Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Croatia and delivering a Council opinion on the 2019 Convergence Programme of Croatia
Date: 2019-06-05
Institutions: European Commission, Secretariat-General
Subjects: Croatia, corporate governance, economic policy, economic reform, education policy, innovation, investment, labour market, stability pact, stability programme

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 5.6.2019  COM(2019) 511 final  Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Croatia and delivering a Council opinion on the 2019 Convergence Programme of Croatia     
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2019 National Reform Programme of Croatia and delivering a Council opinion 
on the 2019 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 Commission, 

Having regard to the resolutions of the European Parliament, 

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 

On 21 November 2018, the Commission adopted the Annual Growth Survey, marking 
the start of the 2019 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. The priorities of 
the  Annual  Growth  Survey  were  endorsed  by  the  European  Council  on  21  March 
2019.  On  21  November  2018,  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 2019 country report for Croatia3 was published on 27 February 2019. 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. 
SWD(2019) 1010 final 

EN 

1 

  EN 

 
 
 
 
 
                                                 
Council  on  13  July  2018,  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  27  February  20194.  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.  However,  imbalances  have  been  narrowing  over  recent  years  supported  by 
robust nominal growth and a prudent fiscal policy. The negative net external position 
has  been  improving  due  to  continued  current  account  surpluses.  Public  debt  has 
declined  significantly  since  its  2015  peak.  Private  sector  debt  reduction  is  ongoing, 
though its pace is set to abate as credit growth and investment recover. The financial 
sector  is  well  capitalised  and  profitable,  but  the  share  of  non-performing  loans, 
although  declining,  remains  high.  Policy  action  has  been  stepped  up,  but  thorough 
implementation of structural measures remains crucial for strengthening the resilience 
of  the  economy.  Despite  some  progress,  issues  with  the  completeness,  accuracy  and 
timelines of economic and government finance statistics remain. 

On  18  April  2019,  Croatia  submitted  its  2019  National  Reform  Programme  and  its 
2019 Convergence Programme. In order to take account of their interlinkages, the two 
programmes have been assessed at the same time. 

Relevant country-specific recommendations have to some extent been addressed in the 
programming of the European Structural and Investment Funds ('ESI Funds') for 2014-
2020. As provided for in Article 23 of Regulation (EU) No 1303/2013 of the European 
Parliament and of the Council5, 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 ESI Funds to sound economic governance6.  

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 0.2% of GDP in 2018, 
the 2019 Convergence Programme plans the headline balance to deteriorate to  -0.3% 
of GDP in 2019 and then to gradually improve to a surplus of 0.8% of GDP in 2022. 
Based on the recalculated structural balance7, the medium-term budgetary objective – 
which has been changed from a structural deficit of 1.75% of GDP in 2019 to 1% of 
GDP  as  of  2020  —  is  planned  to  continue  to  be  overachieved  throughout  the 
programme  period.  According  to  the  2019  Convergence  Programme,  the  general 
government  debt-to-GDP  ratio  is  expected  to  fall  from  71.6%  of  GDP  in  2019 
to 68.5%  in  2020  and  to  continue  declining  to  62%  in  2022.  The  macroeconomic 
scenario underpinning those budgetary projections is plausible. However, the planned 
budgetary targets appear cautious. The Commission 2019 spring forecast projects the 

COM (2019) 150 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. 
Cyclically-adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
using the commonly agreed methodology. 

(3) 

(4) 

(5) 

4 
5 

6 
7 

EN 

2 

  EN 

 
                                                 
(6) 

(7) 

(8) 

(9) 

general government balance at 0.1% and 0.5% of GDP in 2019 and 2020, respectively. 
Based  on  the  Commission  2019  spring  forecast  the  structural  balance  is  forecast  to 
stand  at  -0.8%  of  GDP  in  2019  and  at  -0.5%  of  GDP  in  2020,  remaining  above  the 
medium-term budgetary objective. Croatia is forecast to comply with the debt rule in 
2019  and  2020.  Overall,  the  Council  is  of  the  opinion  that  Croatia  is  projected  to 
comply with the provisions of the Stability and Growth Pact in 2019 and 2020. 

