Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Croatia
Date: 2026-06-03
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

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 3.6.2026  COM(2026) 211 final  Recommendation for a COUNCIL RECOMMENDATION on the economic, social, employment, structural and budgetary policies of Croatia {SWD(2026) 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 
Articles 121(2) and 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  1466/97  (1),  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: 

(1) 

Regulation  (EU)  2024/1263  specifies  the  objectives  of  the  economic  governance 
framework,  which  aims  at  promoting  sound  and  sustainable  public  finances, 
sustainable  and  inclusive  growth  and  resilience  through  reforms  and  investments,  as 
well  as  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 
Treaty  on  the  Functioning  of  the  European  Union (TFEU).  The  European  Semester 
includes, in  particular, the formulation and the surveillance of the implementation  of 
country-specific recommendations. 

(2) 

On  16 July 2025,  the  Commission  adopted  its  proposal  for  a  Regulation  establishing 
the European Fund for economic, social and territorial cohesion, agriculture and rural, 
fisheries and maritime, prosperity and security for the period 2028-2034 and amending 
Regulation (EU) 2023/955 and Regulation (EU, Euratom) 2024/2509 (2). The proposal 

1 
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 1466/97 (OJ L, 2024/1263, 30.4.2024, ELI: http://data.europa.eu/eli/reg/2024/1263/oj). 
2 
Proposal for a Regulation of the European Parliament and of the Council establishing the European Fund for 
economic, social and territorial cohesion, agriculture and rural, fisheries and maritime, prosperity and security for the 
period 2028-2034 and amending Regulation (EU) 2023/955 and Regulation (EU, Euratom) 2024/2509 - COM(2025) 
565 final. The proposed Regulation is currently the subject of negotiations with the co-legislators. 
3 
OJ C, C/2026/2434, 28.4.2026, ELI: http://data.europa.eu/eli/C/2026/2434/oj 

EN 

1 

  EN 

 
(3) 

(4) 

(5) 

(6) 

aims to increase the effectiveness of Union funding by reducing the fragmentation of 
the  financial  architecture  and  to  support  Member  States  in  the  coordination  of  their 
economic policy in line with Article 175.  

On  25 November 2025,  the  Commission  adopted  an  opinion  on  the  2026  draft 
budgetary  plan  of  Croatia.  On  the  same  date,  on  the  basis  of  Regulation  (EU)  No 
1176/2011,  the  Commission  adopted  the  2026  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,  a  recommendation  for  a 
Council recommendation on human capital in the European Union, and a proposal for 
the  2026  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 area (3) 
on 21 April 2026 and the Joint Employment Report, as well as the recommendation on 
human capital on 9 March 2026.  

On  29 January 2025,  the  Commission  published  the  Competitiveness  Compass,  a 
strategic  framework  that  aims  to  boost  the  Union’s  global  competitiveness  over  the 
next five years. The European Semester is aligned with the Competitiveness Compass, 
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. 

In  2026,  the  European  Semester  for  economic  policy  coordination  continues  to 
develop  alongside  the  final  stage  of  Recovery  and  Resilience  Facility  (RRF) 
implementation (4). Recovery and resilience plans (RRPs), along with cohesion policy 
funding, have been essential for delivering on the policy priorities under the European 
Semester, as the plans were required to effectively address all or a significant subset of 
challenges identified in the relevant country-specific recommendations issued in recent 
cycles, and programmes funded by the European cohesion policy were required to take 
country-specific recommendations into account. As the RRF approaches the end of its 
lifetime,  it  remains  essential  to  sustain  the  reforms  and  investments  supported  and 
implemented  under  the  RRF,  in  particular  those  that  contribute  to  addressing 
challenges identified in the country-specific recommendations. 

in 

addressing 

On  3 June 2026,  the  Commission  published  the  2026  country  report  for  Croatia.  It 
assessed  Croatia’s  progress 
country-specific 
recommendations  and  took  stock  of  Croatia  ’s  implementation  of  the  RRP.  On  the 
basis  of  that  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.  

relevant 

the 

(7) 

On  21 January 2025,  the  Council,  upon  the  assessment  and  recommendation  of  the 
Commission, adopted a Recommendation endorsing the national medium-term fiscal-

4 
establishing 
http://data.europa.eu/eli/reg/2021/241/oj). 

the  Recovery 

Regulation  (EU)  2021/241  of  the  European  Parliament  and  of  the  Council  of  12   February   2021 
17,  ELI: 

and  Resilience  Facility 

18.2.2021, 

(OJ  L 

57, 

p. 

