Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Croatia
Date: 2025-06-04
Institutions: European Commission, Reform and Investment Task Force
Subjects: Croatia, budget policy, economic policy, economic recovery, economic reform, employment policy, energy policy, labour market, social policy, stability pact

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   EUROPEAN COMMISSION  Brussels, 4.6.2025  COM(2025) 211 final  Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Croatia {SWD(2025) 211 final}  
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the economic, social, employment, structural and budgetary policies of Croatia 

THE COUNCIL OF THE EUROPEAN UNION, 

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

Having regard to Regulation (EU) 2024/1263 of the European Parliament and of the Council 
of  29  April  2024  on  the  effective  coordination  of  economic  policies  and  on  multilateral 
budgetary surveillance and repealing Council Regulation (EC) No 1466/971, and in particular 
Article 3(3) 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: 

General considerations 

(1) 

Regulation (EU) 2024/1263, which entered into force on 30 April 2024, specifies the 
objectives  of  the  economic  governance  framework,  which  aims  at  promoting  sound 
and  sustainable  public  finances  and  sustainable  and  inclusive  growth  and  resilience 
through reforms and investments, and preventing excessive government deficits. The 
Regulation  stipulates  that  the  Council  and  the  Commission  conduct  multilateral 
surveillance in the context of the European Semester in accordance with the objectives 
and requirements set out in the TFEU. The European Semester includes, in particular, 
the  formulation,  and  the  surveillance  of  the  implementation  of  country-specific 
recommendations.  The  Regulation  also  promotes  national  ownership  of  fiscal  policy 
and  emphasises  its  medium-term  focus,  combined  with  more  effective  and  coherent 
enforcement. Each Member State must submit to  the Council and the Commission  a 
national  medium-term  fiscal-structural  plan,  containing  its  fiscal,  reform  and 
investment  commitments,  over  4  or  5  years,  depending  on  the  length  of the  national 
legislative  term.  The  net  expenditure2  path  in  these  plans  has  to  comply  with  the 

OJ L, 2024/1263, 30.4.2024, ELI: http://data.europa.eu/eli/reg/2024/1263/oj. 

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2  Net  expenditure as defined in Article 2, point (2), of Regulation (EU) 2024/1263: ‘net expenditure’ means 
government expenditure net of (i) interest expenditure; (ii) discretionary revenue measures; (iii) expenditure 
on programmes of the Union fully matched by revenue from Union funds; (iv) national expenditure on co-
financing of programmes funded by the Union; (v) cyclical elements of unemployment benefit expenditure; 
and (vi) one-offs and other temporary measures. 

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(2) 

(3) 

(4) 

Regulation’s  requirements,  including  the  requirements  to  put  or  keep  general 
government debt on a plausibly downward path by the end of the adjustment period, or 
for it to remain at prudent levels below 60% of gross domestic product (GDP), and to 
bring  and/or  maintain  the  general  government  deficit  below  the  3%-of-GDP  Treaty 
reference value over the medium term. Where a Member State commits to a relevant 
set  of  reforms  and  investments  in  accordance  with  the  criteria  set  out  in  the 
Regulation, the adjustment period may be extended by up to three years.  
Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council3,  which 
established  the  Recovery  and  Resilience  Facility  (the  ‘RRF’),  entered  into  force  on 
19 February 2021.  The  RRF  provides  financial  support  to  Member  States  for 
implementing  reforms  and  investments,  delivering  a  fiscal  impulse  financed  by  the 
Union.  In  line  with  the  priorities  of  the  European  Semester  for  economic  policy 
coordination, the RRF fosters economic and social recovery while driving sustainable 
reforms and investments, in particular promoting the green and digital transitions and 
making  Member  States’  economies  more  resilient.  It  also  helps  strengthen  public 
finances  and  boost  growth  and  job  creation  in  the  medium  and  long  term,  improve 
territorial cohesion within the Union and support the continued implementation of the 
European Pillar of Social Rights. 
Regulation  (EU)  2023/435  of  the  European  Parliament  and  of  the  Council4  (the 
‘REPowerEU  Regulation’),  which  was  adopted  on  27 February 2023,  aims  to  phase 
out the Union’s dependence on Russian fossil-fuel imports. This helps achieve energy 
security  and  diversify  the  Union’s  energy  supply,  while  increasing  the  uptake  of 
renewables,  energy  storage  capacities  and  energy  efficiency.  Croatia  added  a  new 
REPowerEU chapter to its national recovery and resilience plan in order to finance key 
reforms and investments that will help achieve the REPowerEU objectives. 