In December 2018, the Croatian Parliament  adopted the Fiscal  Responsibility Act.  It 
aims  to  reinforce  the  set-up  and  mandate  of  the  Fiscal  Policy  Commission  and  lay 
down numerical fiscal rules, including a structural budget balance rule. In March 2019, 
the  mandate  of  the  State  Audit  Office  was  strengthened  through  the  introduction  of 
sanctioning mechanisms for cases of non-compliance with its recommendations and a 
broadening  of  the  scope  of  its  audits.  The  fiscal  framework  will  be  further 
strengthened  with  the  adoption  of  the  amended  Budget  Act.  This  is  expected  to 
improve budgetary planning, collection of fiscal data and the criteria for the issuance 
of government guarantees.   

The  territorial  fragmentation  of  Croatia’s  public  administration  affects  its  efficiency 
and  exacerbates  regional  disparities.  Many  small  local  governments  often  lack 
adequate  financial  and  administrative  resources  to  provide  the  services  under  their 
remit. This creates wide disparities in public service provision between financially and 
administratively strong and weak local units across Croatia. At the central government 
level,  the  authorities  have  taken  steps  towards  the  simplification  of  the  cumbersome 
state  agencies  system,  but  the  legal  framework  introducing  a  higher  degree  of 
homogeneity across the system is pending. It is planned to devolve the responsibilities 
of branch-offices of the central administration operating at local level to the counties’ 
administration.  

The health care system has accumulated further debt in 2018, which poses a risk for 
public  finances.  Financing  of  the  system  relies  on  contributions  by  the  working 
population  and state budget  transfers, though the latter have been consistently below 
full  cost  coverage.  The  financial  situation  of  the  health  care  system  is  expected  to 
improve due to the increase in the health insurance premium introduced in 2019 and 
the excise duties on tobacco in December 2018. The ongoing functional integration of 
hospitals  and  actions  aimed  at  improving  primary  care  could  lead  to  increased 
efficiency in spending, but implementation is proceeding slowly. 

The  wage-setting  framework  lacks  consistency  across  the  public  administration  and 
public services, which affects equality of treatment and hinders central control over the 
public wage bill. New legislation on wage setting for civil servants has been postponed 
several times. The aim of the law is to achieve greater harmonisation across the public 
administration  through  the  introduction  of  common  wage  grids  and  job  complexity 
coefficients,  based  on  more  consistent  job  descriptions  and  competence  frameworks. 
Croatia has a social dialogue framework, but the social partners express concerns that 
the  working  methods  and  procedures  hinder  real  dialogue.  The  fragmentation  of  the 
trade unions also weakens the effectiveness of social dialogue. 

(10) 

In 2018, the unemployment rate continued its rapid decline. Youth unemployment also 
decreased considerably, but remains high. However, activity and employment rates in 
Croatia  remain  low,  with  early  retirement  and  care  responsibilities  playing  an 
important role in inactivity. Access to employment needs to improve, for example by 
anticipating  and  providing  appropriate  skills.  Many  drivers  of  inactivity  are  still 
present and the current measures to help people enter the labour market appear to be 

EN 

3 

  EN 

 
insufficient.  The  capacity  of  labour  market  institutions  remains  limited  and 
cooperation  between  employment  services,  social  services  and  other  relevant 
stakeholders  is  weak.  An  important  package  of  pension  system  reforms  entered  into 
force in  2019. The main  objectives of the reform  are threefold:  i) to  address   design 
inconsistencies,  which  have  resulted  in  unfair  treatment  of  certain  cohorts  of 
pensioners; ii) to improve the adequacy of the pension system by extending working 
lives;  and  iii)  to  strengthen  the  institutional  setup  and  performance  of  the  second 
pension pillar.  

(11)  Socio-economic differences are an important determinant of educational attainment in 
Croatia. The country performs below the EU average when it comes to education, in 
particular  early  childhood  education  and  care,  basic  skills,  tertiary  educational 
attainment,  adult  participation  in  learning,  and  the  labour  market  relevance  of 
vocational education and training. Croatia is implementing the curricular reform as a 
pilot project, but the reform will achieve its full potential only if it is implemented in 
full and accompanied by training of teachers.  