EN 

2 

  EN 

 
 
(8) 

(9) 

structural  plan  of  Croatia  (5).  The  plan  covers  the  period  from  2025  until  2028  and 
presents  a  fiscal  adjustment  spread  over  four  years.  The  Council  recommended  the 
following  maximum  growth  rates  of  net  expenditure:  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 the base year of 2023 of 26.2% in 2025, 32.3% 
in 2026, 37.8% in 2027 and 42.9% in 2028.  

from 

recommendation 

Russia’s  war  of  aggression  against  Ukraine  and  its  repercussions  constitute  an 
existential  challenge  for  the  European  Union.  The  Commission  has  invited  Member 
States  to  request  the  activation  of  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  (6)  and  this  proposal  was  welcomed  by  the 
European Council of 6 March 2025. Following the request of Croatia, on 8 July 2025 
the  Council,  upon  a 
the  Commission,  adopted  a 
Recommendation  allowing  Croatia  to  deviate  from  the  recommended  maximum 
growth  rates  of  net  expenditure  (7).  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. 
On 7 May 2026, Croatia submitted its 2026 Annual Progress Report (8) on adherence 
to 
the 
the  recommended  maximum  growth  rates  of  net  expenditure  and 
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 
implementing  its  recovery  and  resilience  plan  in  accordance  with  Article  27  of 
Regulation (EU) 2021/241.  

(10)  Real  GDP  growth  in  2025  was  3.4%  and  HICP  inflation  stood  at  4.4%.  The 
Commission  Spring  2026  Forecast  projects  real  GDP  to  grow  by  2.7%  in  2026  and 
2.5% in 2027, and HICP inflation to stand at 4.6% in 2026 and 2.7% in 2027.  
(11)  Based on data provided by Eurostat (9), Croatia’s general government deficit increased 
from 2.3% of GDP in 2024 to 3.0% in 2025. The increase in the deficit in 2025 mainly 
reflects  an  increase  in  nationally  financed  investments,  public  wages  and  social 
assistance  expenditure.  Based  on  policy  measures  known  by  the  cut-off  date  of  the 
forecast, the Commission Spring 2026 Forecast projects a deficit of 2.9% of GDP in 
2026 and 2.7% of GDP in 2027. 

(12)  Based  on  the  Commission’s  estimates,  the  fiscal  stance  (10),  which  includes  both 
nationally and EU financed expenditure, was expansionary, by 1.6% of GDP, in 2025. 

Communication  from  the  Commission,  'Accommodating  increased  defence  expenditure  within  the 

Council Recommendation of 21 January 2025 endorsing the national medium-term fiscal-structural plan 

5 
of Croatia (OJ C, C/2025/638, 10 February 2025, ELI: https://eur-lex.europa.eu/eli/C/2025/638/oj). 
6 
Stability and Growth Pact’, Brussels, 19 March 2025, C(2025) 2000 final. 
7 
Council Recommendation  of 8 July 2025 allowing Croatia to deviate from the  maximum growth rates 
of  net  expenditure  as  set  by  the  Council  under  Regulation (EU)  2024/1263  (Activation  of  the  national  escape 
clause), (OJ C, C/2025/3985, 20 August 2025, ELI: http://data.europa.eu/eli/C/2025/3985/oj).  
8 
and-fiscal-governance/stability-and-growth-pact/preventive-arm/annual-progress-reports_en.   
9 
Eurostat-Euro Indicators, 22 April 2026. 
10 
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 

The  2026  Annual  Progress  Reports  are  available  on:  https://economy-finance.ec.europa.eu/economic-

EN 

3 

  EN 

 
 
It is projected to be contractionary in both 2026 and 2027, by 0.3% and 0.9% of GDP, 
respectively. 

(13)  Based on data provided by Eurostat (11), Croatia’s general government debt decreased 
from 57.4% of GDP at the end of 2024 to 56.3% of GDP at the end of 2025. Based on 
policy  measures  known  at  the  cut-off  date  of  the  forecast,  the  Commission  Spring 
2026 Forecast projects the debt-to-GDP ratio to decrease to 55.9% by the end of 2026 
and to further decrease to 55.6% by the end of 2027. 

(14)  Based on Eurostat data (12), total general government defence expenditure in Croatia 
amounted  to  1.5%  of  GDP  in  2025,  corresponding  to  an  increase  of  0.5  percentage 
points  of  GDP  compared  to  the  reference  year  2021.  According  to  the  Commission 
Spring  2026  Forecast,  it  is  projected  at  1.6%  of  GDP  in  2026,  corresponding  to  an 
increase of 0.6 percentage points of GDP compared to 2021. 

(15)  The  Union  continues  to  face  risks  of  energy  supply  disruptions  and  elevated  price 
volatility,  exacerbated  by  geopolitical  tensions  which  affect  global  oil  and  gas 
markets.  Experience  from  the  2022–2023  energy  crisis  has  shown  that  broad  and 
untargeted  measures  entail  large  fiscal  costs  and  are  socially  and  economically 
inefficient. Since the outbreak of the war in the Middle East in February 2026, Croatia 
adopted  fiscal  policy  measures  to  mitigate  the  impact  of  high  energy  prices  on 
households  and  firms  (13).  These  include  an  untargeted  reduction  in  excise  duty  on 
diesel due to expire on 18 May 2026, as well as targeted support for public passenger 
transport, agriculture, fisheries, aquaculture and for energy-intensive industry expiring 
on 30 September 2026. According to the Commission Spring 2026 Forecast, the fiscal 
cost of these measures is projected to amount to 0.1% of GDP in 2026. According to 
Commission estimates, if these measures were to remain in force until end-2026, their 
fiscal cost would amount to 0.2% of GDP in 2026. 

