three years after the expiry of the previous strategy. The institutional set-up 
for  public  debt  management,  including  communication  with  the  markets,  risk 
management and the update of the strategy at regular intervals, is deficient. There is 
also insufficient consideration of off-budget transactions with potential impact on the 
debt.     

The labour market has continued to recover recently, but unemployment is still high, 
with a high share of long-term jobseekers. Along with low and declining activity, this 
means there is a large untapped labour potential. The decline in activity in 2016 was 
particularly pronounced among prime-aged low skilled workers and was driven by a 
shrinking working-age population due to ageing and emigration, both of which have 
been increasing. 

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Inactivity  is  relatively  high  among  cohorts  eligible  for  early  retirement.  Short 
contribution periods  result in  low current and future  pension adequacy and  risks  of 
old-age  poverty.  There  are  many  pathways  to  early  retirement,  possible  a  full  five 
years before the statutory retirement age. Financial incentives to work until that age 
are  weak.  Announced  measures  to  encourage  longer  working  lives  have  not  been 
implemented. Care responsibilities contribute to low labour market participation, of 
elder  prime-aged  women  in  particular.  There  is  a  shortage  of  formal  childcare  and 
there  are  large  regional  disparities.  Paternity  leave  is  unpaid,  and  work  contracts 
allow  little  flexibility  to  balance  work  and  care.  To  date,  the  statutory  pensionable 
age is 61 years and 9 months for women and 65 years for men. The convergence and 
increase  of  the  statutory  retirement  ages  is  slow,  with  both  sexes  to  reach  a 
pensionable age of 67 in 2038. Speeding this up is under consideration but has not 
yet  been  adopted.  The  pension  system  gives  entitlement  to  more  favourable 
conditions to specific categories of workers in occupations classified as arduous and 
hazardous,  and  in  specific  sectors.  The  authorities  have  completed  a  review  of  the 
arduous or hazardous professions, but the rules have not yet been streamlined. 

According to the latest data, in 2015, almost 30 % of the population was exposed to 
the  risk  of  poverty  or  social  exclusion.  The  social  protection  system  displays 
shortcomings  in  effectiveness  and  fairness,  stemming  from  inconsistencies  in 
eligibility  criteria,  fragmented  geographical  coverage,  lack  of  coordination  across 
authorities in charge, and low transparency. In 2016, only 0.6 % of GDP was spent 
on  the  minimum  income  scheme  targeting  the  poorest  households.  Reform  plans 
including the institutional reassignment of responsibilities and the harmonisation of 
eligibility criteria have stalled.  

The  acquisition  of  skills  needed  in  the  labour  market  is  an  important  condition  for 
employability.  Participation  in  adult  education  is  very  low,  as  are  expenditure  and 
coverage of active labour market policies, retraining measures and lifelong learning. 
Training does not sufficiently focus on older and low skilled workers and the long-
term  unemployed,  who  tend  to  face  particular  employability  challenges.  The 
preparation of legislation to improve the quality of the institutions, programmes, and 
teaching for adult learning has been delayed. 

Sufficient basic skills are essential for people to find and retain good, stable jobs and 
successfully participate in economic and social life. International survey information 
points to severe deficiencies in basic skills, applied science, and mathematics among 
Croatian 15-year-old schoolchildren. Since 2015, as part of the implementation of the 
education,  science  and  technology  strategy,  a  reform  of  the  school  curricula  was 
launched to improve on content and teaching of transferable skills. After ambivalent 
stakeholder  reactions,  the  curricular  reform  was  revised,  and  implementation  has 
been  significantly  delayed.  The  process  now  needs  to  continue  in  line  with  the 
original  objectives.  Croatia  recently  adopted  a  vocational  education  and  training 
(VET)  strategy.  This  is  expected  to  lead  to  an  update  of  the  VET  curricula,  an 
increased  role  of  work-based  learning,  and  improved  VET  teaching  quality.  The 
introduction  of  the  system  for  recognising  and  validating  non-formal  and  informal 
learning is pending. 

