REPORT FROM THE COMMISSION Croatia Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union
Date: 2020-05-20
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: Croatia, budget deficit, budget policy, budgetary control, epidemic, gross domestic product, infectious disease, macroeconomics, public debt, stability pact

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 20.5.2020  COM(2020) 547 final  REPORT FROM THE COMMISSION Croatia  Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of the European Union  
 
 
REPORT FROM THE COMMISSION 

Croatia 

Report prepared in accordance with Article 126(3) of the Treaty on the Functioning of 
the European Union 

1. 

INTRODUCTION  

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.Data  notified  by  the  Croatian  authorities  on  31 
March  2020  and  subsequently  validated  by  Eurostat1  show  that  the  general  government 
balance  in  Croatia  reached  +0.4%  of  GDP  in  2019,  while  general  government  gross  debt 
stood  at  73.2%  of  GDP.  According  to  the  2020  Convergence  Programme,  Croatia  plans  a 
deficit of 6.8% of GDP in 2020, while debt is planned at 86.7% of GDP. 

The planned deficit for 2020 provides prima facie evidence of the existence of an excessive 
deficit as defined by the Stability and Growth Pact. 

Against this background, the Commission has therefore prepared this report, which analyses 
Croatia’s compliance with the deficit and debt criteria of the Treaty. It takes into account all 
relevant  factors  and  gives  due  consideration  to  the  major  economic  shock  linked  to  the 
COVID-19 pandemic.  

1 

https://ec.europa.eu/eurostat/documents/2995521/10294648/2-22042020-AP-EN.pdf/6c8f0ef4-6221-1094-

fef7-a07764b0369f 

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Table 1. General government deficit and debt (% of GDP) 

2016 

2017 

2018 

2019 

-1.0 

0.8 

0.2 

0.4 

2020 
COM 

-7.1 

2021 
COM 

-2.2 

80.8% 

77.8% 

74.7% 

73.2% 

88.6% 

83.4% 

-4.1 

-3.2 

-4.1 

-2.7 

3.6 

0.6 

+1.5 

+1.3 

-1.1 

-0.3 

-3.2 

+2.5 

Deficit 
criterion 

Debt 
criterion 

General 
government 
balance 
General 
government 
gross debt 
Gap to the 
debt 
reduction 
benchmark 
Change in 
structural 
balance 

Source: Eurostat, Commission 2020 spring forecast 

2. 

DEFICIT CRITERION 

Based on the 2020 Convergence Programme, Croatia’s general government deficit in 2020 is 
planned to reach 6.8% of GDP, above and not close to the Treaty reference value of 3% of 
GDP. 

The planned excess over the Treaty reference value in 2020 is exceptional, as it results from a 
severe economic downturn. Taking into account the impact of the COVID-19 pandemic, the 
Commission 2020 spring forecast projects a contraction of real GDP in 2020 by 9.1%. 

The  planned  excess  over  the  Treaty  reference  value  would  be  temporary  based  on  the 
Commission 2020 spring forecast, which projects the general government deficit to fall under 
3%  of  GDP  in  2021.  However,  those  projections  are  surrounded  by  an  exceptionally  high 
degree of uncertainty. 

In  sum,  the  planned  deficit  for  2020  is  above  and  not  close  to  the  3%-of-GDP  Treaty 
reference value. The planned excess is considered to be exceptional as defined by the Treaty 
and  the  Stability  and  Growth  Pact,  while  the  nature  of  the  excess  is  currently  considered 
temporary. Hence, the analysis suggests that prima facie the deficit criterion for the purpose 
of the Treaty and Regulation (EC) No 1467/97 is not fulfilled. 

3. 

DEBT CRITERION  

The  government  debt-to-GDP  ratio  decreased  from  74.7%  in  2018  to  73.2%  in  2019.  The 
reduction of debt was driven by solid GDP growth and a headline surplus, which was partly 
offset by a sizable gross debt-increasing stock-flow adjustment as the government issued debt 
in excess of its financing needs and used the surplus to build up deposits.  

The notified data show that Croatia complied with the debt reduction benchmark in 2019, as 
the gap to the benchmark is 2.7% of GDP (i.e. overachieving the benchmark). 

