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Who would benefit from Croatian accession to the EU?

Submitted by on 01 Dec 2010 – 10:16

University College London’s Dr Miriam Manchin discuss the benefits accruing from Croatia joining the EU

The EU single market consists of roughly half a billion consumers. Most countries in the Western Balkans and some other neighbouring regions, trading mostly with the EU, are eager to join this big economic space which offers among other things reduced transaction costs for traders. Croatia appears to be the next country joining the EU. A question one might ask is about the economic implications of Croatia joining the EU, as well as on the distribution of foreseeable benefits, if any.

Croatia obtained the status of candidate country in 2004 and opened accession negotiations in 2005, the same year the Stabilisation and Association Agreement (SAA) between Croatia and the EU also entered into force. The SAA established common political, economic, and commercial objectives and serves as the basis for the implementation of the accession process. The SAA also introduced a free trade area by 2007 for industrial products and most agricultural products. Thus most trade taking place between the EU and Croatia is already free of tariffs.
So how important are the two economies for each other? While about two-thirds of Croatian trade is conducted with the EU, in 2009 only 0.4% of EU imports came from Croatia and 1% of EU exports were sold in Croatia. Furthermore, the size of the Croatian economy is tiny compared to the EU, its GDP is about 0.004% of the EU’s GDP and its population accounts for about 4.4 million people compared to the EU’s 500 million.
Thus given Croatia’s size, the economic impact of its accession will be very marginal for the EU. The issue of migration often comes up in enlargement related discussions as soon as countries with significantly lower wage levels approach negotiations for EU accession. In the case of Croatia, the number of possible migrants after enlargement would be almost negligible. Even if 3-4% of Croatian population would migrate to current EU member states, the effects would be very limited as this would imply about 180.000 people migrating possibly towards different EU countries.
The impact on the Croatian economy on the other hand, is likely to be much more pronounced. Although Croatia already has a free trade agreement with the EU, joining the internal market and aligning national legislation with the acquis communautaire could still have important economic consequences for the Croatian economy. In particular it would imply free movement of goods, services, capital and labour. It would also result in reduction of non-tariff barriers to trade which would lead to lower transaction costs. Furthermore, joining the EU can also act as a vehicle for improving institutional quality in Croatia. This could happen, for example, via the method of open coordination whereby economic policies of each member state is regularly assessed by the European Commission and the other member states. Also, Croatia will have to comply with all EU legislation and enforcement by the European Court of Justice.
One of the most important challenges faced by the Croatian economy is its heavy external debt burden. This creates pressure for keeping a broadly stable exchange rate and implies that alternative measures are required for strengthening competitiveness. Croatia’s competitiveness has been deteriorating, with labour costs increasing significantly faster than those of trading partners, resulting in the overall wages being relatively high compared to productivity. The low competitiveness level of the Croatian economy is partly due to a rigid labour market with low participation, a restrictive and costly business environment, which is also burdened by corruption. Thus there is a strong need to implement competitiveness-enhancing policies, structural reforms, and corruption reduction measures.

These things imply hard choices and political courage which are more likely to take place and be encouraged if Croatia joins the EU. The Stabilisation and Association Process, the regular progress reports and the requirements of the SAA put pressure on Croatia to meet the political and economic criteria for membership and to assume compliance with the acquis, secondary legislation, and policies of the EU. The process of improved institutional infrastructure, and structural reforms should be further reinforced once Croatia joins the EU through open coordination processes.
Better institutions, less corruption, better regulatory environment could lead to increased inflow of much needed foreign direct investment. One of the most important sectors of the Croatian economy is tourism, accounting for about half of exports of goods and services. During the boom years before the crisis tourism failed to attract significant FDI inflows. This was pitiful. The sector would crucially benefit from FDI in physical infrastructures and service quality which is likely to produce improved competitiveness. Quality investment is also much needed in other sectors of the economy. To achieve this, and to fully reap the possible benefits of the EU accession, Croatia needs to address a number of critical issues through structural reform policies which should go beyond satisfying the economic and political criteria needed for EU accession.