(16)  Based on Commission calculations, net expenditure in Croatia grew by 10.9% in 2025 
and 30.1% cumulatively over 2024  and 2025. The net expenditure growth in 2025 is 
above the recommended maximum growth rate, corresponding to a deviation of 1.8% 
of  GDP  in  annual  terms.  When  considering  2024  and  2025  together,  the  cumulative 
growth rate of net expenditure is also above the recommended maximum growth rate, 
corresponding  to  a  deviation  of  1.4%  of  GDP  in  cumulative  terms.  Taking  into 
account the flexibility for higher defence spending provided for by the national escape 
clause, the cumulative deviation of net expenditure amounts to 0.9% of GDP. 

(17)  Based on Commission calculations, net expenditure in Croatia is projected to grow by 
5.7% in 2026, and 37.5% cumulatively over 2024, 2025 and 2026. The projected net 
expenditure  growth  in  2026  is  above  the  recommended  maximum  growth  rate, 
corresponding to a deviation of marginally above 0.3% of GDP in annual terms. When 
considering 2024, 2025 and 2026 together, the projected cumulative growth rate of net 
expenditure is also above the recommended maximum growth rate, corresponding to a 
deviation of 1.6% of GDP in cumulative terms. Taking into account the flexibility for 
higher defence spending provided for by the national escape clause, considering 2024, 

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. 
11 
Eurostat-Euro Indicators, 22 April 2026. 
12 
Eurostat, government expenditure by classification of functions of government (COFOG). 
13 
This reflects the situation at the cut-off date of the Commission’s Spring 2026 Forecast (4 May 2026). 

EN 

4 

  EN 

 
(18) 

2025  and  2026  together,  the  projected  cumulative  deviation  of  net  expenditure 
amounts to 1.0% of GDP. 

In the  coming years public finances  will come under increasing  pressure  from rising 
spending  needs  for  productive  investments,  population  ageing,  climate  adaptation, 
defence,  the  twin  transition,  and  other  competing  priorities.  For  this  reason,  it  is 
warranted for Croatia to improve the quality and efficiency of public spending and the 
prioritisation of growth-enhancing investments, including at local level. While Croatia 
has  made  progress  in  strengthening  its  fiscal  framework,  including  through  the 
establishment  of  a  spending  review  unit  within  the  Ministry  of  Finance  in  2022,  the 
scope  and  transparency  of  spending  reviews  remain  limited.  Spending  reviews  are 
recognised  as  a  useful  tool  for  identifying  efficiency  gains  and  programme  overlaps 
and the savings made as a result could be reallocated to address new  emerging fiscal 
challenges,  as  the  ones  highlighted  above.  Health  and  education  are  sectors  where 
Croatia could expand the use of spending reviews, as expenditures are relatively high, 
but outcomes comparatively lower than peer member states. A comprehensive review 
of public administration workforce management is also warranted, given rising public 
employment  alongside  persistent  understaffing 
in  critical  central  government 
functions.  This  suggests  ineffective  resource  allocation  that  could  be  addressed 
through targeted workforce optimisation and strategic redeployment.  Croatia also has 
overall low insurance coverage to climate risks. Due to this, compensation is granted 
on an ad hoc basis. To further ensure adequate funding, Croatia could further integrate 
climate related fiscal risks in the budgetary planning. 

(19)  The introduction of mandatory e-invoicing in January 2026 under the Fiscalisation 2.0 
reform and the ongoing digital transformation of the tax administration will contribute 
to improving tax compliance and reducing the shadow economy, with positive trends 
already visible in the Q1 2026 data. At the same time, Croatia foregoes a significant 
amount of revenues due to tax expenditures, which amounted to over 4% of GDP in 
2023. Moreover, tax expenditures are not always effective in  pursuing their intended 
policy  objectives.  For  example,  personal  income  tax  expenditures,  in  particular  the 
family  allowance,  seem  to  benefit  more  high-wage  income  earners.  Value-added  tax 
(VAT) expenditures can also be inefficient and poorly targeted at reducing inequality, 
in  particular the  VAT reduced rate for hotel  and restaurants  has a  regressive impact. 
Finally, complex conditions can undermine the effectiveness of corporate income tax 
expenditures,  pointing  to  scope  to  simplify  certain  tax  expenditures  and  their 
administration.  Croatia  would  benefit  from  a  comprehensive  review  of 
tax 
expenditures  to  identify  and  redesign  those  that  do  not  effectively  achieve  their 
income  redistribution  or  environmental 
intended  policy  objectives, 
incentives.  