The analysis thus suggests that the debt criterion is fulfilled based on the 2019 outturn data. 

2 

 
 
 
 
 
 
4. 

RELEVANT FACTORS  

Article 126(3) of the Treaty provides that, if a Member State does not fulfil the requirements 
under one or both of those criteria, the Commission has to prepare a report. That report must 
also  “take  into  account  whether  the  government  deficit  exceeds  government  investment 
expenditure  and  take  into  account  all  other  relevant  factors,  including  the  medium-term 
economic and budgetary position of the Member State”.  

Those factors are further clarified in Article 2(3) of Regulation (EC) No 1467/97, which also 
provides  that  “any  other  factors  which,  in  the  opinion  of  the  Member  State  concerned,  are 
relevant in order to comprehensively assess compliance with the deficit and debt criteria and 
which the Member State has put forward to the Council and to the Commission” need to be 
given due consideration.  

As specified in Article 2(4) of Regulation (EC) No 1467/97, as regards compliance with the 
deficit criterion in 2020, since the government debt-to-GDP ratio exceeds the 60% reference 
value and the double condition is not met - i.e. that the deficit remains close to the reference 
value and that its excess over the reference value is temporary - those relevant factors cannot 
be  taken  into  account  in  the  steps  leading  to  the  decision  on  the  existence  of  an  excessive 
deficit on the basis of the deficit criterion for Croatia. In the current situation, a key additional 
factor  to  take  into  consideration  regarding  2020  is  the  economic  impact  of  the  COVID-19 
pandemic,  which  has  a  very  substantial  impact  on  the  budgetary  situation  and  results  in  a 
highly uncertain outlook. The pandemic has also led to the activation of the general  escape 
clause. 

4.1. 

 COVID-19 pandemic  

The  COVID-19  pandemic  has  led  to  a  major  economic  shock  that  is  having  a  significant 
negative  impact  throughout  the  European  Union.  The  consequences  for  GDP  growth  will 
depend  on  the  duration  of  both  the  pandemic  and  of  the  measures  being  taken  by  national 
authorities and at European and global level to slow its spread, protect production capacities 
and  support  aggregate  demand.  Member  States  have  already  adopted  or  are  adopting 
budgetary  measures  to  increase  the  capacity  of  health  systems  and  provide  relief  to  those 
individuals  and  sectors  that  are  particularly  affected.  Significant  liquidity  support  measures 
and  other  guarantees  have  also  been  adopted.  Subject  to  more  detailed  information,  the 
competent statistical authorities are to examine whether those measures entail an immediate 
impact on the general government balance or not. Together with the fall in economic activity, 
those measures will contribute to substantially higher government deficit and debt positions. 

4.2  Medium-term economic position 

In 2019, real  output finally surpassed its  2008 level  and the unemployment  rate reached an 
all-time  low.  The  macroeconomic  imbalances  (high  levels  of  debt  and  external  liabilities) 
improved below their 2008 levels. Although still relatively high, government debt decreased 
markedly,  helped  by  three  consecutive  years  of  government  surpluses.  Furthermore,  the 
average  maturity  and  cost  of  servicing  public  debt 
improved  substantially.  Cost 
competitiveness  gains  and  Croatia’s  accession  to  the  Union  supported  the  strong  export 
growth until 2019. 

3 

 
 
 
The economic fallout of the COVID-19 pandemic is expected to be particularly pronounced 
in  Croatia,  due  to  the  large  share  of  tourism  in  its  gross  value  added  as  well  as  substantial 
exposure  through  main  trading  partners.  Domestic  demand  is  expected  to  contract  sharply 
due to relatively strong suppression measures that were put in place in  mid-March, phasing 
out of which began in late April. At the same time, exports should suffer due to particulartly 
large  strong  suppression  measures  put  in  place  in  Croatia’s  main  trading  partners  (Italy, 
Slovenia and Austria). That outlook is marked by an exceptional degree of uncertainty on the 
duration of the pandemic and its economic impact as it depends largely on the effectiveness 
of government measures and how quickly global demand rebounds. 

The  projected  sharp  drop  in  GDP  is  a  mitigating  factor  in  the  assessment  of  Croatia’s 
compliance with the deficit criterion in 2020.  