On  15  May  2021,  Croatia  submitted  its  national  recovery  and  resilience  plan  to  the 
Commission, in accordance with Article 18(1) of Regulation (EU) 2021/241. Pursuant 
to Article 19 of that Regulation, the Commission assessed the relevance, effectiveness, 
efficiency  and  coherence  of  the  recovery  and  resilience  plan,  in  accordance  with  the 
assessment guidelines set  out  in Annex V. On  28  July  2021, the Council adopted its 
Implementing Decision approving the assessment of the recovery and resilience plan 
for Croatia 5, which was amended under Article 18(2) on 7 December 2023 to update 
the maximum financial contribution for non-repayable financial support, as well as to 
include  the  REPowerEU  chapter6.  The  release  of  instalments  is  conditional  on  the 
adoption  of  a  decision  by  the  Commission,  in  accordance  with  Article  24(5),  stating 
that  Croatia  has  satisfactorily  achieved  the  relevant  milestones  and  targets  set  out  in 
the  Council  Implementing  Decision.  Satisfactory  achievement  requires  that  the 

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5 

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the  Recovery  and  Resilience  Facility 

Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council  of  12 February 2021 
establishing 
(OJ  L  57,  18.2.2021,  p.  17,  ELI: 
http://data.europa.eu/eli/reg/2021/241/oj). 
Regulation  (EU)  2023/435  of  the  European  Parliament  and  of  the  Council  of  27 February 2023 
amending Regulation (EU) 2021/241 as regards REPowerEU chapters in recovery and resilience plans 
and  amending  Regulations  (EU)  No  1303/2013,  (EU)  2021/1060  and  (EU)  2021/1755,  and  Directive 
2003/87/EC (OJ L 63, 28.2.2023, p. 1, ELI: http://data.europa. eu/eli/reg/2023/435/oj). 
Council Implementing Decision of 28 July 2021   on the approval of the assessment of the recovery and 
resilience plan for Croatia (10687/2021). 
Council Implementing Decision of 7 December 2023 amending the Implementing Decision of  28 July 
2021 on the approval of the assessment of the recovery and resilience plan for Croatia (15834/2023). 

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(5) 

(6) 

(7) 

achievement  of  preceding  milestones  and  targets  for  the  same  reform  or  investment 
has not been reversed. 

On  21  January  2025  the  Council,  upon  the  recommendation  of  the  Commission, 
adopted a recommendation endorsing the national medium-term fiscal-structural plan 
of Croatia7. The plan was submitted in accordance with Article 11 and Article 36(1), 
point (a), of Regulation (EU) 2024/1263, covers the period from 2025 until 2028 and 
presents a fiscal adjustment spread over four years.  

On  26 November 2024,  the  Commission  adopted  an  opinion  on  the  2025  draft 
budgetary  plan  of  Croatia.  On  the  same  date,  on  the  basis  of  Regulation  (EU)  No 
1176/2011,  the  Commission  adopted  the  2025  Alert  Mechanism  Report,  in  which  it 
did  not  identify  Croatia as  one  of  the  Member  States  for  which  an  in-depth  review 
would  be  needed.  The  Commission  also  adopted  a  recommendation  for  a  Council 
recommendation on the economic policy of the euro area and a proposal for the 2025 
Joint  Employment  Report,  which  analyses  the  implementation  of  the  Employment 
Guidelines  and  the  principles  of  the  European  Pillar  of  Social  Rights.  The  Council 
adopted  the  Recommendation  on  the  economic  policy  of  the  euro  area8  on  13  May 
2025 and the Joint Employment Report on 10 March 2025.  

On  29 January 2025,  the  Commission  published  the  Competitiveness  Compass,  a 
strategic framework that aims to boost the EU’s global competitiveness over the next 
five  years.  It  identifies  the  three  transformative  imperatives  of  sustainable  economic 
growth: (i) innovation; (ii) decarbonisation and competitiveness; and (iii) security. To 
close  the  innovation  gap,  the  EU  aims  to  foster  industrial  innovation,  support  the 
growth of start-ups through initiatives like the EU Start-up and Scale-up Strategy, and 
promote the adoption of advanced technologies like artificial intelligence and quantum 
computing.  In  pursuit  of  a  greener  economy,  the  Commission  has  outlined  a 
comprehensive Affordable Energy Action  Plan and a Clean Industrial Deal, ensuring 
that  the  shift  to  clean  energy  remains  cost-effective,  competitiveness-friendly, 
particularly  for  energy-intensive  sectors,  and  is  a  driver  for  growth.  To  reduce 
excessive dependencies and increase security, the Union is committed to strengthening 
global  trade  partnerships,  diversifying  supply  chains  and  securing  access  to  critical 
raw materials and clean energy sources. These priorities are underpinned by horizontal 
enablers, namely regulatory simplification, deepening of the single market, financing 
competitiveness and a Savings and Investments Union, promotion of skills and quality 
jobs, and better coordination of EU policies. The Competitiveness Compass is aligned 
with  the  European  Semester,  ensuring  that  Member  States’  economic  policies  are 
consistent with the Commission’s strategic objectives, creating a unified approach to 
economic governance that fosters sustainable growth, innovation and resilience across 
the Union. 