including 

(20)  Croatia  could  more  broadly  enhance  the  effectiveness  and  progressivity  of  the  tax 
system,  including  by  strengthening  the  design  of  property  taxation.  Important  steps 
have  been  taken  with  recent  reforms  of  immovable  property  taxation.  However,  the 
current framework remains limited in scope, as it applies only to vacant and secondary 
properties  and is  predominantly  based on location  and size  rather than market  value. 
Introducing  a  market  value-based  component  and  progressively  broadening  the  tax 
base  to  cover  a  wider  range  of  properties,  while  duly  taking  into  account  taxpayers’ 
ability to pay, would contribute to increasing revenues and ensuring a more equitable 
and efficient allocation of the tax burden. It would also strengthen incentives to bring 
unoccupied dwellings onto the housing market. 

EN 

5 

  EN 

(21)  The systematic, meaningful and timely 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 Union’s funding 
instruments, as well as in the context of the European Semester.  

(22)  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)  in  Croatia,  is 
above the average pace at EU level, both in terms of project selection and payments. It 
is important to keep current momentum, while maximising the impact of investments 
on the ground. Croatia is already taking action under its cohesion policy programmes 
to  boost  competitiveness  and  growth.  Nevertheless,  some  areas  may  require  further 
strengthening,  including  those  relating  to  social  inclusion,  deinstitutionalisation, 
decarbonisation  of  transport  and  renewable  energy  deployment  as  well  as  circular 
economy. At the same time, Croatia needs to accelerate implementation of the JTF as 
resources are due for disbursement by the end of 2026. It is essential to ensure that the 
new  investments  identified  by  Croatia  in  its  mid-term  review  of  the  cohesion  policy 
funds,  notably  those  linked  to  the  five  priorities  identified  in  the  Mid-Term  Review 
Regulation (14), are deployed rapidly and effectively. 

(23)  Croatia  faces  challenges  on  multiple  interconnected  fronts,  including  a  fragmented 
public research and innovation sector, complex governance structures, and a business 
environment weighed down by regulatory burdens, lengthy permitting processes, and 
the  longest  business-to-business  payment  periods  in  the  EU.  Digital  infrastructure  in 
rural  and  island  areas  lags  behind  EU  averages.  Progress  on  circular  economy, 
building  renovation,  and  renewable  energy  rollout  remains  limited,  compounded  by 
fragmented  administrative  procedures.  On  the  social  side,  poverty  and  income 
inequality  remain  high,  labour  and  skills  shortages  persist  across  sectors,  healthcare 
access is uneven particularly in rural areas, and housing affordability continues to be a 
concern, especially in major cities and coastal regions.  

(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 R&I sector. 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.  Governance  of  the  R&I 
system  remains  complex,  with  policy  responsibilities  spread  across  multiple  entities, 
creating  challenges  for  planning  and  implementation.  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. Regional disparities in terms of R&I performance 
persist,  with  most  R&I  activities  carried  out  in  Zagreb,  while  dedicated  support  to 
selected regional hubs, including a strong link to the industrial transition, would help 
improve performance in other regions. The level of public R&D expenditure as a share 
of GDP remains  below the  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,  especially  in  some  regions, 
contributing  to  suboptimal  performance  and  low  productivity  in  the  manufacturing 

14 
Regulation  (EU)  2025/1914  of  the  European  Parliament  and  of  the  Council  of  18 September 2025 
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. 

EN 

6 

  EN 

 
industry. Public support for business R&D is limited and fragmented, and technology 
transfer activities continue to be on the low side. 

(25)  Croatia’s financing landscape is still predominantly supported by banks, with market-
based  finance, 
including  household  savings  via  capital  markets,  playing  a 
comparatively  smaller  role  in  firms’  financing  due  to  still  low  levels  of  direct  retail 
participation,  despite  some  recent  positive  momentum  including  successful  IPOs  on 
the  Zagreb  Stock  Exchange  and  retail  investor  interest  in  government  securities. 
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  and  growing  but  limited  venture  capital  and  private  equity 
funding compound the financing gap for innovative firms. Reforms under the recovery 
the  strategic  framework  for  capital  markets 
and  resilience  plan, 
development, seek to promote diversification of financing options. Further progress is 
needed  in  boosting  the  participation  of  retail  investors  in  the  capital  market  through 
enhanced  financial  literacy  and  more  accessible  investment  products,  improving  the 
venture capital and private equity environment, including incentivising participation of 
institutional  investors,  and  enhancing  stock  market  attractiveness  and  the  overall 
investment environment through better corporate governance for listed companies. 

