Bloomberg News

Croatians Approve EU Accession in Test of the Bloc’s Lure

January 24, 2012

(Updates with complete voting results in second paragraph.)

Jan. 23 (Bloomberg) -- Croatians approved becoming the European Union’s 28th member, overcoming concern that accession would erode sovereignty, in a test of the bloc’s lure amid a sovereign-debt crisis.

With all ballots counted, 66 percent approved proceeding toward entry, expected July 2013, the Electoral Board in Zagreb said today. EU members must still ratify the move.

Two decades after the country won independence in the bloody breakup of Yugoslavia, the government expects EU entry to boost investment and economic growth and cement its break from communism. Enthusiasm for EU unity is waning among its eastern members, including Hungary and the Czech Republic, as the continent faces a return to a recession and politicians balk at efforts to merge fiscal policies.

“Citizens have voted for a European Croatia,” Foreign Minister Vesna Pusic said on state television yesterday. “This is also great news for Europe. It’s a message to Europe that its values are still supported and recognized.”

Membership in the world’s largest trading bloc may provide the Adriatic nation with hundreds of millions of euros in regional development and infrastructure subsidies. Companies such as Germany’s Siemens AG and Deutsche Telekom AG and Sweden’s Ericsson AB expect to expand into the Balkans as western Europe’s growth stalls over the debt crisis.

‘Significant Benefits’

Croatia, which emerged from a two-year recession in 2011, may slide into another contraction this year because of faltering demand for its exports and waning tourism, central bank Governor Zeljko Rohatinski said in December.

EU accession will provide “significant benefits” to Croatia, particularly in terms of governance and access to international capital flows,” though it won’t solve all of the country’s woes, Michele Napolitano, associate director at Fitch Ratings, said today in an e-mail.

“Croatia will have to carry-out fiscal consolidation to reduce its budget deficit and stabilize the debt ratio,” he wrote in response to questions from Bloomberg. “It will also have to implement structural reforms aimed at improving the business environment in order to reap the full benefits of EU accession and boost its growth potential.”

The yield on government notes maturing in July 2020 declined to 7.728 percent at 4:15 9.m. in Zagreb today from 7.929 percent on Jan. 20, according to mid-pricing data compiled by Bloomberg.

‘High-Risk’ Period

“We are still facing a period of high risk where everyone will be watching the budget proposal in February and the government’s willingness to execute reforms,” Zdeslav Santic, chief analyst at Societe Generale - Splitska Banka d.d., said today by phone.

The government stepped up its campaign for passage in the final days before the vote, with Pusic warning that rejection “would be like shooting yourself in the foot” as neighbors clamor for membership.

Montenegro, another former Yugoslav republic, will start entry negotiations in June, while Serbia will hear in March whether the EU has accepted its application for candidacy.

U.K. Foreign Secretary William Hague said the referendum outcome was “good news” for Croatia and for Europe. “It shows what can be achieved in southeastern Europe with political courage, with real determination,” he told reporters in Brussels today.

‘Clear Signal’

“The upcoming accession of Croatia sends a clear signal to the whole region of southeastern Europe,” European Commission President Jose Barroso and EU President Herman Van Rompuy said in a joint statement yesterday. “It shows that through political courage and determined reforms, EU membership is within reach. Today’s positive vote is therefore good news for Croatia, good news for the region, and good news for Europe.”

A last-minute surge in anti-EU opinion threatened to complicate Croatia’s drive toward the bloc. Opposition groups warned membership would mean an erosion of the country’s independence, while EU regulations and stiffer competition would hurt local businesses instead of helping.

Zeljko Sacic, a war veteran and a prominent campaigner against accession, said the referendum was “illegitimate” because turnout at 43.6 percent was the lowest for any plebiscite for EU entry. There is no minimum threshold for a ballot to be valid.

“This referendum is illegitimate and a rough violation of Croatian national interest,” he said on state television yesterday. “This is a defeat of Croatia’s freedom and independence.”

New Government

Croatians on Dec. 4 ousted the government of former Prime Minister Jadranka Kosor. Zoran Milanovic, whose Cabinet took office a month ago, said his budget proposal expected in February will trim the deficit from an estimated 7 percent of economic output this year, trimming the country’s extensive welfare system and bloated public sector.

Croatia’s credit rating was lowered a year ago to BBB-, one step above junk, at Standard & Poor’s, which cited a “deteriorated fiscal position and continuously weak” external financing.

Fitch Ratings said on Dec. 5 it will review its assessment in the first quarter in 2012, by which time it expects to have more information regarding the government’s fiscal and economic program.

“The European Union gives us a ticket to the world in which we can be successful,” Davor Majetic, head of the Croatian Association of Entrepreneurs, said by phone. “We want to work and have an opportunity to turn our ideas into profitable products that can reach that market of 500 million people.”

--With assistance from Jones Hayden in Brussels. Editors: Alan Crosby, Balazs Penz, Andrew Atkinson

To contact the reporter on this story: Jasmina Kuzmanovic in Zagreb at jkuzmanovic@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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