Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Croatia and delivering a Council opinion on the 2018 Convergence Programme of Croatia
Date: 2018-05-23
Institutions: European Commission, Secretariat-General
Subjects: Croatia, budget deficit, economic policy, economic reform, educational reform, employment policy, fiscal policy, public administration, social policy, stability programme

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 23.5.2018 COM(2018) 410 final  Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Croatia  and delivering a Council opinion on the 2018 Convergence Programme of Croatia  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2018 National Reform Programme of Croatia 

and delivering a Council opinion on the 2018 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 
policies1, 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 
imbalances2, and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament4, 

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) 

(2) 

1 
2 
3 
4 

On 22 November 2017, the Commission adopted the Annual Growth Survey, marking 
the start of the 2018 European Semester of 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. The priorities of 
the  Annual  Growth  Survey  were  endorsed  by  the  European  Council  on  22  March 
2018.  On  22  November  2017,  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.  
The  2018  country  report  for  Croatia5  was  published  on  7  March  2018.  It  assessed 
Croatia’s progress in addressing the country-specific recommendations adopted by the 

OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2018) 410 final. 
P8_TA(2018)0077 and P8_TA(2018)0078. 

EN 

1 

  EN 

 
 
 
 
                                                 
Council  on  11  July  2017,  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  7  March  20186.  The  Commission’s  analysis 
leads  it  to  conclude  that  Croatia  is  still  experiencing  excessive  macroeconomic 
imbalances,  although  they  are  being  reduced.  Vulnerabilities  are  linked  to  still  high 
levels of public, private and external debt, all largely denominated in foreign currency. 
The  level  of  non-performing  loans  remains  high,  in  particular  for  non-financial 
corporations.  Croatia's  potential  growth  remains  insufficient  to  enable  a  durable 
adjustment and overall there has been little progress in implementing policy measures 
to  address  the  chronically  low  labour  utilisation  and  slow  productivity  growth. 
Competitiveness  and 
investment  remain  hindered  by  a  restrictive  business 
environment and the fragmentation of the public administration weighs on efficiency 
in public services. 

On  26  April  2018,  Croatia  submitted  its  2018  National  Reform  Programme  and  its 
2018  Convergence  Programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

Relevant country-specific recommendations have been addressed in the programming 
of  the  European  Structural  and  Investment  Funds  for  the  2014-2020  period.  As 
foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament 
and  of  the  Council7,  where  it  is  necessary  to  support  the  implementation  of  relevant 
Council  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and propose amendments to its Partnership Agreement and relevant programmes. The 
Commission has provided further details on how it would make use of that provision 
in  guidelines  on  the  application  of  the  measures  linking  the  effectiveness  of  the 
European Structural and Investment Funds to sound economic governance8 

Croatia is currently in the preventive arm of the Stability and Growth Pact and subject 
to the debt rule. Starting from a general government surplus of 0.8 % of GDP in 2017, 
the 2018 Convergence Programme plans the headline balance to fall into a deficit of 
0.5 % of GDP in 2018 and then to gradually improve to a surplus of 0.5 % of GDP in 
2021. The medium-term budgetary objective — a structural deficit of 1.75 % of GDP 
—  is  planned  to  continue  to  be  overachieved  throughout  the  programme  period. 
According to the 2018 Convergence Programme, the general government debt-to-GDP 
ratio  is  expected  to  fall  from  78.0  %  of  GDP  in  2017  to  75.1  %  in  2018  and  to 
continue  declining  to  65.9  %  in  2021.  The  macroeconomic  scenario  underpinning 
those  budgetary  projections  is  plausible.  However,  the  planned  budgetary  targets 
appear  cautious.  The  Commission  2018  spring  forecast  projects  the  general 
government balance at 0.7 % and 0.8 % of GDP in 2018 and 2019, respectively. 

(3) 

(4) 

(5) 

(6) 

On  11  July  2017,  the  Council  recommended  Croatia  to  remain  at  its  medium-term 
budgetary  objective  in  2018.  Based  on  the  Commission  2018  spring  forecast  the 

5 
6 
7 

8 

SWD(2018) 209 final. 
COM(2018) 120 final. 
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. 

EN 

2 

  EN 

 
                                                                                                                                                         
(7) 

(8) 

structural balance is forecast to stand at -0.3 % of GDP in 2018 and at -0.6 % of GDP 
in 2019, remaining above the medium-term budgetary objective. Croatia is forecast to 
comply with the debt rule in 2018 and 2019. Overall, the Council is of the opinion that 
Croatia is projected to comply with the provisions of the Stability and Growth Pact in 
2018 and 2019. 