including 

(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 
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. In Croatia, the 
complexity  of  administrative  procedures  is  reported  to  be  a  constraint  by  66%  of 
companies when doing business in Croatia. Structural challenges continue to weigh on 
labour  and  skills  shortages,  regulatory 
Croatia’s  business  environment,  with 
complexity,  and  administrative 
inefficiencies  acting  as  major  constraints  on 
investment  and  growth.  Permitting  processes  remain  particularly  burdensome  with 
lengthy  timelines  for  construction  and  environmental  permits,  including  for  plant 
construction and decarbonisation projects in the manufacturing industry, together with 
fragmented  procedures  across  authorities  and  limited  interoperability  of  digital 
registries.  Late  payments  between  businesses  have  worsened,  with  Croatia  recording 
the  longest  average  business-to-business  payment  period  in  the  EU.  Measures  in  the 
recovery and resilience plan to digitalise public administration, promote competition, 
and simplify procedures are significant steps forward. However, increasing the scope, 
ambition  and  pace  of  regulatory  simplification  and  administrative  modernisation 
would be beneficial. 

(27)  Further progress is also needed on the efficiency of the justice system, as proceedings 
in  civil  and  commercial  courts  remain  among  the  longest  in  the  EU.  During  recent 
years,  Croatia  has  advanced  with  reforms  and  investments,  including  on  the 
digitalisation of justice, strongly  supported by the recovery and resilience plan. Still, 
Croatia  remains  among  the  Member  States  with  the  most  significant  backlog  and 
duration of civil and commercial cases. As this impacts the business environment and 
competitiveness, it would be beneficial if Croatia continued to improve the efficiency 
in resolving civil and commercial court cases, in particular by implementing additional 
reforms, including through possible case management reforms. 

(28)  Croatia’s  territorial  fragmentation  affects  the  efficiency  of  its  public  administration 
and  exacerbates  regional  disparities.  There  is  an  imbalance  between  responsibilities 

EN 

7 

  EN 

and  resources,  as  well  as  the  administrative  and  financial  capacity  at  local  level  to 
absorb funding and deliver quality services. This contributes to the uneven quality of 
public  services  provided  and  raises  administrative  costs  as  many  small  local 
governments lack adequate financial and administrative resources to provide services. 
Although  measures  under  the  recovery  and  resilience  plan  provided  financial 
incentives  to  stimulate  mergers  of  local  government  units,  the  uptake  of  these 
incentives  remains  mainly  focused  on  mergers  of  functions,  with  limited  impact  on 
actual  mergers.  Increasing  the  scope  of  incentives,  coupled  with  potential  legislative 
steps  to  ensure  the  uptake  of  actual  mergers,  would  be  beneficial.  Furthermore, 
translating to the local level the national level efforts such as introducing a transparent 
remuneration system as well as a competency-based recruitment and promotion could 
help improve the quality of public services.  

(29)  Broadband coverage in rural and island areas still lags behind EU averages. Although 
the  share  of  Croatian  firms  citing  digital  infrastructure  as  an  obstacle  fell  to  36%  in 
2025,  very  high-capacity  network  (VHCN)  coverage  (78.9%)  and  rural  VHCN 
(49.1%)  remain  below  the  EU  averages  of  82.5%  and  61.9%,  respectively.  A 
significant gap persists in rural Fiber to the Premises (FTTP), which at 44.4% remains 
well  below  the  EU  average  of  58.8%,  and  in  5G  mid-band  coverage,  which  reaches 
only  8.5%  in  rural  areas  compared  to  the  EU’s  26.2%.  Setbacks  in  implementing 
projects  on broadband and  backhaul  infrastructure to  rural  and suburban settlements, 
coupled  with  a  remaining  funding  gap  and  structural  bottlenecks,  such  as  complex 
permitting  procedures,  spatial  planning  constraints,  and  unresolved 
legacy 
infrastructure issues, delay the digital transition. 

(30) 

In  2025,  Croatia  had  the  sixth  highest  wholesale  electricity  price  in  the  EU,  holding 
back cost competitiveness, decarbonisation and electrification. Installed solar capacity 
has grown strongly, yet the share of solar energy in electricity generation remains low 
at  less  than  8%.  Against  this  background,  faster  roll-out  of  new  renewable  energy 
capacity  and  non-fossil  flexibility  solutions  could  help  reduce  high  electricity 
wholesale prices. On 27 April 2026, the Croatian energy regulatory authority adopted 
updated  grid  connection  fees,  which  could  speed  up  the  deployment  of  renewable 
energy.  Further  support  for  the  deployment  of  renewable  energy,  including  green 
hydrogen, could  help  reduce the high  greenhouse gas  intensity of Croatia’s industry, 
especially if part of a coherent set of industry decarbonisation measures that includes, 
amongst others, also carbon capture and storage and the promotion of demand for low-
carbon  industrial  products.  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. By 2024, 34% 
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 rollout 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. Limited  steps have  been taken to  streamline 
administrative  procedures  for  renewable  energy  as  part  of  the  Renewable  Energy 
Sources  Act  in  2025,  but  permitting  and  grid  connection  procedures  remain 
fragmented  and,  in  some  cases,  unclear.  Further  streamlining  of  permitting  and  grid 
connection could also help with the rollout of photovoltaic systems on multi-apartment 
buildings  as  well  as  energy  communities,  since  the  uptake  remains  negligible  and 
procedures cumbersome.  