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The  territorial  and  functional  fragmentation  of  public  administration  weighs  on 
service  delivery  and  the  efficiency  of  public  expenditure. Current  competences and 
fiscal relations between levels of government are not conducive to the efficient and 
fair  delivery  of  public  services,  notably  in  health,  education,  and  social  assistance. 
The  comprehensive  public  administration  reform  faces  delays.  Legislation  to 

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reallocate  tasks  between  the  central  and  local  authorities  is  pending,  as  is  the 
streamlining of the system of State agencies. In early 2017 the authorities announced 
the establishment of a task force to draw up legislation on sub-national government 
financing. 

Fragmentation  in  wage  setting  in  public  administration  continues  to  impede  the 
transparency of wages and equality of treatment, as well as government control over 
the  public  wage  bill,  with  risks  of  spillovers  to  the  broader  economy.  In  February 
2017,  the  government  adopted  common  guidelines  for  negotiating  and  monitoring 
collective  agreements  in  the  public  sector,  but  the  streamlining  of  the  wage  setting 
frameworks has been postponed to 2019. 

State-owned enterprises are on average less productive than private firms, pointing at 
weaknesses  in  their  governance.  They  exert  a  negative  impact  on  allocative 
efficiency,  and  contribute  to  low  productivity  growth  in  the  economy.  In  the  past 
year,  steps  to  open  State-owned  enterprises  to  private  control  advanced  slowly. 
Better monitoring of their performance and boards’ accountability, including of firms 
owned by local government units, would help improve their management.  

The Croatian Bank for Reconstruction and Development (HBOR) has a key role in 
implementing  the  EU  financial  instruments  and  the  Investment  Plan  for  Europe  in 
particular.  To  play  this  role  fully,  it  needs  to  comply  with  high  standards  of 
transparency  and  accountability.  The  authorities  plan  an  independent  asset  quality 
review of its credit portfolio by independent auditors, to be concluded by the end of 
2017. Based on the findings, its regulatory framework and governance structures will 
be revisited. 

Businesses  are  burdened  with  high  regulatory  costs.  A  high  number  of  parafiscal 
charges,  many  of  which  are  statistically  treated  as  taxes,  complicate  the  business 
environment.  Addressing  a  country-specific  recommendation,  in  summer  2016  the 
government  decided  to  abolish  13  and  reduce  another  11  parafiscal  charges,  but 
implementation  has  been  slow.  Businesses  continue  to  suffer  from  a  high 
administrative  burden.  An  action  plan  for  reducing  the  administrative  burden  was 
adopted, covering eight regulatory areas, but implementation is pending. 

Investment  recovered  in  2016,  after  a  sharp  decline  during  the  crisis.  But  despite 
favourable  macroeconomic  and  financing  conditions,  key  bottlenecks  weigh  on  a 
more sustained recovery in investment. The weaknesses of public administration, the 
cumbersome  business  environment,  slow  implementation  of  the  anti-corruption 
strategy, restrictive  regulation in  key infrastructure sectors, and the strong presence 
of the State in the economy weigh on the business climate. 

The  modernisation  of  professional  regulation  can  promote  labour  mobility  and 
contribute  to  lower  prices  for  professional  services,  thereby  increasing  the  growth 
potential.  Croatia’s  regulation  for  service  providers  and  regulated  professions  has 
been restrictive, for lawyers in particular. In summer 2016, the government adopted 
an action plan to replace and modernise unfit regulation, which however was limited 
in scope and detail.  

The quality and efficiency of the justice system is a key determinant of the business 
environment. Despite reduced backlogs, first instance court proceedings are long in 
commercial,  civil  and  criminal  cases.  The  electronic  filing  and  delivery  of  court 
documents has the potential to significantly improve the justice system, but has not 
yet been rolled out. Commercial judges cannot access registers online: this weighs on 

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the efficiency of insolvency proceedings. Court judgments are only rarely available 
online, and case management reforms such as updating business processes have not 
yet been introduced at first instance commercial courts. 