The planned adoption of key legislation to improve Croatia's fiscal framework is long 
overdue. Flaws in the design of the numerical fiscal rule make it ineffective for fiscal 
policy planning and the role of the Fiscal Policy Commission as an independent body 
is still weak. Croatia's still high level of public debt and its exposure to currency risks 
mean  that  sound  debt  management  practices  remain  essential.  In  2017,  the  debt 
management function was strengthened and a debt managemet strategy was produced, 
which  requires  regular  updates.  The  introduction  of  a  property  tax  already  legislated 
was postponed with no indication of whether and when it would be implemented. This 
leaves Croatia with a low proportion of revenue from recurrent taxation of immovable 
property.  A  recurrent  property  tax  would  create  scope  for  improving  the  overall 
growth-friendliness  of  revenue  collection,  while  ensuring  a  stable  and  predictable 
source of revenue for local government units. 

The  Croatian  labour  market  continued  to  recover  in  2017.  Still,  employment  and  
activity rates remain substantially below the EU average, hampering potential growth. 
To  date,  the  statutory  pensionable  age  is  62  years  for  women  and  65  years  for  men. 
The convergence and increase of the statutory retirement age is slow, with both sexes 
stipulated  to  reach  a  pensionable  age  of  67  only  in  2038.  In  addition,  older  workers 
can benefit from many pathways to early retirement and the pension system includes a 
number  of  special  pension  schemes  providing  more  favourable  conditions  for 
retirement.  The  care  responsibilities  of  women  contribute  further  to  their  low  labour 
market participation. The resulting low average duration of working lives  implies low 
current  and  future  pension  adequacy  and  risks  of  old-age  poverty.  The  announced 
measures to encourage longer working lives have not yet been implemented.  

(9) 

Even though the social dialogue structure in Croatia is in place, the actual interaction 
between  the  authorities  and  stakeholders  in  the  policy  preparation  process  is  limited 
and mostly confined to the provision of written feedback on the government proposed 
measures. In addition, the fragmentation of trade unions limits their overall capacity to 
engage in social dialogue. 

(10)  Despite recent improvements, the share of the population at risk of poverty or social 
exclusion  remains  high,  with  marked  territorial  disparities  across  counties.  The 
elderly, the low skilled and people with disabilities are particularly affected. The social 
protection system displays shortcomings in effectiveness and fairness. Social benefits 
have a limited poverty reduction capacity. Lack of coordination across institutions and 
lower fiscal capacity of poorer local government units leads to an uneven provision of 
social benefits.  

(11)  Croatia  performs  below  EU  average  in  education  investment,  early  childhood 
education  and  care,  basic  skills,  tertiary  educational  attainment  and  labour  market 
relevance of vocational education and training in education. Croatia has launched the 
implementation  of several reforms outlined  in the strategy on education, science  and 
technology. The reform of school curricula is likely to have a positive impact on the 
quality  of  Croatia's  education,  if  it  is  implemented  in  full  and  consistently  with  the 
other actions in the strategy. The labour market relevance of vocational education and 
training programmes appears limited, as suggested by the fact that more than half of 

EN 

3 

  EN 

 
registered  unemployed  are  vocational  education  and  training  graduates.  Better 
coordination  between  public  authorities  and  employers  is  needed  to  improve  the 
identification of skills needs. The adult education system aiming to help inclusion in 
the  labour  market  is  characterized  by  a  large  and  unevenly  distributed  number  of 
providers across the country, and learning programmes that are not properly assessed. 
Participation in adult education and educational programmes offered as part of active 
labour market policy measures are critically low. 

(12)  The  territorial  fragmentation  of  Croatia's  public  administration  and  the  wide 
distribution  of  competences  across  levels  of  government  weigh  on  the  effeciency  of 
public service provision and public expenditure. Many small local units lack adequate 
financial and administrative capacity to carry out decentralised functions. Indicators of 
public  administration  efficiency  show  performance  below  the  EU  average,  which 
hinders the design and implementation of public policies and a more efficient use of 
European  Structural  and  Investment  Funds.  The  planned  reduction  of  the  number  of 
local branch offices of the central administration and the streamlining of the system of 
state  agencies  have  been  further  postponed.  Lack  of  coherence  in  the  wage-setting 
frameworks  in  the  public  administration  and  public  services  impede  equality  of 
treatment and government's control over the public wage bill. The planned legislation 
for their harmonisation has been further postponed to mid-2018. The authorities have 
taken  the first steps to integrate some functions among hospitals in order to improve 
efficiency  in  service  provision  and  access  to  health  care.  However,  an  ineffective 
model  of  the  health  system's  financing  results  in  accumulation  of  debts,  especially 
related to in-patient care. 

(13)  State-owned  enterprises  maintain  their  large  presence  in  the  economy.  Measures  to 
improve their governance have advanced slowly, and they continue to operate at low 
levels  of  productivity  and  profitability.  Adoption  of  new  legislation  governing  the 
management  and  disposal  of  state  assets  has  been  further  delayed,  which  weighs  on 
the advancement of key policy measures aimed at opening up state-owned enterprises 
to private capital and activation of other assets. 