EN 

8 

  EN 

(31)  Energy efficiency measures are necessary to maintain the positive momentum created 
by the EU funding framework and accelerate progress in: (i) building renovation; (ii) 
the supply of energy-efficient housing, in particular affordable and social housing; and 
(iii) the replacement of  gas and oil boilers with heat  pumps and other more efficient 
and  green  solutions.  However,  increased  efforts  are  needed  beyond  EU  funding  to 
achieve  the  building  decarbonisation  targets,  given  the  large  share  of  the  building 
stock  that  still  requires  renovation,  especially  when  it  comes  to  multi-apartment 
buildings.  Renovation  programmes  are  primarily  delivered  through  grants,  leaving  a 
significant  private  investment  gap,  contributing  to  limited  residential  energy  savings 
between 2019 and 2024. Therefore, reducing overall reliance on grants and shifting to 
financial  instruments  can  maximise  the  impact  of  public  funds,  while  grant  support 
should  be  better  targeted  to  the  most  vulnerable  households  and  energy  inefficient 
buildings.  

the 

(32)  Road transport is the most used mode of transport in Croatia for both passengers and 
freight,  and  its  emissions  have  increased  by  42%  since  2005,  one  of  the  biggest 
increases  in  the  EU.  Reforms  and  investments  under  the  Croatian  recovery  and 
resilience  plan  and  cohesion  policy  already  contribute  to  modernising  railway 
infrastructure, promoting green transport, and deploying intelligent transport systems. 
Nevertheless,  sustained  efforts  remain  necessary.  Modernising 
transport 
infrastructure and the railway rolling stock, increasing the use of public transport and 
further  greening  it,  integrating  different  transport  modes  in  urban  areas,  promoting 
active mobility, putting in place intelligent transport systems, can greatly contribute to 
the  decarbonisation  of  the  transport  sector,  reduce  the  reliance  on  fossil  fuels  and 
reduce air pollution in urban centres. Promoting the uptake of zero-emission vehicles, 
including  through  targeted  taxation  incentives  for  company  cars  and  strengthening 
charging  infrastructure  in  urban  areas  to  make  it  better  functioning,  affordable  and 
accessible,  could  help  to  increase  the  share  of  electric  vehicles,  which  in  2025 
remained one of the lowest in the EU. In 2024, Croatia had by far the lowest share of 
renewable energy in transport in the EU, following a decline in 2022 due to rules for 
biofuels  that  reduced  penalties  for  fuel  suppliers  for  not  blending  biofuels  into 
transport  fuels.  This  temporary  reduction  of  penalties  expired  as  of  January 2026, 
which is expected to help revert the recent decline in the share of renewable energy in 
transport.  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  including  the  reimposed  emergency  price  cap  on  petroleum  products 
introduced in March 2026 on service stations off highways, 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.   

(33)  Considering  its  exposure  to  climate-related  risks  and  their  increasing  economic 
impact, Croatia would also benefit from swift implementation, better coordination and 
systematic  monitoring  of  climate  adaptation  and  sustainable  water  management 
policies,  across  sectors  and  levels,  based  on  nature-based  and  climate-proof 
investments in strategic/critical infrastructure, including in coastal and island areas. As 
insurance coverage against weather-related and climate-related events remains one of 
the  lowest  in  the  EU  at  around  2%,  there  is  a  need  to  create  stronger  incentives  for 
climate risk insurance, in particular regarding floods and fires.  

EN 

9 

  EN 

(34)  Progress  towards  a  circular  economy  remains  slow,  with  high  landfilling  rates, 
significant  differences  at  county  level  separate  municipal  waste  collection,  delays  in 
waste management infrastructure completion, and circular material use well below the 
EU average. While Croatia is gradually improving its strategic and legal framework to 
improve waste management and the circular economy, implementation is still lagging, 
with a negative impact both on the environment and competitiveness. There is a need 
to  improve the  circular  material  use rate  to  reduce the impact  of material  use on the 
environment  while  increasing  Croatia's  strategic  independence  from  imported  raw 
materials.    It  would  also  be  beneficial  if  Croatia  invests  more  into  repair  and  reuse 
centres  and  to  adopt  measures,  incentives  or  tax  benefits  to  integrate  secondary  raw 
materials into new products. 

(35) 

In light of the crucial role of human capital in enhancing the Union’s competitiveness 
and  strategic  autonomy,  in  2026  the  Council  recommended  that  Member  States take 
action to  urgently  address  human  capital-related  structural  challenges  in  the  areas  of 
skills  and  education,  which  hamper  competitiveness.  The  2026 country-
specific recommendations  addressed  to  Croatia  can contribute  to  the  implementation 
of the Council Recommendation on human capital in the Union. 