(8) 

In  2025,  the  European  Semester  for  economic  policy  coordination  continues  to 
develop  alongside  the  implementation  of  the  RRF.  The  full  implementation  of  the 
recovery and resilience plans remains essential for delivering on the policy priorities 
under the European Semester, as the plans help effectively address all or a significant 
subset  of  challenges  identified  in  the  relevant  country-specific  recommendations 

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Council  Recommendation  of  21  January  2025  endorsing  the  medium-term  fiscal-structural  plan  of 
Croatia OJ C/2025/638, 10.2.2025. 
Council  Recommendation  of  13  May  2025  on  the  economic  policy  of  the  euro  area  (OJ  C, 
C/2025/2782, 22.5.2025, ELI: http:// data.europa.eu/eli/C/2025/2782/oj).  

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issued  in  recent  years.  These  country-specific  recommendations  remain  equally 
relevant  for  the  assessment  of  amended  recovery  and  resilience  plans  in  accordance 
with Article 21 of Regulation (EU) 2021/241.   

(9) 

The  2025  country-specific  recommendations  cover 
the  key  economic  policy 
challenges that are not sufficiently addressed by measures included in the recovery and 
resilience  plans,  taking  into  account  the  relevant  challenges  identified  in  the  2019-
2024 country-specific recommendations. 

(10)  On  4  June  2025,  the  Commission  published  the  2025  country  report  for  Croatia.  It 
assessed  Croatia’s  progress 
country-specific 
recommendations  and  took  stock  of  Croatia’s  implementation  of  the  recovery  and 
resilience plan. Based on this analysis, the country report identified the most pressing 
challenges  Croatia  is  facing.  It  also  assessed  Croatia’s  progress  in  implementing  the 
European  Pillar  of  Social  Rights  and  in  achieving  the  Union  headline  targets  on 
employment, skills and poverty reduction, as well as progress in achieving the United 
Nations Sustainable Development Goals. 

addressing 

relevant 

the 

in 

Assessment of the Annual Progress Report 

(11)  On 21 January 2025 the Council recommended the following maximum growth rates 
of net expenditure for Croatia: 6.4% in 2025, 4.9% in 2026, 4.1% in 2027, and 3.7% in 
2028,  which  correspond  to  the  maximum  cumulative  growth  rates  calculated  by 
reference  to  2023  of  26.2%  in  2025,  32.3%  in  2026,  37.8%  in  2027,  and  42.9%  in 
2028. On 22 May 2025 Croatia submitted its Annual Progress Report9, on adherence 
the 
the  recommended  maximum  growth  rates  of  net  expenditure  and 
to 
implementation  of  reforms  and  investments  responding  to  the  main  challenges 
identified  in  the  European  Semester  country-specific  recommendations.  The  Annual 
Progress  Report  also  reflects  Croatia’s  biannual  reporting  on  the  progress  made  in 
achieving its recovery and resilience plan in accordance with Article 27 of Regulation 
(EU) 2021/241. 

(12)  Russia’s  war  of  aggression  against  Ukraine  and  its  repercussions  constitute  an 
existential  challenge  for  the  European  Union.  The  Commission  recommended  to 
activate the national  escape clause of the Stability and Growth Pact  in  a coordinated 
manner to support the EU efforts to achieve a rapid and significant increase in defence 
spending and this proposal was welcomed by the European Council of 6 March 2025. 
Following  the  request  of  Croatia  on  27  May  2025,  on  [date]  the  Council,  upon  the 
recommendation  of  the  Commission,  adopted  a  recommendation  allowing  Croatia  to 
deviate  from,  and  exceed,  the  recommended  maximum  growth  rates  of  net 
expenditure10. 

(13)  Based on data validated by Eurostat11, Croatia’s general government deficit increased 
from 0.8% of GDP in 2023 to 2.4% in 2024, while the general government debt fell 
from 61.8% of GDP at the end of 2023 to 57.6% at the end of 2024. According to the 
Commission’s  calculations,  these  developments  correspond  to  a  net  expenditure 

9  The  2025  Annual  Progress  Reports  are  available  on:  https://economy-finance.ec.europa.eu/economic-and-

fiscal-governance/stability-and-growth-pact/preventive-arm/annual-progress-reports_en 

10  Council  recommendation  allowing  Croatia  to  deviate  from,  and  exceed,  the  recommended  net  expenditure 

path (Activation of the national escape clause), OJ C/2025/xxx, x.x.2025. 

11  Eurostat-Euro Indicators, 22.4.2025. 

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growth rate of 17.4% in 2024. In the 2025 Annual Progress Report, Croatia estimates 
the net expenditure growth in 2024 at 17.5%.  Based on the Commission’s estimates, 
the fiscal stance12, which includes both nationally and EU financed expenditure, was 
expansionary, by 1.8% of GDP, in 2024 

(14)  According to the Annual Progress Report, the macroeconomic scenario underpinning 
the budgetary projections by Croatia expects real GDP growth at 3.3% in 2025, while 
CPI  inflation  is  projected  at  2.9%  in  2025.  The  Commission  Spring  2025  Forecast 
projects real GDP to grow by 3.2% in 2025 and 2.9% in 2026, and HICP inflation to 
stand at 3.4% in 2025 and 2.0% in 2026.  