4.3 

 Medium-term budgetary position 

Based on outturn data and the Commission 2020 spring forecast, Croatia was compliant with 
its medium term budgetary objective in 2019.  

The  2020  Convergence  Programme  provides  information  on  the  medium-term  strategy  to 
support  the  economy,  which  consists  of  using  the  fiscal  space  created  in  recent  years  to 
minimize the economic fallout of the COVID-19 pandemic by providing support to otherwise 
viable  businesses  and  employment.  In  that  respect,  the  three  key  measures  taken  were  the 
wage  subsidy  for  businesses  which  retain  employees,  tax  deferrals  and  tax  cancellation  for 
hardest-hit businesses. The total impact of those measures is projected at 3.9% of GDP, out of 
which 2.7% of GDP is deficit-increasing, and the rest are liquidity measures (tax deferrals). 
Overall, the Convergence Programme projects a deficit of 6.8% of GDP in 2020, followed by 
a recovery to 2.4% of GDP in 2021. 

4.4.  Medium-term government debt position 

According to the Commission 2020 spring forecast, general government debt is expected to 
rise from 73.2% of GDP in 2019 to 88.6% by 2020. The debt sustainability analysis has been 
updated  on  the  basis  of  that  forecast.  That  analysis  confirms  that,  notwithstanding  risks 
(including  those  linked  to  the  high  share  of  foreign  currency-denominated  debt),  the  debt 
position remains sustainable over the medium term, which also reflects the debt reduction in 
recent  years.  In  particular,  while  the  government  debt  position  worsens  as  a  result  of  the 
COVID-19 crisis, the debt ratio in the baseline is expected to be on a sustainable (declining) 
trajectory over the medium term. 2 

2 The baseline is based on the Commission spring 2020 forecast. Beyond 2021, a gradual adjustment of fiscal 
policy is assumed, consistent with the EU economic and fiscal coordination and surveillance frameworks. Real 
GDP growth is projected according to the so-called EPC/OGWG T+10 methodology. In particular, (real) actual 
GDP  growth  is  driven  by  its  potential  growth  and  affected  by  any  additional  fiscal  adjustment  considered 
(through the fiscal multiplier). Inflation is assumed to converge gradually to 2%. Interest rates assumptions are 
set in line with financial market expectations. Under the adverse scenario, higher interest rates (by 500 bps.) and 
lower GDP growth (by -0.5 pp.), with respect to the baseline, are assumed (throughout the projection horizon) 

4 

 
 
                                                           
Graph 1. General government debt (% of GDP)  

4.5 

Other factors put forward by the Member State 

On  11  May  2020,  the  Croatian  authorities  transmitted  a  letter  with  relevant  factors  in 
accordance with Article 2(3) of Regulation (EC) No 1467/97. The analysis presented in the 
previous sections already broadly covers the key factors put forward by the authorities.  

 5. 

CONCLUSIONS 

According to  the Convergence Programme, Croatia’s general  government  deficit in  2020 is 
planned to reach 6.8% of GDP, above and not close to the 3% of GDP Treaty reference value. 
The  planned  excess  over  the  reference  value  is  considered  to  be  exceptional  and  currently 
considered to be temporary. 

The general government gross debt stood at 73.2% of GDP at the end of 2019, above the 60% 
of GDP Treaty reference value. Croatia complied with the debt reduction benchmark in 2019. 

In line with the Treaty and the Stability and Growth Pact, this report also examined relevant 
factors. As specified in Article 2(4) of Regulation (EC) No 1467/97, as regards compliance 
with the deficit criterion in 2020, however, since the government debt-to-GDP ratio exceeds 
the  60%  reference  value  and  the  double  condition  is  not  met  –  i.e.  that  the  deficit  remains 
close to the reference value and that its excess over the reference value is temporary – those 
relevant  factors  cannot  be  taken  into  account  in  the  steps  leading  to  the  decision  on  the 
existence of an excessive deficit on the basis of the deficit criterion for Croatia.  

Overall,  the  analysis  suggests  that  the  deficit  criterion  as  defined  in  the  Treaty  and  in 
Regulation (EC) No 1467/1997 is not fulfilled. 

5