(14)  November  2017  saw  the  finalisation  of  an  independent  asset  quality  review  of  the 
Croatian Bank for Reconstruction and Development. Given the bank's importance for 
implementing the EU financial instruments and the Investment Plan for Europe as well 
as its increasing engagement in direct lending, the review's findings should be used to 
strengthen the bank's supervisory and regulatory framework and governance.  

(15)  Administrative  burden  and  parafiscal  charges  continue  to  weigh  on  the  business 
environment.  Reduction  of  the  administrative  burden  has  been  progressing  steadily, 
but at a modest pace. Cuts in parafiscal charges have been limited and transparency is 
low, as neither regular updates of the registry nor impact assessments of the planned 
cuts have been conducted.  

(16)  The anti-corruption action plan 2017–2018 needs to be fully implemented in order to 
deliver  on  the  objectives  of  the  anti-corruption  strategy  2015–2020.  Several  key 
elements  still  require 
improvement,  particularly  asset  and  conflict-of-interest 
disclosures, raising awareness of whistle-blowing reporting channels, and an effective 
control of risks in public procurement, which remains vulnerable to corruption due to a 
large share of in-house contracting by state-owned entities. 

(17)  Restrictive  regulation  in  goods  and  services  markets,  in  particular  a  high  number  of 
exceedingly  regulated  professions  hampers  competition.  Easing  regulation  has  been 
slow against the background of strong resistance from interest groups. 

EN 

4 

  EN 

 
(18)  Lengthy court proceedings and sizeable backlogs continue to weigh on the quality and 
efficiency  of  the  justice  system  and  consequently  the  business  environment.  The 
observed  decrease  in  backlogs  was  mainly  driven  by  a  lower  inflow  of  new  cases 
rather 
improvements,  electronic 
communication in litigation and insolvency proceedings remains underused. 

resolution  of  cases.  Despite 

faster 

than 

(19)  Some targeted efforts to reform the national science and innovation system are in the 
making via Croatia's smart specialisation strategy. Policy responsibilities in support of 
science  and  innovation  appear  uncoordinated,  which  weakens  the  implementation  of 
the  policy  strategy.  Similarly,  major  universities  have  highly  fragmented  governance 
structures  and  rigid  administrative  rules.  Cooperation  between  research  institutions 
and the business sector is weak. There is no systematic monitoring and evaluation of 
the  impact  of  research  and  innovation  policies  in  place,  preventing  proper  priority 
setting.  The  tertiary  education  system  could  benefit  from  incentives  to  encourage 
quality and labour market relevance. 

(20) 

(21) 

(22) 

In  the  context  of  the  2018  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Croatia’s  economic  policy  and  published  it  in  the  2018 
country  report.  It  has  also  assessed  the  2018  Convergence  Programme  and  the  2018 
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  a  sustainable  fiscal  and  socioeconomic  policy  in  Croatia  but  also  their 
compliance with Union rules and guidance, given the need to strengthen the Union’s 
overall  economic  governance  by  providing  Union-level  input  into  future  national 
decisions.  

In  the  light  of  this  assessment,  the  Council  has  examined  the  2018  Convergence 
Programme and is of the opinion that Croatia is expected to comply with the Stability 
and Growth Pact. 

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  under  Article  6  of  Regulation  (EU)  No  1176/2011  are  reflected  in 
recommendations 1 to 4 below. 

HEREBY RECOMMENDS that Croatia take action in 2018 and 2019 to: 

1. 

2. 

3. 

4. 

Strengthen  the  fiscal  framework,  including  by  strengthening  the  mandate  and 
independence of the Fiscal Policy Commission. Introduce a recurrent property tax. 

Discourage early retirement, accelerate the transition to a higher statutory retirement 
age and align pension provisions for specific categories with the rules of the general 
scheme.  Deliver  on  the  reform  of  the  education  and  training  system  to  improve  its 
quality  and labour  market  relevance  for  both  young  people and  adults.  Consolidate 
social benefits and improve their poverty reduction capacity. 

Reduce  the  territorial  fragmentation  of  the  public  administration,  streamline  the 
functional  distribution  of  competencies  and  enhance  the  capacity  to  design  and 
implement public policies. In consultation with social partners, introduce harmonised 
wage-setting frameworks across the public administration and public services. 

Improve  corporate  governance  in  state-owned  enterprises  and  intensify  the  sale  of 
state-owned  enterprises  and  non-productive  assets.  Significantly  reduce  the  burden 
on  businesses  arising  from  parafiscal  charges  and  from  cumbersome  administrative 
and legislative requirements. Enhance competition in business services and regulated 

EN 

5 

  EN 

 
professions.  Reduce  the  duration  of  court  proceedings  and  improve  electronic 
communication in courts. 

Done at Brussels, 

For the Council 
The President 

EN 

6 

  EN