(15) 

In the Annual Progress Report, the general government deficit is expected to increase 
to  2.9%  of  GDP  in  2025,  while  the  general  government  debt-to-GDP  ratio  is  set  to 
decrease  to  56.9%  by  the  end  of  2025.  These  developments  correspond  to  net 
expenditure growth of 7.6% in 2025. The Commission Spring 2025 Forecast projects a 
general  government  deficit  of  2.7%  of  GDP  in  2025.  The  increase  of  the  deficit  in 
2025 mainly reflects a strong growth of capital expenditure supported by an expected 
step up in RRF implementation, carry over effect of the public sector wage reform and 
a further increase in pensions expenditure due to the change in the indexation formula. 
According  to  the  Commission’s  calculations,  these  developments  correspond  to  net 
expenditure growth of 7.9% in 2025. Based on the Commission’s estimates, the fiscal 
stance, which includes both nationally and EU financed expenditure, is projected to be 
expansionary, by 0.8% of GDP, in 2025. The general government debt-to-GDP ratio is 
set to decrease to 56.3% by the end of 2025. The decrease of the debt-to-GDP ratio in 
2025 mainly reflects the denominator effect from the expected nominal GDP growth. 

(16)  General  government  expenditure  amounting  to  1.8%  of  GDP  is  expected  to  be 
financed  by  non-repayable  support  (“grants”)  from  the  Recovery  and  Resilience 
Facility  in  2025,  compared  to  0.9%  of  GDP  in  2024,  according  to  the  Commission 
Spring 2025 Forecast. Expenditure financed by Recovery and Resilience Facility non-
repayable support enables high-quality investment and productivity-enhancing reforms 
without a direct impact on the general government balance and debt of Croatia.  

(17)  General  government  defence  expenditure  in  Croatia  amounted  to  1.0%  of  GDP  in 
2021,  1.0%  of  GDP  in  2022  and  1.3%  of  GDP  in  202313.  According  to  the 
Commission  Spring  2025  Forecast,  expenditure  on  defence  is  projected  at  1.4%  of 
GDP  in  2024  and  1.5%  of  GDP  in  2025.  This  corresponds  to  an  increase  of  0.5 
percentage  points  of  GDP  compared  to  2021.  The  period  when  the  national  escape 
clause is activated (2025-2028) allows Croatia to reprioritise government expenditure 
or increase government revenue so that lastingly higher defence expenditure would not 
endanger fiscal sustainability in the medium term. 

(18)  According  to  the  Commission  Spring  2025  Forecast,  net  expenditure  in  Croatia  is 
projected to grow by 7.9% in 2025 and 26.6% cumulatively in 2024 and 2025. Based 
on  the  Commission  Spring  2025  Forecast,  the  net  expenditure  growth  of  Croatia  in 

12  The  fiscal stance is defined as a  measure of the  annual change in the underlying budgetary position of the 
general government. It aims to assess the  economic  impulse stemming from fiscal policies, both those  that 
are  nationally financed and those  that are  financed by the EU budget. The fiscal stance is measured as the 
difference between (i) the medium-term potential growth and (ii)  the change in primary expenditure net of 
discretionary revenue measures and including expenditure financed by non-repayable support (grants) from 
the Recovery and Resilience Facility and other Union funds. 

13  Eurostat, government expenditure by classification of functions of government (COFOG).  

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2025 is projected to be above the recommended maximum growth rate, corresponding 
to  a  deviation14  of  0.6%  of  GDP  in  annual  terms.  When  considering  2024  and  2025 
together, the cumulative growth rate of net  expenditure is also projected to be above 
the  recommended  maximum  growth  rate,  corresponding  to  a  deviation  of  0.2%  of 
GDP. However, the projected deviation is within the flexibility of the national escape 
clause based on current projections for defence spending.  

(19)  The  Annual  Progress  Report  does  not  include  budgetary  projections  beyond  2025. 
Based on policy measures known at the cut-off date of the forecast, the Commission 
Spring 2025 Forecast projects a general government deficit of 2.6% of GDP in 2026. 
These developments correspond to net expenditure growth of 4.9% in 2026. Based on 
the Commission’s estimates, the fiscal stance, which includes both nationally and EU 
financed  expenditure,  is  projected  to  be  broadly  neutral  in  2026.  The  general 
government  debt-to-GDP  ratio  is  projected  by  the  Commission  to  increase  to  56.4% 
by  the  end  of  2026.  The  increase  of  the  debt-to-GDP  ratio  in  2026  mainly  reflects 
debt-increasing stock-flow adjustments. 