The banking sector remains well capitalised, and its profitability recovered in 2016 
following  the  conversion  of  Swiss  franc  into  euro  loans  in  2015.  The  ratio  of  non-
performing  loans  to  gross  loans  has  been  declining  lately  but  is  still  high,  among 
non-financial corporations in particular. The decline appears to be driven by sales, as 
well as the progressive and automatic provisioning requirements introduced in 2013. 
As part of the recent tax reform, the government also introduced a new tax treatment 
for  write-offs  of  non-performing 
to  a  country-specific 
loans, 
recommendation. Its effects require close monitoring. The efficiency of the recently 
reformed insolvency framework in facilitating the resolution of non-performing loans 
also deserves close monitoring. 

in  response 

In  the  context  of  the  European  Semester  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Croatia’s  economic  policy  and  published  it  in  the  2017 
country  report.  It  has  also  assessed  the  Convergence  Programme  and  the  National 
Reform  Programme  and  the  follow-up  given  to  the  recommendations  addressed  to 
Croatia  in  previous  years.  It  has  taken  into  account  not  only  their  relevance  for 
sustainable  fiscal  and  socioeconomic  policy  in  Croatia,  but  also  their  compliance 
with EU rules and guidance, given the need to strengthen the EU’s overall economic 
governance by providing EU-level input into future national decisions.  

In  the  light  of  this  assessment,  the  Council  has  examined  the  Convergence 
Programme and its opinion12 is reflected in particular in recommendation 1 below. 

In  the  light  of  the  Commission’s  in-depth  review  and  this  assessment,  the  Council 
has examined the National Reform Programme and the Convergence Programme. Its 
recommendations  made  under  Article  6  of  Regulation  (EU)  No 1176/2011  are 
reflected in recommendations 1 to 5 below, 

HEREBY RECOMMENDS that Croatia take action in 2017 and 2018 to: 

1. 

2. 

3. 

4. 

Pursue  its  fiscal  policy  in  line  with  the  requirements  of  the  preventive  arm  of  the 
Stability  and  Growth  Pact,  which  implies  to  remain  at  its  medium-term  budgetary 
objective in 2018. By September 2017, reinforce budgetary planning and the multi-
annual  budgetary  framework,  including  by  strengthening  the  independence  and 
mandate  of  the  Fiscal  Policy  Commission.  Take  the  necessary  steps  for  the 
introduction of the value based property tax. Reinforce the framework for public debt 
management, including by ensuring annual updates of the debt management strategy. 

Discourage  early  retirement,  accelerate  the  transition  to  the  higher  statutory 
retirement age, and align pension provisions for specific categories with the rules of 
the general scheme. Improve coordination and transparency of social benefits.  

Improve adult education, in particular of older workers, the low-skilled, and the long-
term unemployed. Accelerate the reform of the education system. 

Reduce the fragmentation and improve the functional distribution of competencies in 
public  administration,  while  enhancing  the  efficiency  and  reducing  territorial 
disparities  in  the  delivery  of  public  services.  In  consultation  with  social  partners, 
harmonise the wage-setting frameworks across the public administration and public 
services.  

12 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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Speed  up  the  divestment  of  State-owned  enterprises  and  other  State  assets,  and 
improve  corporate  governance  in  the  State-owned  enterprise  sector.  Significantly 
reduce  the  burden  on  businesses  stemming  from  costs  of  regulation  and  from 
administrative burdens. Remove regulatory restrictions hampering access to and the 
practice of regulated professions and professional and business services. Improve the 
quality  and  efficiency  of  the  justice  system,  in  particular  by  reducing  the  length  in 
civil and commercial cases. 

Done at Brussels, 

For the Council 
The President 

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