(12)  Despite  still  relatively  high  unemployment,  labour  shortages  are  affecting  some 
sectors of the economy, mainly because of skills gaps. Improving digital  skills could 
raise productivity and close some skills gaps. The limited labour market-relevance of 
vocational  education  and  training  contributes  to  low  employment  rate  among 
graduates.  Student  participation  in  programmes  that  include  work-based  learning  is 
low. The establishment of the Regional Centres of Competences and the experimental 
programme in dual education should improve the quality of vocational education and 
training and facilitate the identification of skills needs. Participation in adult education 
programmes, offered as part of measures to help people find work or training, is low. 
This  is  especially true of those most in need of education, such as low-qualified and 
unemployed persons.  

(13)  The proportion of the population at risk of poverty or social exclusion is declining, but 
remains above the EU average. This risk mainly concerns the elderly and people with 
disabilities. The capacity of social benefits to reduce poverty remains weak compared 
to the EU average. The authorities have taken steps to improve the recording of social 
benefits  provided  at  the  local  level  by  harmonising  their  classification.  This  should 
result  in  a  better  overview  of  the  benefits  provided  across  the  territory,  which  could 
then be used to improve the effectiveness of the social protection system in reaching 
those most in need.  

(14)  The transport network is unbalanced, with railway infrastructure lagging significantly 
behind,  resulting  in  low  quality  of  service  and  barriers  to  workers’  mobility.  Public 
transport  in  smaller  cities  lacks  adequate  infrastructure.  Greenhouse  gas  emissions 
from road transport have increased significantly over the last five years. The share of 
renewable energy sources in the transport sector is far below the 2020 target of 10%. 
Additional efforts and investments are needed to effectively reduce the high proportion 
of  fossil  fuel-powered  cars,  promote  inter-modality  and  more  generally  curb  rising 
greenhouse gas emissions from the transport sector. 

(15)  Croatia’s high energy intensity could be decreased by investments in energy efficiency 
and  smart  energy  systems.  Particular  attention  could  go  to  reducing  the  energy 
consumption  in  buildings  and  improving  the  energy  efficiency  of  district  heating 
networks.  Investments  in  wind  and  solar  have  considerable  potential  too,  as  have 
renewables  in  heating  and  cooling.  Their  promotion  would  also  enable  Croatia’s 
islands  to  increase  self-reliance  in  energy,  in  line  with  the  ‘Clean  Energy  for  EU 

EN 

4 

  EN 

 
(16) 

islands’  initiative.  In  addition,  Croatia  is  particularly  vulnerable  to  climate  risks, 
especially floods and forest fires. 

Investments could also promote the transition to a circular economy. They are needed 
to  support  separate  waste  collection  and  recycling  as  alternatives  to  landfilling, 
develop  alternatives  to  raw  materials  and  increase  demand  for  recycled  content  and 
raise  public  awareness  of  sustainable  consumption  practices  and  behaviour.  In 
addition, significant investment is also necessary to ensure the collection and treatment 
of  wastewater  in  agglomerations  above  2 000  population  equivalent.  Investment  in 
water  networks  could  reduce  leakage  of  drinking  water  and  fulfil  unmet  quality 
requirements. 

(17)  Research  and  innovation  capacities  and  the  uptake  of  advanced  technologies  need 
investment  to  strengthen  innovation  performance  and  foster  productivity  growth, 
which  is  being  hampered  by  fragmented  and  inefficient  research  and  innovation 
policies.  Croatia’s  2016-2020  'smart  specialisation'  strategy  (RIS3)  aims  to  foster 
innovation,  overcome  fragmentation  in  the  system  and  ensure  that  research  and 
development  activities  are  organised  around  key  economic  priorities,  but  its 
implementation 
to  accelerate  further.  Investment  could  support 
collaboration between universities and businesses, to enable the transfer of technology 
and commercialisation of research outcomes and could strengthen governance. 

is  expected 

(18)  Measures  to  improve  corporate  governance  in  state-owned  enterprises  have  slowly 
progressed.  A  new  Code  of  Corporate  Governance  was  adopted  and  mid-term 
planning  and  performance  reporting  were  mandated.  Still,  the  combination  of  state-
owned  enterprises’  heavy  presence  in  many  sectors  and  their  low  profitability  and 
weak productivity continue to weigh on the economy. In 2018, the list of companies of 
special interest was further reduced and more companies are now formally eligible for 
sale, but there is no clear privatisation strategy in place. The authorities’ efforts appear 
to  focus  on  disposing  of  the  large  remaining  stock  of  minority  shares  and  activating 
non-productive  assets.  Corruption  is  perceived  to  be  widespread  and  growing. 
Effective  tools  to  prevent  and  sanction  corruption  are  lacking,  in  particular  at  local 
level.  There  remains  a  need  to  enhance  oversight  and  sanctioning  mechanisms  for 
appointees to local public companies. 

