Bloomberg News

Croatia Shouldn’t Rush to Feuding Euro Area, Milanovic Says

August 30, 2011

(Updates with Sanader questioning in 18th paragraph.)

Aug. 30 (Bloomberg) -- Croatia should resist rushing to adopt the euro after it joins the European Union as a feud over bailouts dims the currency’s appeal, said the head of the party that leads opinion polls before the December elections.

“Given the precarious state of affairs in Europe and in the world’s financial markets, we will see what happens over the next two to three years,” said Zoran Milanovic, the head of the Social Democratic Party in an Aug. 26 interview in Zagreb. “That’s certainly not the period in which we can even think of joining the euro zone. So we have to take our time.”

The euro remains a long-term goal and the former Yugoslav republic should focus on strengthening the economy after two years of recession, Milanovic, 45, said. The cost of insuring the debt against default using five-year credit-default swaps rose to 427 basis points on Aug. 26 from 310 basis points a month earlier, according to data provider CMA.

Croatia is preparing to become the EU’s 28th member in July 2013 as the world’s largest trading bloc roils over the bailouts of its most-indebted countries including Greece and the euro- region’s economic recovery is losing steam. The world’s largest economies may face as many as seven “lean years,” German Finance Minister Wolfgang Schaeuble said on Aug. 27.

Milanovic, a trained lawyer, would inherit an economy emerging from its longest recession since the breakup of Yugoslavia. His Social Democratic Party, which last ruled in 2003, had 24 percent support in an Aug. 26 IPSOS-Puls survey of 1,000 people.

Transition to Market

Prime Minister Jadranka Kosor’s ruling Croatian Democratic Union, which spent 16 of the past 20 years in power, had 20 percent backing. The margin of error was 3.1 percent.

Croatia should focus on completing its transition to a market economy after the bloody disintegration of Yugoslavia left the country lagging behind the other former communist countries of eastern Europe, said Milanovic.

Poland and the Czech Republic, who remain outside the euro region, should serve as role models for Croatia, said Damir Grubisa, the director of the European Studies Center in Zagreb.

“The European Union is not perfect, but it’s the most powerful catalyst for change in this part of Europe,” Grubisa said. “Without it, we’d fall back to the Balkans.”

Croatia’s economy expanded 0.8 percent in the second quarter from a year earlier, after a 0.8 percent contraction in the first three months, the statistics office reported on Aug. 26. The Czech economy grew 2.4 percent in the period and Polish gross domestic product probably rose 4.2 percent, according to 30 economists polled by Bloomberg. The country will report GDP data today.

‘Deeply Corrupted’

Croatia is struggling with a corruption scandal that led to the arrest of dozens of ruling-party officials including former Prime Minister Ivo Sanader, who resigned in 2009 and handed the reins of government to Kosor, his former second-in-command.

“Everything since Sanader’s demise points to the fact that Croatia has been a deeply corrupted country, with the core in the ruling party,” Milanovic said.

The Social Democrats lost to Kosor’s Democratic Union in 2007 by a margin of 5.4 percentage points. Milanovic this year will head a four-party coalition that has 35 percent support in the IPSOS survey, while Kosor’s party is running without committed allies.

“We have a strong and determined opponent, which has deep roots in a part of Croatian society, and that’s something one shouldn’t underestimate,” Milanovic said. “This time, we have much more patience and much more tactical wisdom.”

Asset Sales

The Social Democrats will probably be forced to turn to the International Monetary Fund to strengthen the country’s recovery amid the euro region’s sovereign debt crisis, said Goran Saravanja, chief analyst at Zagrebacka Banka d.d., the Croatian unit of Italy’s UniCredit SpA, said. The country may also have to sell state assets to raise revenue, he said.

“I’d be surprised if big state companies aren’t sold by the end of their mandate,” Saravanja said.

Strategic companies such as the national grid and other utilities, should stay in state hands, according to Milanovic. A contract signed by Sanader’s government that ceded control of the oil company INA Industrije Nafte d.d. to Hungary’s Mol Nyrt. “would be very hard, if not impossible, to revoke, due to incompetence and negligence of the government, to say the least,” said Milanovic. He said the government should instead “concentrate on enhancing cooperation” with the Hungarian refiner.

Sanader is testifying today in Zagreb as part of the probe into whether he took a bribe to cede control of INA. He faces questions by the Office for Suppression of Corruption and Organized Crime at 1:30 p.m. at the Remetinec jail near Zagreb, his lawyer Cedo Prodanovic said late yesterday.

Keeping budget expenditures at about 120 billion kuna ($23 billion) and discontinuing government borrowing while creating jobs and attracting foreign investment would take Croatia out of crisis, Milanovic said.

“We need new technologies, we need knowledge-based companies,” he said. “To get that, we have to remove the red tape to make doing business comfortable here, but at the same time, we must maintain social balance and harmony.”

--Editors: Balazs Penz, Alan Crosby

To contact the reporters on this story: Jasmina Kuzmanovic at jkuzmanovic@bloomberg.net James M. Gomez at jagomez@bloomberg.net

To contact the editor responsible for this story: Hellmuth Tromm at htromm@bloomberg.net


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