(20) 

Key policy challenges 

In accordance with Article 19(3), point (b), of Regulation (EU) 2021/241 and criterion 
2.2  of  Annex  V  to  that  Regulation,  the  recovery  and  resilience  plan  includes  an 
extensive set  of mutually reinforcing  reforms and investments  to  be implemented by 
2026.  These  are  expected  to  help  effectively  address  all  or  a  significant  subset  of 
challenges  identified  in  the  relevant  country-specific  recommendations.  Within  this 
tight timeframe, finalising the effective implementation of the recovery and resilience 
plan  is  essential  to  boost  Croatia’s  long-term  competitiveness  through  the  green  and 
digital  transitions,  while  ensuring  social  fairness.  To  deliver  on  the  commitments  of 
the  recovery  and  resilience  plan  by  August  2026,  it  is  essential  for  Croatia  to 
accelerate  the  implementation  of  reforms  and  investments  by  addressing  relevant 
challenges 
terms  of  administrative  capacity  constraints,  complex  public 
procurement procedures, protracted permitting processes and inefficient coordination. 
The  systematic  involvement  of  local  and  regional  authorities,  social  partners,  civil 
society  and  other  relevant  stakeholders  remains  essential  in  order  to  ensure  broad 
ownership for the successful implementation of the recovery and resilience plan. 

in 

(21)  The implementation  of  cohesion  policy  programmes, which encompass support from 
the  European  Regional  Development  Fund  (ERDF),  the  Just  Transition  Fund  (JTF), 
the European Social Fund Plus (ESF+) and the Cohesion Fund (CF), has accelerated in 
Croatia. It is important to continue efforts to ensure the swift implementation of these 
programmes, while maximising their impact on the ground. Croatia is  already taking 
action under its cohesion policy programmes to boost competitiveness and growth. At 
the  same  time,  Croatia  continues  to  face  challenges,  including  those  relating  to 
enhancing  competitiveness  and  innovation  performance,  affordable  housing,  water 
resilience, active labour market policies for disadvantaged groups, up- and reskilling, 
long-term care and deinstitutionalisation. In accordance with Article 18 of Regulation 
(EU) 2021/1060, Croatia is required – as part of the mid-term review of the cohesion 
policy funds – to review each programme taking into account, among other things, the 
challenges identified in the 2024 country-specific recommendations. The Commission 

14  From  2026  these  figures  will  appear  in  the  control  account  that  is  established  in  Article  22  of  the 

Regulation (EU) 2024/1263. 

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proposals adopted on 1 April 202515 extend the deadline for submitting an assessment 
–  for  each  programme  –  of  the  outcome  of  the  mid-term  review  beyond  31  March 
2025.  It  also  provides  flexibilities  to  help  speed  up  programme  implementation  and 
incentives  for  Member  States  to  allocate  cohesion  policy  resources  to  five  strategic 
priority areas of the Union, namely competitiveness in strategic technologies, defence, 
housing, water resilience and energy transition. 

(22)  The  Strategic  Technologies  for  Europe  Platform  (STEP)  provides  the  opportunity  to 
invest in a key EU strategic priority by strengthening the EU’s competitiveness. STEP 
is channelled through 11 existing EU funds.  Member States can also contribute to the 
InvestEU programme supporting investments in priority areas. Croatia could use these 
initiatives  to  support  the  development  or  manufacturing  of  critical  technologies, 
including clean and resource-efficient technologies. 

(23)  Beyond the economic and social challenges addressed by the recovery and resilience 
plan and other EU funds, Croatia faces several additional challenges related to labour 
and  skills  shortages,  decarbonisation  and  energy  efficiency,  innovation,  access  to 
diversified sources of financing, the business environment and social inclusion. 

(24)  Croatia’s  research  and  innovation  (R&I)  performance  continues  to  improve,  but 
progress  is  hindered  by  persistent  structural  challenges,  in  particular  the  highly 
fragmented  public  research,  development  and  innovation  sector,  which  consists  of 
numerous public research institutes and faculties within universities. The large number 
of these entities dilutes resources and hinders collaboration, resulting in lower research 
outputs  and  reduced  scope  for  business-academia  collaboration  and  technology 
transfer.  Although  Croatia  has  been  implementing  reforms  under  the  recovery  and 
resilience  plan  to  reduce  the  number  of  public  research  institutions,  increasing  the 
scope, ambition and pace of implementation of these efforts would be beneficial. The 
level of public R&D expenditure as a share of GDP remains under EU average and has 
been  stagnating  in  recent  years.  The  share  of  business  expenditure  for  R&D  and  the 
uptake of innovation schemes by businesses also remains well below the EU average, 
contributing to a suboptimal performance. 

(25)  Croatia’s financing landscape is still predominantly supported by banks, with market-
based finance playing a comparatively smaller role. Firms continue to rely heavily on 
internal funds and bank loans, while access to household savings via capital markets 
remains  limited  due  to  still  low  levels  of  direct  retail  participation,  despite  some 
progress. Domestic institutional investors, such as pension funds and insurers, assume 
a  limited  role  in  financing  innovative  businesses.  The  relatively  small  size  and 
liquidity  of  the  domestic  capital  markets  limit  exit  options  for  venture  capital  and 
private equity investors, compounding the financing gap for innovative firms. Reforms 
under  the  recovery  and  resilience  plan  and  the  capital  markets  development  strategy 
seek  to  promote  regional  integration,  digitalisation,  and  diversification  of  financing 
options.  Further  progress  is  needed  in  boosting  venture  capital,  private  equity  and 
financial literacy, and improving the investment environment. 