(36)  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 has reached a 
record high, closing the gap to the EU average and approaching Croatia's 2030 target, 
it  remains  particularly  low  for  vulnerable  groups  such  as  older  people,  low-skilled 
workers,  and  persons  with  disabilities.  The  disability  employment  gap  also  remains 
one  of  the  highest  in  the  EU.  Regional  disparities  in  labour  market  participation 
remain  substantial.  Limited  participation  in  adult  learning,  especially  outside  major 
urban  centres,  constrains  labour-market-relevant  skills  and  contributes  to  skills 
mismatches, which remain  above the EU average.  Croatia is  implementing measures 
to address labour market needs, 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,  these  efforts  should  be  intensified  and  made  more 
effective by better targeting vulnerable groups, addressing training gaps and ensuring 
alignment  of  training  to  the  labour  market  needs,  incentivising  adult  learning 
participation  and  improving  labour-market-relevant  skills,  including  through  high-
quality  curricula  at  various  levels  of  education.  Fully  implementing  the  education 
system reform is essential to achieve higher participation in early childhood education 
and care (ECEC) and more instruction time in schools,  to strengthen basic skills and 
provide a better basis for further education and skills acquisition. Delays in completing 
the necessary infrastructure prevent timely implementation of full-day teaching model 
which should increase instruction hours and improve basic skills, while evaluation on 
the  progress  of  experimental  implementation  remains  absent.  Continued  efforts  are 
needed  to  increase  the  share  of  qualified  teachers,  in  particular  ECEC  teachers  and 
teachers  of  physics  and  other  science,  technology,  engineering  and  mathematics 
(STEM)  subjects,  to  address  persistent  teacher  shortages  that  risk  undermining 
education quality, especially in remote and rural areas. 

(37)  Despite  progress  and  policy  efforts,  Croatia  faces  significant  social  challenges. 
Poverty and income inequality rates have decreased for some groups, notably children, 
but remain high, particularly among older people, persons with disabilities and those 
living in rural areas and progress towards the 2030 national poverty reduction target is 

EN 

10 

  EN 

slow.  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  remain  limited.  Recent  amendments  to  the 
pension  act,  including  a  more  favourable  indexation  formula,  the  introduction  of  an 
annual pension supplement, increases in the minimum pension and benefits for longer 
working lives, should contribute to improving pension adequacy. Access to long-term 
care  remains  insufficient,  with  limited  access  to  home-based  and  community-based 
care relative to rising demand, high out-of-pocket costs, and unmet care needs among 
older people that are among the highest in the EU. This  places disproportionate care 
burdens  on  informal  carers,  especially  women,  reducing  their  labour  market 
participation.  Addressing  these  challenges  would  contribute  to  upward  social 
convergence. 

(38)  Efforts on addressing sustainability, availability and quality of healthcare are ongoing, 
but  remain  slow  to  translate  into  improved  health  outcomes  and  could  be  better 
targeted, while prevention has received limited attention. Uneven distribution of health 
workers remains a major barrier to healthcare access in islands, remote and rural areas. 
Addressing workforce shortages requires increasing the number of healthcare workers, 
and  improving  training,  recruitment  and  retention,  with  particular  attention  to 
geographical disparities. While e-health is being strengthened, the share of population 
using online health services remains one of the lowest in the EU. Preventable mortality 
has only slightly decreased over the past decade and requires better targeted measures 
on  key  behavioural  risk  factors,  and  enhanced  coordination  across  public 
administration beyond the health sector, to prevent or delay the onset of diseases. 

(39)  Housing  affordability  in  Croatia  remains  a  concern.  Supply  is  constrained  by  a  high 
share  of  vacant  dwellings  and  short-term  rentals,  especially  in  the  main  cities  and 
coastal  areas,  with  price  increases  broadly  matching  income  growth,  hindering 
affordability. Croatia has adopted a National Plan for Housing Policy until 2030 and 
has already implemented some of the Plan’s measures, including housing tax reforms, 
but  further  reforms  are  needed  to  improve  the  housing  market  and  increase 
affordability.  Effective  and  coordinated  implementation  of  the  Housing  Policy  Plan, 
particularly  locally  relevant  measures  to  strengthen  housing  supply  in  high-demand 
areas  and  activate  vacant  dwellings,  would  improve  affordable  housing.  Croatia  also 
lacks a national-level monitoring framework for social housing, which is decentralised 
and  managed  at  the  local  level.  While  local  authorities  are  well  placed  to  determine 
local  social  housing  needs,  a  national  monitoring  framework  would  better  capture 
housing  challenges  for  vulnerable  groups  across  the  country  and  inform  appropriate 
policy action for affordable and social housing. 