(19)  Excessive administrative and legislative requirements and parafiscal (non-tax) charges 
burden  businesses,  particularly  smaller  ones.  The  identification  of  administrative 
burden  has  been  completed,  allowing 
the 
implementation  of  warranted  relief  measures.  Cuts  in  parafiscal  charges  have  been 
lagging.  The  high  number  of  overly  regulated  professional  services  hampers 
competition. There has been progress in certain sectors, most notably taxi services, but 
excessive restrictions remain in place for many economically important professions. 

to  proceed  with 

the  authorities 

(20)  Substantial  backlogs  and  lengthy  proceedings  in  civil  and  commercial  courts  reduce 
legal  certainty,  while  inefficiencies  in  criminal  justice  hamper  the  fight  against 
economic and financial offences. The perception of independence of the judiciary has 
further  deteriorated.  Amendments  to  the  law  on  the  State  Judicial  Council  were 
adopted  in  2018.  With  the  exception  of  the  High  Commercial  Court,  the  continued 
reduction in backlogs was mainly due to a decline in the incoming caseload. Electronic 
communication is being tested in some courts but has yet to be extended nationally. 

(21)  The programming of EU funds for the period 2021-2027 could help address some of 
the gaps identified in  the recommendations and  in  particular in the areas covered by 

EN 

5 

  EN 

 
Annex  D  to  the  country  report8.  This  would  allow  Croatia  to  make  the  best  use  of 
those funds in respect of the identified sectors, taking into account regional disparities. 
Strengthening  the  country’s  administrative  capacity  to  manage  these  funds  is  an 
important factor for the success of these investment. The institutional setup for public 
procurement  requires  strengthening  to  improve  compliance  and  enable  strategic 
procurement to achieve policy objectives and ensure efficient public spending. 

In  the  context  of  the  2019  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Croatia’s  economic  policy  and  published  it  in  the  2019 
country  report.  It  has  also  assessed  the  2019  Convergence  Programme  and  the  2019 
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  Union  rules  and  guidance.  This  reflects  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  2019  Convergence 
Programme and is of the opinion9 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  2019  National  Reform  Programme  and  the  2019  Convergence 
Programme.  Its  recommendations  under  Article  6  of  Regulation  (EU)  No  1176/2011 
are  reflected  in  recommendations  (1)  to  (4)  below.  Fiscal  policies  referred  to  in 
recommendation  (1)  contribute  inter-alia  to  address  imbalances  linked  to  high 
government debt. 

(22) 

(23) 

(24) 

HEREBY RECOMMENDS that Croatia take action in 2019 and 2020 to: 

1. 

2. 

3. 

Reinforce the budgetary framework and monitoring of contingent liabilities at central 
and local level. Reduce the territorial fragmentation of the public administration and 
streamline the functional distribution of competencies. 

Deliver on the education reform and improve both access to education and training at 
all levels and their quality and labour market relevance. Consolidate social benefits 
and  improve  their  capacity  to  reduce  poverty.  Strengthen  labour  market  measures 
and institutions and their coordination with social services. In consultation with the 
social  partners,  introduce  harmonised  wage-setting  frameworks  across  the  public 
administration and public services.  

Focus  investment-related  economic  policy  on  research  and  innovation,  sustainable 
urban  and  railway  transport,  energy  efficiency,  renewables  and  environmental 
infrastructure,  taking into account  regional disparities.  Increase the administration’s 
capacity to design and implement public projects and policies. 

8 
9 

SWD(2019) 1010 final 
Under Article 9(2) of Regulation (EC) No 1466/97 

EN 

6 

  EN 

 
                                                 
4. 

Improve  corporate  governance  in  state-owned  enterprises  and  intensify  the  sale  of 
such enterprises and non-productive assets. Enhance the prevention and sanctioning 
of  corruption,  in  particular  at  the  local  level.  Reduce  the  duration  of  court 
proceedings  and  improve  electronic  communication  in  courts.  Reduce  the  most 
burdensome parafiscal charges and excessive product and services market regulation.  

Done at Brussels, 

For the Council 
The President 

EN 

7 

  EN