(26)  As  set  in  the  Competitiveness  Compass,  all  the  EU,  national,  and  local  institutions 
must  make  a  major  effort  to  produce  simpler  rules  and  to  accelerate  the  speed  of 

15 

Proposal for a regulation of the European Parliament and of the Council amending Regulations (EU) 
2021/1058 and (EU) 2021/1056 as regards specific measures to address strategic challenges in the 
context of the mid-term review – COM(2025) 123 final. 

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administrative  procedures.  The  Commission  has  set  ambitious  goals  for  reducing 
administrative  burden:  by  at  least  25%  for  all  companies  and  by  at  least  35%  for 
SMEs. It has also created new tools to achieve these goals, including systematic stress 
test of the stock of EU legislation and enhanced stakeholders’ dialogue. To match this 
ambition,  Croatia  also  needs  to  take  action.  The  complexity  of  administrative 
procedures is reported to be a constraint by 66% of companies when doing business in 
Croatia16. Structural challenges continue to weigh on Croatia’s business environment, 
with 
labour  and  skills  shortages,  regulatory  complexity,  and  administrative 
inefficiencies  acting  as  major  constraints  on  investment  and  growth.  Regulatory 
barriers in sectors such as retail and in certain professions restrict competition, while 
delays in  transposing EU directives increase uncertainty  and compliance burdens for 
businesses.  Measures  in  the  recovery  and  resilience  plan  to  digitalise  public 
administration,  promote  competition,  and  simplify  procedures  are  significant  steps 
forward.  However, 
the  scope,  ambition  and  pace  of  regulatory 
simplification and administrative modernisation would be beneficial. 

increasing 

is  also  an 

(27)  The  territorial  fragmentation  of  Croatia’s  public  administration  affects  its  efficiency 
and  exacerbates  regional  disparities.  There 
imbalance  between 
responsibilities and resources at local level. This contributes to  the uneven quality of 
public  services  provided  across  the  country  and  raises  administrative  costs  as  many 
small  local  governments  lack  adequate  financial  and  administrative  resources  to 
provide  services  within  their  remit.  Although  measures  under  the  recovery  and 
resilience plan help  address  the high  fragmentation by providing  financial  incentives 
to stimulate mergers of local government units, the uptake of these incentives remains 
mainly focused on mergers of functions, while the uptake in terms of actual mergers of 
local  government  units  remains  limited.  Increasing  the  scope  of  incentives,  coupled 
with  potential  legislative  steps  to  ensure  the  uptake  of  actual  mergers,  would  be 
beneficial.   

(28) 

In the  first  half of 2024, Croatia had the third highest  electricity price in the EU for 
business/industrial consumers. This continues to hold back the cost competitiveness of 
Croatian companies. Despite the record increase of 397 MW of solar capacity in 2024, 
the  share  of  solar  energy  in  electricity  generation  remains  low,  at  less  than  6%. 
Against this background, faster roll-out of new renewable energy capacity – especially 
solar  –  and  non-fossil  flexibility  solutions  could  help  reduce  price  levels.  The 
increased  uptake  of  large-scale  renewables,  including  solar,  is  hampered  by  an 
uncertain  regulatory  framework  as  the  national  energy  regulator  (HERA)  is  yet  to 
adopt  updated  grid  connection  fees,  which  creates  uncertainty  for  potential  investors 
and has  effectively  prevented projects  from  securing financing. Increased investment 
in  the  electricity  grid  beyond  the  investments  included  in  the  Croatian  recovery  and 
resilience plan will be crucial to promote the uptake of renewable energy in Croatia. In 
the short term, this will require measures to incentivise hybrid storage and renewable 
energy  projects.  In  2023,  only  24%  of  household  consumers  had  smart  meters 
installed,  which  is  significantly  less  than  the  EU  target  of  80%.  To  be  able  to  fully 
capitalise on the increased uptake of renewable energy, significant funding for the roll-
out of smart meters beyond the measures in the recovery and resilience plan as well as 
dynamic contracts, will be needed to empower consumers and foster demand response. 
Revising  and  simplifying  administrative  procedures  for  installing  renewable  energy 
projects,  including  in  multi-apartment  buildings,  would  help  reduce  the  reliance  on 

16 

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fossil fuels. Administrative procedures for setting up energy communities should also 
be reviewed as the number of registered energy communities remains low. 

(29)  Energy efficiency measures are necessary to maintain the positive momentum created 
by the recovery and resilience plan and accelerate progress in: (i) building renovation; 
(ii)  the  supply  of  energy-efficient  housing,  in  particular  social  housing;  and  (iii)  the 
replacement of gas and oil boilers with heat pumps and other more efficient and green 
solutions.  Relevant  price signals  for electrification are also  hindered by a tax burden 
disproportionally  skewed  towards  electricity  for  both  households  and  industrial 
consumers.  Considering  its  exposure  to  climate-related  risks  and  their  potential 
economic impact, Croatia would also benefit from accelerating climate adaptation and 
water resilience through swift implementation and close monitoring of adaptation and 
sustainable  water  management  policies,  based  on  nature-based  and  climate-proof 
investments in strategic infrastructure. 