(40) 

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  2026  the  Council  recommended  that  the  euro-area  Member  States  take 
action,  including  through  their  recovery  and  resilience  plans,  to  implement  the  2026 
Recommendation  on  the  economic  policy  of  the  euro  area.  For  Croatia,  the 
recommendation  (1)  helps  implement  the  first    the  second  recommendation  and  the 
third  recommendations  on  the  euro  area,  recommendation  (2)  helps  implement  the 
fourth  recommendation  on  the  euro  area,  recommendation  (3)  helps  implement  the 
seventh  the  ninth  and  the  tenth  recommendations  on  the  euro  area,  recommendation 
(4)  helps  implement  the  seventh  recommendation  on  the  euro  area  and  the 
recommendation (5) helps implement the fifth recommendation on the euro area. 

EN 

11 

  EN 

HEREBY RECOMMENDS that Croatia take action in 2026 and 2027 to:  

1. 

2. 

3. 

4. 

5. 

In  view  of  the  material  deviation  recorded  by  2025  and  projected  for  2026  by  the 
Commission  vis-à-vis  the  recommended  net  expenditure  ceiling,  take  action  to 
control net expenditure so that it respects the maximum growth rates recommended 
by  the  Council  on  21 January 2025,  while  making  use  of  the  flexibility  under  the 
national  escape  clause  for  higher  defence  expenditure.  Reinforce  defence  spending 
and readiness while ensuring spending efficiency and gradually adapting the budget 
to  sustain  structurally  higher  defence  spending.  Ensure  that any measures  taken 
to mitigate  the  impact  of the  hike  in  energy  prices  resulting  from  the  crisis  are 
temporary,  targeted  at  protecting  vulnerable  households  or  at  addressing  the  needs 
of energy-intensive firms, preserve incentives for energy savings while ensuring that 
their fiscal cost is compatible with the commitments under the EU fiscal framework. 
Improve  the  efficiency  of  public  expenditure  by  strengthening  the  role  of  regular 
spending  reviews  and  integrating  them  in  the  budgetary  framework.  Review  the 
effectiveness  of  tax  expenditures.  Continue  advancing  the  reform  of  recurrent 
property  taxation  by  completing  the  necessary  administrative  infrastructure  and 
introducing a value-based system. 

Ensure continuity of reforms and investments implemented under the Recovery and 
Resilience  Facility.  Sustain  implementation  momentum  under  cohesion  policy 
programmes,  building,  where  appropriate,  on  the  reallocation  to  strategic  priorities 
and flexibilities in the mid-term review of the cohesion policy framework. 

Promote  the  consolidation,  collaboration  and,  where  relevant,  mergers  of  public 
research  institutes  and  universities.  Foster  R&I  investments,  coordination  and 
governance,  while  considering  regional  disparities.  Continue  improving  access  to 
diverse  financing  and  deepen  capital  markets  by  further  facilitating  retail  and 
institutional  investor  participation,  expanding  venture  capital,  addressing  listing 
barriers,  and  strengthening  corporate  governance.  Simplify  regulation  and  reduce 
administrative  burden  through better  coordination  across  government  levels  and 
digital  tools  integration, and  streamline  permitting  to  support  the  clean  industrial 
transition.  Merge  local  level  public  administration  functions  and/or  municipalities 
and  enhance  human  resource  management.  Further  improve  the  efficiency  of  the 
justice  system. Accelerate  broadband  deployment  in  underserved  areas, particularly 
rural areas and islands. 

Accelerate the deployment of renewable energy to lower wholesale electricity prices 
by upgrading electricity grids and investing in electricity storage. Advance the roll-
out of smart meters and promote dynamic contracts. Streamline permitting and grid 
connection  procedures  for  renewables  and  energy  communities.  Accelerate  energy 
efficiency  measures  and  promote  efficient  and  green  solutions  for  heating  and 
cooling.  Promote  sustainable  urban  transport,  rail  and  the  electrification  of  road 
transport. Phase out fossil fuel subsidies, particularly in the transport sector. Address 
the  risk  from  natural  hazards  by  improving  governance,  investing  in  climate 
resilience,  and creating incentives  for  climate risk insurance.  Further foster circular 
economy. 

Reduce  labour  and  skills  shortages  by  removing  obstacles  to  labour  force 
participation, strengthening education at  all  levels, particularly for basic  and STEM 
skills, and  ensuring enough qualified  teachers.  Strengthen  upskilling  and  reskilling 
and  enhance  work-based  learning.  Better  target  active  labour  market  policies  to 
vulnerable groups, and strengthen efforts to attract, develop and retain talent. Reduce 

EN 

12 

  EN 

poverty  and  income  inequality  by  increasing  the  adequacy  of  social  benefits 
while maintaining fiscal  sustainability through  better  targeting.  Improve  access  to 
formal  home-  and  community-based  long-term  care.  Balance  the  geographical 
distribution  of  health  workers  and  facilities,  invest  in  e-health, and  strengthen 
prevention.  Increase  housing  supply  in  high-demand  areas  and  improve  monitoring 
of affordable and social housing. 

Done at Brussels, 

For the Council 
The President 

EN 

13 

  EN