(30)  Road transport is the most used mode of transport in Croatia for both passengers and 
freight.  Reforms  and  investments  under  the  Croatian  recovery  and  resilience  plan  – 
such as modernising railway infrastructure, promoting green transport, and deploying 
intelligent transport systems – already support these objectives; nevertheless, sustained 
efforts  remain  necessary.  Modernising  the  transport  infrastructure  and  the  railway 
rolling stock, increasing the use of public transport and further greening it, putting in 
place  intelligent  transport  systems,  and  promoting  the  uptake  of  zero-emission 
vehicles,  for  example  by  revising  taxation  incentives,  can  greatly  contribute  to  the 
decarbonisation  of  the  transport  sector  and  reduce  the  reliance  on  fossil  fuels  and 
energy demand. In 2023, Croatia had the lowest share of renewable fuels in transport 
in the EU (0.9% vs EU average of 10.8%). Revising rules on blending and mixing of 
biofuels could  encourage  the use of alternative fuels.  Croatia  records  sizeable  fossil-
fuel  subsidies  without  a  planned  phase-out  before  2030.  In  particular,  fossil-fuel 
subsidies  that  address  neither  energy  poverty  in  a  targeted  way  nor  genuine  energy 
security  concerns,  hinder  electrification  and  are  not  crucial  for 
industrial 
competitiveness  could  be  considered  a  phase-out  priority. In  Croatia,  fossil-fuel 
subsidies such as the ongoing emergency price cap on petroleum products and gas, as 
well  as  partial  refunds  of  excise  duties  for  diesel  in  commercial  transport  are 
economically  inefficient,  perpetuate  reliance  on  fossil  fuels  and  disincentivise 
electrification and the shift to zero-emission vehicles and other sustainable solutions. 

(31)  Positive  trends  in  Croatia’s  labour  market  continue,  though  persistent  structural  and 
regional challenges weigh on competitiveness and growth potential. Labour and skills 
shortages are reported across many sectors, while the employment rate remains below 
the  EU  average,  particularly  for  vulnerable  groups  such  as  older  people,  low-skilled 
workers,  and  persons  with  disabilities.  The  disability  employment  gap  has  widened 
considerably,  increasing  the  risk  of  poverty  and  social  exclusion  for  disadvantaged 
groups.  Limited  participation  in  adult  learning,  especially  outside  the  capital  region, 
constrains  the  development  of  labour-market-relevant  skills  and  contributes  to  skills 
mismatches.  Croatia  is  implementing  a  series  of  measures  to  address  labour  market 
needs, some of which supported by the recovery and resilience plan and the European 
Social  Fund  Plus.  These  measures  include  active  labour  market  policies,  upskilling 
and  reskilling  programmes,  and  reforms  to  better  integrate  foreign  workers  into  the 
labour  market.  However,  there  is  a  need  to  intensify  these  efforts  and  improve  their 
effectiveness  by  more  closely  targeting  vulnerable  groups,  addressing  training  gaps, 
incentivising adult learning participation and improving labour-market-relevant skills, 
including through high-quality curricula at various levels of education. Advancing the 

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reform  of  the  education  system  would  help  achieve  higher  participation  in  early 
childhood education and care and more instruction time in schools, strengthening basic 
skills  and  providing  a  better  basis  for  further  education  and  skills  acquisition. 
Continued efforts are needed to increase the share of qualified teachers of mathematics 
and  physics  to  improve  those  skills  and  participation  in  science,  technology, 
engineering and mathematics (STEM) studies. 

(32)  Despite  some  progress  and  significant  policy  efforts,  Croatia  continues  to  face 
significant  social  challenges.  Poverty  and  income  inequality  rates  are  still  high, 
particularly  among  older  people,  persons  with  disabilities  and  those  living  in  rural 
areas.  In 2023, the risk of poverty or social exclusion remained high  in Croatia. The 
impact  of  social  transfers  (excluding  pensions)  on  poverty  reduction  is  among  the 
weakest in the EU, and the adequacy and coverage of minimum income schemes and 
unemployment  benefits  are  still  limited.  Pensions  are  comparatively  low,  and,  at  the 
same time, the  system’s  sustainability  is  challenged by demographic pressures and a 
history  of  early  retirement.  The  availability  of  long-term  care  is  limited,  with  yet 
insufficient access to home care and community-based care, placing disproportionate 
care burdens on informal carers, especially women, which means they are less likely to 
work or look for a job. Ensuring effective and coordinated implementation of the 2030 
National  Housing  Policy  Plan  would  contribute  to  making  housing  more  affordable. 
Addressing  these  challenges  would  also  contribute  to  supporting  upward  social 
convergence, in line with the Commission  services’ second-stage country analysis of 
the Social Convergence Framework17. 

(33)  The uneven distribution of doctors is a major barrier to accessing healthcare services 
in  remote/rural  regions.  Addressing  shortages  of  workers  requires  initiatives  to 
increase  the  number  of  healthcare  workers,  and  improve  training,  recruitment  and 
retention,  paying  particular  attention  to  geographical  disparities.  The  share  of  the 
population  using online health  services  is one of the lowest  in  the EU.  Although the 
recovery and resilience plan supports telemedicine services in remote and island areas, 
a concerted effort is needed to promote equal access to healthcare services, especially 
to primary and outpatient/ambulatory care. 

(34) 

In view of the close interlinkages between the economies of euro-area Member States 
and  their  collective  contribution  to  the  functioning  of  the  economic  and  monetary 
union,  in  2025,  the  Council  recommended  that  the  euro-area  Member  States  take 
action,  including  through  their  recovery  and  resilience  plans,  to  implement  the  2025 
the  euro  area.  For  Croatia, 
Recommendation  on 
the  economic  policy  of 
recommendations  (2),  (3),  (4)  and  (5)  help 
the  first  euro-area 
implement 
recommendation  on  competitiveness,  while  recommendations  (4)  and  (5)  help 
implement  the second euro-area recommendation on resilience,  and  recommendation 
(1)  helps  implement  the  third  euro-area  recommendation  on  macroeconomic  and 
financial stability set out in the 2025 Recommendation. 

HEREBY RECOMMENDS that Croatia take action in 2025 and 2026 to:  

1. 

Reinforce overall defence spending and readiness in line with the European Council 
conclusions  of  6  March  2025.  Adhere  to  the  maximum  growth  rates  of  net 
expenditure recommended by the Council on 21 January 2025, while making use of 
the allowance under the national escape clause for higher defence expenditure.  

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a424524e-40a5-4036-9f13-85160612b902_en. 

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2. 

3. 

4. 

5. 

In  view  of  the  applicable  deadlines  for  the  timely  completion  of  reforms  and 
investments  under  Regulation  (EU)  2021/241,  accelerate  the  implementation  of  the 
recovery  and  resilience  plan,  including  the  REPowerEU  chapter.  Accelerate  the 
implementation  of  cohesion  policy  programmes  (ERDF,  JTF,  ESF+,  CF),  building, 
where  appropriate,  on  the  opportunities  offered  by  the  mid-term  review.  Make 
optimal use of EU instruments, including the scope provided by the InvestEU and the 
Strategic Technologies for Europe Platform, to improve competitiveness. 

Address  the  fragmentation  of  public  research  institutes  and  universities  by  setting 
goals  in  performance  agreements  that  promote  consolidation,  collaboration,  and, 
where relevant, mergers, backed by financial incentives to boost scientific output and 
public  return  on  R&D  investment.  Foster  investments  in  research  and  innovation. 
Boost  access  to  diverse  sources  of  financing  for  businesses  and  promote  capital 
markets  by  further  facilitating  the  participation  of  retail  investors,  including  in  the 
bond market,  addressing barriers to  listing, and strengthening corporate governance 
to  improve  the  attractiveness  of  the  stock  market.  Further  simplify  regulation, 
improve regulatory tools and reduce  administrative burden through digitalisation  to 
facilitate  business  creation  and  expansion.  Reinforce  the  capacity  and  efficiency  of 
the  public  administration  at 
level  by  merging  functions  and/or 
municipalities. 

local 

the 

Address  high  electricity  prices  for  businesses  by  accelerating  deployment  and  grid 
connection  of  renewable  energy  projects.  Further  upgrade  electricity  transmission 
and distribution grids, invest in electricity storage and advance the roll-out of smart 
meters.  Streamline  permitting,  including  for  energy  communities,  and  simplify  the 
procedures  for  installing  solar  photovoltaic  facilities  in  multi-apartment  buildings. 
Accelerate  the  implementation  of  energy  efficiency  measures,  especially  in 
residential buildings, reduce the dependence on fossil fuels in the heating sector, and 
accelerate the installation of heat pumps. Reduce reliance on fossil fuels and energy 
demand in the transport sector by promoting sustainable urban transport, rail and the 
electrification of road transport, including by reviewing targeted taxation incentives. 
Take  concrete  steps  to  phase  out  fossil  fuel  subsidies  in  particular  in  the  transport 
sector. Address the recent decline in the share of renewables in transport by revising 
the rules on biofuels. 

Reduce  labour  and  skills  shortages  by  removing  obstacles  to  labour  force 
participation, ensuring  stronger  educational  foundations  at  every level,  in particular 
for  basic  and  science,  technology,  engineering  and  mathematics  (STEM)  skills, 
strengthening upskilling and reskilling, better targeting active labour market policies 
to  vulnerable  groups,  and  strengthening  efforts  to  attract,  develop  and  retain  talent. 
Strengthen labour market policies and their coordination with social services. Reduce 
poverty  and  income  inequality  by  increasing  the  adequacy  of  social  benefits, 
including pensions, while maintaining fiscal sustainability. Improve access to formal 
home-  and  community-based  long-term  care.  Promote  balanced  geographical 
distribution  of  health  workers  and  facilities,  investments  in  e-health,  and  closer 
cooperation between all levels of public administration on health policy.  

Done at Brussels, 

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For the Council 
The President 

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